CHAPTER 13
Marketing Channels and Supply-Chain
Management
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Class Exercises
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Chapter Quiz
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Semester Project
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PURPOSE AND PERSPECTIVE
This chapter explores marketing channels and supply chain management. It begins by exploring the
foundations of supply chain management, including a discussion of the concept of the supply chain and
its various activities. The chapter elaborates on the role that marketing channels and supply chains play in
marketing. Then it considers the different types of marketing channels and the role of supply chain
management in choosing which channels are best for any given product. Next, it explores how marketers
determine the appropriate intensity of market coverage for a product. It also looks at different strategic
issues that affect marketing channels, such as leadership, cooperation, and conflict. It then examines how
physical distribution plays into supply chain management. Finally, it looks at several legal issues
affecting channel management.
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Chapter 13: Marketing Channels and Supply–Chain Management
LECTURE OUTLINE
I. Foundations of the Supply Chain
A. The distribution component of the marketing mix focuses on the decisions and actions involved in
making products available to customers when and where they want to purchase them.
B. An important function of the marketing channel is the joint effort of all involved organizations to
create an effective supply chain, which refers to all the activities associated with the flow and
transformation of products from raw materials through to the end customer.
1. Integrating these activities requires marketing managers to work with counterparts in the
following areas:
a. Operations management is the total set of managerial activities used by an
organization to transform resource inputs into goods, services, or both.
b. Logistics management involves planning, implementing, and controlling the efficient
and effective flow and storage of products and information from the point of origin to
consumption in order to meet customers’ needs and wants.
c. Supply management, in its broadest form, refers to the processes which enable the
progress of value from raw material to final customer and back to redesign and final
disposition.
C. Supply-chain management is the set of approaches used to integrate the functions of operations
management, logistics management, supply management, and marketing channel management so
products are produced and distributed in the right quantities to the right locations and at the right
time.
1. It includes activities like manufacturing, research, sales, advertising, shipping, and, most of
all, cooperation and understanding of tradeoffs throughout the whole channel to achieve
optimal levels of efficiency and service.
2. The supply chain involves all entities that facilitate product distribution and benefit from
cooperative efforts.
a. These entities include suppliers of raw materials and other components to make goods
and services, logistics and transportation firms, communication firms, and other firms
that indirectly take part in marketing exchanges.
D. Technology has dramatically improved the capability of supply-chain management globally.
1. Information technology, in particular, has helped some firms create a seamless distribution
process for matching inventory needs to manufacturer requirements in the upstream portion
of the supply chain and to customers’ requirements in the downstream portion of the chain.
2. Integrated information helps to reduce costs, improve service, and provide increased value to
the end consumer.
E. As demand for innovative goods and services has escalated, marketers have had to increase their
flexibility and responsiveness to new products and modify existing ones to meet the ever-changing
needs of customers.
1. Suppliers now provide material and service inputs.
2. Supply-chain managers can use data through improved information technology in order to
learn about the firm’s customers, which helps to improve products in the downstream portion
of the supply chain.
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Chapter 13: Marketing Channels and Supply–Chain Management
3. The entire supply chain is critically important to ensure that customers get the products
when, where, and how they want them.
F. Firms must be involved in the management of their own supply chains in partnership with the
network of upstream and downstream organizations in the supply chain.
G. Supply chain management is closely linked to a market orientation.
1. All functional areas of business (marketing, management, production, finance, and
information systems) overlap with and are involved in executing a customer orientation and
participate in supply-chain management.
2. Managers should recognize that supply-chain management is critical to fulfilling customer
expectations and that it requires coordination with all areas of the business.
II. The Role of Marketing Channels in Supply Chains
A. A marketing channel (also called a channel of distribution or distribution channel) is a group of
individuals and organizations that direct the flow of products from producers to customers within
the supply chain.
B. The major role of marketing channels is to make products available at the right time at the right
place in the right quantities.
C. Some marketing channels are direct—the product goes from the producer straight to the
customer—but most channels have one or more marketing intermediaries that link producers to
other intermediaries or to ultimate consumers through contractual arrangements or through the
purchase and resale of products.
1. Wholesalers buy and resell products to other wholesalers, retailers, and industrial customers.
2. Retailers purchase products and resell them to the end consumers.
3. Supply chain management begins with a focus on the customer and requires the cooperation
of channel members to satisfy customer requirements. Cooperation increases coordination,
reduces costs and increases profits.
4. Each supply-chain member requires information from other channel members.
a. Customer relationship management (CRM) systems exploit the information in supply-
chain partners’ information systems and make it available for easy reference to help all
channel members make better marketing strategy decisions that develop and sustain
desirable customer relationships.
D. The Significance of Marketing Channels
1. Although marketing channel decisions need not precede other marketing decisions, they are
a powerful influence on the rest of the marketing mix.
2. Channel decisions are critical because they determine a product’s market presence and
buyers’ accessibility to the product.
3. Channel decisions have additional strategic significance because they entail long-term
commitments. It is usually easier to change prices or promotional efforts than to change
marketing channels.
E. Marketing Channels Create Utility
1. Marketing channels create four types of utility: time, place, possession, and form.
a. Time utility—making products available when the customer wants them.
b. Place utility—making products available in locations where customers wish to
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purchase them.
c. Possession utility—the customer has access to the product to use or to store for future
use.
d. Form utility—created by assembling, preparing, or refining the product to suit
individual customer needs.
F. Marketing Channels Facilitate Exchange Efficiencies
1. Marketing intermediaries can reduce the costs of exchanges by performing certain services
or functions efficiently.
a. Intermediaries provide valuable assistance because of their access to and control over
important resources used in the proper functioning of marketing channels.
2. Nevertheless, the press, consumers, public officials, and other marketers freely criticize
intermediaries, especially wholesalers.
a. Detractors accuse wholesalers of being inefficient and adding to costs.
b. Buyers often wish to make the distribution channel as short as possible, assuming the
fewer the intermediaries, the lower the price.
c. Eliminating intermediaries would not remove the need for the services they provide.
Other channel members would have to perform the functions.
d. Because suggestions to eliminate them come from both ends of the marketing channel,
wholesalers must be careful to perform only those marketing activities that are truly
desired, and they must strive to be as efficient and customer-focused as possible.
G. Types of Marketing Channels
1. Multiple distribution paths have been developed because different products require different
marketing channels.
a. The various marketing channels can be classified generally as channels for consumer
products and channels for business products.
H. Channels for Consumer Products
1. As shown in Figure 13.2, Channel A moves goods directly from the producer to consumers.
2. Channel B, which moves goods from the producer to a retailer and then to customers, is a
frequent choice of large retailers because it allows them to buy in quantity from
manufacturers.
3. A long-standing channel, especially for consumer products, Channel C takes goods from the
producer to a wholesaler, then to a retailer, and finally to consumers.
4. Channel D, wherein goods pass from producer, to agents, to wholesalers, to retailers, and
finally to consumers, is frequently used for products intended for mass distribution, such as
processed foods.
5. For some consumer goods, a long channel may be the most efficient distribution channel.
When several channel members perform specialized functions, costs may be lower than
when one channel member tries to perform them all.
I. Channels for Business Products
1. Figure 13.3 shows four of the most common channels for business products.
a. Channel E illustrates the direct channel for business products, which is the most
popular channel for business products. Business customers like to directly
communicate with producers, especially when expensive or technically complex
products are involved.
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Chapter 13: Marketing Channels and Supply–Chain Management
b. With Channel F, an industrial distributor facilitates exchanges between the producer
and customer.
(1) An industrial distributor is an independent business that takes title to products
and carries inventories.
(a) Industrial distributors are most effectively used when a product has broad
market appeal, is easily stocked and serviced, is sold in small quantities,
and is needed on demand to avoid high losses.
(b) They offer sellers several advantages, such as performing the needed
selling activities in local markets at relatively low cost to a manufacturer
and reducing a producer’s financial burden by providing customers with
credit services. Their relationships with customers also means they are
aware of local needs and can pass on market information to producers.
(c) Using industrial distributors also has several disadvantages, including the
fact that they may be difficult to control, they often stock competing
brands, they incur expenses from maintaining inventories, and they are
less likely to handle bulky or slow-selling items. Sometimes they lack the
specialized knowledge necessary to sell and service technical products.
2. Channel G employs a manufacturer’s agent, an independent businessperson who sells
complementary products of several producers in assigned territories and is compensated
through commissions.
a. Using manufacturers’ agents can benefit a business marketer because these agents
possess considerable technical and market information and have an established set of
customers.
b. The use of manufacturers’ agents is not problem-free; even though straight
commissions may be cheaper, the seller may have little control over manufacturers’
agents. Because they work on commission, they often prefer to concentrate on larger
accounts.
3. Channel H includes both a manufacturer’s agent and an industrial distributor.
a. This is appropriate when the producer wants to cover large geographic areas but does
not maintain a sales force or when a marketer wants to enter a new geographic market
without expanding the sales force.
J. Multiple Marketing Channels and Channel Alliances
1. To reach diverse target markets, manufacturers may simultaneously use several marketing
channels, with each channel involving a different set of intermediaries.
a. A manufacturer often uses multiple channels when the same product is directed to
both consumers and business customers.
2. Dual distribution is the use of two or more marketing channels for distributing the same
products to the same target market.
a. Dual distribution can cause dissatisfaction among wholesalers and smaller retailers
when they must compete with large retail chains that make direct purchases from
manufacturers.
3. A strategic channel alliance exists when the products of one organization are distributed
through the marketing channels of another.
a. The products of the two firms are often similar with respect to uses or target markets,
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Chapter 13: Marketing Channels and Supply–Chain Management
but are not direct competitors.
K. Selecting Marketing Channels
1. Channel selection decisions usually are significantly affected by one or more of the
following factors:
a. Customer characteristics
b. Product attributes
c. Type of organization
d. Competition
e. Marketing environmental forces
f. Characteristics of intermediaries
L. Customer Characteristics
1. Marketing managers must consider the characteristics of target market members in channel
selection.
a. Business customers often prefer to deal directly with producers (or very
knowledgeable channel intermediaries, such as industrial distributors), especially for
highly technical or expensive products that require strict specifications and technical
assistance. They also buy in considerable quantities.
b. Consumers generally buy limited quantities of a product, purchase from retailers, and
often don’t mind limited customer service.
2. When customers are concentrated in a small geographic area, a more direct channel may be
ideal, but when many customers are spread across an entire state or nation, distribution
through multiple intermediaries is likely to be more efficient.
M. Product Attributes
1. Product attributes have a strong effect on marketing channel choice.
a. Marketers of complex and expensive products such as automobiles will likely employ
short channels, as will marketers of perishable products such as dairy and produce.
b. Less-expensive, more standardized products, such as soft drinks and canned goods,
can employ longer channels with many intermediaries.
c. Fragile products that require special handling are more likely to be distributed through
shorter channels to minimize the risk of damage.
N. Type of Organization
1. Due to their sheer size, larger firms may be better able to negotiate better deals with vendors
or other channel members.
a. Large firms may be in a position to have more distribution centers, which may reduce
delivery times to customers.
b. Large companies can use an extensive product mix as a competitive tool.
2. A smaller regional company, using regional or local channel members, may be in a position
to better serve customers in that region compared to a larger, less-flexible organization.
a. Smaller firms may not have the resources to develop their own sales force, ship their
products long distances, maintain a large inventory, or extend credit.
O. Competition
1. The success or failure of a competitor’s marketing channel may encourage or dissuade an
organization from considering a similar approach.
2. A firm may also be forced to adopt a similar strategy in order to remain competitive, which
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usually involves taking the steps necessary to keep costs low.
P. Environmental Forces
1. Adverse economic conditions might force an organization to use a low-cost channel, even
though customer satisfaction is reduced, whereas a booming economy might allow a
company to choose a channel previously too costly to consider.
2. The introduction of new technology might cause an organization to add or modify its channel
strategy.
3. As labor and environmental regulations change, an organization may be forced to modify its
existing distribution channel structure to comply with new laws.
Q. Characteristics of Intermediaries
1. An organization may reconsider its channel choices if it feels that an intermediary is not
adequately promoting its products.
a. An existing intermediary may not offer an appropriate mix of services, forcing an
organization to change to a new intermediary.
b. Some firms may choose to eliminate intermediaries and perform the eliminated
intermediaries’ functions.
III. Intensity of Market Coverage
A. In addition to deciding which marketing channels to use to distribute a product, marketers must
determine the intensity of coverage a product should get—the number and kinds of outlets in which
it will be sold. The decision depends on the product and the target market.
B. Intensive Distribution
1. In intensive distribution, all available outlets for distributing a product are used.
a. Intensive distribution is appropriate for products that have a high replacement rate,
require almost no service, and are often bought based on price cues.
b. Most convenience products like bread, chewing gum, soft drinks, and newspapers are
marketed through intensive distribution.
c. Sales and product availability of low-cost convenience products may be directly
related to product availability.
C. Selective Distribution
1. In selective distribution, only some available outlets in an area are chosen to distribute a
product.
a. Selective distribution is appropriate for shopping products, which includes durable
goods like televisions or stereos.
b. Selective distribution is desirable when a special effort—such as customer service
from a channel member—is important to customers.
D. Exclusive Distribution
1. In exclusive distribution, only one outlet is used in a relatively large geographic area.
a. Exclusive distribution is suitable for products infrequently purchased, consumed over
a long period of time, or requiring a high level of customer service or information.
b. Exclusive distribution is often used as an incentive to sellers when only a limited
market is available for products.
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IV. Strategic Issues in Marketing Channels
A. Marketing channels require a strategic focus on competitive priorities including developing channel
leadership, fostering cooperation between channel members, managing channel conflict, and
possibly consolidating marketing channels through channel integration.
B. Competitive Priorities in Marketing Channels
1. Supply chains can be a source of competitive advantage for many marketers and a means of
maintaining a strong market orientation because supply-chain decisions cut across all
functional areas of business.
a. Building the most effective and efficient supply chain can sustain a business and help
it to use resources effectively and be more efficient.
b. To unlock the potential of a supply-chain, activities must be integrated so that all
functions are coordinated into an effective system.
C. Channel Leadership, Cooperation, and Conflict
1. Each channel member performs a specific role in the distribution system and agrees
(implicitly or explicitly) to accept rights, responsibilities, rewards, and sanctions for
nonconformity.
a. Each channel member has certain expectations for other channel members.
2. Channel partnerships can facilitate effective supply-chain management when partners agree
on objectives, policies, and procedures for physical distribution efforts associated with the
supplier’s products.
D. Channel Leadership
1. Although many marketing channels are determined through channel member compromise
with a better marketing channel as the end goal, some are organized and controlled by a
single leader, or channel captain (or channel leader), who may be a producer, wholesaler,
or retailer.
a. To attain desired objectives, the captain must possess channel power, the ability to
influence another channel member’s goal achievement.
E. Channel Cooperation
1. Channel cooperation is vital if each member is to gain something from the other members.
2. Channel cooperation helps to speed up inventory replenishment, improve customer service,
and cut the costs of bringing products to the consumer.
a. Without cooperation, neither overall channel goals nor individual member goals will
be realized.
3. There are several ways to improve channel cooperation.
a. If a marketing channel is viewed as a unified supply chain competing with other
systems, individual members will be less likely to take actions that would create
disadvantages for other members.
b. Channel members should agree to direct efforts toward common objectives so channel
roles can be structured for maximum effectiveness in working toward achieving
objectives, which in turn can help members achieve individual objectives.
F. Channel Conflict
1. Channel members work toward the same goal—distributing products profitably and
efficiently—but members may sometimes disagree on the best methods for attaining this
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goal.
a. Channel conflicts may arise from self-interest, which creates misunderstandings about
role expectations; the end result is frustration and conflict for the whole channel.
b. Communication difficulties are a potential form of channel conflict because
ineffective communication leads to frustration, misunderstandings, and ill-coordinated
strategies, jeopardizing further coordination.
2. Although there is no single method for resolving conflict, partners can improve relations if
two conditions are met.
a. The role of each channel member must be clearly defined and adhered to.
b. Members of channel partnerships must agree on certain measures of coordinating
channels, which requires strong, but not polarizing, leadership.
3. To prevent channel conflict from arising, producers, or other channel members, may provide
competing resellers with different brands, allocate markets among resellers, define policies
for direct sales to avoid potential conflict over large accounts, negotiate territorial issues
among regional distributors, and provide recognition to certain resellers for their importance
in distributing to others.
G. Channel Integration
1. Channel functions may be transferred between intermediaries and to producers, and even
customers.
2. Various channel stages may be combined under the management of a channel captain either
horizontally or vertically.
H. Vertical Channel Integration
1. Vertical channel integration combines two or more stages of the channel under one
management.
a. This may occur when one member of a marketing channel purchases the operations of
another member or simply performs the functions of another member, eliminating the
need for that intermediary.
b. Vertical channel integration represents a more progressive approach to distribution in
which channel members become extensions of one another as they are combined
under a single management.
2. Integration has been successfully institutionalized in a marketing channel called the vertical
marketing system (VMS), in which a single channel member coordinates or manages all
activities to maximize efficiencies, resulting in an effective and low-cost distribution system
that does not duplicate services.
3. Most vertical marketing systems take one of three forms: corporate, administered, or
contractual.
a. A corporate VMS combines all stages of the marketing channel, from producers to
consumers, under a single owner.
b. In an administered VMS, channel members are independent, but a high level of inter-
organizational management is achieved by informal coordination.
c. Under a contractual VMS, the most popular type of vertical marketing system, channel
members are linked by legal agreements spelling out each member’s rights and
obligations.
I. Horizontal Channel Integration
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1. Combining organizations at the same level of operation under one management constitutes
horizontal channel integration.
a. An organization may integrate horizontally by merging with other organizations at the
same level in a marketing channel.
2. Although horizontal integration permits efficiencies and economies of scale in purchasing,
marketing research, advertising, and specialized personnel, it is not always the most effective
method of improving distribution.
a. Problems that come with increased size often follow, resulting in decreased flexibility,
difficulties coordinating between members, and the need for additional marketing
research and large-scale planning.
V. Physical Distribution in Supply-Chain Management
A. Physical distribution, also known as logistics, refers to the activities used to move products from
producers to consumers and other end users.
B. Within the marketing channel, physical distribution activities may be performed by a producer, a
wholesaler, or a retailer or they may be outsourced.
1. Outsourcing is the contracting of physical distribution tasks to third parties.
a. Most physical distribution activities can be outsourced to outside firms with special
expertise.
C. Cooperative relationships with third-party organizations can help reduce marketing channel costs
and boost service and customer satisfaction.
D. Planning an efficient physical distribution system is crucial to developing an effective marketing
strategy because it can decrease costs and increase customer satisfaction.
E. Although physical distribution mangers try to minimize the costs associated with order processing,
inventory management, materials handling, warehousing, and transportation, decreasing the costs
in one area often raises them in another.
1. Physical distribution managers must be sensitive to the issue of cost trade-offs.
a. Trade-offs are strategic decisions to combine (and recombine) resources for greatest
cost-effectiveness. The goal is not always to find the lowest cost.
F. Another important goal of physical distribution involves cycle time, the time needed to complete a
process.
G. Order Processing
1. Order processing is the receipt and transmission of sales order information. When quickly
and accurately carried out, order processing contributes to customers’ satisfaction, decreased
costs and cycle time, and increased profits.
2. Order processing involves three main tasks: order entry, order handling, and order delivery.
a. Order entry begins when customers or salespeople place purchase orders via
telephone, regular mail, e-mail, or a website.
b. Order handling involves several tasks.
(1) Once the order is entered, it is transmitted to a warehouse where product
availability is verified, and to the credit department where prices, terms, and the
customer’s credit rating is checked.
c. When the order is assembled and packed for shipment, the warehouse schedules
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delivery with an appropriate carrier.
3. Electronic Data Interchange (EDI) uses computer technology to integrate order processing
with production, inventory, accounting, and transportation.
a. Within the supply chain, EDI functions as an information system that links marketing
channel members and outsourcing firms together.
H. Inventory Management
1. Inventory management involves developing and maintaining adequate assortments of
products to meet customers’ needs. It is essential in any effective physical distribution
system.
2. Inventory decisions have a major impact on physical distribution costs and the level of
customer service provided.
a. When too few products are carried in inventory, the result is stockouts or product
shortages, which in turn results in brand switching, lower sales, and loss of customers.
b. An excess of products can lead to a cost increase, risks of product obsolescence,
pilferage, and damage.
3. To determine when to order, a marketer calculates a reorder point at which the inventory
level signals the need to place a new order.
a. To calculate the reorder point the marketer must know the order lead time, the usage
rate, and the amount of safety stock required.
(1) The order lead time refers to the average time lapse between placing the order
and receiving it.
(2) The usage rate is the rate at which a product’s inventory is used or sold during a
specific time period.
(3) Safety stock is the amount of extra inventory a firm keeps to guard against
stockouts resulting from above-average usage rates and/or longer-than-expected
lead times.
b. The reorder point can be calculated using the following formula: Reorder Point =
(Order Lead Time × Usage Rate) + Safety Stock
4. Efficient inventory management with accurate reorder points is crucial for firms that use the
just-in-time (JIT) approach, wherein supplies arrive just as they are needed for use in
production or for resale.
I. Materials Handling
1. Materials handling is the physical handling of tangible goods, supplies, and resources.
2. Efficient materials handling minimizes inventory management costs, reduces the number of
times a good is handled, improves customer service, and increases customer satisfaction.
3. A growing number of firms are using radio waves to track materials tagged with radio
frequency identification (RFID) through every phase of handling.
4. Product characteristics often determine how they are handled. Most companies employ
packaging consultants during the product design process.
5. Unit loading and containerization are two common methods used in materials handling.
a. Unit loading is when one or more boxes are placed on a pallet or skid. These units
then can be loaded efficiently by mechanical means.
b. Containerization is the consolidation of many items into a single, large container that
is sealed at the point of origin and opened at its destination.
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J. Warehousing
1. Warehousing is the design and operation of facilities for storing or moving goods.
2. Warehousing provides time utility by enabling firms to compensate for dissimilar production
and consumption rates.
3. The choice of warehouse facilities is an important strategic consideration because they allow
a company to reduce transportation and inventory costs and improve service to customers.
4. Warehouses fall into two general categories: private and public.
a. Private warehouses are company-owned facilities for shipping and storing their own
products. A firm usually leases or purchases a private warehouse when its
warehousing needs in a given geographic market are substantial and stable enough to
warrant a long-term commitment to a fixed facility.
b. Public warehouses are storage spaces and related physical distribution facilities
leased to other companies.
(1) Field public warehouses are established by public warehouses at the owner’s
inventory location. Public
(2) Public warehouses also provide bonded storage, a warehousing arrangement in
which imported or taxable products are not released until the owners pay U.S.
customs duties, taxes, or other fees.
5. A distribution center is a large facility used for receiving, warehousing, and redistributing
products to stores or customers. The focus is on the rapid flow of goods rather than storage.
K. Transportation
1. Transportation is the movement of products from where they are made to intermediaries
and end users, and is the most expensive distribution function.
2. Because product availability and timely deliveries depend on transportation functions,
transportation decisions directly affect customer service.
3. In some cases, a firm may choose to build its distribution and marketing strategy around a
unique transportation system, if that system can ensure on-time deliveries and give the firm a
competitive edge.
4. Companies may build their own transportation fleets (private carriers) or outsource the
transportation function to a common or contract carrier.
L. Transportation Modes
1. There are five basic transportation modes for moving physical goods: railroads, trucks,
waterways, airways, and pipelines.
a. Railroads carry heavy, bulky freight that must be shipped long distances over land.
b. Trucks provide the most flexible schedules and routes of all major transportation
modes. Trucks are often used with other modes of transportation.
c. Waterways are the cheapest method of shipping heavy, low-value, non-perishable
goods.
d. Air transportation is the fastest but most expensive form of shipping. It is used most
often for perishable goods; for high-value, low-bulk items; and for products requiring
quick delivery over long distances, such as emergency shipments.
e. Pipelines are the most automated transportation mode, usually belonging to the
shipper and carrying the shipper’s products. Most pipelines carry petroleum products
or chemicals.
M. Choosing Transportation Modes
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1. Logistics managers select a transportation mode based on the combination of cost, speed,
dependability, load flexibility, accessibility, and frequency that is most appropriate for their
products and generate the desired level of customer service.
2. Marketers compare transportation modes to determine if the benefits from a more expensive
mode are worth the higher costs (such as greener modes or faster modes).
N. Coordinating Transportation
1. To take advantage of the benefits offered by various transportation modes and compensate
for deficiencies, marketers often combine and coordinate two or more modes.
a. Intermodal transportation is easier than ever because of developments within the
transportation industry. It occurs when two or more transportation modes are used in
combination.
b. Freight forwarders are organizations that combine shipments from several firms into
efficient lot sizes.
c. Megacarriers are freight transportation companies that offer several modes of
shipment methods.
VI. Legal Issues in Channel Management
A. Dual Distribution
1. Many companies may use dual distribution by utilizing two or more marketing channels to
distribute the same products to the same target market.
a. Courts do not consider this practice illegal when it promotes competition, but they
view as a threat to competition a manufacturer that uses company-owned outlets to
dominate or drive out of business independent retailers or distributors that handle its
products.
B. Restricted Sales Territories
1. To tighten control over distribution of its products, a manufacturer may try to prohibit
intermediaries from selling its products outside designated sales territories.
2. Although the courts have deemed restrictive sales territories a restraint of trade among
intermediaries handling the same brands, they have also determined that exclusive territories
can promote competition among dealers handling different brands.
C. Tying Agreements
1. A tying agreement exists when a supplier furnishes a product to a channel member with the
stipulation that the channel member must purchase other products as well.
a. A related practice is full-line forcing, in which a supplier requires channel members to
purchase the supplier’s entire line to obtain any of the supplier’s products.
2. The courts accept tying agreements when the supplier alone can provide products of a certain
quality, when the intermediary is free to carry competing products as well, and when a
company has just entered the market. Most other tying agreements are considered illegal.
D. Exclusive Dealing
1. Exclusive dealing occurs when a manufacturer forbids an intermediary to carry products of
competing manufacturers.
2. The legality of an exclusive-dealing contract is generally determined by applying three tests.
a. If the exclusive dealing blocks competitors from 15 percent of the market or more, the
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Chapter 13: Marketing Channels and Supply–Chain Management
sales volume is large, and the producer is considerably larger than the retailer, then the
arrangement is considered anticompetitive.
b. If dealers and customers in a given market have access to similar products or if the
exclusive-dealing contract strengthens an otherwise weak competitor, the arrangement
is allowed.
E. Refusal to Deal
1. For nearly a century, the courts have held that producers have the right to choose channel
members with which they will do business.
a. Within existing distribution channels, however, suppliers may not legally refuse to
deal with wholesalers or dealers just because these wholesalers or dealers resist
policies that are anticompetitive or in restraint of trade.