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I. Intensity of Market Coverage
14.5).
B. Intensive Distribution
1. In intensive distribution, all available outlets for distributing a product are used.
2. Intensive distribution is appropriate for convenience products. Convenience products have a
high replacement rate, no service, and are usually bought on price cures.
3. Sales 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.
2. Selective distribution is appropriate for shopping products.
3. Selective distribution is desirable when a special effort—such as customer service from a
1. In exclusive distribution, only one outlet is used in a relatively large geographic area.
2. Exclusive distribution is suitable for products infrequently purchased, consumed over a long
period of time, or requiring service or information to fit them to buyers’ needs.
3. Exclusive distribution is often used as an incentive to sellers when only a limited market is
available for products.
1. Supply chains can provide a competitive advantage for many marketers.
2. Many countries offer firms opportunities to create an effective and efficient supply chain to
support the development of competitive national industries.
3. A significant supply chain issue can reduce a firm’s market value by an estimated 10 percent.
4. If supply chain activities are not integrated, functions exist without coordination.
5. To unlock the potential of a supply chain, activities must be integrated so that all functions
are coordinated into an effective system. Supply chains driven by firm-established goals
1. Each channel member performs a different role in the distribution systems and agrees to
certain rights, responsibilities, rewards, and sanctions for nonconformity. Each channel
Chapter 14: Marketing Channels and Supply-Chain Management 278
2. Channel Leadership
a. Although many marketing channels are determined by consensus, some are organized
3. Channel Cooperation
a. Channel cooperation is vital if each member is to gain something from other members.
b. Channel cooperation helps to speed up inventory replenishment, improve customer
service, and cut the costs of bringing products to the consumer. Without cooperation,
4. Channel Conflict
a. Channel members work toward the same goals, but may disagree on the best methods for
attaining goals.
b. Channel conflicts may arise from self-interest, misunderstandings about role
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.
Chapter 14: Marketing Channels and Supply-Chain Management 279
3. Vertical Channel Integration
a. Vertical channel integration combines two or more stages of the channel under one
management.
b. This may occur when one member of a marketing channel purchases the operations of
4. Horizontal Channel Integration
a. Combining organizations at the same level of operation under one management
constitutes horizontal channel integration.
1. Within the marketing channel, physical distribution activities may be performed by a
producer, a wholesaler, or a retailer or they may be outsourced.
2. Outsourcing is the contracting of physical distribution tasks to third parties. Most physical
activities can be outsourced to third-parties with special expertise who do not have
managerial authority within the marketing channel.
3. Cooperative relationships with third-party organizations and planning an efficient physical
distribution system can reduce marketing channel costs and boost service and customer
satisfaction.
4. The Internet and technological advancements have revolutionized logistics, allowing many
manufactures to carry out actions and services entirely online, bypassing shipping and
warehousing considerations, and transforming physical distribution by facilitating just-in-
time delivery, precise inventory visibility, and instant shipment-tracking capabilities.
Chapter 14: Marketing Channels and Supply-Chain Management 280
a. Technological advances create new and different problems for manufacturers, such as
how to maintain a high level of customer service when customers never enter a store or
meet with a salesperson and how to deal with returns of a product that does not exist in a
physical form.
b. Information technology increases the transparency of the supply chain by allowing all
marketing channel members to track the movement of goods through the supply chain.
5. Although physical distribution mangers try to minimize the costs associated with order
processing, inventory management, materials handling, warehousing and transportation,
decreasing the cost in one area often raises them in another—forcing managers to examine
cost trade-offs (see Figure 14.6).
6. Trade-offs are strategic decisions to combine (and recombine) resources for greatest cost-
7. Another important goal of physical distribution involves cycle time, the time need to
complete a process.
B. 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 delivering.
a. Order entry begins when customers or salespeople place purchase orders via telephone,
3. Electronic Data Interchange (EDI) is a computerized means of integrating order processing
with production, inventory, accounting, and transportation. Within the supply chain, EDI
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
Chapter 14: Marketing Channels and Supply-Chain Management 281
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. To calculate the reorder point the marketer must
know the order lead time, the usage rate, and the amount of safety stock required.
4. Efficient inventory management with accurate reorder points is crucial for firms that use just-
in-time (JIT) wherein supplies arrive just as they are needed for use in production or for
resale.
D. 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 ID (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
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. The right type of
warehouse allows a company to reduce transportation and inventory costs or improve service
to customers.
a. Private warehouses are company-owned facilities for shipping and storing their own
Chapter 14: Marketing Channels and Supply-Chain Management 282
(2) Public warehouses also provide bonded storage, a warehousing arrangement in which
imported or taxable products are not released until the products’ owners pay U.S.
customs duties, taxes, or other fees.
c. 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 products
rather than storage.
F. 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. There are five basic transportation modes for moving physical goods: railroads, trucks,
waterways, airways and pipelines (see Table 14.3).
a. Railroads carry heavy, bulky freight that must be shipped long distance over land.
b. Trucks provide the most flexible schedules and routes of all major transportation modes.
3. Choosing Transportation Modes
a. Logistics managers select a transportation mode based on the combination of cost, speed,
4. Coordinating Transportation
a. To take advantage of the benefits offered by various transportation modes and
compensate for deficiencies, marketers often combine and coordinate two or more
modes.
Chapter 14: Marketing Channels and Supply-Chain Management 283
e. Megacarriers are freight transportation companies that offer several modes of shipment.
VI. Legal Issues in Channel Management
A. The numerous federal, state, and local laws governing distribution channel management in the
U.S. are based on the principle that the public is best served by protecting competition and free
trade.
1. Under the authority of federal legislation, such as the Sherman Antitrust Act and the Federal
2. Although channel managers are not expected to be legal experts, they should be aware that
attempts to control distribution functions might have legal repercussions.
B. Dual Distribution
1. Some companies may use dual distribution by utilizing two or more marketing channels to
distribute the same products to the same target market.
2. Courts do not consider this practice illegal when it promotes competition, but they view as a
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 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.
D. Tying Agreements
1. A tying agreement exists when a supplier furnishes a product to a channel member with the
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.
E. 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.
d. If the exclusive dealing blocks competitors from as much as 15 percent of the market; if
the sales revenue involved is sizable; and if the manufacturer is much larger than the
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1. For nearly 100 years, the courts have held that producers have the right to choose channel
members with which they will do business.
2. 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.
