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Chapter 14 Marketing Channels and Supply Chain Management 395
CHAPTER 14
MARKETING CHANNELS AND SUPPLY CHAIN MANAGEMENT
CHAPTER OVERVIEW
It’s wonderful to have a great new product, and a great promotion to get the word out, but you need a
way to get the product into the customer’s hands. Distribution—moving goods and services from
producers to customers—is the second marketing mix variable and a key element in the big picture of the
marketing mix.
Chapter 14 is the first of two chapters devoted to distribution strategy. The chapter explains that
distribution strategy has two critical elements: marketing channels (also called distribution channels) and
logistics and supply-chain management. The text makes a clear distinction between these elements.
A marketing channel is an organized system of marketing institutions that allow for the physical flow of
goods and services from producer to purchaser. By contrast, logistics is the process that coordinates the
flow of information, goods, and services among members of a marketing channel.
Changes in the 17th Edition
The chapter has been updated and revised in several ways:
• The Opening Vignette and Evolution of a Brand profile Terra Technology and its CEO, Robert
Byrne. Terra Technology is a supply chain solutions provider that has developed sophisticated
software systems that show companies how to do a better job of forecasting demand for their
products. When companies can do a better job of forecasting product demand, they can better
manage their inventories and supply chaings. For details, refer to “Terra Technology Helps
Manage Global Supply Chain.”
396 Part 5 Distribution Decisions
• Marketing Success features the success story of Red Lobster, a popular seafood destination
that serves fish and lobster dishes in a number of locations across the United States and Canada.
The challenge was to provide wholesome seafood at reasonable prices to recession-hit families
and to simultaneously address the issue of dwindling ocean species. The story is presented in
“Red Lobster ‘Seas’ Food Differently.”
• Career Readiness provides information about some basic strategies one can adopt while
negotiating a sale.” Tips on the need for preparation, product knowledge, and etiquette are
provided in “How to Successfully Close a Sale.”
LECTURE OUTLINE
The Opening Vignette and Evolution of a Brand—Terra Technology Helps Manage Global Supply
Chain features the story of a supply chains solution company that uses sophisticated algorithms to
help companies forecast demand for their goods and services. How can forecasting demand help
companies manage their inventories and overall supply chain?
Chapter Objective 1: Describe the four types of marketing channels and the roles they play
in marketing strategy.
Key Terms: distribution, marketing channel or distribution channel, logistics, supply chain
1. Marketing channels and supply chain management
a. Distribution—moving goods and services from producers to
customers—is the second marketing mix variable
b. A distribution strategy has two critical components:
marketing channels and, logistics and supply-chain
management
i. A marketing channel, also called a distribution
channel, is an organized system of marketing
ii. The choice of marketing channel should support the
firm’s overall strategy
iii. Logistics refers to the process of coordinating the
flow of information, goods, and services among
members of the marketing channel
iv. Supply chain management is the control of
purchasing, processing, and delivery through which
2. The role of marketing channels in marketing strategy
a. Distribution channels provide the means by which the firm
moves its goods and services to ultimate users
b. Channels perform four functions:
i. They facilitate the exchange process by reducing the
number of marketplace contacts needed to make a
sale
3. Types of marketing channels
a. Several major channels are available to marketers and a
marketing channel is selected depending on the seller’s
objectives and distribution needs of customers
b. Most channel options involve at least one marketing
4. Direct selling
a. A direct channel is the simplest and shortest marketing
channel, carrying goods directly from a producer to the
business purchaser or ultimate user
b. It forms part of direct selling, a strategy in which a producer
establishes direct sales contact with its product’s final users
i. Direct selling is important for goods that require
extensive demonstrations or explanations
5. Channels using marketing intermediaries
a. Direct channels allow simple and straightforward marketing,
but do not always move goods from producers to consumers
efficiently
i. It may be more efficient, less expensive, and less
time-consuming to use marketing intermediaries in
these cases
ii. Five channels are involved in marketing
intermediaries
b. Producer to wholesaler to retailer to consumer
Chapter 14 Marketing Channels and Supply Chain Management 399
c. Producer to wholesaler to business user
i. Similar characteristics in the organizational market
often attract marketing intermediaries to operate
between producers and buyers
ii. Industrial distributors are intermediaries in the
business market that take title to the goods
d. Producer to agent to wholesaler to retailer to consumer
i. A unique intermediary—the agent—brings buyer and
seller together
e. Producer to agent to wholesaler to business user
i. Often called manufacturers’ representatives, brokers
are independent intermediaries who may or may not
take possession of goods, but never take ownership
ii. Agents and brokers form an independent sales force
to serve the business market when small producers
want to distribute goods through large wholesalers
f. Producer to agent to business user
i. For products sold in small units, only merchant
wholesalers can efficiently cover the markets
6. Dual distribution
a. Dual distribution refers to movement of products through
more than one channel to reach the firm’s target market
7. Reverse channels
a. When the concept of marketing channels involve the
movement of goods and services from producer to
400 Part 5 Distribution Decisions
consumer or business user, marketers should not ignore
reverse channels—those designed to return goods to their
producers
Assessment check questions
1.1. Distinguish between a marketing channel and logistics. A marketing
channel is an organized system of marketing institutions and their
1.2. What are the different types of marketing channels? The different
1.3. What four functions do marketing channels perform? The four
functions of marketing channels are (1) facilitating the exchange process
Chapter Objective 2: Outline the three major channel strategy decisions.
Key Terms: distribution intensity, intensive distribution, selective distribution, cooperative
advertising, exclusive distribution, exclusive dealing agreements, closed sale territories, horizontal
territorial restrictions, vertical territorial restrictions, tying agreements
PowerPoint Basic: 10-11
PowerPoint Expanded: 21-24
1. Channel strategy decisions
a. Marketers face some strategic decisions in choosing
2. Selection of a marketing channel
a. Marketers must consider a variety of questions before
selecting a marketing channel
b. These include the marketplace in which the firm operates,
the nature of the product, or the size and competitive
Chapter 14 Marketing Channels and Supply Chain Management 401
Table 14.1 Factors
Influencing
markets, for either consumer or business users
d. Product factors
i. Product characteristics influence channel selection
ii. Perishable and seasonal goods typically move
through short channels
e. Organizational and competitive factors
i. Companies with adequate financial, managerial, and
marketing resources may feel little need for help
iv. A manufacturer’s desire for control over marketing of
its own products also influences channel selection
3. Determining distribution intensity
a. Distribution intensity refers to the number of intermediaries
through which a manufacturer distributes its goods
i. Optimal distribution intensity should ensure adequate
market coverage for a product
b. Intensive distribution
i. Intensive distribution distributes a product through all
402 Part 5 Distribution Decisions
available channels in a trade area
ii. Producers of convenience goods try to saturate their
markets, enabling purchasers to buy products with
minimum effort
iii. This massive availability suits everyday items with
wide appeal across broad groups of consumers
c. Selective distribution
i. Selective distribution chooses only a limited number
of retailers in a market to handle a line
ii. By limiting retailers, marketers cut costs while
establishing strong working relationships within the
channel
d. Exclusive distribution
i. Exclusive distribution takes selective distribution one
step further, granting rights to sell products in a
specific geographic region to only one wholesaler or
retailer
e. Legal problems of exclusive distribution
i. Exclusive distribution presents potential legal
problems in three main areas—dealing agreements,
closed sales, and tying agreements
ii. Though not illegal per se, firms may break the law if
they reduce competition or create monopolies
Chapter 14 Marketing Channels and Supply Chain Management 403
iv. Closed sales territories: restrict distributors to certain
geographic regions, so they gain protection from rival
dealers in their territories but sacrifice opportunities
to open new facilities or expand territory
4. Who should perform channel functions?
a. A member of the channel must perform certain central
marketing functions (such as establishing warehouses,
maintaining a sales force, or arranging financing)
Assessment check questions
2.1. Identify four major factors in selecting a marketing channel. The four
2.2. Describe the three general categories of distribution intensity. Intensive
distribution seeks to distribute a product through all available channels in a
Chapter Objective 3: Describe the concepts of channel management, conflict, and
cooperation.
Key Terms: channel captain, horizontal conflict, vertical conflict, gray market, gray goods
PowerPoint Basic: 12
PowerPoint Expanded: 25-28
1. Channel management and leadership
a. Distribution strategy does not end with choosing a channel
b. Positive relationships encourage channel members to
404 Part 5 Distribution Decisions
remember their partners’ goods and market them
c. Coordination, commitment, and trust between members is
critical
d. Not all channel members wield equal power; the channel
captain is the dominant and controlling member of a
marketing channel
2. Channel conflict
a. Channel captains are often expected to resolve channel
conflicts
i. Marketing channels work smoothly only when
members cooperate in well-organized operations
ii. Yet channel members often perform as separate,
independent, and even competing forces, so conflict
is inevitable
c. Vertical conflict
i. Vertical conflict occurs when channel members at
different levels find many reasons for disputes, and
can be frequent and severe
ii. It is often seen when retailers irritate producers by
selling private brands that compete with producers’
brands
d. The gray market
i. The gray market creates another type of channel
conflict, one that arises as a result of licensing
Chapter 14 Marketing Channels and Supply Chain Management 405
technology and brands abroad
ii. Local manufacturers sometimes find themselves in
competition with their own brands produced by
3. Achieving channel cooperation
a. The basic solution to channel conflict is effective
cooperation among channel members
Assessment check questions
3.1. What is a channel captain? What is its role in channel cooperation? A
3.2. Identify and describe the three types of channel conflict. Horizontal
conflict results from disagreements among channel members at the same
Chapter Objective 4: Describe the three different vertical marketing systems.
Key Terms: vertical marketing system (VMS), forward integration, backward integration, corporate
marketing system, administered marketing system, contractual marketing system, wholesaler-
sponsored voluntary chain, retail cooperative, franchise
PowerPoint Basic: 13-14
PowerPoint Expanded: 29-34
1. Vertical marketing systems
a. There are ways to reduce channel conflict and improve
distribution, often through vertical marketing
b. A vertical marketing system (VMS) is a planned channel
system designed to improve distribution efficiency and cut
406 Part 5 Distribution Decisions
Table 14.2 The Top
20 Fastest-Growing
Franchises
Of the firms listed,
how many offer
goods? How many
offer services? Do
control over inputs in its production process (a
manufacturer acquires the supplier of one of its raw
materials)
d. Advantages of a VMS:
i. It improves chances for controlling and coordinating
the distribution or production process
2. Corporate and administered systems
a. Corporate marketing system: a single owner runs
3. Contractual systems
a. A contractual marketing system coordinates distribution
through formal agreements among channel members
b. Three types of agreements set up these systems:
wholesaler-sponsored voluntary chains, retail cooperatives,
and franchises
e. Franchise: a wholesaler or dealer (franchisee) agrees to
meet the operating requirements of a manufacturer or other
franchiser;
i. Franchising is a huge and growing industry
ii. Franchise owners pay huge money to purchase and
set up a franchise and later pay royalty on sales in
exchange for the brand name, services, and volume
discounts
Chapter 14 Marketing Channels and Supply Chain Management 407
decisions
Assessment check questions
4.1. What are vertical marketing systems (VMSs)? Identify the major types.
4.2. Identify the three types of contractual marketing systems. The three
types of contractual systems are wholesale-sponsored voluntary chains,
retail cooperatives, and franchises.
Chapter Objective 5: Explain the roles of logistics and supply chain management in an
overall distribution strategy.
Key Terms: supply chain or value chain, upstream management, downstream management, radio
frequency identification (RFID), enterprise resource planning (ERP), third-party (contract) logistics
firms or 3PL firms
PowerPoint Basic: 15-17
PowerPoint Expanded: 35-40
Marketing Success:
Red Lobster “Seas”
Food Differently
few products you
buy and the ways
they might be
handled through
1. Logistics and supply chain management
a. Logistics involves careful coordination of a network,
inventory, and shipping or delivery
b. It means getting the right product to the right location at the
right time
2. Effective logistics requires proper management of the supply chain
a. The supply chain, or value chain, is the sequence of
suppliers and activities contributing to a product’s creation
and delivery
b. It includes all aspects of the marketing the product—such as
design, manufacturing, customer service, and delivery
c. Each link of the chain benefits customers as raw materials
move through manufacturing to distribution
d. Supply chain management takes place in two directions:
i. Upstream management involves managing raw
materials, inbound logistics, and warehouse and
storage facilities
ii. Downstream management involves managing
need when they need it
g. The chain can involve value-added service, a supplemental
benefit that customers do not normally receive or expect
408 Part 5 Distribution Decisions
downstream
management.
3. Radio frequency identification (RFID)
a. Radio frequency identification (RFID) is a growing
technology involving a tiny chip with identification
information that can be read at a distance by a scanner
using radio waves
b. These chips are already widely used in tollway transmitters
and electronic employee ID cards
c. RFID has the potential of improving supply chain
management and lowering costs
d. It may speed deliveries, make consumer bar codes
obsolete, and give marketers valuable information on
consumer preferences
4. Enterprise resource planning
a. An enterprise resource planning (ERP) system is an
5. Logistical cost control
a. Many firms focus on logistics as a way of cutting costs,
since distribution functions currently represent almost half of
a typical firm’s total marketing costs
b. To reduce costs, they are reexamining each link of their
Chapter 14 Marketing Channels and Supply Chain Management 409
Assessment check questions
5.1. What is upstream management? What is downstream management?
5.2. Identify three methods for managing logistics. Methods for managing
logistics include RFID technology, enterprise resource planning (ERP)
systems, and logistical cost control.
Chapter Objective 6: Identify the six major components of a physical distribution system.
Key Terms: physical distribution system, suboptimization, customer service standards, class rate,
commodity rate or special rate, common carriers, contract carriers, private carriers
PowerPoint Basic: 18-19
PowerPoint Expanded: 41-46
1. Physical distribution
a. The physical distribution system is an organized group of
components linked according to a plan for achieving specific
distribution objectives
b. It contains the following elements:
i. Customer service
ii. Transportation
iii. Inventory control
d. The general shift from a manufacturing economy to a
service economy in the United States has affected physical
distribution in two key ways:
i. Customers require more flexible—yet reliable—
transportation service
ii. The number of smaller shipments is growing much
faster than the number of large shipments
2. The problem of suboptimization
a. Logistics managers establish a specified level of customer
service while minimizing the costs of physically moving and
410 Part 5 Distribution Decisions
3. Customer service standards
a. Customer service standards state goals and define
acceptable performance for the quality of service that a firm
expects to deliver to its customers
4. Transportation
a. The transportation industry has been largely deregulated,
especially benefiting motor carriers, railroads, and air
carriers
b. Today about 15.5 million trucks are transporting goods
commodity moving between any pair of destinations
ii. A commodity rate, or special rate, is a lower charge
to a favored shipper (often a railroad or inland water
carrier) as a reward for either regular business or
large-quantity shipments
exclusively for particular industries under looser
regulations than common carriers
iii. Private carriers do not offer services for hire, but
provide transportation solely for internally generated
freight, so they have no rate or service regulations
Assessment check questions
6.1. What are the six major elements of physical distribution? The major
6.2. What is suboptimization? Suboptimization occurs when managers of
individual functions try to reduce costs but create less than optimal results.
Chapter Objective 7: Compare the five major modes of transportation.
Key Terms: ton-mile, intermodal operations, barge lines, oceangoing ships, pipelines, oil
pipelines, slurry pipelines
PowerPoint Basic: 20
PowerPoint Expanded: 47-52
1. Major transportation modes
a. Logistics managers choose among five transport
2. Railroads
a. Railroads continue to control the largest share of the freight
business (measured by ton-miles)
b. Ton-mile refers to the shipping activity required to move one
ton of freight one mile
c. Rail shipments quickly add up ton-miles because they are
the most efficient way to move bulk commodities over long
distances
412 Part 5 Distribution Decisions
Table 14.3
f. The industry is seeing a boom and an increase in large
cross-country shipments, so it must improve its
infrastructure (new tracking and switching equipment,
warehousing facilities)
3. Motor carriers
a. The trucking industry is still an important factor in the freight
industry—the American Trucking Association (ATA) reports
that trucks haul more than 9.2 billion tons of freight annually
4. Water carriers
a. Two types of transport methods move products over water:
inland or barge lines, and oceangoing, deepwater ships
i. Barge lines transport bulky, low-unit-value
5. Pipelines
a. Pipelines are specialized transporters for transporting
certain raw materials; more than 2.5 million miles of
pipelines crisscross the United States in an extremely
efficient network for transporting energy products—enough
to circle the planet 100 times
b. Oil pipelines carry both crude oil and refined products
c. Slurry pipelines carry coal in suspension after it has been
