Marketing Chapter 15 Exclusive Distribution Often Used Incentive Sellers When

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CHAPTER 15

Marketing Channels and Supply-Chain

Management

TEACHING RESOURCES QUICK REFERENCE GUIDE

Resource

Location

Purpose and Perspective

IRM, p. 323

Lecture Outline

IRM, p. 324

Discussion Starters

IRM, p. 336

Class Exercise

IRM, p. 337

Chapter Quiz

IRM, p. 339

Semester Project

IRM, p. 340

PURPOSE AND PERSPECTIVE

This chapter explores marketing channels and supply chain management. We begin by exploring the

foundations of supply chain management, including a discussion of the concept of the supply chain and

its various activities. We will elaborate on the role that marketing channels and supply chains play in

Answers to Discussion and Review Questions

IRM, p. 341

Answers to Application Questions

IRM, p. 345

Answers to Internet Exercise

IRM, p. 346

Answers to Developing Your Marketing Plan

IRM, p. 347

Comments on the Cases

IRM, p. 348

Case 15.1

IRM, p. 348

Case 15.2

IRM, p. 349

Examination Questions: Essay

Testing CD

Examination Questions: Multiple-Choice

Examination Questions: True-False

Testing CD

PowerPoint Slides

324 Chapter 15: 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, all the activities associated with the flow and transformation of

products from raw material through to the end customer.

C. Integrating these activities requires marketing managers to work with counterparts in the

following areas:

1. Operations management is the total set of managerial activities used by an organization to

transform resource inputs into products.

D. Supply-chain management is a 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 involves activities like manufacturing, research, sales, advertising, shipping, and, most of

all, cooperation and understanding of tradeoffs throughout the whole channel to achieve the

optimal level of efficiency and service. (Table 15.1 outlines the key tasks involved in supply-

chain management.)

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.

Chapter 15: Marketing Channels and Supply Chain Management 325

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.

II. The Role of Marketing Channels in Supply Chains

A. Marketing Channel Concepts

1. 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.

a. The major role of marketing channels is to make products available at the right time at

the right place in the right quantities.

2. Supply chains start with the customer and require the cooperation of channel members to

satisfy customer requirements. Cooperation reduces the costs of all channel members and

improves profits.

3. Each supply-chain member requires information from other channel members. Customer

B. 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.

4. Marketing Channels Create Utility

a. Marketing channels create four types of utility: time, place, possession, and form.

b. Time utility—created by having products available when the customer wants them

326 Chapter 15: Marketing Channels and Supply Chain Management

5. Marketing Channels Facilitate Exchange Efficiencies

a. Marketing intermediaries can reduce the costs of exchanges by performing certain

services or functions efficiently. Intermediaries provide valuable assistance because of

their access to and control over important resources used in the proper functioning of

marketing channels.

b. Nevertheless, the press, consumers, public officials, and other marketers freely criticize

intermediaries, especially wholesalers.

(1) Critics accuse wholesalers of being inefficient and parasitic.

C. Types of Marketing Channels

1. Multiple distribution paths have been developed because different products require different

marketing channels. Marketing channels can be classified as for consumer products or for

business products.

2. Channels for Consumer Products

a. As shown in Figure 15.2, Channel A moves goods directly from the producer to

consumers.

b. Channel B, which moves goods from the producer to a retailer and then to customers, is a

3. Channels for Business Products

a. Figure 15.3 shows the four most common channels for business products.

Chapter 15: Marketing Channels and Supply Chain Management 327

(1) An industrial distributor is an independent business that takes title to products and

carries inventories.

(2) Industrial distributors are most effectively used when a product has broad market

d. 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.

(1) Using manufacturers’ agents can benefit a business marketer because these agents

e. Channel H includes both a manufacturer’s agent and an industrial distributor. 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.

4. Multiple Marketing Channels and Channel Alliances

a. To reach diverse target markets, manufacturers may simultaneously use several

marketing channels, with each channel involving a different set of intermediaries. This is

especially common when a product is directed at both consumer and business markets.

D. Selecting Marketing Channels

1. Channel selection decisions usually are significantly affected by one or more of the following

factors: customer characteristics, product attributes, type of organization, competition,

marketing environmental forces, and characteristics of intermediaries.

2. Consumer Characteristics

a. Business customers often prefer to deal directly with a producer (or very knowledgeable

328 Chapter 15: Marketing Channels and Supply Chain Management

3. Product Attributes

a. Product attributes have a strong effect on marketing channel choice. Marketers of

complex and expensive products such as automobiles will likely employ short channels,

4. Type of Organization

a. Due to their sheer size, larger firms may be better able to negotiate better deals with

vendors or other channel members.

5. Competition

a. The success or failure of a competitor’s marketing channel may encourage or dissuade an

6. Environmental Forces

a. 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

Chapter 15: Marketing Channels and Supply Chain Management 329

E. Characteristics of Intermediaries

1. An organization may reconsider its channel choices if it feels that an intermediary is not

adequately promoting its products.

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.

C. Selective Distribution

1. In selective distribution, only some available outlets in an area are chosen to distribute a

product.

D. Exclusive Distribution

1. In exclusive distribution, only one outlet is used in a relatively large geographic area.

IV. Strategic Issues in Marketing Channels

A. Marketing channels require a strategic focus on competitive priorities and the development of

channel leadership, cooperation, and the management of channel conflict. Consolidation of

marketing channels may also be needed.

B. Competitive Priorities in Marketing Channels

1. Supply chains can provide a competitive advantage for many marketers. Effective supply-

330 Chapter 15: Marketing Channels and Supply Chain Management

C. Channel Leadership, Cooperation, and Conflict

1. Each channel member performs a different role in the distribution systems and agrees to

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

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

d. To prevent channel conflict from arising, producers, or other channel members, may

provide competing resellers with different brands, allocate markets among resellers,

Chapter 15: Marketing Channels and Supply Chain Management 331

D. Channel Integration

1. Channel functions may be transferred between intermediaries and to producers and even

customers.

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

d. Integration has been successfully institutionalized in marketing channels called vertical

marketing systems (VMSs), in which a single channel member coordinates or manages

channel activities to achieve efficient, low-cost distribution aimed at satisfying target

market customers. Most vertical marketing systems take one of three forms:

(1) A corporate VMS combines all stages of the marketing channel, from producers to

4. Horizontal Channel Integration

a. Combining organizations at the same level of operation under one management

constitutes horizontal channel integration.

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.

1. Within the marketing channel, physical distribution activities may be performed by a

producer, a wholesaler, or a retailer or they may be outsourced.

332 Chapter 15: Marketing Channels and Supply Chain Management

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. Customer relationship management systems exploit the information from supply-chain

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

functions as an information system which links marketing channel members and outsourcing

firms together.

C. 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.

Chapter 15: Marketing Channels and Supply Chain Management 333

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.

E. 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.

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.

334 Chapter 15: Marketing Channels and Supply Chain Management

2. 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 distance over land.

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.

VI. Legal Issues in Channel Management

A. Dual Distribution

1. Some companies may use dual distribution by utilizing two or more marketing channels to

B. Restricted Sales Territories

1. To tighten control over distribution of its products, a manufacturer may try to prohibit

Chapter 15: Marketing Channels and Supply Chain Management 335

C. Tying Agreements

1. A tying agreement exists when a supplier furnishes a product to a channel member with the

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 10 percent of the market; if the sales

E. Refusal to Deal

1. For nearly 100 years, the courts have held that producers have the right to choose channel

336 Chapter 15: Marketing Channels and Supply Chain Management

DISCUSSION STARTERS

Discussion Starter 1: Keeping Up with Demand for a Hot Product

ASK: How does a firm ensure they are able to meet demand for a hot new product?

Even before Apple’s iPad launched, the demand was through the roof. This was before anyone had a

Discussion Starter 2: Warehousing and Shipping

ASK: How many of you have ever been inside a distribution warehouse?

Often people who have never been inside a warehouse are struck by the mere size and scope of these