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Chapter 15 - Managing Marketing Channels and Supply Chains
15-1
CHAPTER CONTENTS
PAGE
POWERPOINT RESOURCES TO USE WITH LECTURES .......................................... 15-2
LEARNING OBJECTIVES (LO) ........................................................................................ 15-4
KEY TERMS .......................................................................................................................... 15-4
LECTURE NOTES
• Chapter Opener: Eddie Bauer: The “Brick, Click, and Flip” Pick for the Active Outdoor
Enthusiast ..................................................................................................................... 15-5
• Nature and Importance of Marketing Channels (LO 15-1) ......................................... 15-5
• Marketing Channel Structure and Organization (LO 15-2) ........................................ 15-8
• Marketing Channel Choice and Management (LO 15-3) ........................................... 15-16
• Logistics and Supply Chain Management (LO 15-4)................................................. 15-23
• Two Concepts of Logistics Management in a Supply Chain ...................................... 15-28
• Closing the Loop: Reverse Logistics .......................................................................... 15-29
APPLYING MARKETING KNOWLEDGE ..................................................................... 15-32
BUILDING YOUR MARKETING PLAN ......................................................................... 15-34
VIDEO CASE (VC)
• VC-15: Amazon: Delivering the Goods…Millions of Times a Day! ......................... 15-35
APPENDIX D CASE (D)
• D-15: Shiseido: Channeling Cosmetics in China........................................................ 15-38
IN-CLASS ACTIVITIES (ICA)
• ICA 15-1: Marketing Channels for Apple .................................................................. 15-42
• ICA 15-2: Marketing Channels for Fastenal ............................................................... 15-45
CONNECT APPLICATION EXERCISES ………………………………………………15-48
• Vertical Marketing Systems at Starbucks Case Analysis
• Marketing Channel Functions at Home Depot Click and Drag*
• Total Logistics Cost Factors Click and Drag*
• Amazon: Delivering the Goods... Millions of Times Video Case
• iSeeit! Video Case: Supply Chain Video Case
Chapter 15 - Managing Marketing Channels and Supply Chains
15-2
• Target Market Coverage: Distribution Density Click and Drag*
• Marketing Analytics: Channel Sales and Profits Analytics Exercise
*Note: An alternate version of each Click and Drag exercise is available in Connect for students with
accessibility needs.
Chapter 15 - Managing Marketing Channels and Supply Chains
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POWERPOINT RESOURCES TO USE WITH LECTURES
PowerPoint
Textbook Figures Slide
Figure 15-1 Terms used for marketing intermediaries in consumer and business markets .............. 15-6
Figure 15-2 Marketing channel intermediaries perform three functions, each consisting of
different activities ........................................................................................................ 15-7
Figure 15-3 Common marketing channels for consumer products and services .............................. 15-9
Figure 15-4 Common marketing channels for business products and services ............................... 15-11
Figure 15-5 Consumer Internet marketing channels look much like those for consumer
products and services .................................................................................................. 15-13
Figure 15-6 Three types of vertical marketing systems: corporate, contractual, and
administered ................................................................................................................ 15-17
Figure 15-7 The Clayton Act and the Sherman Act restrict specific channel strategies and
practices ...................................................................................................................... 15-24
Figure 15-8 Relating logistics management and supply chain management to supplier
networks and marketing channels ............................................................................... 15-26
Figure 15-9 The automotive supply chain includes thousands of firms that provide functional
components, software codes, and parts in a typical car ............................................... 15-27
Figure 15-10 Supply chain managers balance total logistics cost factors against customer
service factors ........................................................................................................... 15-32
Applying Marketing Metrics
Channel Sales and Profit at Charlesburg Furniture: Channel Sales, Profit and Annual
Percentage Change in Sales by Channel .......................................................................................... 15-21
Marketing Matters and Making Responsible Decisions
Marketing Matters—Customer Value: Nestlé and General Mills—Cereal Partners Worldwide ..... 15-15
Marketing Matters—Customer Value: IBM’s Watson Supply Chain—Delivering a Total
Solution for Its Customers ............................................................................................................... 15-29
Making Responsible Decisions—Sustainability: Reverse Logistics and Green Marketing Go
Together at Hewlett-Packard: Recycling e-Waste ........................................................................... 15-36
Chapter 15 - Managing Marketing Channels and Supply Chains
15-4
POWERPOINT RESOURCES TO USE WITH LECTURES
PowerPoint
Slide
Videos
15-1: Honey Nut Cheerios Ad ......................................................................................................... 15-14
15-2: IBM Video ............................................................................................................................... 15-29
15-3: UPS Video .............................................................................................................................. 15-35
15-4: Amazon Video Case .............................................................................................................. 15-37
In-Class Activities (ICA)
ICA 15-1: Marketing Channels for Apple ........................................................................................ 15-41
ICA 15-2: Marketing Channels for Fastenal ..................................................................................... 15-46
Chapter 15 - Managing Marketing Channels and Supply Chains
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LEARNING OBJECTIVES (LO)
After reading this chapter students should be able to:
LO 15-1: Explain what is meant by a marketing channel of distribution and why intermediaries
are needed.
LO 15-2: Distinguish among traditional marketing channels, electronic marketing channels, and
different types of vertical marketing systems.
LO 15-3: Describe factors that marketing executives consider when selecting and managing a
marketing channel, including legal restrictions.
LO 15-4: Explain what supply chain and logistics management are and how they relate to
marketing strategy.
KEY TERMS
channel conflict
multichannel marketing
customer service
reverse logistics
disintermediation
selective distribution
dual distribution
supply chain
exclusive distribution
total logistics cost
intensive distribution
vendor-managed inventory (VMI)
logistics
vertical marketing systems
marketing channel
Chapter 15 - Managing Marketing Channels and Supply Chains
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LECTURE NOTES
EDDIE BAUER: THE “BRICK, CLICK, AND FLIP” PICK FOR THE
ACTIVE OUTDOOR ENTHUSIAST
• Eddie Bauer:
a. An outdoor lifestyle apparel and gear company and brand.
b. Eddie Bauer creed: “To give you outstanding quality, value, and service and
guarantee you we may be worthy of your respect.”
c. Uses a multichannel marketing strategy.
d. 370 stores (brick), website (click), and seasonal catalogs (flip).
• Shopping and purchase experience must be the same for customers across stores,
website, and catalogs.
• Integrated purchasing data from each channel provides insights into evolving
customer needs, preferences, and perceived value.
• Ex: Used data from its website channel to discover 20,000 customers in New
York City, and thousands more in adjacent areas to open a retail store in
downtown Manhattan.
• Supply Chain Dynamics:
a. Complex task due to different objectives and priorities of each channel.
• Supply chain for stores focus on efficiently keeping products that customers
want most displayed on store shelves, with rapid replenishment from
distribution centers.
• Supply chain for online and catalog operations focuses on providing wider
product assortments and customized products from central distribution center
or supplier inventory.
b. Eddie Bauer has mastered the balance between effectiveness and efficiency in
managing multichannel supply chain.
I. NATURE AND IMPORTANCE OF
MARKETING CHANNELS [LO 15-1]
Directly or indirectly reaching prospective buyers is required for successful marketing.
A. What Is a Marketing Channel of Distribution?
• A marketing channel:
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a. Consists of individuals and firms involved in the process of making a product
or service available for use or consumption by consumers or industrial users.
b. Make possible the flow of products and services from a producer, through
intermediaries, to a buyer.
c. Go by various names and perform various functions.
• Some purchase items from the seller, store them, and resell them to
buyers.
• Others represent sellers to bring a seller and a buyer together but do not
take title to the products.
• [Figure 15-1] Types of marketing intermediaries include the following:
a. Middleman. Any intermediary between the manufacturer and end-users.
b. Agent or broker. Any intermediary with legal authority to act on behalf of the
manufacturer.
c. Wholesaler. An intermediary who sells to other intermediaries, usually to
retailers; term usually applies to consumer markets.
d. Retailer. An intermediary who sells to ultimate consumers.
e. Distributor.
• Describes intermediaries who perform a variety of distribution functions,
including selling, maintaining inventories, extending credit, and so on.
• May also be used to refer to wholesalers.
f. Dealer. A more imprecise term than distributor that can mean the same as
distributor, retailer, wholesaler, and so forth.
B. How Is Value Created by Intermediaries?
The importance of intermediaries is based on:
• The functions they perform.
• The value they create for buyers.
1. Important Functions Performed by Intermediaries.
a. [Figure 15-2] Intermediaries perform three basic functions:
• Transactional function.
– Involves buying, selling, and sharing risk with the producer by
stocking merchandise in anticipation of sales.
– If the stock is unsold for any reason, the intermediary—not the
producer—suffers the loss.
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– Consists of the following activities:
* Buying. Purchasing products for resale or as an agent for supply of
a product.
* Selling. Contacting potential customers, promoting products, and
seeking orders.
* Risk taking. Assuming business risks in the ownership of
inventory that can become obsolete or deteriorate.
• Logistical function.
– Involves the details of preparing and getting a product to buyers.
– Consists of the following activities:
* Assorting. Creating product assortments from several sources to
serve customers.
* Storing. Assembling and protecting products at a convenient
location to offer better customer service.
* Sorting. Purchasing in large quantities and breaking into smaller
amounts desired by customers.
* Transporting. Physically moving a product to customers.
• Facilitating function.
– Assists producers in making the transactions of goods and services
more attractive for buyers.
– Consists of the following activities:
* Financing. Extending credit to customers.
* Grading. Inspecting, testing, or judging products and assigning
them quality grades.
* Marketing information and research. Providing information to
customers and suppliers, including competitive conditions and
trends.
b. All three functions must be performed in a marketing channel, even though
each channel member may not participate in all three.
c. Channel members often negotiate about which specific functions they will
perform and for what price.
2. Consumer Benefits.
Marketing channels help create value for consumers through:
a. Time utility. Having a product or service when consumers want it.
b. Place utility. Having a product or service available where consumers want it.
c. Form utility. Enhancing an offering to make it more appealing to buyers.
Chapter 15 - Managing Marketing Channels and Supply Chains
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d. Possession utility. Helping buyers take possession of a product or service.
LEARNING REVIEW
15-1. What is meant by a marketing channel?
15-2. What are the three basic functions performed by intermediaries?
Answer: Intermediaries perform three basic functions: (1) Transactional, which occurs
II. MARKETING CHANNEL STRUCTURE
AND ORGANIZATION [LO 15-2]
• A product can take many routes from a producer to buyers.
• There are marketing channels differences for consumer vs. business products.
A. Marketing Channels for Consumer Products and Services
• [Figure 15-3] Shows the:
a. Four common marketing channels for consumer products and services.
b. Number of levels in each channel, which is based on the number of
intermediaries between a producer and ultimate consumers.
• As the number of intermediaries between a producer and buyer increases, the
length of the channel increases.
• Example: The producer→wholesaler→retailer→consumer channel is longer
than the producer→consumer channel.
1. Direct Channel.
a. A direct channel is a marketing channel where a producer and ultimate
consumers deal directly with each other.
b. Since there are no intermediaries, the producer must perform all channel
functions. Channel A (producer→consumer).
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2. Indirect Channel.
a. Indirect channels are marketing channels where intermediaries:
• Are inserted between the producer and consumers.
• Perform numerous channel functions.
b. The producer→retailer→consumer channel (Channel B) is the most common:
• If the retailer can buy large quantities from a producer.
• When the cost of inventory makes it too expensive to use a wholesaler.
c. Why is there no wholesaler?
• So many product variations may exist that it would be impossible for a
wholesaler to stock all the models required to satisfy buyers.
d. The producer→wholesaler→retailer→consumer channel (Channel C) is
common for low-cost, low-unit value items that consumers frequently
purchase.
e. The producer→agent→wholesaler→retailer→consumer channel (Channel D)
is used when:
• There are many small manufacturers and many small retailers.
• An agent is used to help coordinate a large supply of the product.
[ICA 15-1: Marketing Channels for Apple]
B. Marketing Channels for Business Products and Services
• [Figure 15-4] Shows the:
a. Four most common marketing channels for business products and services.
• Business channels are shorter and rely on one intermediary or none at all because
business users:
a. Are fewer in number.
b. Are more concentrated geographically.
c. Buy in larger quantities.
15-11
1. Direct Channel.
a. Channel A is a direct channel where a producer and industrial user deal
directly with each other (producer→industrial user).
b. Firms using this channel:
• Maintain their own salesforce.
• Perform all channel functions.
c. A direct channel is used when:
• Buyers are large and well defined.
• The sales effort requires extensive negotiations.
• The products:
– Are of high unit value.
– Require hands-on expertise in terms of installation or use.
2. Indirect Channel.
a. Channels B, C, and D are indirect channels where one or more intermediaries
are inserted between the producer and industrial users.
b. Channel B (producer→industrial distributor→industrial user):
• Industrial distributors perform a variety of marketing channel functions:
– Selling. – Delivering a full product assortment.
– Stocking. – Financing.
• Industrial distributors are like wholesalers in consumer channels.
c. Channel C (producer→agent→industrial user) introduces a second
intermediary, an agent, who:
• Serves as the independent selling arm of producers.
• Represents a producer to industrial users.
d. Channel D (producer→agent→industrial distributor→industrial user):
• Is the longest channel.
• Includes both agents and distributors.
[ICA 15-2: Marketing Channels for Fastenal]
C. Internet Marketing Channels
• Advances in electronic commerce offer new avenues for reaching buyers and
creating customer value.
Chapter 15 - Managing Marketing Channels and Supply Chains
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• [Figure 15-5] Internet marketing channels:
a. Employ the Internet to make products and services available for consumption
or use by consumers or organizational buyers.
b. Combine Internet and traditional intermediaries to create time, place, form,
and possession utility for buyers.
• Electronic intermediaries:
• Electronic intermediaries are incapable of performing elements of the logistical
function, which remains with traditional intermediaries or with the producer.
• Many services can be distributed through Internet marketing channels, but others
still involve traditional intermediaries.
D. Direct and Multichannel Marketing
• Direct marketing channels:
a. Allow consumers to buy products by interacting with various advertising
media without a face-to-face meeting with a salesperson.
b. Include:
• Mail order selling. • Telemarketing.
• Direct mail sales. • Interactive media.
• Catalog sales. • Televised home shopping.
c. To reach more buyers, some firms:
• Sell products almost entirely through direct marketing channels.
• Use wholesalers and retailers as well as catalogs and telemarketing.
• Multichannel marketing:
a. Is the blending of different communication and delivery channels that…
b. Are mutually reinforcing in attracting, retaining, and building relationships
with consumers who…
c. Shop and buy in traditional intermediaries and online.
d. Integrates a firm’s electronic and delivery channels.
e. Leverages the value-adding capabilities of different channels.
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• Retail stores leverage their physical presence by allowing customers to:
– Pick up their online orders at a nearby store.
– Exchange nonstore purchases.
• Catalogs serve as shopping tools for both online and in-store purchasing.
• Websites can help consumers do their homework before visiting a store.
E. Dual Distribution and Strategic Channel Alliances
• Dual distribution is an arrangement whereby a firm reaches different buyers by
employing two or more different types of channels for the same basic product.
a. In some instances, firms pair multiple channels with a multibrand strategy to:
• Minimize the cannibalization of the firm’s family brand.
• Differentiate the channels.
b. A firm also distributes modified products through different channels.
• Strategic channel alliances.
a. Involve a practice whereby one firm’s marketing channel is used to sell
another firm’s products.
MARKETING MATTERS
Customer Value: Nestlé and General Mills—Cereal Partners Worldwide
Cereal Partners Worldwide (CPW) is a strategic alliance designed from the start to be
a global business. CPW joined the cereal manufacturing and marketing capability of U.S.-
based General Mills with the worldwide distribution clout of Swiss-based Nestlé. Today,
CPW competes in over 140 international markets.
[Video 15-1: Honey Nut Cheerios Ad]
F. Vertical Marketing Systems
• Vertical marketing systems:
Chapter 15 - Managing Marketing Channels and Supply Chains
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a. Are professionally managed and centrally coordinated marketing channels.
• [Figure 15-6] describes the three major types of vertical marketing systems.
1. Corporate Systems.
a. A corporate vertical marketing system is the combination of successive stages
of production and distribution under a single ownership.
b. Companies pursue forward and backward integration to reduce distribution
costs and gain greater control over supply sources or resale of their products.
• Forward integration.
– Occurs when a producer owns an intermediary at the next level down
in the channel.
– Examples: Ralph Lauren, Apple.
• Backward integration.
– Occurs when a retailer owns a manufacturing operation.
– Examples: Kroger Supermarkets, Tiffany & Co.
• Companies pursuing forward or backward integration:
– Seek to reduce distribution costs.
2. Contractual Systems.
a. A contractual vertical marketing system:
• Consists of:
– Independent production and distribution firms that…
– Combine their efforts on a contractual basis to…
– Obtain greater functional economies and marketing impact than they
could achieve alone.
• Is the most popular of the three types of vertical marketing systems.
b. Three variations of contractual systems exist:
• Wholesaler-sponsored voluntary chains.
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– Involve a wholesaler that develops a contractual relationship with
small, independent retailers.
– Standardize and coordinate buying practices, merchandising programs,
• Retailer-sponsored cooperatives.
– Consist of small, independent retailers.
– Form an organization that:
* Operates a wholesale facility cooperatively to…
* Concentrate their buying power through the wholesaler.
– Plan collaborative promotional and pricing activities.
– Examples: Associate Grocers and Ace Hardware.
• Franchising.
– Is a contractual arrangement between:
* A parent company (a franchisor) and…
* An individual or firm (a franchisee).
– Allows the franchisee to operate a certain type of business:
c. Four types of franchise arrangements are:
• Manufacturer-sponsored retail franchise systems.
– Is where a manufacturer:
* Licenses dealers to sell its products…
* Subject to various sales and service conditions.
– Example: Ford and its dealerships.
• Manufacturer-sponsored wholesale franchise systems.
– Is where a manufacturer:
* Licenses wholesalers that purchase the product…
• Service-sponsored retail franchise systems.
– Is where a firm:
* Has designed a unique approach for performing a service and…
Chapter 15 - Managing Marketing Channels and Supply Chains
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* Wishes to profit by selling the franchise to others.
– Example: McDonalds.
• Service-sponsored franchise systems.
– Is where a franchiser:
* Licenses individuals or firms to…
3. Administered Systems.
a. Administered vertical market systems:
• Achieve coordination at successive stages of production and distribution…
• By the size and influence of one channel member rather than through
ownership.
b. Procter & Gamble (P&G):
• Is able to obtain cooperation from supermarkets to display, promote, and
price its products…
c. Walmart:
• Given its position as the world’s largest retailer…
• It can obtain cooperation from manufacturers in terms of product
specifications, price levels, and promotional support.
Chapter 15 - Managing Marketing Channels and Supply Chains
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LEARNING REVIEW
15-3. What is the difference between a direct and an indirect channel?
15-4. Why are channels for business products typically shorter than channels for
consumer products?
15-5. What is the principal distinction between a corporate vertical marketing system
and an administered vertical marketing system?
Answer: A corporate vertical marketing system combines successive stages of
III. MARKETING CHANNEL CHOICE AND MANAGEMENT [LO 15-3]
Marketing channels:
• Link a producer to its buyers.
• Provide the means through which a firm executes its marketing strategy.
A. Factors Affecting Channel Choice and Management
Marketers ask three questions when choosing a marketing channel and intermediaries:
• Which will provide the best coverage of the target market?
• Which will best satisfy the buying requirements of the target market?
• Which will be the most profitable?
1. Target Market Coverage.
a. Achieving the best target market coverage requires attention to the:
• Density—the number of stores in a given geographical area.
• Type of intermediaries used at the retail level of distribution.
Chapter 15 - Managing Marketing Channels and Supply Chains
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b. Three degrees of distribution density exist:
• Intensive distribution.
– Is when a firm places its offerings in as many outlets as possible.
– Is usually chosen for convenience products or services.
• Exclusive distribution.
– Is when only one retail outlet in a specific geographical area carries the
firm’s products.
– Is the extreme opposite of intensive distribution.
– Is typically chosen for specialty products or services.
– Is preferred by retailers and industrial distributors because:
• Selective distribution.
– Is when a firm selects a few retail outlets in a specific geographical
area to carry its products.
– Lies between these two extremes:
* Weds the market coverage benefits of intensive distribution with…
* The control over resale evident with exclusive distribution.
– Is the most common form of distribution density.
2. Buyer Requirements.
a. A second consideration in channel choice:
• Is gaining access to channels and intermediaries that…
• Satisfies at least some of the interests buyers might want fulfilled when
they purchase a firm’s products or services.
b. These interests fall into four categories:
• Information.
– Is an important requirement when buyers have limited knowledge
and/or desire specific data about a product or service.
• Convenience.
– Has multiple meanings for buyers.
* May mean proximity of driving time to a retail outlet.
Chapter 15 - Managing Marketing Channels and Supply Chains
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* For others, it may mean a minimum of time and hassle.
– For those who shop on the Internet, convenience means that:
* Websites must be easy to locate and navigate.
* Image downloads must be fast.
– Bottom line: Observe the “eight second rule:
* Consumers abandon their efforts to enter or navigate a website if…
• Variety.
– Reflects buyers’ interest in having numerous competing and
complementary items from which to choose.
– Is evident in both the breadth and depth of products and brands carried
by intermediaries, which enhances their attraction to buyers.
• Pre- or post-sale services.
– Are provided by intermediaries.
3. Profitability.
a. Is determined by the margins earned (revenue minus cost) for each channel
member and for the channel as a whole.
b. Channel costs include distribution, advertising, and selling expenses.
Chapter 15 - Managing Marketing Channels and Supply Chains
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APPLYING MARKETING METRICS
Channel Sales and Profit at Charlesburg Furniture
Charlesburg Furniture sells its furniture through furniture store chains, independent
furniture stores, and department store chains in the southern U.S. The company has
traditionally allocated its marketing funds for cooperative advertising, in-store displays, and
retail sales support on the basis of dollar sales by channel.
Your Challenge.
Review the company’s sales and profit in its three channels and recommend a course
of action. The question: Should Charlesburg Furniture continue to allocate its marketing
funds on the basis of channel dollar sales or profit?
Your Findings.
Charlesburg Furniture tracks the sales and profit from each channel (and individual
customer) and sales trends on its marketing dashboard. Several findings stand out:
• Furniture store chains and independent furniture stores account for 85.2 percent of
Charlesburg Furniture sales and 93 percent of company profit.
Your Actions.
• Charlesburg Furniture should consider abandoning the practice of allocating
marketing funds solely on the basis of channel sales volume.
• The importance of independent furniture stores to Charlesburg’s profitability warrants
further spending, particularly given this channel’s favorable sales trend.
