CHAPTER 13: DISTRIBUTION AND

PRICING

Right Product, Right Person, Right Place,

Right Price

DISTRIBUTION: GETTING YOUR

PRODUCT TO YOUR CUSTOMER
Distribution is a key element of the marketing mix
Where should the product be sold?
How will it get to the location(s) from the factory?

Channel of Distribution
the network of organizations and processes
that links producers to consumers

DISTRIBUTING DIRECTLY TO THE

CONSUMER

Direct Channel
Distribution process that links the
producer and the customer with
no intermediaries.

CHANNEL INTERMEDIARIES

Channel Intermediaries
informally called middlemen. They
facilitate the movement of products
from the producer to the consumer.

DISTRIBUTORS: STREAMLINING
CONSUMER TRANSACTIONS

Grocery
Store

THE ROLE OF DISTRIBUTORS:

ADDING VALUE (Utility)

THE MEMBERS OF THE CHANNEL

Wholesalers
distributors that buy
products from producers
and sell them to other
businesses or
non-final users.
Retailers the
distributors that sell
products directly to
the ultimate users

WHOLESALERS: SORTING OUT THE

OPTIONS

Merchant Wholesalers

Take legal possession/title

Full-service
Limited Service
Drop

Shippers
Cash and Carry
Truck Jobbers

Agents/Brokers

Dont take title of the goods

RETAILERS: THE CONSUMER

CONNECTION

Store Retailers
Non-Store Retailers

Online
Direct Response
Direct Selling
Vending

DISTRIBUTION STRATEGY

Price / Product

MULTICHANNEL RETAILING

Store

Retailers are
encouraging
consumers to buy
through multiple
channels

PHYSICAL DISTRIBUTION:
PLANES, TRAINS, AND MUCH,
MUCH
Determining
theMORE
best distribution
channels for your product is only half
the distribution strategy.
Supply Chain Management
planning and coordinating the
movement of products along
the supply chain
Logistics focuses on
the tactics involved in
moving the products
How will the product flow through the

ELEMENTS OF THE SUPPLY

CHAIN

SUPPLY CHAIN MANAGEMENT

DECISIONS

Warehousing
Materials Handling
Inventory Control
Order Processing
Customer Service
Transportation
Security

TRANSPORTATION DECISIONS
MODES OF TRANSPORTATION:
Mode

Percent
age of
U.S.
Volume

Speed

On-Time
Dependab
ility

Flexibili
ty in
Handlin
g

Frequen
cy of
Shipme
nts

Cost

Availabil
ity

Rail

39.5%

Medium

Slow

Medium

Medium

Low

Extensive

Truck

28.6%

High

Fast

High

Medium

High

Most
Extensive

Ship

12.0%

Lowest

Slowest

Lowest

Highest

Lowest

Limited

Plane

0.3%

Highest

Fastest

Medium

Low

Medium

Medium

Pipelin
e

19.6

Low

Slow

Highest

Lowest

Highest

Most
Limited

PRICING : A HIGH STAKES GAME

Pricing plays a key role in the demand

for products
Price is a tough variable

Legal constraints
Intermediary pricing

Stable pricing is not the norm

Prices must constantly be evaluated

PRICING OBJECTIVES AND

STRATEGIES

Building Profitability

Matching the
Competition

Creating Prestige

Skimming Pricing

Boosting Volume

Penetration Pricing
Every-day-low Pricing
High/Low Pricing
Loss Leader Pricing

AMAZON STIRS UP A PRICE

WAR
Revamped Kindle Tablets Undercut Apple's iPad

Amazon's new tablets are the latest move to expand into

the hardware market by competing on price. While Apple has
typically priced its products at a premium, Amazon plunged into the
tablet market last year with a Kindle Fire for $199, which at the time was
one of the lowest prices in the market.

Amazon's prices are a differentiator in an increasingly crowded

tablet market. "Amazon did what it has to do to compete with Apple,
Google and other tablet makers," said Colin Sebastian, a Robert W. Baird &
Co. analyst. "This will put some pressure on them, particularly on price."

Mr. Bezos suggested Amazon may break even or even lose

money on the sale of its devices. The company expects to recoup
the money later through the sale of apps and services such as its annual
$79 Prime fast-shipping membership.

"We want to make money when people use our devices, not
when they buy our devices," Mr. Bezos said at Thursday's event.
Source: Wall Street Journal September 7, 2012

SLIPPERY FINGER ONLINE PRICING

GOOFS

Free flights from Los Angeles to Fiji.

Round-trip tickets from San Jose, California,

to Paris for $27.98.

$1,049 televisions wrongly listed for $99.99

on Amazon.

$588 Hitachi monitors mistakenly priced at

$164.

$379 Axim X3i PDAs wrongly priced at $79

on Dells site.

PRICING IN PRACTICE
Breakeven analysis
the process of determining the number of units that must be sold to
cover costs.
Total fixed cost (FC)

Breakeven Point (BP) =

Price/Unit (P) Variable cost/unit (VC)

Businesses make decisions to adjust the price and/or costs.

Raise prices
Decrease variable costs
Decrease fixed costs

FIXED MARGIN PRICING

Profit Margin the gap
Cost-Based
between cost and the price
per product.

Pricing

Demand-Based Pricing

CONSUMER PRICING PERCEPTIONS:

THE STRATEGIC WILD CARD

Consumer price perceptions can defy

logic!
The link between price and perceived
quality can be powerful

Consumers will use price as a quality

indicator

Does odd pricing like $196 or $199

always mean a bargain?

PSYCHOLOGICAL PRICING

of
y
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A re
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i
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ole
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n
u
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m
a

CHAPTER 18: OPERATIONS

MANAGEMENT
Putting It All Together

OPERATIONS MANAGEMENT: IT ISNT

GLAMOROUS, BUT IT MATTERS.
Operations
Operations Management
Management planning,
planning,
organizing,
organizing, leading
leading and
and controlling
controlling all
all the
the
activities
activities in
in creating
creating value
value by
by producing
producing goods
goods
and
and services
services and
and distributing
distributing them
them to
to customers
customers

Good
Good Operations
Operations Management:
Management:

Most
Most efficient
efficient and
and effective
effective processes
processes

Produce
Produce the
the right
right goods
goods and
and services
services

Produce
Produce the
the right
right quantities
quantities

Distribute
Distribute products
products to
to the
the right
right customers
customers at
at the
the

right
right time
time

EFFECTIVENESS VS.
EFFICIENCY

There is nothing so useless as doing efficiently that which

should not be done at all
- Peter Drucker

GOODS

VS.

SERVICES

WHAT DO OPERATIONS
MANAGERS DO?

FACILITY LOCATION

GOING OVERSEAS

Low-wage labor is a key reason firms

focus overseas but, low wages do not
always translate into low cost
There are a variety of opportunities in
rapidly growing foreign markets
Key to balance advantages with
drawbacks:

Different laws and customs

Inadequate infrastructure
Inexperienced workers
Political instability

PROCESS SELECTION AND FACILITY

LAYOUT

Flow Shops

Produce Large Batches

Standardized Products
Specialized Machinery
Standardized Tasks
Assembly Line is a Flow Shop Process

Job Shops

Produce Small Batches

Variety of Products
General-purpose Machinery
Flexible Processes

TECHNOLOGY OF OPERATIONS
AUTOMATION: LET THE MACHINES DO IT

Automation replacing
human operations and
control of machinery
and equipment with some
Robot a
form of programmed control.
programmable machine that
is capable of manipulating
materials in order
to perform tasks.

ROBOTS
Robots are well
suited for
dangerous, tedious,
dirty and physically
demanding tasks.
Robots dont get
tired
Robots are flexible

INVENTORY CONTROL: DONT JUST SIT

THERE
Why hold
inventories
Smooth out
production
schedules
Meet
demand
increases
Reduce
switching
costs

Why not
Unsold
inventory
ties up funds
Inventory
must be
warehoused
and
managed
Risk of
losses due to
spoilage,

REDUCING INVESTMENT IN
INVENTORY: JUST-IN-TIME TO THE
RESCUE

Produce goods and services to meet

actual demand. Minimize
inventories
at all stages of the supply chain
through coordination.

MANAGING PROJECTS

Production of some products are

projects
Projects are usually complex and
expensive

New House/Building
Filming a Movie

Managers use Gantt charts and critical

path method to manage projects

PROJECT SCHEDULING
Activity

Operations Managers
must manage and
schedule projects
Scheduling starts with
identifying the required
activities, the time
required and the order
in which they must
happen

Immedia
te
Predeces
sor

Time
(Wee
ks)

None

B. Determine site for

Arena

C. Preliminary Design
Developed

D. Obtain Major
Donation for Funding

B,D

F. Select Architect

G. Establish Budget

H. Obtain Remaining
Financing

F,G

10

A. Survey of Needs

E. Obtain Board
Approval

GANTT CHART

CRITICAL PATH METHOD

The essential technique for using CPM is to construct a model
of the project
that includes the following:
A list of all activities required to complete the project
The time (duration) that each activity will take to completion
The dependencies between the activities.

MANAGING SUPPLY CHAINS

Supply chains can be

complex

Wide range of functions

Involve many firms

Heavy use of technology

RFID

Chips

Internet has provided great

tools for supply chain
management

TRADE-OFF BETWEEN VERTICAL

INTEGRATION AND OUTSOURCING

Vertical
Integration

Gain control over

supply chain
Begin producing
its own parts
Buying suppliers

Outsourcing

Use outside firm

for producing
supplies
Focus on key
production areas
Cost savings

The trend has been to rely more on outsourcing

which has become a controversial issue.

FOCUS ON QUALITY

Quality improves effectiveness

and efficiency
Quality helps achieve competitive
advantage
Lower costs, increases value
Poor quality costs

DEMING CHAIN REACTION

Improve Quality

W. Edwards Costs decrease because of less rework,

Deming, viewed fewer mistakes, fewer delays and snags,
and better use of time and materials
as the father of
the quality
Productivity Improves
movement, first
proposed the
Capture the market with better
relationship
quality and lower price
between quality
Stay in business
and business in
the early 1950s.
Provide jobs and more jobs

HOW AMERICAN FIRMS

RESPONDED TO THE QUALITY
CHALLENGE

Total Quality Management:

Customer Focus
Build quality throughout the organization
Empowerment of employees
Focus on prevention of errors
Long-run commitment to continuous
improvement

QUALITY APPROACH: SIX SIGMA

Single unifying measure: to reduce defects of

operation to a level of no more than 3.4 million

Organization-wide focus on quality

Prevention rather than correction

Rigorous and challenging goal

Rely on employee training and expert

guidance

Advanced techniques, high level of expertise

INTERNATIONAL
ORGANIZATION FOR
STANDARDIZATION

Founded in 1947

Network of national standards institutes

in 150 nations

ISO 9000 Certification

Generic quality standards

Updated and modified, latest version is ISO

9000:2005

Environmental management focused

standards: ISO 14000

THE BALDRIGE NATIONAL QUALITY

PROGRAM

Created by Congress in 1987

to encourage global
competition

Participating firms are

extensively evaluated

Detailed reports of company

strengths and weaknesses
The 2012 Baldrige Award recipients listed by Industry categoryare:
Lockheed Martin Missiles and Fire Control, Grand Prairie, Texas (manufacturing)
MESA Products Inc., Tulsa, Okla. (small business)
North Mississippi Health Services, Tupelo, Miss. (health care)
City of Irving, Irving, Texas (nonprofit)