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Chapter 13

Logistics and Channel Management


Chapter Objectives
In this chapter we turn our attention to the fourth major element needed to foster a cooperative team of
channel members—an effective and efficient logistics system. In recent years, the term supply chain
management has been used to describe logistics systems characterized by strong cooperation among
channel members in partnerships and strategic alliances to gain efficiencies and thereby lower the total
cost of logistics while improving customer service. The basic role of logistics is to get the right amount of
the right products to the right place at the right time.
Any logistics system consists of six basic components: (1) transportation; (2) materials handling; (3)
order processing; (4) inventory control; (5) warehousing and (6) packaging
Channel management interfaces with logistics management in at least four areas: (1) defining channel
member service standards; (2) making sure a proposed logistics program meets those standards; (3)
selling the program to the channel members and (4) monitoring the program once instituted to determine
if it continues to meet channel members’ service needs.
If the manufacturer can convince channel members that the logistics program will help to (1) minimize
out-of-stock occurrences; (2) reduce channel member inventory requirements and (3) strengthen the
manufacturer channel member relationship in a way that benefits the channel members, the manufacturer
has a potent set of appeals for selling the logistics program to the channel members.
Learning objectives
After reading this chapter you should:
1) Be familiar with the definition of logistics, or physical distribution.
2) Have an awareness of the recent supply chain management emphasis of logistics.
3) Be aware of the role of logistics in the firm.
4) Understand the systems concept and the total cost approach as they apply to logistics.
5) Know the major components of any logistics system.
6) Recognize that the output of a logistics system is good customer service.
7) Be cognizant of the distinction between logistics management and channel management.
8) Have an overview of four key interfaces between channel management and logistics
management.

Chapter Topics
1) The Role of Logistics
2) Logistics Systems, Components, Cost
3) The Output of Logistics System: Customer Service and Competitive Advantage
4) Four Key Areas of Interface between Logistics and Channel Management
Chapter Outline
Logistics, also often referred to as physical distribution (PD), has many definitions, but most share the
same underlying theme expressed in Kotler’s classic definition, which defines logistics as “Planning,
implementing, and controlling the physical flows of materials and final goods from points of origin to
points of use to meet customers’ needs at a profit.”
In more recent years, with the growing emphasis on marketing channels cooperating in partnerships and
strategic alliances (see Chapter 9), the term supply chain management (SCM) has come into common
usage to describe logistical systems that emphasize close cooperation and comprehensive inter-
organizational management to integrate the logistical operations of the different firms into the channel.

The Role of Logistics


Even the most carefully designed and managed marketing channel must rely on logistics to actually make
products available to customers. The movement of the right amount of the right products to the right place
at the right time—a commonly heard description of what logistics is supposed to do—is more than a
catchy phrase. It is, in fact, the essence of the role of logistics in the marketing channel.
In fact, the field has become so complex and sophisticated that a multibillion-dollar industry referred to as
third-party logistics providers (sometimes referred to as 3PLs) has emerged during the past two decades.
These firms specialize in performing most or all of the logistical tasks that manufacturers or other channel
members would normally perform themselves.
As specialists in logistics, companies such as Strategic Distribution Inc. (SDI), which focus on
maintenance, repair and operating supplies (MRO), are able to provide superior service at lower cost than
the firms who hire them. Here is how SDI describes the logistical services it offers to its clients on its
Web site:
Our end goal is to help you cut costs up and down your supply chain. But our approach focuses
on solutions, not products. We deliver the technology and processes that give you the power to
manage. We dig deep into the mundane details of MRO—through stacks of work orders,
hundreds of suppliers, and thousands of SKUs—and uncover opportunities to help you save.
The initiative, referred to in the industry as Efficient Consumer Response (ECR), seeks to provide
consumers with better service and more value through the cooperation of all firms in the supply chain.
So, logistics—getting the right amount of the right products to the right place at the right time at the
lowest possible cost to the customer (whether captured in new, perhaps more exciting, terms such as
supply chain management and Efficient Consumer Response or in the traditional “plain vanilla” term
“logistics”)—unquestionably plays a crucial role in channel management.
Logistics Systems, Components and Costs
This concept of logistics as a system has served as the foundation of modern logistics management.13 In
essence, those in charge of managing logistics seek to find the optimum combination of basic logistics
components to meet customer service demands.
1. Transportation
2. Materials handling
3. Order processing
4. Inventory control
5. Warehousing
6. Packaging

1.) Transportation
Transportation is the most fundamental and obviously necessary component of any logistics system, for
clearly, in the case of physical products that must be moved from one location to another, a transaction
cannot be completed until transportation has occurred. Transportation is also quite often the component
accounting for the highest percentage of the total cost of logistics.
From a logistics management standpoint, the overriding issue facing the firm is choosing the optimum
mode of transportation to meet customer service demands. This can be a very complex and technical task
because there are so many considerations. A few of these are:
1. Should the firm use its own carriers or common carriers?
2. What are the different rates available?
3. What specific transportation services are offered?
4. How reliable are various common carriers?
5. What modes of transport are competitors using?

2.) Materials Handling


Materials handling encompasses the range of activities and equipment involved in the placement and
movement of products in storage areas. Issues that must be addressed when designing materials handling
systems include how to minimize the distances products are moved within the warehouse during the
course of receiving, storage and shipping; what kinds of mechanical equipment (such as conveyor belts,
cranes and forklifts) should be used and how to make the best use of labor when receiving, handling and
shipping products.
3.) Order Processing
The task of filling customer orders may at first appear to be a minor part of logistics and a rather routine
activity that does not require a great deal of thought to do well. In fact, order processing is often a key
component of logistics and developing an efficient order processing system can be far from routine.
The importance of order processing in logistics lies in its relationships with order cycle time, which the
time is between when an order is placed and when it is received by the customer. If order processing is
cumbersome and inefficient, it can slow down the order cycle time considerably. It can even increase
transportation costs if a faster mode of transportation must be used to make up for the slow order
processing time.
“Routine” order processing may actually be the result of a great deal of planning, capital investment and
training of people. When many thousands of orders are received on a daily basis, filling the orders quickly
and accurately can be a challenging task.

4.) Inventory Control


Inventory control refers to the firm’s attempt to hold the lowest level of inventory that will still enable it
to meet customer demand. This is a never-ending battle that all firms face. It is a critically important one
as well. Inventory carrying costs—including the costs of financing, insurance, storage and lost, damaged
and stolen goods—on average can amount to approximately 25 percent of the value of the inventory per
year.
Average inventory carrying costs rise in direct proportion to the level of the inventory, while average
ordering costs decrease in rough proportion to the size of the order. Thus, a trade-off must be made
between these two costs to find the optimum levels for both. This point, usually referred to as the
economic order quantity (EOQ), occurs at the point at which total costs (inventory carrying costs plus
ordering costs) are lowest.

5.) Warehousing
The warehousing or storage component of a logistics system is concerned with the holding of products
until they are ready to be sold. Warehousing can actually be one of the more complex components of a
logistics system because, quite often, warehousing options entail several key decisions, each of which can
be difficult and complex to deal with. The most basic of these decisions are:
(1) The location of warehouse facilities;
(2) The number of warehousing units;
(3) The size of units;
(4) The design of units, including layout and internal systems and
(5) The questions of ownership.

6.) Packaging
Packaging and the costs associated with the packaging of products are relevant as a component of the
logistics system because packaging can affect the other components of the system, and vice versa.
Packaging is far more than a promotional device for fostering product differentiation and attracting
consumer attention. Packaging has an important logistics dimension that can make a significant difference
in the effectiveness and efficiency of the logistics system. Indeed, a product in distinctive and effective
packaging will have even more appeal if it is also easy to handle, stacks up with no problem and takes
minimum space on the channel members’ shelves.

The Output of the Logistics System: Customer Service and Competitive Advantage
Johnson et al. capture succinctly the meaning and importance of customer service in the context of
logistics:
Customer service is the collection of activities performed in filling orders and keeping customers
happy or creating in the customer’s mind the perception of an organization that is easy to do
business with.
The following nine categories of logistics service standards:
1) Time from order receipt to order shipment
2) Order size and assortment constraints
3) Percentage of items out of stock
4) Percentage of orders filled accurately
5) Percentage of orders filled within a given number of days from receipt of the order
6) Percentage of orders filled
7) Percentage of customer orders that arrive in good condition
8) Order cycle time (time from order placement to order delivery)
9) Ease and flexibility of order placement
La Londe describes customer service in terms of the six key elements:
1) Product availability
2) Order cycle time
3) Distribution system flexibility
4) Distribution system information
5) Distribution system malfunction
6) Post sale product support

Four Key Areas of Interface between Logistics and Channel Management


Channel management and logistics management work together to provide effective and efficient
distribution. But such meshing of channel management and logistics management requires good
coordination. This especially applies to four major interfaces between channel management and logistics
management:
1) Defining the kinds of logistics service standards that channel members want
2) Making sure that the proposed logistics program designed by the manufacturer meets
channel member service standards
3) Selling channel members on the logistics program
4) Monitoring the results of the logistics program once it has been instituted
Interface 1. Defining Logistics Service Standards
In general, the higher the service standards offered by the manufacturer, the higher the costs will be.
While well-designed logistics systems and modern technology can keep these costs under control, it is
usually not possible to completely escape the trade-off of higher costs for higher service standards.
It was found that three key factors—timelines of deliveries, availability of products and condition of
products—significantly influence purchasing managers’ perceptions of the quality of logistical service,
with timeliness being the most important of the three. Thus, manufacturers now have empirically based
findings on what industrial customers are seeking with regard to logistics service, or what the authors
refer to as physical distribution service quality (PDSQ).
The development of logistics service standards should not be based solely on the views of the
manufacturer; channel members’ views should also be incorporated. If this is done, the set of logistics
service standards developed by the manufacturer is much more likely to reflect the kinds and levels of
service that the channel members actually want, rather than what the manufacturer may think they want.
Since the channel members, in one way or another, pay for the logistics services offered by
manufacturers, they should at least have some say in what they are getting for their money.

Interface 2. Evaluating the Logistics Program


A logistics program may be offered to channel members as a separate entity or may be included as a
major component of the manufacturer’s overall approach for supporting channel member needs.
Inadequate evaluation of a logistics system can lead to horrendous problems in business-to-business
markets as well. This is especially the case when so-called “killer software apps” (high-tech software for
synchronizing the supply chain) do not live up to over-hyped expectations.
No matter how high tech and exciting a logistics system may appear, the channel manager still needs to
assess what can realistically be expected as well as what might happen if something goes wrong.
Interface 3. Selling the Channel Members on the Logistics Program
Regardless of how good a manufacturer perceives its logistics program to be, it still must convince
channel members of its value.41 Stewart made this point succinctly in the seminal discussion of this
topic:
A word of caution! Changes in [physical] distribution must be palatable to the company’s
customers [channel members]. Changes which provide cost benefits only to the manufacturer
without corresponding benefits to customers may be more difficult to implement than those that
offer incentives to customers to change.
Stewart went on to suggest several types of appeals that, if emphasized by the manufacturer in
attempting to sell the logistics program, may help the manufacturer to be more convincing. They are as
relevant today as ever. Manufacturers should emphasize that a new logistics program can foster:
1) Fewer out-of-stock occurrences.
2) Reduced channel member inventories.
3) Increased manufacturer support for channel members.

1.) Minimizing Out-of-Stock Occurrences


By minimizing out-of-stock occurrences through an improved logistics program, sales lost by
the channel members will be reduced. Thus, if a manufacturer can convince channel members that the
new logistics system will indeed help them achieve this result, it has a very potent argument for gaining
an enthusiastic reception for the program. Indeed, reducing the problem of stock outs is probably the
strongest appeal that can be presented to channel members because it is such a bottom-line factor.
Computer-to-computer ordering arrangements and Electronic Data Interchange (EDI) are
good examples of systems that do appear to be living up to the benefits promised. Now widely used,
these systems have revolutionized traditional ordering practices and drastically reduced out-of-stock
occurrences. Rather than having to write an order, phone it in and wait for confirmation, a channel
member simply inputs the order on a computer terminal and it is electronically transferred to the
manufacturer’s computer system almost instantaneously.
In recent years, the availability of the Internet and networked personal computers has
substantially lowered the cost of computer-to-computer ordering systems. Instead of having to invest in
large mainframe computers and the specialized programs and training often needed for older EDI
systems, small businesses can now use their desktop PCs and the Internet to achieve results that in the
past required far more expensive and dedicated EDI infrastructure.

2.) Reducing Channel Member Inventory Requirements


A well-designed and responsive logistics program can mean shortened channel member order
cycles, which in turn can mean the channel members can carry lower inventories. To the extent that a
manufacturer can develop such a logistics program to a greater degree than its competitors, the possibility
exists for channel members to gain an economic advantage by doing more of their business with this
particular manufacturer. The kanban, or just-in-time (JIT), system of inventory management developed
by the Japanese automotive industry is perhaps the most talked about example of a logistics innovation
that can have spectacular effects in terms of reducing inventory requirements. The principle of JIT is to
have only enough inventory on hand to meet immediate production needs with no reserve stock. In this
way, manufacturers receive parts and materials “just in time” to meet the day’s manufacturing quota with
virtually no extra. But the JIT approach depends on excellent cooperation between the manufacturer and
its suppliers and also on a superbly designed and executed logistics system. If done well, though, the
results can be dramatic because inventory costs can be reduced by tremendous amounts, sometimes well
over 50 percent.
While the just-in-time system has been associated mainly with manufacturers, and
particularly the automotive industry, it has a much wider potential application. Indeed, knowledgeable
observers believe it could apply to virtually any industry and all types and levels of channel
relationships.46 Moreover, the system may well set the pace, or even become the norm, for what is
expected from efficient logistics systems—perfection in the flow of any type of goods from vendor to
purchaser. Hence firms that are unable to keep up with this pace may well find themselves at a serious
competitive disadvantage.

3.) Strengthening the Manufacturer-Channel Member Relationship


A carefully designed logistics program aimed at improving service to the channel members
can serve as one of the most tangible signs of the manufacturer’s concern and commitment to the channel
members’ success. In presenting a proposed logistics program to the channel members, the channel
manager should emphasize that the program was conceived to help them (the channel members) to be
more successful.
Improved logistics management offers great potential as a strategic marketing tool. But it
will offer even greater potential to manufacturers who are able to extend their superior logistics
capabilities to help channel members improve their logistics and marketing capabilities as well.

Interface 4. Monitoring the Logistics System


Over three decades ago, while referring to the need to continually monitor a logistics system, Weeks
coined a rule, which he calls the Great Physical Distribution Management Paradox (GPDMP). This rule
applies today more than ever:
Any given PD strategy, carefully thought out, wholeheartedly accepted, honestly implemented,
thoroughly debugged and scrupulously maintained, will be hopelessly inappropriate five years
later.
The channel manager should continually monitor the channel members’ reactions to logistics programs.
The principal objectives of such monitoring are to appraise channel members’ responses to the program
and to find out whether modifications are needed.
The most effective way of monitoring channel member reactions is to conduct a survey of a sample of
channel members. If the number of channel members is small, it may be feasible to include all of them.
The survey dealing with the logistics program may be conducted as part of an overall marketing channel
audit, or separately. In either case, the key areas of customer service at which the logistics program was
aimed should be examined. The manufacturer must be careful, however, to follow through by actually
making improvements in those areas of logistics service that channel members feel are deficient.
According to a seminal study of channel member responses to such logistics surveys, channel member
satisfaction with the manufacturer’s logistics program tends to decrease when channel members who
pointed out deficiencies see no subsequent attempts to remedy the deficiencies.