CHAPTER 13

Logistics and Channel Management

THE ROLE OF LOGISTICS

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 customer’s needs at a profit. The term
supply chain management has come into common usage to describe logistical systems that
emphasize close cooperation and comprehensive interorganizational management to
integrate the logistical operations of the different firms into the channel. Even the most
carefully designated 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.

LOGISTICS SYSTEMS, COMPONENTS AND COST

1. Transportation – 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.

2. 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 distance 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 rather routine activity that does not require a great deal of thought to
do well. The importance of order processing in logistics lies in its relationships with order
cycle time, which the time between when an order is placed and when it is received by the
customer.

4. Inventory Control – it refers to the firm’s attempt to hold the lowest level of inventory
that will still enable it to meet customer demand.

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 decision, each of which can be difficult and complex
to deal with. The most basic of these dimensions are (1) the location of warehouse facilities
(2) the number of warehousing units (3) the size of units (4) the design of units, including
lay-out and internal systems and (5) the questions of ownership.

6. Packaging – packaging and the cost associated with packing of products are relevant as a
component of the logistics system because packaging can affect the other components
system, and vice versa. For example, the type of transport used can affect packaging and
packing costs.

THE OUTPUT OF THE LOGISTICS SYSTEM: CUSTOMER SERVICE

& 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 customershappy or creating in customer’s mind the perception of an
organization that is easy to do business with. A number of attempts have been made to
define and enumerate these services and to measure performance in terms of what logistics
experts refer to as service standards. Heskett, Galskowsky and Ivie, for example, stress the
following nine categories of logistics service standards:

1. Time from order receipt to order shipment

2. Order size and assortment constraint

3. Percentage of items out of stock

4. Percentage of ordered 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 shipment to order delivery)

9. Ease and flexibility of order placement

LaLonde 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. Postsale product support

FOUR KEY AREAS OF INTERNET BETWEEN LOGISTICS

AND CHANNEL MANAGEMENR

1. Defining Logistics Service Standards

In general, the higher the service standards offered by the manufacturer, the higher the cost
will be. While well-designed logistics systems and modern technology can keep these cost
under control, it is usually not possible to completely escape the trade-off of higher costs for
higher service standards .A manufacturer or other channel member must cover the costs
either indirectly in the price it charges for products or by passing them along to channel
members in the form of service charges.

2. Evaluating the Logistics Program

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 app”
(high-tech software for synchronizing the supply chain) do not live up to over-hyped
expectations.

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. Steward 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:

o Fewer out-of-stock occurrences

o Reduced channel member inventories

o Increased manufacturer support for channel members

4. Monitoring the Logistics System

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.

CHAPTER 14
Evaluating Channel Member Performance

FACTORS AFFECTING SSCOPE AND FREQUENCY OF EVALUATION

1. Degree of Control

The degree of control a producer, manufacturer or franchisor has over its channel members
plays a major role in determining the scope and frequency of its evaluation. If control is
based on strong contractual agreements with channel members, the channel manager is in a
position to demand a great deal of information on channel member performance on
virtually every aspect of the channel members’ operations.

2. Importance of Channel Members

For the manufacturer who sells all of its output through intermediaries, the evaluation of
channel members is likely to be much more comprehensive than for manufacturers who rely
less on intermediaries. This is because the firm’s success in the market is so directly
dependent on the channel members’ performance.

3. Nature of the Product

Generally, the more complex the product is, the broader the scope of the evaluation and
vice versa. For example, a manufacturer of high-volume products of low unit value requiring
little after-sale servicing may settle for routine sales data as the basis for an evaluation of
channel members.

4. Number of Channel Members

For the manufacturer using distribution, channel member evaluation may be little more than
a cursory“once over lightly” look at current sales figures. Some manufacturers find it
necessary to use an“evaluation by exception” process whereby a more thorough evaluation
is reserved only for those channel members who show sales figures that are unusually out of
line.

PERFORMANCE EVALUATION VERSUS DAY-TO-DAY MONITORING

Pegram identified two basic types of evaluating approaches:

The first type of evaluation is basically a routine, day-to-day monitoring of performance of

the channel members based almost exclusively on sales criteria. Billings of sales to the
channel members, reflected in standard sales analysis reports (such as from scanner data),
can furnish the basic information needed for this kind of evaluation.
The second approach is much broader evaluation procedure that usually involves a number
of criteria besides sales. As an example of this more comprehensive approach to channel
member evaluation, consider the case of the well-known paint manufacturer Glidden.
Glidden sells a large portion of its paints through giant home improvement retailer home
depot.

CHANNEL MEMBER PERFORMANCE AUDIT

The channel member performance audit is a periodic and comprehensive review of channel
member performance. The audit may be done for one, several or all of the channel
members at the wholesale and/or retail levels. The frequency of the audit varies, bbut
seldom is it done more frequently than once per year per channel member. The channel
member performance audit consists of three phases: (1) developing criteria for measuring
channel member performance; (2) periodically evaluating the channel member’s
performance against the criteria and (3) recommending corrective actions to reduce the
number of inadequate performances.