Channel MGT Handout CH 1-8

Chapter One
An overview of logistics and channel management
Chapter objectives
At the end of this chapter you will be able to
 Define logistics
 Describe the role and importance of logistics
 Analyze the logistics system
 Identify the logistics cost and components
Introduction
All organizations move materials. Manufacturers build factories that collect raw materials from
suppliers and deliver finished goods to customers; retail shops have regular deliveries from
wholesalers; a television news service collects reports from around the world and delivers them
to viewers; most of us live in towns and cities and eat food brought in from the country; when
you order a book or DVD from a website, a courier delivers it to your door. Every time you buy,
rent, lease, hire or borrow anything at all, someone has to make sure that all the parts are brought
together and delivered to your door. Logistics is the function that is responsible for this
movement. It is responsible for the transport and storage of materials on their journey between
suppliers and customers.
1.1 Evolution of logistics Management

1. Evolution of Logistics
The concept of “Logistics” started many years before Christ and was used by Greek generals
(Leon the Wise, Alexander the Great) in order to describe all the procedures for the army’s
procurement on food, clothing, ammunition, etc.
 Alexander the Great was a big fan of the mobility of his troops and he didn’t want his
troops to stay in one place waiting for supplies from Macedonia. Thus, he tried to resolve
the issues of supplies by using supplies from the local resources of his defeated enemies.
1 MARKETING CHANNEL AND LOGISTICS MANAGEMENT

 For many years, logistics were always an issue in war affairs. Kingdoms and generals
with strategic planning on logistics were those who won the war. World War II was the
major motivation of logistics to increase recognition and emphasis, following the clear
importance of their contribution toward the Allied victory.
Prior 1950s the practice of LM at an enterprise level was fragmentary. However, the late 1950s
were destined to witness the start of a major change in Logistical Management practices.
Because of:
1. The use and development of computer and quantitative techniques
2. The volatility of economic situation forced management to create an
attitude conducive to cost reduction. For this purpose logistics provided a
fertile area for realizing such cost control.
The subsequent development of integrated logistics is reviewed in four time periods during
which revised attitudes and practices emerged regarding movement and storage of materials.
1. 1956-1965 - decade of conceptualization-integrated logistical concept began to

crystallized
2. 1966-1970 -Time to test for relevancy
3. 1971-1979 - period of changing priority
4. 1980-1985 – A period of significant political and technological change
5. 1986 and beyond – Toward integrated logistics
The present and the future offer greater payoffs from the full implementation of integrated
logistical management. The physical/market distribution, manufacturing support and
purchasing/procurement operations must be integrated for better performance because of the
following reasons:
 There is a great deal of interdependence between all logistical areas which can be
exploited to the advantage of the organization
 Control requirements to each operation is similar
 There is a tradeoff between manufacturing economics and marketing
requirements

 The complexity of logistical operation requires innovative approach It involves
the management of the flow of products from the point where they exist as raw
materials to the point where they are finally discarded, suggesting that logistics is
a process.
 The objective of Logistics is to arrange delivery of finished inventory, WIP
inventory, and materials assortments, when required, in usable condition, to the
location where needed, and at the lowest total cost.
 It is through the logistical process that materials flow in to manufacturing
capacity/facilities and products are distributed through marketing channels for
consumption.
1.2 Definition of Logistics
Logistics is the art and science of management, engineering and technical activities concerned
with requirements, design and supplying, maintaining resources to support objectives, plans and
operation.
Fierce competition in today’s market has forced business enterprises to invest in and focus on
supply chains. The growth in telecommunication and transportation technologies has led to
further growth of the supply chain. The supply chain, also known as the logistics network,
consists of suppliers, manufacturing centers, warehouses, distribution centers and retail outlets,
as well as raw materials, work-in-process inventory and finished products that flow between the
facilities.
The logistics management takes into consideration every facility that has an impact on cost. It
plays an important role in making the product conform to customer requirements. Also it
involves efficient integration of suppliers, manufacturers, warehouses and stores and
encompasses the firms’ activities at many levels, from the strategic level through the tactical to
the operational level.
Logistics is a challenging and important activity because it serves as an integrating or boundary

spanning function. It links suppliers with customers and it integrates functional entities across a

company. With the ever-growing competition in today’s market place it becomes necessary for a
firm to use its resources to focus on strategic opportunities. This includes several internal factors
like management style, culture, human resources, facilities and several external factors like
technology, globalization and competition. This is where the concept of logistics plays a major
role, i.e. it helps to leverage certain advantages the firm has in the marketplace.
Logistics management is that part of supply chain process that plans, implements, and controls
the efficient, effective flow and storage of goods, services, and related information from the
point of origin to the point of consumption in order to meet customers’ requirements. It can be
defined as:
Logistics is the process of planning, implementing and controlling the efficient, cost-
effective flow and storage of raw materials, in-process inventory, finished goods and related
information from the point of origin to point of consumption for the purpose of conforming
to customer requirements. (Council of Logistics Management)
1.2 The role and importance of logistics
1.2.1The role of logistics
The movement of the right amount of the right product to the right time in essence of the role of
logistics in the market channel.
1.2.2 Importance of logistics
Essential and expensive

Logistics is essential for every organization. ‘Logistics has always been a central and essential
feature of all economic activity’. Shapiro and Heskett agree, saying that, ‘There are few aspects
of human activity that do not ultimately depend on the flow of goods from point of origin to
point of consumption’. Without logistics, no materials move, no operations can be done, no
products are delivered, and no customers are served.

Not only is logistics essential, but it is also expensive. Organizations may reduce their overheads
as much as possible, but they are often left with surprisingly high logistics costs. Unfortunately,
it is difficult to put a figure to these, and there is a good deal of uncertainty in the area. Normal
accounting conventions do not separate expenditure on logistics from other operating costs, and
there is some disagreement about the activities to include. As a result, very few organizations can
put a precise figure on their logistics expenditure, and many have almost no idea of the costs.
1.3. Logistical System

The logistical process is viewed as a system that links an enterprise with its customers and
suppliers. Information flows from and about customers in the form of forecasts and orders and is
refined through planning in to specific manufacturing and purchasing objectives. As materials
and products are purchased, a value added inventory flow is initiated which ultimately results in
ownership transfer of finished products to customers. Thus, the logistical process is viewed in
terms of two inter related efforts:
1. Value – added inventory flow, and
2. Requirements information flow
1. Value – added inventory flow
Logistics is about creating value-value for customers and suppliers of the firm, and value for
firm’s stakeholders. The operational aspect of logistics is concerned with management of the
movement and storage of materials and finished goods. As such logistical operations are viewed
as commencing with the initial transportation of a material from suppliers and terminating with
the final delivery of a manufactured or processed product to a consumer. From the initial
purchase of a material, the logistical process adds value by placing inventory at the right time
and place required. At each step in the mfg process, a material gains greater potential value as it
is transformed in to finished inventory. = WIP inventory to FG. The ultimate value added is
achieved by the final ownership transfer of finished goods inventory to a customer at specified
time and place.
Logistical operations of an enterprise are divided in to three categories:
1. Market distribution - (concerned with physical movement of finished products to
consumers)

2. Manufacturing support- (concerns control over WIP inventory as it flows b/n
stages of MFG)
3. Purchasing - (concerned with the procurement and movement of materials, parts
and finished inventory from supplier location to mfg or assembly plants,
warehouses or retail stores.)
2. Requirements information flow
Requirement information flow is concerned with the identification of what specific inventory is
needed at which locations within the logistical system. The primary objective of developing
requirements information is to establish a plan to integrate logistical operations and maintain
operational continuity.
1.4. Logistical System Components (the work of logistics)
The performance of value added inventory and requirements information flows is formulated in
to an integrated logistical process by the coordination of:
1. Facility structure
2. Forecasting and order management
3. Transportation
4. Inventory , and
5. Warehousing and packaging
These system components provide a capacity to achieve the operating objectives of physical
distribution, manufacturing support, and purchasing.
1. Facility structure
Classical economics neglected the importance of facility location and overall network design to
efficient business operations. In business operations, however, the number, size, and
geographical relationship of facilities used to perform logistical operations directly impacts
customer service capabilities and cost. The facility network of an enterprise represents a series
of locations to which and through which materials and products flow. Such facilities include
mfg plants, warehouses, and retail stores. The network of facilities selected by an enterprise’s
management is fundamental to logistical efficiency. All business transactions must be developed
within and between frameworks of facility locations. Continuously modifying the facility
network to accommodate change in demand and supply infrastructures is very important because
product assortments, customers, suppliers, and manufacturing requirements are constantly

changing in a dynamic competitive environment. The selection of a superior location network
can provide a significant step toward achieving competitive advantage.
2. Order Processing
Information is critical to logistics operations; the processing of orders is of primary importance
in the logistical process. Current information technology (computerized system) is capable of
handling the most demanding customer requirements. When desired, order information can be
obtained on a real time basis. Forecasting and communication of customer requirements are
the two areas of logistical work driven by information. In most supply chains, customer
requirements are transmitted in the form of orders. The processing of these orders involves all
aspects of managing customer requirements from initial order receipt, delivery, invoicing, and
collection. The logistics capabilities of a firm can only be as good as its order processing
competency.
3. Transportation
Transportation is the operational area of logistics that geographically moves and positions
inventory Provides place utility. Firms have three alternative ways of obtain transportation
capacity.
1. A private fleet of equipment may be purchased or leased
2. Specific contracts may be arranged with transport specialists to provide movement
service
3. Engage the services of any legally authorized transport company that provides point to
point transfer at specified charged
From the logistical system viewpoint, three factors are fundamental to transportation
performance:
i. Cost,
ii. Speed, and
iii. Consistency.
Cost of transport is the payment for shipment between two geographical locations and the
expenses related to maintaining in-transit inventory. Logistical systems should utilize
transportation that minimizes total system cost. This may mean that the least expensive method
of transportation may not result in the lowest total cost of logistics.

Speed of transportation is the time required to complete a specific movement. Speed and cost of
transportation are related in two ways. First, transport firms, capable of offering faster service,
typically charge higher rates. Second, the faster the transportation service is the shorter the time
interval during which inventory is in-transit. Thus, a critical aspect of selecting the most
desirable method of transportation is to balance speed and cost of service.
Consistency of transportation refers to variations in time required to perform a specific
movement over a number of shipments. Consistency reflects the dependability of transportation
and the most important attribute of quality transportation. When transportation lacks consistency,
inventory safety stocks are required to protect against service breakdowns, impacting both the
seller's and buyers overall inventory commitment. Speed and consistency combine to create the
quality aspect of transportation. Note: in designing a logistical system, a balance must be
maintained between transportation cost and service quality. In some circumstances low-cost,
slow transportation is satisfactory. In other situations, faster service may be essential to
achieving operating goals. Finding and managing the desired transportation mix across the
supply chain is a primary responsibility of logistics.
4. Inventory
The inventory requirements of a firm are directly linked to the facility network and the desired
level of customer service. Theoretically, a firm could stock every item sold in every facility
dedicated to servicing each customer. Few business operations can afford such a luxurious
inventory commitment because the risk and total cost are prohibitive. The objective in
inventory strategy is to achieve desired customer service with the minimum inventory
commitment. Excessive inventories may compensate for deficiencies in basic design of a
logistics system but will ultimately result in higher than- necessary total logistics cost. A firm's
degree of commitment to deliver products rapidly to meet a customer's inventory requirement is
a major competitive factor. If products and materials can be delivered quickly, it may not be
necessary for customers to maintain large inventories. Material and component inventories exist
in a logistical system for reasons other than finished product inventory. Each type of inventory
and the level of commitment must be viewed from a total cost perspective. Understanding the
interrelationship between order processing, inventory, transportation, and facility network
decisions is fundamental to integrated logistics.

5. Warehousing and packaging
Warehousing, materials handling, and packaging are an integral part of other logistics areas,
cannot stand alone. For example, inventory typically needs to be warehoused at selected times
during the logistics process. Transportation vehicles require materials handling for efficient
loading and unloading. Finally, the individual products are most efficiently handled when
packaged together into shipping cartons or other unit loads. When effectively integrated into an
enterprise's logistical operations, warehousing, materials handling, and packaging facilitate the
speed and overall ease of product flow throughout the logistical system.
1.5. Total Cost Concept
The logistical system should be viewed as a cost center and every effort must be made to hold
expenditure to a minimum. Central to the scope and design of logistics system is trade-off
analysis, which, in turn, leads to the total cost concept. The cost trade-off is the recognition that
cost pattern of various activities of the firm frequently is play characteristics that put them in
conflict with one another. The conflict is managed by balancing the activities so that they are
collectively optimized.
For example; when transportation service is selected, the direct cost of transport service and the
indirect cost effect on inventory level in the logistics channel due to different delivery
performance of carriers are said to be in cost conflict with each other.
The best economic choice occurs at the point where the sum of both costs is lowest. There are
also other tradeoffs such as setting customer service level, setting safety stock levels, and
determining number of warehouses.

Inventory flow
Enterprise
Physical Physical Suppliers

Customer s
Distribution
MFG support Distribution
Logistical operation
Information flow
Fig 1.1: Logistics System
Discussion question
1. Define logistics
2. Describe the role and importance of logistics
3. Analyze the logistics system and
4. Identify the cost and components of logistics
For further reading please refer

1. Logistics Management by Donald J. 3rd ed p. 1-12

Chapter Two
Transportation Management
2.1 Transportation Economics and Pricing
Transportation economics and pricing are concerned with factors and characteristics that drive
cost. To develop effective logistics strategy, it is necessary to understand such factors and
characteristics. Successful negotiation requires a full understanding of transportation economics.
An overview of transportation economics and pricing builds upon four topics: (1) the factors that
drive transport costs, (2) the cost structures or classifications, (3) carrier pricing strategy, and (4)
transportation rates and ratings.
2.1.1 Economic Drivers

Transportation costs are driven by seven factors. While not direct components of transport
tariffs, each factor influences rates. The factors are: (I) distance, (2) volume, (3) density, (4)
stowability, (5) handling, (6) liability, and (7) market. In general, the discussion sequence
reflects the relative importance of each factor from the shipper's perspective. Keep in mind that
the precise impact of each factor varies based on specific product characteristics.
Distance
Distance is a major influence on transportation cost since it directly contributes to variable
expense, such as labor, fuel, and maintenance.
Volume
The second factor is load volume. Like many other logistics activities, transportation scale
economies exist for most transportation movements. Transport cost per unit of weight decreases
as load volume increases. This occurs because the fixed costs of pickup, delivery, and
administration can be spread over incremental volume. This relationship is limited by the size of
the transportation vehicle. Once the vehicle is full, the relationship begins again for each
additional vehicle. The management implication is that small loads should be consolidated into
larger loads to maximize scale economies. The principles of economy of scale and economy of
distance were introduced in the previous section.

Density
A third factor is product density. Density is a combination of weight and volume. Weight and
volume are important since transportation cost for any movement is usually quoted in dollars per
unit of weight. Transport charges are commonly quoted as amount per hundredweight (CWT). In
terms of weight and volume, vehicles are constrained more by cubic capacity than by weight.
Since actual vehicle, labor, and fuel expenses are not dramatically influenced by weight, higher-
density products allow relatively fixed transport costs to be spread across more weight. As a
result, higher density products are typically assessed lower transport costs per unit of weight.
In general, traffic managers seek to improve product density so that trailer cubic capacity can be
fully utilized. For example, Kimberly-Clark was able to reduce transportation expense by
reducing air contained in paper products. Such compression increased product density.
Stowability
Stowability refers to how product case dimensions fit into transportation equipment. Odd
package sizes and shapes, as well as excessive weight or length, may not fit well in
transportation equipment; this results in wasted cubic capacity. Although density and stowability
are similar, it is possible to have items with similar densities that stow very differently. Items
having rectangular shapes are much easier to stow than odd shaped items. For example, while
steel blocks and rods may have the same physical density, rods are more difficult to stow than
blocks due to their length and shape.
Stowability is also influenced by other aspects of size, since large numbers of items may be
nested in shipments whereas they may be difficult to stow in small quantities. For example, it is
possible to accomplish significant nesting for a truckload of trashcans while a single can is
difficult to stow.

Handling
Special handling equipment may be required to load and unload trucks, railcars, or ships. In
addition to special handling equipment, the manner in which products are physically grouped
together in boxes or on pallets for transport and storage will impact handling cost.
Liability
Liability includes product characteristics that can result in damage and potential claims. Carriers
must either have insurance to protect against possible claims or accept financial responsibility for
damage. Shippers can reduce their risk, and ultimately transportation cost, by improved
packaging or reducing susceptibility to loss or damage.
Market
Finally, market factors such as lane volume and balance influence transportation cost. A
transport lane refers to movements between origin and destination points. Since transportation
vehicles and drivers must return to their origin, either they must find a back-huul load or the
vehicle is returned or deadheaded empty. When empty return movements occur, labor, fuel and
maintenance costs must be charged against the original front-haul movement. Thus, the ideal
situation is to achieve two-way or balanced movement where volume is equal in both directions.
However, this is rarely the case due to demand imbalances in manufacturing and consumption
locations. For example, many goods are manufactured and processed on the East Coast of the
United States and then shipped to consumer markets in the western portion of the country; this
results in more volume moving west than east. This imbalance causes rates to be generally lower
for eastbound moves. Movement balance is also influenced by seasonality, such as the
movement of fruits and vegetables to coincide with growing seasons. Demand location and
seasonality result in transport rates that change with direction and season. Logistics system
design must take such factors into account to achieved backhaul movement whenever possible.
2.1.2 Cost Structure

The second dimension of transport economic and pricing concerns the criteria used to allocate
cost. Cost allocation is primarily the carrier's concern, but since cost structure influences

negotiating ability, the shipper's perspective is important as well. Transportation costs are
classified into a number of categories.
Variable
Variable costs change in a predictable, direct manner in relation to some level of activity.
Variable costs can only be avoided by not operating the vehicle. Aside from exceptional
circumstances, transport rates must at least cover variable cost. The variable category includes
direct carrier cost associated with movement of each load. These expenses are generally
measured as a cost per mile or per unit of weight. Typical variable cost components include
labor, fuel, and maintenance. The variable cost of operations represents the minimum amount a
carrier must charge to pay its day-to-day bills. It is not possible for any carrier to charge below
its variable cost and expect to remain in business long. In fact, rates should fully cover all costs.
Fixed
Fixed costs are expenses that do not change in the short run and must be serviced even when a
company is not operating, such as during a holiday or a strike. The fixed category includes costs
not directly influenced by shipment volume. For transportation firms, fixed components include
vehicles, terminals, rights-of-way, information systems, and support equipment. In the short
term, expenses associated with fixed assets must be covered by contribution above variable costs
on a per shipment basis.
Joint
Joint costs are expenses unavoidably created by the decision to provide a particular service. For
example, when a carrier elects to haul a truckload from point A to point B, there is an implicit
decision to incur a joint cost for the back-haul from point B to point A. Either the joint cost must
be covered by the original shipper from A to B or a back-haul shipper must be found. Joint costs
have significant impact on transportation charges because carrier quotations must include
implied joint costs based on considerations regarding an appropriate back-haul shipper and/or
back-haul charges against the original shipper.

Common
This category includes carrier costs that are incurred on behalf of all or selected shippers.
Common costs, such as terminal or management expenses, are characterized as overhead. These
are often allocated to a shipper according to a level of activity like the number of shipments or
delivery appointments handled. However, allocating overhead in this manner may incorrectly
assign costs. For example, a shipper may be charged for delivery appointments when it doesn't
actually use the service.
2.1.3 Carrier Pricing Strategies

When setting rates to charge shippers, carriers typically follow one or a combination of two
strategies. Although it is possible to employ a single strategy, the combination approach
considers trade-offs between cost of service incurred by the carrier and value of service to the
shipper.
Cost-of-Service
The cost-of-service strategy is a build up approach where the carrier establishes a rate based on
the cost of providing the service plus a profit margin. For example, if the cost of providing a
transportation service is 2000 Br and the profit markup is 10%, the carrier would charge the
shipper 2200. The cost-of-service approach, which represents the base or minimum for
transportation charges, is most commonly used as a pricing approach for low-value goods or in
highly competitive situations.
Value-of-Service
Value-of-service is an alternative strategy that charges a price based on value as perceived by
the shipper rather than the carrier's cost of actually providing the service. For example, a shipper
perceives transporting 1000Br of electronics equipment as more critical or valuable than 1000 Br
of coal since electronics are worth substantially more than the coal. As such, a shipper is
probably willing to pay more for transportation. Carriers tend to utilize value-of-service pricing
for high-value goods or when limited competition exists.

Value-of-service pricing is illustrated in the premium overnight freight market. When FedEx first
introduced overnight delivery, there were few competitors that could provide comparable
service, so it was perceived by shippers as a high-value alternative. They were willing to pay
more for overnight delivery of a single package. Once competitors such as UPS and the United
States Postal Service entered the market, rates dropped to current discounted levels per package.
This rate decrease more accurately reflects the value and cost of this service.
Combination Pricing
The combination pricing strategy establishes the transport price at an intermediate level
between the cost-of-service minimum and the value-of-service maximum. In practice, most
transportation firms use such a middle value. Logistics managers must understand the range of
prices and the alternative strategies so they can negotiate appropriately.
Net-Rate Prices
A number of common carriers are experimenting with a simplified pricing format termed net-
rate pricing. Carriers are now able to simplify pricing to fit an individual customer's
circumstances and needs. Specifically, carriers can replace individual discount sheets and class
tariffs with a simplified price sheet. The net-rate pricing approach does away with the complex
and administratively burdensome discount pricing structure that has become common practice
since deregulation.
Established discounts and accessorial charges are built into the net rates. In other words, the net
rate is an all-inclusive price. The goal is to drastically reduce carriers' administrative cost and
directly respond to customer demand to simplify the rate-making process. Shippers are attracted
to such simplification because it promotes billing accuracy and provides a clear understanding of
how to generate savings in transportation.
2.1.4 Rates and Rating

The previous discussion reviewed key strategies used by carriers to set prices. Building on this
foundation, this section presents the pricing mechanics used by carriers. This discussion applies
specifically to common carriers, although contract carriers utilize a similar approach.

Class Rates
In transportation terminology, the price in dollars and cents per hundredweight to move a
specific product between two locations is referred to as the rate. The rate is listed on pricing
sheets or on computer files known as tariffs. 'The term class rate evolved from the fact that all
products transported by common carriers are classified for pricing purposes. All product legally
transported in interstate commerce can be shipped via class rates.
Determination of common carrier class rates is a two-step process. The first step is the
classification or grouping of the product being transported. The second step is the determination
of the precise rate or price based on the classification of the product and the original destination
points of the shipment.
Classification
All products transported are typically grouped together into uniform classifications. The
classification takes into consideration the characteristics of a product or commodity that will
influence the cost of handling or transport. Products with similar density, stowability, handling,
liability, and value characteristics are grouped together into a class, thereby reducing the need to
deal with each product on an individual basis. The particular class that a given product or
commodity receives is its rating, which is used to determine the freight rate. It is important to
understand that the classification does not identify the price charged for movement of a product.
It refers to a product's transportation characteristics in comparison to other commodities.
Products are also assigned different ratings on the basis of packaging. Glass may be rated
differently when shipped loose, in crates, or in boxes than when shipped in wrapped protective
packing. It should be noted that packaging differences influence product density, stowability, and
damage, illustrating that cost factors discussed earlier enter into the rate-determined process.
Thus, a number of different classifications may apply to the same product depending on where it
is being shipped, shipment size, transport mode, and product packaging.

One of the major responsibilities of transportation managers is to obtain the best possible rating
for all goods shipped, so it is useful for members of a traffic department to have a thorough
understanding of the classification systems. Although there are differences in rail and motor
classifications, each system is guided by similar rules; however, rail rules are more
comprehensive and detailed than those for motor freight.
It is possible to have a product reclassified by written application to the appropriate classification

board. The classification board reviews proposals for change or additions with respect to
minimum weights, commodity descriptions, packaging requirements, and general rules and
regulations. An alert traffic department will take an active role in classification. Significant
savings may be realized by finding the correct classification for a product or by recommending a
change in packaging or shipment quantity that will reduce a product's rating.
Rate Administration
Once a classification rating is obtained for a product, rate must be determined. The rate per
hundred weight is usually based on the shipment origin and destination, although the actual price
charged for a particular shipment is normally subject to a minimum charge and may also be
subject to surcharge assessments. Historically, the origin and destination rates were manually
maintained in notebooks that had to be updated and revised regularly. Today, rates are provided
in diskette form by carriers and the administration process is typically computerized.
Class rates, minimum charges, arbitrary charges, and surcharges form a pricing structure that, in
various combinations, is applicable within the continental United States. The tariff indicates the
class rate for any rating group between specified origins and destinations. In combination, the
classification scheme and class rate structure form a generalized pricing mechanism for rail and
motor carriers. Each mode has specific characteristics applicable to its tariffs. In water, specific
tariff provisions are made for cargo location within the ship or on the deck. In addition,
provisions are made to charter entire vessels. Similar specialized provisions are found in air
cargo and pipeline tariffs. Non operating intermediaries and package services also publish tariffs
specialized to their service.

Commodity Rates
When a large quantity of a product moves between two locations on a regular basis, it is common
practice for carriers to publish a commodity rate. Commodity rates are special or specific rates
published without regard to classification. The terms and conditions of a commodity rate are
usually indicated in a contract between the carrier and shipper. Commodity rates are usually
published on a point-to-point basis and apply only on specified products. Today, most rail freight
moves under commodity rates. They are less prevalent in motor carriage. Whenever a
commodity rate exists, it supersedes the corresponding class or exception rate.
Exception Rates
Exception rates, or exceptions to the classification, are special rates published to provide
shippers lower rates than the prevailing class rate. The original purpose of the exception rate was
to provide a special rate for a specific area, original destination, or commodity when either
competitive or high-volume movements justified it. Rather than publish a new tariff, an
exception to the classification or class rate was established.
Just as the name implies, when an exception rate is published, the classification that normally
applies to the product is changed. Such changes may involve assignment of a new class or may
be based on a percentage of the original class. Technically, exceptions may be higher or lower,
although most are less than original class rates. Unless otherwise noted, all services provided
under the class rate remain under an exception rate.
Since deregulation, several new types of exception rates have gained popularity. For example, an
aggregate tender rate is utilized when a shipper agrees to provide multiple shipments to a
carrier in exchange for a discount or exception from the prevailing class rate. The primary
objective is to reduce carrier cost by permitting multiple shipment pickup during one stop at a
shipper's facility or to reduce the rate for the shipper because of the carrier's decreased operations
or marketing expenses. To illustrate, UPS offers customers that require multiple small package
shipments a discount based on aggregate weight and/or cubic volume. Since 1980, numerous
pricing innovations have been introduced by common carriers based on various aggregation
principles.

A limited service rate is utilized when a shipper agrees to perform selected services typically
performed by the carrier, such as trailer loading, in exchange for a discount. A common example
is a shipper load and count rate, where the shipper takes responsibility for loading and counting
the cases. Not only does this remove the responsibility for loading the shipment from the carrier,
but it also implies that the carrier is not responsible for guaranteeing case count. Another
example of limited service is a released value rate, which limits carrier liability in case of loss or
damage. Normally, the carrier is responsible for full product value if loss or damage occurs in
transit.
The quoted rate must include adequate insurance to cover the risk. Often it is more effective for
manufacturers of high-value product to self-insure to realize the lowest possible rate. Limited
service is used when shippers have confidence in the carrier's capability. Cost can be reduced by
eliminating duplication of effort or responsibility. Under aggregate tender and limited service
rates, as well as other innovative exception rates, the basic economic justification is the reduction
of carrier cost and subsequent sharing of benefits based on shipper/carrier cooperation.
Special Rates and Services

A number of special rates and services provided by for-hire carriers are available for logistical
operations. Several important examples are discussed.
Freight-All-Kind Rates- As indicated earlier, Freight-All-Kind (FAK) rates are important to

logistics operations. Under FAK rates, a mixture of different products is transported under a
generic rating. Rather than determine the classification and applicable rate of each product, an
average rate is applied for the total shipment. In essence, FAK rates are line-haul rates since they
replace class, exception, or commodity rates. Their purpose is to simplify the paperwork
associated with the movement of mixed commodities to lower the costs, so they are of particular
importance in physical distribution.
Local, Joint, Proportional, and Combination Rates - Numerous special rates exist that may
offer transportation savings on specific freight movements. When a commodity moves under the
tariff of a single carrier, it is referred to as a local rate or single-line rate. If more than one carrier
is involved in the freight movement, a joint rate may be applicable even though multiple carriers

are involved in the actual transportation process. Because some motor and rail carriers operate in
restricted temtory, it may be necessary to utilize the services of more than one carrier to
complete a shipment. Utilization of a joint rate can offer substantial savings over the use of two
or more local rates.
Proportional rates offer special price incentives to utilize a published tariff that applies to only
part of the desired route. Proportional provisions of a tariff are most often applicable to origin or
destination points outside the normal geographical area of a single-line tariff. If a joint rate does
not exist and proportional provisions do, the strategy of moving a shipment under proportional
rates provides a discount on the single-line part of the movement, thereby resulting in a lower
overall freight charge.
Combination rates are similar to proportional rates in that a shopper may combine two or more
rates when no single-line or joint rate exists between an origin and a destination. The rates may
be any combination of class, exception, and commodity rates. The utilization of combination
rates often involves several technicalities that are beyond the scope of this discussion. Their use
substantially reduces the cost of an individual shipment. In situations involving regular freight
movement, the need to utilize combination rates is eliminated by publication of a through rate.
A through rate is a standardized rate that applies from origin to destination for a shipment.
Transit Services- Transit services permits a shipment to be stopped at an intermediate point

between initial origin and destination for unloading, storage, and/or processing. The shipment is
then reloaded for delivery to the destination. Typical examples of transit services are milling for
grain products and processing for sugar beets. When transit privileges exist, the shipment is
charged a through rate from origin to destination plus a transit privilege charge. Transit services
are most typical in rail tariffs. From the viewpoint of the shipper, the use of this specialized
service is restricted to routings and destinations. Therefore, a degree of flexibility is lost when
the product is placed in transit because the final destination can be altered only at significant
added expense or, at the least, with loss of the through rate privilege. The added cost of
administration must be carefully weighed in evaluating the true benefits gained from utilizing a

transit privilege. During the last decade railroads have generally reduced the availability of such
transit services.
2.2 Transport Decisions
The selection of mode of transportation or service offering within a mode of transportation

depends on a variety of service characteristics. The six key factors include:
1. Freight rate
2. Reliability
3. Transit time
4. Loss, damage, claim processing, and tracing
5. Shipper market consideration and
6. Carrier consideration

Chapter Three
Traffic Management
Chapter Objectives
At the end of this chapter students will be able to
 Familiarize with traffic management
 Identify the goal conflicts between transport and traffic
 Identify the responsibilities of traffic manager
3.1 Traffic
Traffic is a special area of macro logistics. Traffic scientists investigate the traffic flows of
goods, persons and transport means between anonymous sources and sinks in a region, of a
country or around the globe, which are the sum of all single transport flows between households,
companies and other actors of an economy. Topics of traffic technique are development,
planning, construction and realization of traffic routes, traffic networks and public transport
systems, traffic control, and traffic safety.
Traffic management and traffic politics plan and initiate the building of new traffic networks.
They care for safe, fast and efficient traffic flows through existing networks. Their goal is to
enable and secure the disturbance-free and environmentally safe fulfillment of the transport
demand of a region or a country at lowest costs.
Traffic economics deals with the economic aspects of public transport systems and traffic
networks. Traffic economists investigate the structure of traffic networks, routes and nodes and
the crossings between different transport modes. They study costs, prices and pricing-models
and the competitors on transport markets. Further topics are the structure and directions of traffic
flows, the development of traffic within and between regions and countries, the causes of traffic
emergence and the possibilities of traffic restriction.
Goal Conflicts between Transport and Traffic
Transport and traffic are interdependent:
• Prerequisites for efficient transports between the actors of an economy are safe traffic networks
and public transport systems with sufficient capacities, demand driven traffic control, and cost-
based and use-related pricing.

• Prerequisites for investments in traffic networks and public transport systems and for their
economic operation are adequate traffic flows respectively sufficient user frequencies.
From the different tasks and the partially deviating interests of the participants result the
following goal conflicts between transport and traffic:
• Transport business cares for the goals of single companies and traffic participants, even if they
are inconsistent with the goals of the society.
• Traffic economy aims at safe and economic utilization of traffic networks and public transport
in the interest of all companies, traffic participants and society, even if some individuals or
groups are put at a disadvantage.
These conflicts lead to challenging tasks for logistic research:
 Analysis of the organizational, technical and economic options of action to achieve the
different goals of transport and traffic.
 Development of methods to solve current and future tasks and problems of transport and
freight
 Investigation of the transport markets and freight markets, the competitors and the
pricing for transport and networks.
 Conception of strategies to accomplish or to restrain excessive transport demand and
traffic volume.
 Proposals for the legislature to regulate goal conflicts between transport and traffic A fair
solution of these tasks requires independency of logistic research from the particular
interests of business and daily policy.
While traffic managers administer many different activities, they are fundamentally responsible
for: (1) operations management,
(2) Freight consolidation,
(3) Rate negotiation,
(4) Freight control,
(5) Auditing and claims, and
(6) Logistical integration.
1. Operations Management
The fundamental responsibility of a traffic department is to oversee day-to-day shipping. In
large-scale organizations, traffic operations management involves a wide variety of

administrative responsibilities. From an operational perspective, key elements of transportation
management are equipment scheduling, load planning, routing, and carrier administration.
Equipment Scheduling
One major responsibility of the traffic department is equipment scheduling. Scheduling is an
important process in both common carrier and private transportation. A serious and costly
operational bottleneck can result from transportation equipment waiting to be loaded or
unloaded. Proper scheduling requires careful load planning, equipment utilization, and driver
scheduling. Additionally, equipment preventative maintenance must be planned, coordinated,
and monitored. Finally, any specialized equipment requirements must be planned and
implemented.
Closely related to equipment scheduling is the arrangement of delivery and pickup appointments.
To avoid extensive waiting time and improve equipment utilization, it is important to pre
schedule dock positions or slots. It is becoming common practice to establish regular or standing
appointments to facilitate loading and unloading.
Some firms are implementing the practice of establishing appointments at the time of purchase or
sale commitment. Increasingly, the effective scheduling of equipment is key to implementing
time-based logistical arrangements. For example, cross-dock arrangements are totally dependent
on precise scheduling of equipment arrival and departure.
Load Planning
How loads are planned directly impacts transportation efficiency. In the case of motor carriers,
capacity is limited in terms of weight and cube. Planning the load sequence of a trailer must
consider product physical characteristics, the size of individual shipments, and delivery sequence
if multiple shipments are loaded on a single trailer. As noted earlier, TMS software is available
to help facilitate load planning.
How effectively load planning is performed will directly impact overall logistical efficiency. For
example, the load plan drives timing of product selection and the work sequence at warehouses.
Transportation equipment must be available to maintain an orderly flow of product and material
from warehouse or factory to shipment destination.

Routing
An important part of achieving transportation efficiency is shipment routing. Routing plans the
geographical path a vehicle will travel to complete transportation requirements. Once again,
routing software is an integral part of TMS. From an administrative viewpoint, the traffic
department is responsible for assuring that routing is performed in an efficient manner while
meeting key customer service requirements. How routes are implemented must take into
consideration special requirements of customers in terms of delivery time, location, and special
unloading services.
Carrier Administration
Traffic managers have the basic responsibility of administering the performance of for-hire and
private transportation. Effective administration requires continuous carrier performance
measurement and evaluation. Until recently, efforts to measure actual carrier service were
sporadic and unreliable. A typical procedure was to include postcards with shipments requesting
consignees to record time and condition of arrival.
The development of information technology has significantly improved shipment information
reliability. The fact that most shippers have reduced their carrier base has greatly simplified
administration. Effective administration requires carrier selection, integration, and evaluation.
Carrier Selection - A basic responsibility of the traffic department is to select carriers to
perform for-hire transport. To some degree all firms use the services of for-hire carriers. Even
those with commitment to private fleets regularly require the supplemented services of common,
contract, and specialized carriers to complete transportation requirements. Most firms that use
for-hire transportation have implemented what is commonly called a core carrier strategy.
The concept of a core carrier is to build a working relationship with a small number of
transportation providers. Historically, shippers followed the practice of spreading their
transportation requirements across a wide variety of carriers to assure equipment supply. During
the regulated era, few differences in price existed between carriers. As a result, shippers often
conducted business with hundreds of different carriers.
Carrier Integration-Carrier integration is similar to introducing new product and service
capabilities into logistics operations. The two challenges of carrier integration are long-term
trends and carrier services. These two types of integration are critical for shippers to achieve

their functional and strategic performance in the marketplace. Monitoring long-term market
trends requires assessment of trailer or railcar capacity that will be needed to meet shipping
requirements on a seasonal or yearly basis. Related is planning the supply of equipment type to
satisfy operational requirements.
Carrier Evaluation - Prior to deregulation, purchasers of transportation services had a relatively
easy task. Shippers selected a carrier for a specific shipment from a long list, knowing that each
offered essentially standardized service for the same price. Due to economic regulation, there
wasn't much room to negotiate price or service.
2. Freight Consolidation
The fact that freight costs are directly related to size of shipment and length of haul places a
premium upon freight consolidation. To control transportation cost when using a time-based
strategy, managerial attention must be directed to the development of ingenious ways to realize
benefits of transportation consolidation. To plan freight consolidation, it is necessary to have
reliable information concerning both current and planned inventory status. It is also desirable to
be able to reserve or promise scheduled production to complete planned consolidations.
To the extent practical, consolidations should be planned prior to order processing and
warehouse order selection to avoid delays. All aspects of consolidation require timely and
relevant information concerning planned activity. From an operational viewpoint, freight
consolidation techniques can be grouped as reactive and proactive. Each type of consolidation is
important to achieving transportation efficiency.
Reactive Consolidation
A reactive approach to consolidation does not attempt to influence the composition and timing of
transportation movements. The consolidation effort takes shipments as they come and seeks to
combine freight into larger shipments for line-haul movement.
From an operational viewpoint, there are three ways to achieve effective reactive freight
consolidation: (1) market area, (2) scheduled delivery, and (3) pooled delivery.
Market Area - The most basic method of consolidation is to combine small shipments going to
different customers within a geographical market area. This procedure does not interrupt the
natural freight flow by changing the timing of shipments. Rather, the overall quantity of
shipments to a market area provides the consolidation basis. The difficulty of developing either
inbound or outbound market area consolidations is the variation in daily volume. To offset the

volume deficiency, three operating arrangements are commonly used. First, consolidated
shipments may be sent to an intermediate break-bulk point for purposes of line-haul
transportation savings. There, individual shipments are separated and forwarded to their
destination. Second, firms may elect to hold consolidated shipments for scheduled delivery on
specific days to given destination markets. Third, f i s may achieve consolidation of small
shipments by utilizing the services of a third-party logistics f i to pool delivery. The last two
methods require special arrangements, which are discussed in greater detail below.
Scheduled Delivery- Scheduled delivery consists of limiting shipments to specific markets to
selected days each week. The scheduled delivery plan is normally communicated to customers in
a way that highlights the mutual benefits of consolidation. The shipping firm commits to the
customer that all orders received prior to a specified cutoff time will be guaranteed for delivery
on the scheduled day.
Scheduled delivery may conflict with the trend toward customer-specified delivery
appointments. Specified delivery time means that an order is expected to be delivered within a
narrow time window. In today's world, a requirement to provide l-hour delivery of a component
or part may be written into the purchase contract.
Pushed to the limit, customer-specified delivery requires the capability to deliver any size
shipment at any time specified by a customer. The objective of scheduled delivery is to offer a
solution that the customer can depend upon while also achieving consolidation benefits.
Pooled Delivery- Participation in a pooled delivery plan typically means that a freight forwarder,
public warehouse, or transportation company arranges consolidation for multiple shippers
serving the same geographical market area. Integrated source providers that arrange pooled
consolidation services typically have standing delivery appointments at high-volume delivery
destinations. It is common, under such arrangements, for the consolidation company to perform
value-added service such as sorting, sequencing, or segregation of inbound freight to
accommodate customer requirements.
Proactive Consolidation
While reactive efforts to develop transportation consolidations have been successful, firms are
becoming more innovative concerning pre-transaction planning. Two forces are driving a more
proactive approach to consolidation. First, the impact of time-based responsive logistical systems
is creating a larger number of small shipments. This trend towards increased smaller shipments

has been intensified by increased e-commerce fulfillment. Second, proactive consolidation has
increased the desire for shippers, carriers, and consignees to participate in consolidation savings.
Traditional consolidation programs typically favored one of the three to the exclusion of one or
both of the others. A willingness to share benefits can provide incentive for all members of the
supply chain to achieve freight consolidation.
3. Rate Negotiation
For any given shipment it is the responsibility of the traffic department to obtain the lowest
possible rate consistent with service requirements. The prevailing price for each transport
alternative-rail, air, motor, pipeline, water, and so on-is found by reference to tariffs.
4. Freight Control
Other important responsibilities of transportation management are tracing and expediting.
Tracing is a procedure to locate lost or late shipments. Shipments committed across a
transportation network are bound to be misplaced or delayed from time to time. Most large
carriers maintain online tracing to aid shippers in locating a shipment. The tracing action must be
initiated by the shipper's traffic department, but once initiated, it is the carrier's responsibility to
provide the desired information. Expediting involves the shipper notifying a carrier that it needs
to have a specific shipment move through the carrier's system as quickly as possible and with no
delays.
5. Auditing and Claim Administration
When transportation service or charges are not performed as promised, shippers can make claims
for restitution. Claims are typically classified as loss and damage or over charged undercharge.
Loss and damage claims occur when a shipper demands the carrier pay for partial or total
financial loss resulting from poor performance. As the name implies, loss and damage claims
usually occur when product is lost or damaged while in transit. Over charge /under charge claims
result when the amount billed is different from that expected and are typically resolved through
freight bill audit procedures.
6. Logistical Integration
For any given operating period, traffic management is expected to provide the required
transportation services at budgeted cost. It is also traffic management's responsibility to search
for alternative ways to deploy transportation to reduce total logistics cost.

For example, a slight change in packaging may create an opportunity for negotiation of a lower
freight classification rating for a product. Although packaging costs may increase, this added
expense may be offset by a substantial reduction in transportation cost. Unless such proposals
originate from the traffic department, they will likely go undetected in the average firm. As
indicated earlier, transportation is the highest single cost area in most logistical systems. This
expenditure level combined with the dependence of logistical operations on effective
transportation means that the traffic departments must play an active role in strategic planning.
Self assessment questions

1. Define traffic management using your own words
2. Identify the goal conflicts between transport and traffic
3. Identify the responsibilities of traffic manager

CHAPTER FOUR
MARKETING CHANNEL MANAGEMENT
Chapter Objectives
 Identify Marketing channels
 Discuss the importance of channel
 Identify the role of channel
 Identify the channel function
 Discuss channel management decision
4.1 Marketing Channels
Most producers do not sell their goods directly to the final users; between them stands a set of
intermediaries performing a variety of functions. These intermediaries constitute a marketing
channel (also called a trade channel or distribution channel). Formally, marketing channels are
sets of interdependent organizations involved in the process of making a product or service
available for use or consumption. They are the set of pathways a product or service follows after
production, culminating in purchase and use by the final end user.
Some intermediaries—such as wholesalers and retailers—buy, take title to, and resell the
merchandise; they are called merchants. Others—brokers, manufacturers' representatives, sales
agents—search for customers and may negotiate on the producer's behalf but do not take title to
the goods; they are called agents. Still others—transportation companies, independent
warehouses, banks, advertising agencies—assist in the distribution process but neither take title
to goods nor negotiate purchases or sales; they are called facilitators.
4.1.1 The Importance of Channels
A marketing channel system is the particular set of marketing channels employed by a firm.
Decisions about the marketing channel system are among the most critical facing management.
In the United States, channel members collectively earn margins that account for 30 to 50
percent of the ultimate selling price. In contrast, advertising typically accounts for less than 5 to
7 percent of the final price. Marketing channels also represent a substantial opportunity cost.
One of the chief roles of marketing channels is to convert potential buyers into profitable orders.
Marketing channels must not just serve markets, they must also make markets.

The channels chosen affect all other marketing decisions. The company's pricing depends on
whether it uses mass merchandisers or high-quality boutiques. The firm's sales force and
advertising decisions depend on how much training and motivation dealers need. In addition,
channel decisions involve relatively long-term commitments to other firms as well as a set of
policies and procedures. When an automaker signs up independent dealers to sell its
automobiles, the automaker cannot buy them out the next day and replace them with company-
owned outlets.
In managing its intermediaries, the firm must decide how much effort to devote to push versus
pull marketing. A push strategy involves the manufacturer using its sales force and trade
promotion money to induce intermediaries to carry, promote, and sell the product to end users.
Push strategy is appropriate where there is low brand loyalty in a category, brand choice is made
in the store, the product is an impulse item, and product benefits are well understood. A pull
strategy involves the manufacturer using advertising and promotion to persuade consumers to
ask intermediaries for the product, thus inducing the intermediaries to order it. Pull strategy is
appropriate when there is high brand loyalty and high involvement in the category, when people
perceive differences between brands, and when people choose the brand before they go to the
store. Top marketing companies such as Nike, Intel, and Coca-Cola skillfully employ both push
and pull strategies.
4.1.2 Channel Development

A new firm typically starts as a local operation selling in a limited market, using existing
intermediaries. The number of such intermediaries is apt to be limited: a few manufacturers'
sales agents, a few wholesalers, several established retailers, a few trucking companies, and a
few warehouses. Deciding on the best channels might not be a problem; the problem might be to
convince the available intermediaries to handle the firm's line.
If the firm is successful, it might branch into new markets and use different channels in different
markets. In smaller markets, the firm might sell directly to retailers; in larger markets, it might
sell through distributors. In rural areas, it might work with general-goods merchants; in urban
areas, with limited-line merchants. In one part of the country, it might grant exclusive franchises;
in another, it might sell through all outlets willing to handle the merchandise. In one country it

might use international sales agents; in another, it might partner with a local firm. In short, the
channel system evolves in response to local opportunities and conditions.
4.1.3 The Role of Marketing Channels
Why would a producer delegate some of the selling job to intermediaries? Delegation means
relinquishing some control over how and to whom the products are sold. Producers do gain
several advantages by using intermediaries:
 Many producers lack the financial resources to carry out direct marketing. For example,
General Motors sells its cars through more than 8,000 dealer outlets in North America
alone. Even General Motors would be hard-pressed to raise the cash to buy out its
dealers.
 Producers who do establish their own channels can often earn a greater return by
increasing investment in their main business. If a company earns a 20 percent rate of
return on manufacturing and a 10 percent return on retailing, it does not make sense to do
its own retailing.
 In some cases direct marketing simply is not feasible. The William Wrigley Jr. Company
would not find it practical to establish small retail gum shops throughout the world or to
sell gum by mail order. It would have to sell gum along with many other small products
and would end up in the drugstore and grocery store business. Wrigley finds it easier to
work through the extensive network of privately owned distribution organizations.
 Intermediaries normally achieve superior efficiency in making goods widely available
and accessible to target markets. Through their contacts, experience, specialization, and
scale of operation, intermediaries usually offer the firm more than it can achieve on its
own. According to Stern and his colleagues:
 Intermediaries smooth the flow of goods and services.... This procedure is necessary in
order to bridge the discrepancy between the assortment of goods and services generated
by the producer and the assortment demanded by the consumer. The discrepancy results
from the fact that manufacturers typically produce a large quantity of a limited variety of
goods, whereas consumers usually desire only a limited quantity of a wide variety of
goods.
4.2 Channel Functions and Flows

A marketing channel performs the work of moving goods from producers to consumers. It
overcomes the time, place, and possession gaps that separate goods and services from those who
need or want them. Members of the marketing channel perform a number of key functions some
functions (physical, title, promotion) constitute a forward flow of activity from the company to
the customer; other functions (ordering and payment) constitute a backward flow from customers
to the company. Still others (information, negotiation, finance, and risk taking) occur in both
directions. If these flows were superimposed in one diagram, the tremendous complexity of even
simple marketing channels would be apparent. A manufacturer selling a physical product and
services might require three channels: a sales channel, a delivery channel, and a service channel.
To sell its Bovvflex fitness equipment, the Nautilus Group has used television infomercials, the
telephone, and the Internet as sales channels; UPS ground service as the delivery channel; and
local repair people as the service channel. When sales failed to meet goals, Nautilus added retail
stores to its sales channels in 2003. When a competitor infringed on the Bowflex patent by
placing an imitation product into retail stores, Nautilus began selling Bovvflex home gyms
through the retail channel.
The question is not whether various channel functions need to be performed—they must be—
but rather, who is to perform them. All channel functions have three things in common: They use
up scarce resources; they can often be performed better through specialization; and they can be
shifted among channel members. When the manufacturer shifts some functions to intermediaries,
the producer's costs and prices are lower, but the intermediary must add a charge to cover its
work. If the intermediaries are more efficient than the manufacturer, prices to consumers should
be lower. If consumers perform some functions themselves, they should enjoy even lower prices.

Marketing functions, then, are more basic than the institutions that perform them at any given
time. Changes in channel institutions largely reflect the discovery of more efficient ways to
combine or separate the economic functions that provide assortments of goods to target
customers.
4.3 Channel Levels
The producer and the final customer are part of every channel. We will use the number of
intermediary levels to designate the length of a channel.
 A zero-level channel (also called a direct-marketing channel) consists of a
manufacturer selling directly to the final customer. The major examples are door-to-
door sales, home parties, mail order, telemarketing, TV selling, Internet selling, and
manufacturer-owned stores.
 A one-level channel contains one selling intermediary, such as a retailer.
 A two-level channel contains two intermediaries. In consumer markets, these are
typically a wholesaler and a retailer.
 A three-level channel contains three intermediaries. In the meatpacking industry,
wholesalers sell to jobbers, who sell to small retailers.
Channels normally describe a forward movement of products from source to user. One can also
talk about reverse-flow channels. They are important in the following cases: (1) to reuse products
or containers (such as refillable chemical-carrying drums); (2) to refurbish products (such as

circuit boards or computers) for resale; (3) to recycle products (such as paper); and (4) to dispose
of products and packaging (waste products). Several intermediaries play a role in reverse-flow
channels, including manufacturers' redemption centers, community groups, traditional
intermediaries such as soft-drink intermediaries, trash-collection specialists, recycling centers,
trash-recycling brokers, and central-processing warehousing.
Identifying Major Channel Alternatives

Companies can choose from a wide variety of channels for reaching customers—from sales
forces to agents, distributors, dealers, direct mail, telemarketing, and the Internet. Each channel
has unique strengths as well as weaknesses. Sales forces can handle complex products and
transactions, but they are expensive. The Internet is much less expensive, but it cannot handle
complex products. Distributors can create sales, but the company loses direct contact with
customers.
The problem is further complicated by the fact that most companies now use a mix of channels.
Each channel hopefully reaches a different segment of buyers and delivers the right products to
each at the least cost. When this does not happen, there is usually channel conflict and excessive
cost.
A channel alternative is described by three elements: the types of available business
intermediaries, the number of intermediaries needed, and the terms and responsibilities of each
channel member.
TYPES OF INTERMEDIARIES A firm needs to identify the types of intermediaries available
to carry on its channel work.
For example, a test-equipment manufacturer developed an audio device for detecting poor
mechanical connections in machines with moving parts. Company executives felt this product
would sell in all industries where electric, combustion, or steam engines were used, such as
aviation, automobiles, railroads, food canning, construction, and oil. The sales force was small.
The problem was how to reach these diverse industries effectively. The following alternatives
were identified:
 Expand the company's direct sales force. Assign sales representatives to contact all
prospects in an area, or develop separate sales forces for the different industries.

 Hire manufacturers' agents in different regions or end-use industries to sell the new
equipment.
 Find distributors in the different regions or end-use industries that will buy and carry the
device. Give them exclusive distribution, adequate margins, product training, and
promotional support.
NUMBER OF INTERMEDIARIES Companies have to decide on the number of

intermediaries to use at each channel level. Three strategies are available: exclusive distribution,
selective distribution, and intensive distribution.
Exclusive distribution means severely limiting the number of intermediaries. It is used when the
producer wants to maintain control over the service level and outputs offered by the resellers.
Often it involves exclusive dealing arrangements. By granting exclusive distribution, the
producer hopes to obtain more dedicated and knowledgeable selling. It requires greater
partnership between seller and reseller and is used in the distribution of new automobiles, some
major appliances, and some women's apparel brands. When the legendary Italian designer label
Gucci found its image severely tarnished by overexposure from licensing and discount stores,
Gucci decided to end contracts with third-party suppliers, control its distribution, and open its
own stores to bring back some of the luster. Exclusive deals between suppliers and retailers are
becoming a mainstay for specialists looking for an edge in a business world that is increasingly
driven by price.
Selective distribution involves the use of more than a few but less than all of the intermediaries
who are willing to carry a particular product. It is used by established companies and by new
companies seeking distributors. The company does not have to worry about too many outlets; it
can gain adequate market coverage with more control and less cost than intensive distribution.
Disney is a good example of selective distribution.
Intensive distribution consists of the manufacturer placing the goods or services in as many
outlets as possible. This strategy is generally used for items such as tobacco products, soap,
snack foods, and gum, products for which the consumer requires a great deal of location
convenience.

Manufacturers are constantly tempted to move from exclusive or selective distribution to more
intensive distribution to increase coverage and sales. This strategy may help in the short term,
but often hurts long-term performance. Intensive distribution increases product and service
availability but may also result in retailers competing aggressively. If price wars ensue, retailer
profitability may also decline, potentially dampening retailer interest in supporting the product. It
may also harm brand equity.
Evaluating the Major Alternatives
Each channel alternative needs to be evaluated against economic, control, and adaptive criteria.
ECONOMIC CRITERIA Each channel alternative will produce a different level of sales and
costs. Clearly, sellers would try to replace high-cost channels with low-cost channels when the
value added per sale was sufficient. The lower-cost channels tend to be low-touch channels. This
is not important in ordering commodity items, but buyers who are shopping for more complex
products may prefer high-touch channels such as salespeople. When sellers discover a
convenient lower-cost channel, they try to get their customers to use it. The company may
reward customers for switching. Many airlines initially gave bonus frequent flier mileage awards
when customers booked reservations on line. Other companies may raise the fees on customers
using their higher-cost channels to get them to switch. Companies that are successful in
switching their customers to lower-cost channels, assuming no loss of sales or deterioration in
service quality, will gain a channel advantage.
CONTROL AND ADAPTIVE CRITERIA Using a sales agency poses a control problem. A
sales agency is an independent firm seeking to maximize its profits. Agents may concentrate on
the customers who buy the most, not necessarily those who buy the manufacturer's goods.
Furthermore, agents might not master the technical details of the company's product or handle its
promotion materials effectively.
To develop a channel, members must make some degree of commitment to each other for a
specified period of time. Yet these commitments invariably lead to a decrease in the producer's
ability to respond to a changing marketplace. In rapidly changing, volatile, or uncertain product
markets, the producer needs channel structures and policies that provide high adaptability.
4.4 Channel-Management Decisions

After a company has chosen a channel alternative, individual intermediaries must be selected,
trained, motivated, and evaluated. Channel arrangements must be modified over time.
Selecting Channel Members
Companies need to select their channel members carefully. To customers, the channels are the
company.
To facilitate channel member selection, producers should determine what characteristics
distinguish the better intermediaries. They should evaluate the number of years in business, other
lines carried, growth and profit record, financial strength, cooperativeness, and service
reputation. If the intermediaries are sales agents, producers should evaluate the number and
character of other lines carried and the size and quality of the sales force. If the intermediaries
are department stores that want exclusive distribution, the producer should evaluate locations,
future growth potential, and type of clientele.
Training Channel Members
Companies need to plan and implement careful training programs for their intermediaries
Motivating Channel Members
A company needs to view its intermediaries in the same way it views its end users. It needs to
determine intermediaries' needs and construct a channel positioning such that its channel
offering is tailored to provide superior value to these intermediaries. Being able to stimulate
channel members to top performance starts with understanding their needs and wants. The
company should provide training programs, market research programs, and other capability-
building programs to improve intermediaries' performance.
The company must constantly communicate its view that the intermediaries are partners in a
joint effort to satisfy end users of the product.
Producers vary greatly in skill in managing distributors. Channel power can be defined as the
ability to alter channel members' behavior so that they take actions they would not have taken
otherwise. Manufacturers can draw on the following types of power to elicit cooperation:
 Coercive power. A manufacturer threatens to withdraw a resource or terminate a
relationship if intermediaries fail to cooperate. This power can be effective, but its
exercise produces resentment and can generate conflict and lead the intermediaries to
organize countervailing power.

 Reward power. The manufacturer offers intermediaries an extra benefit for performing
specific acts or functions. Reward power typically produces better results than coercive
power, but can be overrated. The intermediaries may come to expect a reward every time
the manufacturer wants a certain behavior to occur.
 Legitimate power. The manufacturer requests a behavior that is warranted under the
contract. As long as the intermediaries view the manufacturer as a legitimate leader,
legitimate power works.
 Expert power. The manufacturer has special knowledge that the intermediaries value.
Once the expertise is passed on to the intermediaries, however, this power weakens. The
manufacturer must continue to develop new expertise so that the intermediaries will
want to continue cooperating.
 Referent power. The manufacturer is so highly respected that intermediaries are proud to
be associated with it. Companies such as IBM, Caterpillar, and Hewlett-Packard have
high referent power.
Coercive and reward power are objectively observable; legitimate, expert, and referent power are
more subjective and dependent on the ability and willingness of parties to recognize them.
Most producers see gaining intermediaries' cooperation as a huge challenge. They often use
positive motivators, such as higher margins, special deals, premiums, cooperative advertising
allowances, display allowances, and sales contests. At times they will apply negative sanctions,
such as threatening to reduce margins, slow down delivery, or terminate the relationship. The
weakness of this approach is that the producer is using crude, stimulus-response thinking.
More sophisticated companies try to forge a long-term partnership with distributors. The
manufacturer clearly communicates what it wants from its distributors in the way of market
coverage, inventory levels, marketing development, account solicitation, technical advice and
services, and marketing information. The manufacturer seeks distributor agreement with these
policies and may introduce a compensation plan for adhering to the policies. Here are three
examples of successful partner-building practices:
Evaluating Channel Members
Producers must periodically evaluate intermediaries' performance against such standards as
sales-quota attainment, average inventory levels, customer delivery time, treatment of damaged
and lost goods, and cooperation in promotional and training programs. A producer will

occasionally discover that it is paying too much to particular intermediaries for what they are
actually doing. One manufacturer that was compensating a distributor for holding inventories
found that the inventories were actually held in a public warehouse at its expense. Producers
should set up functional discounts in which they pay specified amounts for the trade channel's
performance of each agreed-upon service. Underperformers need to be counseled, retrained,
motivated, or terminated.
Modifying Channel Arrangements
A producer must periodically review and modify its channel arrangements. Modification
becomes necessary when the distribution channel is not working as planned, consumer buying
patterns change, the market expands, new competition arises, innovative distribution channels
emerge, and the product moves into later stages in the product life cycle. Consider Apple.
No marketing channel will remain effective over the whole product life cycle. Early buyers
might be willing to pay for high value-added channels, but later buyers will switch to lower-cost
channels. Small office copiers were first sold by manufacturers' direct sales forces, later through
office equipment dealers, still later through mass merchandisers, and now by mail-order firms
and Internet marketers.
In competitive markets with low entry barriers, the optimal channel structure will inevitably
change over time. The change could involve adding or dropping individual channel members,
adding or dropping particular market channels, or developing a totally new way to sell goods.
Adding or dropping individual channel members requires an incremental analysis. What would
the firm's profits look like with and without this intermediary? An automobile manufacturer's
decision to drop a dealer requires subtracting the dealer's sales and estimating the possible
sales loss or gain to the manufacturer's other dealers.
The most difficult decision involves revising the overall channel strategy. Distribution channels
clearly become outmoded, and a gap arises between the existing distribution system and the ideal
system that would satisfy target customers' needs and desires (see "Marketing Memo: Designing
a Customer-Driven Distribution System"). Examples abound: Avon's door-to-door system for
selling cosmetics had to be modified as more women entered the workforce; IBM's exclusive
reliance on a field sales force had to be modified with the introduction of low-priced personal
computers; and in retail banking the trend toward opening branches has now come full circle
within just a decade.

CHAPTER FIVE
CHANNEL PARTICIPANTS
Chapter objectives
At the end of this chapter students will be able to:
 Identify the channel participants

 Discuss the functions of channel participants
5.1 An Overview of the Channel Participants

The three basic divisions of the marketing channel are (1) producers and manufacturers, (2)
intermediaries, and (3) final users. The latter two are broken down further into wholesale and
retail intermediaries and consumer and industrial users, respectively. The final users, though
technically members of the marketing channel because they are involved in negotiator functions,
from this point on will not be viewed as channel members in this text. In the context of the
management perspective we are using, it is more appropriate to view final users as target
markets that are served by the commercial subsystem of the channel. The commercial
channel, then, by definition excludes final users. Thus, whenever the term marketing channel is

mentioned in the remainder of the text, it is understood that we are referring to the commercial
channel.
Since facilitating agencies do not perform negotiator functions, they are not members of the
channel. They do, however, participate in the operation of the channel by performing other
functions. Six of the more common types of facilitating agencies are Transportation firms,
storage firms advertising agencies, financial firms, Insurance firms and Marketing research.
5.2 Producers and Manufacturers
Producers and manufacturers consist of firms that are involved in extracting, growing, or making
products. This category includes those firms classified under agriculture, forestry and fishing,
mining, construction, manufacturing, and some service industries.
The range of producing and manufacturing firms is enormous, both in terms of the diversity of
goods and services produced and the size of the firms. It includes firms that make everything
from straight pins to jet planes and that vary in size from one-person operations to giant
multinational corporations with many thousands of employees and multibillion-dollar sales
volumes. But even with all this diversity, a thread of commonality runs through producing and
manufacturing firms: All exist to offer products that satisfy the needs of customers. For the needs
of those customers to be satisfied, products must be made available to customers when, where,
and how they want them. Thus, producing and manufacturing firms must somehow see that their
products are distributed to their intended markets. Most producing and manufacturing firms, both
large and small, however, are not in a favorable position to distribute their products directly to
their final user markets. Quite often, they lack the requisite expertise and the economies of scale
(and/or scope) to perform all of the distribution tasks necessary to distribute their products
effectively and efficiently to their final users.
With respect to expertise, many producers and manufacturers do not have nearly the level of
expertise in distribution that they have attained in production or manufacturing. An electronics
manufacturer may be operating at the leading edge of electronics technology and yet know very
little about the best way to distribute its sophisticated products to its markets. A drill bit
manufacturer may make the finest products using the most advanced alloys and yet be quite
naive when it comes to performing the tasks necessary to distribute those products. A West Coast
farm that grows the finest produce based on the latest developments in agricultural technology
may know very little about how to make that produce available, in good condition and at low

cost, to consumers on the East Coast. In short, expertise in production or manufacturing
processes does not automatically translate into expertise in distribution.
5.3 Intermediaries
Intermediaries (or middlemen) are independent businesses that assist producers and
manufacturers (and final users) in the performance of negotiatory functions and other distribution
tasks. Intermediaries thus participate in the negotiation and/or ownership flows. They operate
basically at two levels: wholesale and retail.
5.3.1 Wholesale Intermediaries
Wholesalers consist of businesses that are engaged in selling goods for resale or business use to
retail, industrial, commercial, institutional, professional, or agricultural firms, as well as to other
wholesalers. Also included are firms acting as agents or brokers in either buying goods for or
selling them to such customers.
Types and Kinds of Wholesalers

The most comprehensive and commonly used classification of wholesalers is that used by the
Census of Wholesale Trade, published by the U.S. Department of Commerce every five years,
which breaks them down into three major types:
1. Merchant wholesalers
2. Agents, brokers, and commission merchants
3. Manufacturers’ sales branches and offices
Merchant wholesalers are firms engaged primarily in buying, taking title to, usually storing,
and physically handling products in relatively large quantities and then reselling the products in
smaller quantities to retailers; to industrial, commercial, or institutional concerns; and to other
wholesalers. They go under many different names, such as wholesaler, jobber, distributor,
industrial distributor, supply house, assembler, importer, exporter, and others.
Agents, brokers, and commission merchants are also independent middlemen who do not, for
all or most of their business, take title to the goods in which they deal, but who are actively
involved in negotiatory functions of buying and selling while acting on behalf of their clients.
They are usually compensated in the form of commissions on sales or purchases. Some of the

more common types are known in their industries as manufacturers’ agents, commission
merchants, brokers, selling agents, and import and export agents.
Manufacturers’ sales branches and offices are owned and operated by manufacturers but are
physically separated from manufacturing plants. They are used primarily for the purpose of
distributing the manufacturer’s own products at wholesale. Some have warehousing facilities
where inventories are maintained, while others are merely sales offices. Some of them also
wholesale allied and supplementary products purchased from other manufacturers.
Distribution Tasks Performed by Merchant Wholesalers
Merchant wholesalers serve manufacturers as well as retailers and other customers. They have
survived as intermediaries in the marketing channel because, as specialists in the performance of
distribution tasks, they can operate at high levels of effectiveness and efficiency.
Modern, well-managed merchant wholesalers are especially well suited for performing the
following types of distribution tasks for producers and manufacturers.
1. Providing market coverage

2. Making sales contacts
3. Holding inventory
4. Processing orders
5. Gathering market information
6. Offering customer support
Market coverage is provided by merchant wholesalers to manufacturers because the markets for
the products of most manufacturers consist of many customers spread over large geographical
areas. To have good market coverage so that their products are readily available to customers
when needed, manufacturers often rely on merchant wholesalers to secure the necessary market
coverage at reasonable cost. In k2the magazine industry, for example, the mass consolidation of
magazine wholesalers from almost 3,000 to fewer than 50 in the past decade has publishers
worried that their ability to reach small retail vendors in more remote markets will suffer.
Sales contact is a valuable service provided by merchant wholesalers. For manufacturers, the
cost of maintaining an outside sales force is high. If a manufacturer’s product is sold to many
customers over a large geographical area, the cost of covering the; territory with its sales force

can be prohibitive. By using wholesalers to reach all or a significant portion of their customers,
manufacturers may be able to reduce substantially the costs of outside sales contacts because
their sales force would be calling on a relatively small number of wholesalers rather than the
much larger number of customers.
The value of wholesalers in providing sales contact becomes even more apparent for
manufacturers entering foreign markets.
Holding inventory is another crucial task performed by wholesalers for manufacturers.
Merchant wholesalers take title to, and usually stock, the products of the manufacturers whom
they represent. By doing so, they can reduce the manufacturers’ financial burden and reduce
some of the manufacturers’ risk associated with holding large inventories. Moreover, by
providing a ready outlet for manufacturers’ products, wholesalers help manufacturers to better
plan their production schedules. For example, Fort Howard Corporation, a paper products
manufacturer, uses paper products wholesalers such as Darter Inc. of University Park, Illinois, to
perform the inventory holding task.
Order processing performed by wholesalers is very helpful to manufacturers because many
customers buy in small quantities. Yet manufacturers both large and small find it extremely
inefficient to attempt to fill large numbers of small orders from thousands of customers. Many of
the original dot-com firms engaged in E-commerce were undermined by the high fulfillment
costs associated with thousands of small orders. For most of them, order processing costs were a
major cause of their demise because the costs were very high relative to the value of the products
being sold. Wholesalers, on the other hand, are specifically geared to handle small orders from
many customers. By carrying the products of many manufacturers, wholesalers’ order processing
costs can be absorbed by the sale of a broader array of products than that of the typical
manufacturer.
Gathering market information is another task of substantial benefit to manufacturers.
Wholesalers are usually quite close to their customers geographically and in many cases have
continuous contact through frequent sales calls on their customers. Hence, they are in a good
position to learn about customers’ product and service requirements. Such information, if passed
on to manufacturers, can be valuable for product planning, pricing, and the development of
competitive marketing strategy. Some wholesalers are using the Internet to provide information
to link suppliers and customers together. For example, in the business of online sales of

computer hardware and software, half dozen wholesalers provide information on over 150,000
products from more than 800 manufacturers. Customers ranging from small businesses to giant
corporations use these wholesalers to compare prices, locate hard-to find parts, configure
computer systems from multiple sources, and actually place orders over the Internet.
Customer support is the final distribution task that wholesalers provide for manufacturers.
Products may need to be exchanged or returned, or a customer may require setup, adjustment,
repairs, or technical assistance. For manufacturers to provide such services directly to large
numbers of customers can be very costly. Instead, manufacturers can use wholesalers to assist
them in providing these services to customers. This extra support by wholesalers, often referred
to as value added services, plays a crucial role in making wholesalers vital members of the
marketing channel from the standpoints of both the manufacturers who supply them and the
customers to whom they sell.
In addition to performing the six distribution tasks for manufacturers, as discussed in the
preceding paragraphs, merchant wholesalers are equally well suited to perform the following
distribution tasks for their customers:
1. Assuring product availability
2. Providing customer service
3. Extending credit and financial assistance
4. Offering assortment convenience
5. Breaking bulk
6. Helping customers with advice and technical support
Product availability, providing for the ready availability of products, is probably the most basic
distribution task performed by wholesalers for customers. Because of the closeness of
wholesalers to their customers and/or their sensitivity to customers’ needs, they can provide a
level of product availability that many manufacturers could not easily match.
Customer service is another valuable distribution task performed by wholesalers. Customers
often require services such as delivery, repairs, or warranty work. By making these services
available to their customers, wholesalers save their customers effort and expense.
Credit and financial assistance are provided by wholesalers in two ways. First, by extending
open account credit to customers on products sold, wholesalers allow customers to use products
in their business before having to pay for them. Second, by stocking and providing ready

availability for many of the items needed by their customers, wholesalers significantly reduce the
financial inventory burden their customers would bear if they had to stock all the products
themselves.
Assortment convenience refers to the wholesaler’s ability to bring together from a variety of
manufacturers an assortment of products, greatly simplifying customers’ ordering tasks. Instead
of having to order separately from dozens or even hundreds of manufacturers, customers can turn
to one or a few general line or specialist wholesalers who can provide them with all or most of
the products they need.
Breaking bulk is important because often customers do not need large quantities of products, or
they may prefer to order only a small quantity at a time. Many manufacturers find it
uneconomical to fill small orders and will establish minimum order requirements to discourage
them. By buying large quantities from manufacturers and breaking down these “bulk” orders into
smaller quantities, wholesalers provide customers with the ability to buy only the quantity they
need.
5.3.2 Retail Intermediaries

Retailers consist of business firms engaged primarily in selling merchandise for personal or
household consumption and rendering services incidental to the sale of goods.
Self assessment questions

1. Identify the channel participants
2. Discuss the functions of channel participants

K8
CHAPTER SIX
DEVELOPING THE CHANNEL DESIGN
Chapter objectives
 Design channel
 Discuss paradigm of the channel design decision
6.0 Introduction
Channel selection and deployment is one of the most critical issues facing companies today.
Customers are in the drivers’ seats, as they should be, when it comes to the buying relationship.
Powerful products and, to some degree, great brands no longer provide sustainable
differentiation to customers. Customers are looking for superior value in all the solutions they
consider. Increasingly, the sales channel creates the most powerful and sustainable
differentiation in delivering superior value to customers.
However, much of what companies do today in deploying sales channels keeps them from
establishing the highest performance, most effective channels. Many companies are not getting

the sales growth, market penetration and customer share they should because of ineffective
channel design and deployment. In assessing the channel effectiveness of dozens of
organizations worldwide, we find companies doing things backwards. They are designing their
sales channels from inside-out that is, based on a company focused strategy. Our work has
shown the easiest and most effective means of designing and deploying high performance sales
channels start with the customer.
6.1 Channel Design
Unfortunately, many great companies are prisoners of their heritage. Their sales channel design
and deployment is driven by their heritage. They continue to do the same thing, only more and
faster, not necessarily better. Those organizations that had a strong focus on company owned
field sales channels continue to expand that organization, often losing productivity, effectiveness,
and profitability.
Other companies try to do everything, exploiting multiple channels to reach the same customers,
confusing the customer, creating channel conflict, eroding margins, losing share and opportunity.
These companies have all the traditional channels in place and are adding all the new and
fashionable channels (internet, direct marketing, and others) without rationalizing the strategy
and approach.
Others drive their channel strategies based solely on financial criteria, namely cost of selling, not
treating their sales channels as investments which are expected to produce a reasonable return.
We see companies downsizing, shifting from a high fixed cost for their own organization to the
lower or variable costs of an indirect channel structure (distributors, resellers, representatives,
outsourced telesales). Their decisions are driven by expense criteria, not the ability of the
channel to effectively reach the right customers at the right time with the right solutions.
Then there are those that can’t decide, every year changing their sales strategy to something
different than before. Shifting from indirect sales to company owned sales forces, Moving to
inside sales, Moving to direct marketing, Moving to the internet. Then starting the whole process
again when each move fails to achieve the results needed.

All of these activities are driven by dozens of task forces, studies, organizational assessments and
other research efforts to look at the right channel design.
These efforts all miss the point! Moreover, they make channel design and deployment more
complicated than it really is. The easiest way to design high performance sales channels is to
start with the customer! Once you know who your customers are and how they want to buy, then
you can design the channel that most effectively reaches those customers in the way that is most
effective.
Channel Design Is Not Rocket Science!
Customer focused channel design and deployment is not rocket science. Effective design,
however, requires a disciplined approach to understanding who your customers are and how they
buy. Designing a customer-focused channel involves several simple steps:
 Start with the customer. Who are the customers we want to serve? Do we want
k8to expand our relationships with our current customers? Do we want to acquire
new customers? What share of customer objectives do we have?
 How do we segment these customers and characterize each segment? What
markets do we serve, which products and services are directed to which customers
or markets? Remember that customers in similar segments but different
geographies may behave very differently (i.e. are your French customers the same
as your Chinese and Chilean customers?). What goals or objectives do we have
with each segment?
 How do these customers/segments buy solutions like those that we offer? What is
involved in their buying process? What steps does the customer go through in
defining requirements and specifications, evaluating, selecting, and implementing
a solution? Does it require close and frequent interaction? Is it complex, with
many people involved in the buying decisions? Does the buying process require

close involvement and contact with the “factory?” Is there a lot of customization
and integration required? Are there complementary services or products required
to provide a complete solution?
 Who do they buy those solutions from? How do they buy the solutions? Direct
field sales organization (hunters, farmers?), inside sales, distribution, resellers,
reps, Internet, catalog, OEM, integrator, retail, supplier chain relationship?
 What are their expectations of those solution providers? What level of service
and support is important in the buying and implementation process?
 How do these solution providers complement and add value to the offerings of the
suppliers? They are part of the value delivery chain and need to add value not
cost.
 What is the profile of these solution providers, what are their characteristics?
How are they organized to support the customers? What programs and
capabilities do they need to have? What relationship do they have with the
manufacturer?
 What do those solution providers expect of their suppliers? What is the value
proposition for channel partner (internal or external)? How do we motivate them
to wake up every morning excited about selling our products and services over
those of any one else (including other divisions within our organization)?
 How do we map our products and services into the channels that most effectively
reach these customers? Which products and services are we going to sell to
which customers through which channel?
 What channel programs do we need to put in place to support the channels? What
marketing programs are we going to direct to the customer/segment and channel
to drive sales growth in the desired area? What programs, policies, processes are
needed by segment/channel?
Exploring these issues in the sequence outlined will help establish the design and the deployment
of the correct sales resources to achieve your objectives. The “right” channel design and
structure becomes will start to become obvious with this analysis. Usually, a couple of
alternatives that emerge and a variety of criteria can be used in selecting the best alternative.

In addition to making the channel design and deployment process much easier, the tremendous
power to this approach is that since it is customer driven, it will become immediately obvious
and easy for your customer to buy your products and solutions in a manner that is most closely
tailored to how they want to acquire solutions. This means you sell more stuff to more people
more effectively and efficiently!
Critical Success Factors
Based on our experience, few companies can achieve their objectives with a single channel
strategy approach. Most organizations must establish a variety of different channels to reach
their customers most effectively. Leading companies will have a combination of many different
channels. However, from the customer view, the sales channel should be very clear and easy to
understand!
Rule 1: Don’t confuse the customer about how he acquires your solutions, keep it simple,
intuitive and obvious!
There are too many alternatives for your customers to choose from. Their job is not to sort
through how to buy your product, which channel to work with, what price to pay, who is good,
who is bad. They just want to procure a solution in the easiest manner possible.
If the customer is in any way confused about who they should buy from, the channel has been
defined incorrectly. We need to make it very clear and simple about how to buy our products. If
the customer cannot easily understand who they should purchase the product from, they will go
somewhere else. Part of what we need to do is make our products and services easy to buy or
acquire.
Rule 2: There will be overlap in channels, but this should be minimized and managed
effectively. Focus your channels on competing against the competition, not against each
other.
The real world is not black and white; there are many shades of gray. It is impossible to define
the channel structure cleanly. Design your channel strategy in a way that your channels spend

more time fighting the competition than they do fighting each other. The latter case will only
produce dissatisfaction with customer and the channels. Ultimately it leads to pricing/margin
erosion and share erosion.
Rule 2A: Don’t over-distribute your products. Over-distribution means that you will compete
against yourself not your competition. You will lose the loyalty of your channel and lose
customers.
6.2 Paradigm of the channel design decision
1. Recognizing the need for a channel design decision
2. Setting and coordinating distribution objectives
3. Specifying the distribution tasks
4. Developing possible alternative channel structures
5. Evaluating the variables affecting channel structure
6. Choosing the best channel structure
7. Selecting channel members
Chapter Seven
Conflict in the marketing channel
7.1 Conflict Cooperation, and Competition

No matter how well channels are designed and managed, there will be some conflict, if for no
other reason than that the interests of independent business entities do not always coincide.

Channel conflict is generated when one channel member's actions prevent the channel from
achieving its goal. Channel coordination occurs when channel members are brought together to
advance the goals of the channel, as opposed to their own potentially incompatible goals. Here
we examine three questions: What types of conflict arise in channels? What causes channel
conflict? What can be done to resolve conflict situations?
Types of Conflict and Competition

Suppose a manufacturer sets up a vertical channel consisting of wholesalers and retailers. The
manufacturer hopes for channel cooperation that will produce greater profits for each channel
member. Yet vertical, horizontal, and multichannel conflict can occur.
Vertical channel conflict means conflict between different levels within the same channel.
General Motors came into conflict with its dealers in trying to enforce policies on service,
pricing, and advertising. Coca-Cola came into conflict with bottlers who also agreed to bottle Dr.
Pepper.
Horizontal channel conflict involves conflict between members at the same level within the
channel. Some Ford car dealers in Chicago complained about other Chicago Ford dealers
advertising and pricing too aggressively. Some Pizza Inn franchisees complained about other
Pizza Inn franchisees cheating on ingredients, providing poor service, and hurting the overall
Pizza Inn image.
Multichannel conflict exists when the manufacturer has established two or more channels that
sell to the same market. Multichannel conflict is likely to be especially intense when the
members of one channel get a lower price (based on larger volume purchases) or work with a
lower margin. When Goodyear began selling its popular tire brands through Sears, Wal-Mart,
and Discount Tire, it angered its independent dealers. It eventually placated them by offering
exclusive tire models that would not be sold in other retail outlets. Such a strategy does not
always work. When Pacific Cycles purchased Schwinn, it decided to supplement the brand's
higher-end 2,700-dealer network with some of its own channels where it sold its own mid-tier
bikes through large retail chains such as Toys "R" Us, Target, and Wal-Mart. Even though
Pacific Cycles offered exclusive models to the existing Schwinn network, over 1,700 dealers
pedaled away. A key question was whether the sales gains from the big retail chains would offset
the loss from the dealer defections.

7.2 Causes of Channel Conflict
It is important to identify the causes of channel conflict. Some are easy to resolve, others are not.
One major cause is goal incompatibility. For example, the manufacturer may want to achieve
rapid market penetration through a low-price policy. Dealers, in contrast, may prefer to work
with high margins and pursue short-run profitability. Sometimes conflict arises from unclear
roles and rights. HP may sell personal computers to large accounts through its own sales force,
but its licensed dealers may also be trying to sell to large accounts. Territory boundaries and
credit for sales often produce conflict.
Conflict can also stem from differences in perception. The manufacturer may be optimistic about
the short-term economic outlook and want dealers to carry higher inventory. Dealers may be
pessimistic. In the beverage category it is not uncommon for disputes to arise between
manufacturers and their distributors about the optimal advertising strategy. Conflict might also
arise because of the intermediaries' dependence on the manufacturer. The fortunes of exclusive
dealers, such as auto dealers, are profoundly affected by the manufacturer's product and pricing
decisions. This situation creates a high potential for conflict.
7.3 Managing Channel Conflict

As companies add channels to grow sales, they run the risk of creating channel conflict. Some
channel conflict can be constructive and lead to better adaptation to a changing environment, but
too much is dysfunctional. The challenge is not to eliminate conflict but to manage it better.
Here's an example of how one B2B company added a potentially conflicting e-commerce
channel and still managed to build trust—not stir up conflict—with its distributors:
There are several mechanisms for effective conflict management. One is the adoption of super
ordinate goals. Channel members come to an agreement on the fundamental goal they are jointly
seeking, whether it is survival, market share, high quality, or customer satisfaction. They usually
do this when the channel faces an outside threat, such as a more efficient competing channel, an
adverse piece of legislation, or a shift in consumer desires.
A useful step is to exchange persons between two or more channel levels. General Motors
executives might agree to work for a short time in some dealerships, and some dealership owners

might work in GM's dealer policy department. Hopefully, the participants will grow to appreciate
the other's point of view.
Co-optation is an effort by one organization to win the support of the leaders of another
organization by including them in advisory councils, boards of directors, and the like. As long as
the initiating organization treats the leaders seriously and listens to their opinions, co-optation
can reduce conflict, but the initiating organization may have to compromise its policies and plans
to win their support.
Much can be accomplished by encouraging joint membership in and between trade associations.
For example, there is good cooperation between the Grocery Manufacturers of America and the
Food Marketing Institute, which represents most of the food chains; this cooperation led to the-
development of the Universal Product Code (UPC). Presumably, the associations can consider
issues between food manufacturers and retailers and resolve them in an orderly way.
When conflict is chronic or acute, the parties may have to resort to diplomacy, mediation, or
arbitration. Diplomacy takes place when each side sends a person or group to meet with its
counterpart to resolve the conflict. Mediation means resorting to a neutral third party who is
skilled in conciliating the two parties' interests. Arbitration occurs when the two parties agree to
present their arguments to one or more arbitrators and accept the arbitration decision.
Sometimes, when none of these methods proves effective, a company or a channel partner may
choose to file a lawsuit. Levi Strauss and U.K. retailer Tesco became locked in a legal battle
beginning in 1999.
7.4 Resolving conflicts
Conflict Resolution Strategies
Institutionalized Mechanisms Designed to Contain Conflict Early
Information-Intensive Mechanisms
Many of these mechanisms are designed to head off conflict by creating a way to share
information. An information-intensive mechanism is risky and expensive: Each side risks

divulging sensitive information and must devote resources to communication. Trust and
cooperation are helpful conditions because they keep conflict manageable.
Co-optation
Co-optation is a mechanism designed to absorb new elements into the leadership or policy-
determining structure of an organization as a means of averting threats to its stability or
existence. Effective co-optation may bring about ready accessibility among channel members
because it requires the establishment of routine and reliable channels through which information,
aid, and requests may be brought.
Co-optation thus permits the sharing of responsibility so that a variety of channel members may
become identified with and committed to the programs developed for a particular value offer or
service. However, co-optation carries the risk of having one's perspective or decision-making
process changed. It places an "outsider" in a position to participate in analyzing an existing
situation, to suggest alternatives, and to take part in the deliberation of con-sequences.
Third-Party Mechanisms
Co-optation brings together representatives of channel members. In contrast, mediation and

arbitration are ways to bring in third parties that are uninvolved with the channel. This
mechanism prevents conflict from arising or keeps manifest conflict within bounds. Mediation is
the process whereby a third party attempts to secure settlement of a dispute by persuading the
parties either to continue their negotiations or to consider procedural or substantive
recommendations that the mediator may make.
Effective mediation succeeds in clarifying facts and issues, in keeping parties in con-tact with
each other, in exploring possible bases of agreement, in encouraging parties to agree to specific
proposals, and in supervising the implementation of agreements.
Building Relational Norms
There is an important class of factors that serves to forestall or direct conflict and that
management cannot simply decide to create. These are norms that govern how channel members
manage their relationship. They grow up over time as a relationship functions. A channel's norms

are its expectations about behaviour, expectations the channel's members at least partially share.
In channels that are alliances, it is common to observe norms such as:
Flexibility.
Channel members expect each other to adapt readily to changing circumstances, with a minimum
of obstruction and negotiation.
Information Exchange
Channel members expect each other to share any and all pertinent information - no matter how
sensitive - freely, frequently, quickly, and thoroughly.
Solidarity.
Channel members expect each other to work for mutual benefit, not merely one-sided benefit.
A channel with strong relational norms is particularly effective at forestalling conflict. It

discourages the parties from pursuing their own interests at the expense of the channel. These
norms also encourage the players to refrain from coercion and to make the effort work through
their differences, thus keeping conflict in the functional zone.
Styles of Conflict Resolution
Avoidance
A relatively passive channel member (perhaps one in a weak position or represented by a poor
negotiator) has an avoidance style of dealing with conflict. It attempts to pre-vent conflict from
occurring by . . . failing to press for much of anything! Typically, the avoider wants to save time
and head off unpleasantness.
Accommodation
Another style of dealing with conflict is to be accommodating to the other party, meaning to be
more focused on its goals than on one's own. Unlike avoidance (a passive strategy), this is more
than just another way of keeping the peace. Accommodation is a proactive means of
strengthening the relationship by cultivating the other channel member.

Competition
A strategy of competition (or aggression) involves playing a zero-sum game by pursuing one's
own goals while ignoring the other party's goals. This approach focuses on pushing one's own
position while conceding very little. Not surprisingly, this style aggravates conflict, fosters
distrusts, and shortens the time horizon of the channel member’s vis-à-vis their relationship.
Channel members tend to limit their usage of the aggressive style, especially in long-term
relationships.
Repeated Compromise
A very different style is to compromise repeatedly, pressing for solutions that let each side
achieve its goals, but only to an intermediate degree. This is a centrist approach that gives
something to everyone; the compromise strategy seems to be fair. It is used often to handle
minor conflicts, wherein it is easiest to get both sides to concede, thereby speeding the search for
a resolution.
Collaboration
The collaboration style of handling conflict requires a high level of resources, especially
information, time, and energy.
The problem solver tries to get both sides to get all their concerns and issues out in the open
quickly, to work immediately through their differences, to discuss issues directly, and to share
problems with an eye toward working them out.
Problem solving requires creativity in trying to devise a mutually beneficial solution. It is an

information-intensive strategy. In pursuing it, negotiators are sure to reveal a good deal of
sensitive information, which could then be used against them.
Resolving Conflict and Achieving Coordination via Incentives
What are the best arguments to use to persuade the channel member?

Evidence indicates that economic incentives work extremely well, regardless of the personalities,
the players, and the history of their relationship.
Evidence shows that much of the acrimony can be dissolved by combining appealing economic
incentives to participate with a pay-for-performance system, and presenting the proposal through
a salesperson who has a good working relationship with the retailer.
Chapter Eight
Motivating the channel members
8.1 Motivating channel members
The most successful firms view their channel members in the same way they view their end
users. This means determining their intermediaries’ needs and then tailoring the channel
positioning to provide superior value to these intermediaries. To improve intermediaries’
performance, the company should provide training, market research, and other capability-
building programs. And the company must constantly reinforce that its intermediaries are
partners in the joint effort to satisfy customers. More sophisticated companies go beyond merely
gaining intermediaries’ cooperation and instead try to forge a long-term partnership with
distributors. The manufacturer communicates clearly what it wants from its distributors in the
way of market coverage, inventory levels, marketing development, account solicitation, technical
advice and services, and marketing information. The manufacturer then seeks distributor
agreement with these policies and may introduce a compensation plan or other rewards for
adhering to the policies. Still, too many manufacturers think of their distributors and dealers as
customers rather than as working partners. Up to now, we have treated manufacturers and

distributors as separate organizations. But many manufacturers are distributors of related
products made by other manufacturers, and some distributors also own or contract for the
manufacture of in-house brands.
Here are a few ways to give your new relationship a positive foundation.
 Introduce the new distributor to your customers. Use press releases and other publicity
vehicles to let the world know that your value offers can now be purchased from this
source.
 Help the distributor take over existing accounts. Go along on sales calls to your biggest
end user accounts to help establish the new distributor as the new sources for your value
offer or service.
Turn over any contracts or leads from the previous distributor to the new one.
 Build confidence with easy assignments. Let new distributors start by selling value
offers that are easy to sell and accounts that are easy to close. As they succeed, add in
more complex value offers and accounts.
 Provide enough product samples, literature, price sheets, and other collateral material
for all of the distributor's sales personnel.
 Schedule factory visits and joint sales calls to build enthusiasm among the ranks.
 Conduct as much intensive, on-site and customer-call product training as the
distributor allows.
 Give plenty of positive feedback on their work.
Push Strategies
• A push strategy is any marketing activity that entices your COD to sell your value offers
rather than those of other manufacturers the channel represents. In other words, these
types of promotions push your value offer through the channel. Push strategy examples
are:

• Travel incentive programs that award an all-expense-paid trip to a domestic or foreign
destination for meeting a quota during a specified period of time.
• Merchandise programs that reward salespeople for performance with items such as
televisions, sporting goods, and clothing and gourmet foods.
• Training programs that increase the distributor salespeople's comfort level with your
value offers, thereby making it easy to sell the value offers to their customers and reap
compensation (commission, bonus) accordingly.
• Monetary SPIFFS (special promotional incentive factory funds) that draw specific
attention to certain models or groups of units in your value offer line. For instance, for the
next thirty days, you will pay $30 per unit SPIFF bonus for each particular model a
distributor salesperson sells. Two tremendous advantages of this type of program are that
it can be launched with very little administrative work and can be communicated quickly
to your channel.
• Special discounts or allowances that draw special attention to your value offer line
through a limited-time offer. For example a manufacturer might announce that, for the
next sixty days, its channel will receive an additional 10 percent discount off the best
published price on any order.
• Local COOP advertising efforts (direct mail, exhibitions, space advertising) that
produce local market quality sales leads that materialize into real purchases.
Guidelines for Great Channel Partnerships
Rule 1: Be Honest and Accurate—Even if It's Painful
Being completely honest with distributors is one of the most important ingredients in building a
lasting trusting COD partnership. Tell the truth consistently, and your distributors will begin to
respect and trust you. When you have bad news, make sure your channel hears it directly from
you, not from a competitor or other third party. Share news—good or bad—promptly.
Rule 2: Communicate With Every Level of Personnel to Ensure the Most Complete and
Accurate Transmission of Your Channel Information Flow

Everyone employed by your distributor, from the CEO to the salesperson in the field, is selling
for you. All of them are your customers. Communicate with everyone, and you create strong
backers who will enthusiastically support your value offer marketing efforts within the
distributor's organization.
Rule 3: Consider the Needs of Your Channel Before You Implement New Policies
Whether you're forecasting next year's sales or contemplating a price increase or a new value
offer, check with your channel first. By all means avoid the "ivory tower" attitude that
factory/manufacturer knows best. Listen to and consider your distributor’s opinions.
Rule 4: Use the Channel Telegraph Judiciously
The infamous channel telegraph does exist. Distributors, especially eagles, are in constant
contact with each other . . . Think through any policy or procedure before it is implemented. Act
incorrectly, and everyone soon knows.
Rule 5: Communicate With Other Friendly Channel Marketing Managers in Your

Industry or Marketplace
This golden rule governs your relationship with your peers. Don't seal yourself off from other
channel managers . . . Sharing your insights lets you glean customer and marketplace trend data
that can help you compile accurate sales forecasts, take advantage of market opportunities, guard
against glitches, keep up on news of distributors, and gather news of direct competitors.


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Chapter One

An overview of logistics and channel management

At the end of this chapter you will be able to

1.1 Evolution of logistics Management

1 MARKETING CHANNEL AND LOGISTICS MANAGEMENT

1. 1956-1965 - decade of conceptualization-integrated logistical concept began to

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1.2 Definition of Logistics

Logistics is a challenging and important activity because it serves as an integrating or boundary

3 MARKETING CHANNEL AND LOGISTICS MANAGEMENT

1.2 The role and importance of logistics

1.2.1The role of logistics

1.2.2 Importance of logistics

Essential and expensive

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1.3. Logistical System

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Physical Physical Suppliers

Fig 1.1: Logistics System

For further reading please refer

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2.1.1 Economic Drivers

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2.1.2 Cost Structure

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2.1.3 Carrier Pricing Strategies

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2.1.4 Rates and Rating

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It is possible to have a product reclassified by written application to the appropriate classification

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Special Rates and Services

Freight-All-Kind Rates- As indicated earlier, Freight-All-Kind (FAK) rates are important to

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Transit Services- Transit services permits a shipment to be stopped at an intermediate point

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2.2 Transport Decisions

The selection of mode of transportation or service offering within a mode of transportation

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Self assessment questions

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4.1.2 Channel Development

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or containers (such as refillable chemical-carrying drums); (2) to refurbish products (such as