CHAPTER II

GLOBAL LOGISTICS
 CONTENT
 Global operations and logistics planning
 Global operations and logistics strategies
 Strategic changes required by globalization
 The strategic framework for global operations
 Supplier network development, physical
distribution
 The role of logistics in global operations and
marketing strategies
Becton Dickinson’s Worldwide Sources
 International Logistics
 Changes to political landscape affect logistics
 The end of Soviet rule in Eastern Europe
 EU economic integration
 Nontariff barriers-a rule that has the effect of reducing
imports
 Restrictions on truck traffic, forcing freight onto rail and
water
 NAFTA
 Multinational firms
 Comparison of Domestic and
International Logistics
Domestic International
Estimated at 16% of world GDP today
Cost About 10% of U.S. GDP today
Mainly ocean and air, with significant intermodal
Transport mode Mainly truck and rail
activity
Inventories Lower levels, reflecting short-order, lead-time Higher levels, reflecting longer lead times and
requirements and improved transport greater demand and transit uncertainty
capabilities
Agents Heavy reliance on forwarders, consolidators, and
Modest usage, mostly in rail customs brokers
Financial risk Low High, owing to differences in currencies, inflation,
levels and little recourse for default
Cargo risk Low High, owing to longer and more difficult transit,
frequent cargo handling, and varying levels of
infrastructure development
Government Primarily for hazardous materials, weight, Many agencies involved (e.g., customs, commerce,
agencies safety laws, and some tariff requirements agriculture, transportation
Minimal documentation involved (e.g., Significant paperwork; the U.S. Department of
purchase order, bill of lading, invoice) Commerce estimates that paperwork cost for an
Administration
average shipment is $250
Voice, paper-based systems adequate, with Voice and paper costly and often ineffective;
Communication growing usage of electronic data interchange movement toward electronic interchange but
and Internet variations in standards hinder widespread usage
Cultural differences Relative homogeneity requires little product Cultural differences require significant market and
modification product adaptation
International Market Entry Strategies

 Exporting • Ownership
 Licensing • Importing
 Joint ventures • Countertrade
 Major Participants in an International
Logistics Transaction
Domestic Domestic
bank seller

Domestic Export
government facilitators
agencies
Inland
transportation
carrier
Domestic
port or terminal
of exit
International
carrier
(air, water)
Foreign port
Product or terminal
movement of entry
Foreign Foreign inland
government transportation
Information agencies carrier
flow
Foreign Foreign
bank buyer
The Global Logistics Environment

Customer
service
Other
Inventory

Competition
activities
Logistics
executive
Warehousing Packaging
and storage

Transportation
Responding to
Competition with Logistics
 Increasing the number of cross-national partnerships,
alliances, mergers, and/or acquisitions.
 Expansion of many previously domestic-based
organizations into international markets.
 Development of global communications networks
operating 24 hours a day.
 Establishment of country and regional warehouses in
major world markets.
 Identifying and developing relationships with logistics
service providers that offer transportation, storage,
materials handling, and other services on a global basis.
Exporting Companies

 Export distributor
 Customs house broker
 International freight forwarder
 Trading company
 Non-vessel-operating common carrier
(NVOCC)
Documentation
 Country of Origin
 Bills of Lading
 Packing Lists
 Customs
 Certified Shippers - C-T PAT
Free Trade Zones
 > 225 in the US
 postpone payment of customs or taxes until item is sold
 avoid customs completely if consolidated and re-exported
Ocean Shipping
 Types of Ocean Cargo
 Petroleum
 Dry-bulk cargoes-grain, ores, sulfur, sugar, scrap iron,
coal, lumber, logs in vessel loads
 Containers
 Shipping conferences and alliances pool resources
and extend market coverage
Ocean Shipping
 Types of Vessels
 Containerships
 Lighter aboard ship (LASH) vessels
 Roll On-Roll Off (RO-RO) vessels
 Tankers
 Specialized vessels
A RO-RO Vessel in Jacksonville Florida
 International Trade Inventories
 May vary in small ways from country to country—
products may be tailored to fit
 Less is needed (than in U.S.) to serve any one
country
 Return items are impossible to accommodate
 Import and export quotas affect value of
inventories
 Currency and language differences
 Defining Global Operations
 International business - engages in cross-border
transactions
 Multinational Corporation - has extensive involvement in
international business, owning or controlling facilities in
more than one country
 Global company - integrates operations from different
countries, and views world as a single marketplace
 Transnational company - seeks to combine the benefits of
global-scale efficiencies with the benefits of local
responsiveness
Reasons to Globalize Operations
Tangible  Reduce costs (labor, taxes, tariffs, etc.)
 Improve the supply chain
 Provide better goods and services
 Attract new markets
 Learn to improve operations
 Attract and retain global talent
Intangible
Pros and Cons of Globalization
 Pros (Pluses)
 Productivity grows more quickly (living standards can go up
faster)
 Global competition and cheap imports keep a lid on prices
(inflation less likely to derail economic growth)
 Open economy spurs innovation (with fresh ideas from abroad)
 Export jobs often pay more than other jobs
 US has more access to foreign investment (keeps interest rates
low)
Pros and Cons of Globalization
 Cons (Minuses)
 Millions of Americans have lost jobs due to imports or
production shifts abroad
 Most displaced workers find new jobs that pay less
 Workers face pay-cuts demands from employers
 Service and white-collar jobs are increasingly vulnerable
 US employees lose their comparative advantage when
companies build advanced factories abroad
Global Strategies
 Boeing – sales and production are worldwide
 Benetton – moves inventory to stores around the world
faster than its competition by building flexibility into
design, production, and distribution
 Sony – purchases components from suppliers in
Thailand, Malaysia, and around the world
Global Strategies
 Volvo – considered a Swedish company but it is
controlled by an American company, Ford. The current
Volvo S40 is built in Belgium and shares its platform
with the Mazda 3 built in Japan and the Ford Focus
built in Europe.
 Haier – A Chinese company, produces compact
refrigerators (it has one-third of the US market) and
wine cabinets (it has half of the US market) in South
Carolina
Some Multinational Corporations
% Sales % Assets
Outside Outside
Home Home Home % Foreign
Company Country Country Country Workforce

Citicorp USA 34 46 NA
Colgate- USA 72 63 NA
Palmolive
Dow USA 60 50 NA
Chemical
Gillette USA 62 53 NA
Honda Japan 63 36 NA
IBM USA 57 47 51
Some Multinational Corporations
% Sales % Assets
Outside Outside
Home Home Home % Foreign
Company Country Country Country Workforce

ICI Britain 78 50 NA
Nestle Switzerland 98 95 97
Philips Netherlands 94 85 82
Electronics
Siemens Germany 51 NA 38
Unilever Britain & 95 70 64
Netherlands
 Some Boeing Suppliers (787)
Firm Country Component
Latecoere France Passenger doors
Labinel France Wiring
Dassault France Design and
PLM software
Messier-Bugatti France Electric brakes
Thales France Electrical power
conversion system
and integrated
standby flight display
Messier-Dowty France Landing gear structure
Diehl Germany Interior lighting
 Some Boeing Suppliers (787)
Firm Country Component
Cobham UK Fuel pumps and valves
Rolls-Royce UK Engines
Smiths Aerospace UK Central computer
system
BAE SYSTEMS UK Electronics
Alenia Aeronautics Italy Upper center
fuselage &
horizontal stabilizer
Toray Industries Japan Carbon fiber for
wing and tail units
 Some Boeing Suppliers (787)
Firm Country Component
Fuji Heavy Japan Center wing box
Industries
Kawasaki Heavy Japan Forward fuselage,
Industries fixed section of wing,
landing gear well
Teijin Seiki Japan Hydraulic actuators
Mitsubishi Heavy Japan Wing box
Industries
Chengdu Aircraft China Rudder
Group
Hafei Aviation China Parts
 Some Boeing Suppliers (787)
Firm Country Component
Korean Aviation South Wingtips
Korea
Saab Sweden Cargo access doors
Reduce Costs
 Foreign locations with lower wage rates can lower
direct and indirect costs
 Maquiladoras
 World Trade Organization (WTO)
 North American Free Trade Agreement (NAFTA)
 APEC, SEATO, MERCOSUR
 European Union (EU)
Improve the Supply Chain
 Locating facilities closer to unique resources
 Auto design to California
 Athletic shoe production to China
 Perfume manufacturing in France
Provide Better Goods
and Services
 Objective and subjective characteristics of goods and
services
 On-time deliveries
 Cultural variables
 Improved customer service
Understand Markets
 Interacting with foreign customers and suppliers can
lead to new opportunities
 Cell phone
design from
Europe
 Cell phone
fads from
Japan
 Extend the product life cycle
Learn to Improve Operations
 Remain open to the free flow of ideas
 General Motors partnered with a Japanese auto
manufacturer to learn
 Equipment and layout have been improved using
Scandinavian ergonomic competence
Attract and Retain Global Talent
 Offer better employment opportunities
 Better growth opportunities and insulation against
unemployment
 Relocate unneeded personnel to more prosperous
locations
 Incentives for people who like to travel
Cultural and Ethical Issues
 Cultures can be quite different
 Attitudes can be quite different towards

 Punctuality  Thievery
 Lunch breaks  Bribery
 Environment  Child labor
 Intellectual
property
You May Wish To Consider
 National literacy rate  Work ethic
 Rate of innovation  Tax rates
 Inflation
 Rate of technology change
 Availability of raw materials
 Number of skilled workers
 Interest rates
 Political stability
 Population
 Product liability laws  Number of miles of highway
 Export restrictions  Phone system
 Variations in language
Global operations and logistics
strategies
Developing Missions and Strategies

Mission statements tell an organization

where it is going

The Strategy tells the organization how

to get there
 Mission

 Mission - where are you

going?
 Organization’s purpose for
being
 Answers ‘What do we
provide society?’
 Provides boundaries and
focus
FedEx
FedEx is committed to our People-Service-Profit philosophy. We will
produce outstanding financial returns by providing total reliable,
competitively superior, global air-ground transportation of high
priority goods and documents that require rapid, time-certain
delivery. Equally important, positive control of each package will be
maintained using real time electronic tracking and tracing systems. A
complete record of each shipment and delivery will be presented with
our request for payment. We will be helpful, courteous, and
professional to each other and the public. We will strive to have a
completely satisfied customer at the end of each transaction.
Merck
The mission of Merck is to provide society with superior
products and services - innovations and solutions that improve
the quality of life and satisfy customer needs - to provide
employees with meaningful work and advancement
opportunities and investors with a superior rate of return
Hard Rock Cafe

Our Mission: To spread the spirit of Rock ‘n’ Roll by

delivering an exceptional entertainment and dining
experience. We are committed to being an important,
contributing member of our community and offering the
Hard Rock family a fun, healthy, and nurturing work
environment while ensuring our long-term success.
Arnold Palmer Hospital

Arnold Palmer Hospital is a healing environment

providing family-centered care with compassion,
comfort and respect… when it matters the most.
Key Issues in Global Logistics

 Response Times
a. Customers expect longer and less reliable order cycle
times internationally?
 Longer distances travelled
 Substantial international freight moves by ocean
 Additional documentation, arrangements and
coordination required. May take considerable time to
complete.
Key Issues in Global Logistics

 Order Completeness & Shipping Accuracy

a. More important in global logistics than in domestic markets
due to:
 Higher cost of back orders
 Higher cost of expedited shipments
Key Issues in Global Logistics

 Shipment Condition
a. Packages must be adequately protected to reduce damage
in transit and handling.
b. Cost & time needed to replace damaged items can be
substantial.
 Global Logistics Management Process Key
questions for analysis, planning & control

Controlling
Environmental Plan
Planning Structure the logistics
Analysis Implementation
program

• What are the • Who should make • How do we • How to develop • How to
unique logistics decisions? structure our effective measure and
characteristics logistics operational monitor plan
• Major assumptions about
of each market? organization to logistics plans performance
each market. Valid?
optimally
• What • What • What steps to
• Customer service needs achieve
characteristics transportation, take to bridge
of target markets objectives,
does each inventory, gaps in
given available
market have in • Characteristics of packaging, performance
skills &
common with logistics systems warehousing
resources
other national available and customer
markets? • What is the service
• Strengths & weaknesses
responsibility of strategies do
• Should the firm in each market
each we have for
cluster national
• What are our objectives? organizational each target?
markets for
level?
logistics • Balance of payments and
operating and/or currency situation and Source:
planning impact on firm’s physical Adapted from Keegan, W.J., (1996), Global Marketing
purposes? distribution system Management, 5th ed., NJ : Prentice Hall: p. 37.
Guidelines for Developing a Global
Logistics Strategy

 General Management Guidelines

a. Recognize problems.
Logistics-related problems include maintaining control of global
supply chains, obtaining information from customers and
suppliers and responding to government regulatory bodies.
b. Analyze options arising from new situations or opportunities.
Logistics-related options include transportation modes, carriers
& routing, consignment, and postponement.
c. Prepare for rapid execution of plans, programs and strategies.
Guidelines for Developing a Global
Logistics Strategy

 Logistics-Specific Guidelines
a. Logistics planning should be integrated into the company’s
strategic planning process.
b. Logistics departments need to be guided by a clear vision and
must measure output regularly.
c. Import/export management should ensure integrated
management of all elements of the supply chain, from origin to
destination.
d. Opportunities to integrate domestic and international operations
should be pursued to leverage total company volumes with
globally oriented carriers.
Organizing for Global Logistics

 Centralization versus Decentralization

a. Centralize planning & control functions
 Example: Information systems should be centralized
for integrated decision-making.
b. Decentralize operations functions
 Example: Customer service work best when localized
in foreign market.
c. Group all important international logistics elements
together under a single manager.
Organizing for Global Logistics

 Factors affecting Logistics Strategies & Organizational

Structures
a. Rapid product introduction across numerous regions
b. Focused market needs
c. Quick-response delivery
d. Expanded, special services
e. Innovative channels
Financial Aspects of Global Logistics

 Working Capital Considerations

a. Financing required for inventory, credit, investment in
buildings and equipment, etc.
b. Longer time to get payment for product sold due to longer
distances, border crossing delays and government
regulations that may restrict smooth movement of goods
from manufacturer to customer.
c. Impact of exchange rate fluctuation on lag time from the
time product is shipped, delivered to the consignee and
finally paid
Financial Aspects of Global Logistics

 Inventories
a. Higher inventory levels are often required due to greater
uncertainty and delay.
b. Impact of inflation on accounting for inventory costs and
profit
Financial Aspects of Global Logistics

 Investment in Facilities & Logistics Networks

a. High capital expenditure for direct investment in facilities

and logistics networks

b. Impact of currency exchange fluctuations on valuation of

assets and cost of operations in foreign markets
Financial Aspects of Global Logistics

 Payment
a. Letters of Credit
b. Insured transactions – lower overhead costs than letters of
credit
Strategic changes required by
globalization
Forces toward Globalization
 Global market forces.
 Technological forces.
 Global cost forces.
 Political and economic forces.
Global Market Forces
 Pressures created by foreign competitors, as well as the
opportunities created by foreign customers.
 Presence of foreign competitors in home markets can affect
their business significantly.
 Much of the demand growth available to companies is in
foreign and emerging markets.
 Increasing demand for products throughout the world
through the global proliferation of information.
Global Market Forces
 Particular markets often serve to drive technological advances in
some areas.
 Companies forced to develop and enhance leading-edge
technologies and products.
 Such products can be used to increase or maintain market
position in other areas or regions where the markets are not as
competitive
Technological Forces
 Related to the products
 Various subcomponents and technologies available in
different regions and locations
 Successful firms need to use these resources quickly and
effectively.
 Locate research, design, and production facilities close to
these regions.
 Frequently collaborate, resulting in the location of joint
facilities close to one of the partners.
 Global location of research-and-development facilities
driven by two main reasons:
 As product cycles shrink, locate research facilities close to
manufacturing facilities.
 Specific technical expertise may be available in certain areas or
regions
Global Cost Forces
 Often dictate global location decisions
 Costs of cheaper unskilled labor more than offset by the
increase in other costs associated with operating facilities in
remote locations.
 In some cases cheaper labor is sufficient justification for
overseas manufacturing.
 Other global cost forces have become more significant
 Cheaper skilled labor is drawing an increasing number of companies
overseas.
Political and Economic Forces
 Exchange rate fluctuation
 Regional trade agreements
 Tariff system
 Trade protection mechanisms
 More subtle regulations
 Local content requirements
 Voluntary export restrictions
 Government procurement policies
Activity Mapping
Courteous, but Limited
Passenger Service

Lean, Productive Short Haul, Point-to-Point

Employees Routes, Often to Secondary
Airports
Competitive Advantage:
Low Cost

High Aircraft Frequent, Reliable

Utilization Schedules
Standardized Fleet of
Boeing 737 Aircraft
Activity Mapping
Courteous, but Limited
Passenger Service

Lean, Productive Short Haul, Point-to-Point

Employees Routes, Often to Secondary
Automated ticketing machines Airports
Competitive Advantage:
No seat assignments
Low Cost
No baggage transfers

High Aircraft No meals (peanuts) Frequent, Reliable

Utilization Schedules
Standardized Fleet of
Boeing 737 Aircraft
Activity Mapping
Courteous, but Limited
Passenger Service
No meals (peanuts)
Lower gate costs at secondary airports
Lean, Productive Short Haul, Point-to-Point
Employees
High number of flights reduces employee Routes, Often to Secondary
idle time between flights Airports
Competitive Advantage:
Low Cost

High Aircraft Frequent, Reliable

Utilization Schedules
Standardized Fleet of
Boeing 737 Aircraft
Activity Mapping
Courteous,
High number of flights reducesbut Limited
employee
Passenger
idle time between flightsService
Saturate a city with flights, lowering
administrative costs (advertising, HR, etc.)
Lean, Productive Short Haul, Point-to-Point
Employees per passenger for that city Routes, Often to Secondary
Pilot training required on only one type of Airports
aircraft
Competitive Advantage:
Reduced maintenance inventoryLow Costrequired
because of only one type of aircraft
High Aircraft Frequent, Reliable
Utilization Schedules
Standardized Fleet of
Boeing 737 Aircraft
Activity Mapping
Pilot training required on only one type of
Courteous, but Limited
aircraft
Passenger Service
Reduced maintenance inventory required
because of only one type of aircraft
Lean, Productive Excellent supplier relations with Boeing has
Short Haul, Point-to-Point
Employees aided financing Routes, Often to Secondary
Airports
Competitive Advantage:
Low Cost

High Aircraft Frequent, Reliable

Utilization Schedules
Standardized Fleet of
Boeing 737 Aircraft
Activity Mapping
Courteous, but Limited
Passenger
Reduced Service inventory required
maintenance
because of only one type of aircraft
Lean, Productive Flexible employees and standardShort
planes aid Point-to-Point
Haul,
Employees scheduling Routes, Often to Secondary
Flexible union Maintenance personnel trained only oneAirports
contracts type of aircraft
Competitive Advantage:
20-minute
Low Cost gate turnarounds

High Aircraft Frequent, Reliable

Utilization Schedules
Standardized Fleet of
Boeing 737 Aircraft
Activity Mapping
Automated ticketing machines
Courteous, but Limitedemployees
Empowered
Passenger Service
High employee compensation
Hire for attitude, then train
Lean, Productive Short Haul, Point-to-Point
Employees High level of stock ownership
Routes, Often to Secondary
High number of flights reduces employeeAirports
idleAdvantage:
Competitive time between flights
Low Cost

High Aircraft Frequent, Reliable

Utilization Schedules
Standardized Fleet of
Boeing 737 Aircraft
 Four International Operations
Strategies International
High
Strategy
 Import/export or license
existing product
Cost Reduction Considerations

Examples
U.S. Steel
Harley Davidson

Low
Low High
Local Responsiveness Considerations
(Quick Response and/or Differentiation)
 Four International Operations
Strategies
High
Cost Reduction Considerations

International Strategy
 Import/export or license
existing product

Examples
U.S. Steel
Harley Davidson

Low
Low High
Local Responsiveness Considerations
(Quick Response and/or Differentiation)
 Four International Operations
Strategies Global
High Strategy
 Standardized product
 Economies of scale
 Cross-cultural learning
Cost Reduction Considerations

Examples
Texas Instruments
Caterpillar
International Strategy

Otis Elevator
 Import/export or license
existing product

Examples
U.S. Steel
Harley Davidson

Low
Low High
Local Responsiveness Considerations
(Quick Response and/or Differentiation)
 Four International Operations
Strategies
High
Global Strategy
 Standardized product
 Economies of scale
 Cross-cultural learning

Examples
Cost Reduction Considerations

Texas Instruments
Caterpillar
Otis Elevator

International Strategy
 Import/export or license
existing product

Examples
U.S. Steel
Harley Davidson

Low
Low High
Local Responsiveness Considerations
(Quick Response and/or Differentiation)
 Four International Operations
Multidomestic
Strategies Strategy
High
 Use existing domestic
Global Strategy
model globally
 Standardized product
 Economies of scale
 Franchise, joint ventures,
 Cross-cultural learning

Examples
subsidiaries
Cost Reduction Considerations

Texas Instruments
Caterpillar
Otis Elevator
Examples
Heinz
International Strategy
 Import/exportMcDonald’s
or license

The Body Shop

existing product

Examples
U.S. Steel Hard Rock Cafe
Harley Davidson

Low
Low High
Local Responsiveness Considerations
(Quick Response and/or Differentiation)
 Four International Operations
Strategies
High
Global Strategy
 Standardized product
 Economies of scale
 Cross-cultural learning

Examples
Cost Reduction Considerations

Texas Instruments
Caterpillar
Otis Elevator

International Strategy Multidomestic Strategy

 Use existing
 Import/export or license domestic model globally
existing product  Franchise, joint ventures,
subsidiaries
Examples
U.S. Steel Examples
Harley Davidson Heinz The Body Shop
McDonald’s Hard Rock Cafe

Low
Low High
Local Responsiveness Considerations
(Quick Response and/or Differentiation)
 Four International Operations
Strategies Transnational
High Strategy
 Move material, people,
Global Strategy
 Standardized product
ideas across national
 Economies of scale
 Cross-cultural learning

Examples boundaries
Cost Reduction Considerations

Texas Instruments
 Economies of scale
Caterpillar
Otis Elevator
 Cross-cultural learning
Examples
International Strategy Multidomestic Strategy
 Use existing
Coca-Cola
 Import/export or license domestic model globally
existing product  Franchise, joint ventures,

U.S. SteelNestlé
subsidiaries
Examples
Examples
Harley Davidson Heinz The Body Shop
McDonald’s Hard Rock Cafe

Low
Low High
Local Responsiveness Considerations
(Quick Response and/or Differentiation)
 Four International Operations
Strategies
High
Global Strategy Transnational Strategy
 Standardized product  Move material, people, ideas across
 Economies of scale national boundaries
 Cross-cultural learning  Economies of scale
 Cross-cultural learning
Examples
Cost Reduction Considerations

Texas Instruments Examples

Caterpillar Coca-Cola
Otis Elevator Nestlé

International Strategy Multidomestic Strategy

 Use existing
 Import/export or license domestic model globally
existing product  Franchise, joint ventures,
subsidiaries
Examples
U.S. Steel Examples
Harley Davidson Heinz The Body Shop
McDonald’s Hard Rock Cafe

Low
Low High
Local Responsiveness Considerations
(Quick Response and/or Differentiation)
 The role of logistics in global
operations and marketing strategies
Marketing / Logistics Management
Concept
Customer
satisfaction

• Suppliers
• Intermediate customers
• Final customers

Integrated Company
effort profit
• Maximize long-term
• Product profitability
• Price • Lowest total costs at
• Promotion an acceptable level of
• Place (distribution) customer service
Logistics and Competitive Advantage

High
Focus on Cost and
Customer Service
Value-Added Leader
Differential
(Value)
Advantage
Focus on
Commodity Process
Improvement
Low

Low High
Cost / Productivity
Advantage
 Logistics Involves Both...

Internal interactions between product groups,

departments and divisions

External interactions with customers,

suppliers and third party providers
Supply Chain Management (SCM)

“Supply chain management involves the management of

upstream and downstream relationships with suppliers,
distributors and customers to achieve greater customer value-
added at less total cost.”

(Christopher, M. 1998)
 Partnering Through Supply Chain Management

 SCM involves (& often requires)

 Partnerships among channel members working to create a
distribution system that reduces inefficiencies, costs, and
redundancies while creating competitive advantage and satisfying
customers.

 The use of technology e.g., bar code data, electronic data

interchange, etc. to link supply chain partners. This increases
productivity by reducing inventory, shortening cycle time, and
removing wasted human effort.
 Channels of Distribution
Definitions
 A sequence of marketing organizations that directs a product from the
producer to the ultimate (or end) user.
 Systems of relationships among businesses that participate in the process of buying
and selling products and services
 May sometimes be referred to as a supply chain or marketing channel

Multiple Channels for Consumer Products

 Manufacturers/Suppliers use different channels to reach different market
segments
Formal (contract-based) vs. Informal (Partnerships) Channel
Relationships
Distribution Channels – Consumer Products
CONSUMER PRODUCTS

Producer Consumer

 Producer  Consumer (Direct Channel)

 Includes no intermediaries.
 Used by services and consumer goods sold directly to the consumer

Producer Retailer Consumer

 Producer  Retailer  Consumer
 Producers sell directly to large retailers (e.g., Wal-Mart)
 Used where shipping and handling costs are high, or with perishable
products and/or fashion products with short product life cycles.

Figure 15.1
Distribution Channels – Consumer Products

Producer Agent Wholesaler Retailer Consumer

 Producer  Agent Wholesaler  Retailer  Consumer

 Agents market products to wholesalers on commission basis.

Producer Wholesaler Retailer Consumer

 Producer  Wholesaler  Retailer  Consumer
 Traditional channel where the wholesaler services numerous retailers for the
producer.
Distribution Channels – Business Products
BUSINESS PRODUCTS
Business
Producer
customer

 Producer  Business user

 Direct channel
 Manufacturer’s sales force sells directly to the consumer.

Agent Business
Producer
middleman customer

 Producer  Agent middleman  Business user

 Independent intermediary represents the manufacturer to the
consumer.
Domestic vs. Global Channels
 Country-specific logistics requirements
 Complexity
 Costs
 Distances
 Intermediaries
 Alternative channel structures
 Time
 Control
 Information
 Decentralized decision making
Alternative International Channel
Structures
Manufacturer
International Host Country
Division Buying Office Wholesaler Wholesaler Trading CompanyTrading Company
/Agent /Agent
Wholesaler

Parent Trading Company

Company Wholesaler /Agent

Distributor Wholesaler Distributor

Wholesaler
Wholesaler Wholesaler

Wholesaler Wholesaler

Retailer Retailer Retailer Retailer Retailer

Customer
Channel Flows
Products/Service
Ownership
Promotional Information
Supply Information

Producer Agent Wholesaler Retailer Consumer

Money
Market research Information
Demand Information
Products/Service (returns)
Middlemen
 Middleman (or marketing
intermediary)
 A marketing organization that links a producer and user
within a marketing channel.

 Merchant middleman—takes title to products by buying

them, e.g. distributors.
 Functional middleman—helps in the transfer of ownership
of products but does not take title to the products, e.g., 3pls.
 Retailer—buys from producers or other middlemen and sells
to consumers.
 Wholesaler—a middleman that sells products to other firms.
 Efficiency Provided by an
Intermediary
The services of intermediaries reduce the number of contacts, or exchanges, between producers
and buyers, thereby increasing efficiency; especially across longer distances. These intermediaries
however ‘lengthen’ the supply chain.

Producer Buyer Producer Buyer

Producer Buyer Producer Buyer

Middleman or
intermediary
Producer Buyer Producer Buyer

Producer Buyer Producer Buyer

Source: William M. Pride and O. C. Ferrell, Marketing: Concepts and Strategies, 2000e.
Copyright © 2000 by Houghton Mifflin Company, Adapted with permission. Figure 15.3
Efficiency Provided by an Intermediary
Retailer Retailer Retailer Retailer Retailer Retailer

Manufacturer

Initial manufacturer must arrange

for six interfaces or interactions
1X6=6
 Efficiency Provided by an Intermediary

Retailer Retailer Retailer Retailer Retailer Retailer

Manufacturer Manufacturer Manufacturer

As the industry grows, the number of

interfaces or interactions continue to grow
3 X 6 = 18
Retailer Retailer Retailer Retailer Retailer Retailer

Middle Man

Manufacturer Manufacturer Manufacturer

Eventually, it will be economical

for a middle man to improve
transaction efficiency
3+6=9
Losing the Middle Man
 Can a company or product grow so large that as middle man
does not make sense?

 At what point do we lose the middle man?

Wholesalers – Services to
Manufacturers
 Provide instant, ready-made sales forces.

 Reduce manufacturers’ inventory costs by purchasing

finished goods in sizable quantities.

 Assume credit risks associated with selling to retailers.

 Furnish market information (from

customers) to manufacturers.
 Wholesalers - Services to Retailers

 Promotion: Promote products to retailers.

 Market Information: Two-way source of market

information for both producers and retailers.

 Financial Aid: Provide timely product deliveries that reduce

inventory costs for retailers and extend credit to retailers for
inventory purchases.
 Designing Effective Channels - I

External (Environmental) Issues

 Firms’ global presence  Increased channel complexity, market
diversity and cost
 Government Regulatory Environment: Trade Initiatives; Privatization;
etc.
 Corporate Reconfiguration: Vertical & Horizontal; Integration

 Technological Innovations

 TQM
 Designing Effective Channels - II

Internal (Marketing) Issues

 Types of Distribution Strategies
 Intensive  Wide channels e.g., commodities
 Exclusive  Narrow channels e.g., cars
 Selective  Mixed & targeted
 Product Characteristics: Value, Requirements, etc.
 Customer Service Objectives: Return policy, Delivery times and
schedules
Characteristics of Effective
Channels

 Flexible & Adaptable

 Dynamic
 Integrated Relationships
 Global Management (+ Foreign Participation) but region-
specific
 “No boundaries”

 From Channel  Network

 “Slim” (No excesses)
Types of Channels
 Ownership channel (title)
 Negotiations channel (buy/sell)
 Financing channel (payment)
 Promotions channel (marketing)
 Logistics channel (movement/storage)
 Logistics Channel Functions
 Concentration
 Combine multiple small shipments into larger shipments
 Accumulating from different sources (consolidating)

 Customization
 A shipment of different pieces is assembled
 Sorting heterogeneous products into homogeneous stocks

 Dispersion
 Large shipments are broken down into smaller shipments
 Allocating into smaller lots (bulk-breaking)

 Assorting
 Building assortments of goods for resale
Different Channel Flows
 There are channels for the flow of information
 There are channels for the flow of product/service

 There are forward channels

 There are reverse channels
“Power” in the Channel
 Each channel member has strengths and weaknesses

 The channel member with the greater power (known as the

“Channel Captain”) will dictate roles within the channel or
even develop alternative channels

 What’s wrong with this picture?

 Vendor Managed Inventories (VMI)
 Instead of worrying about inbound freight and ordering optimal quantities,
why not have the vendor manage a pocket of inventory close to our
manufacturing location
 Or, have vendor manage the inventory in our DC or stores

 Illustration: Multiple Vendor Managed Inventories (MVMI) at Ryder

Integrated Logistics
 Exploits the VMI concept by offering a consolidated approach and value-added
services
Evolution of Business Structures

Divisions

Matrix Management

Networks
 Functional ‘Silos’
 Structured around individual functional areas (divisions)
 “Silo Mentality” focuses primarily on internal operations –
ignores “overall picture”
 Little consideration for cross-functional interaction
 Adversarial and competitive cross-functional relationships
 Often conflicting goals and objectives across functions and
within overall corporate objectives
 Conflicting goals and poor communication results in higher
total costs and reduced productivity
Matrix Organization
 Provides linkages between divisions and overall corporate organization
 Developed from combinations of horizontal and vertical interactions
 Structured around cross-functional projects

Teams
 Structured around cross-product/service relationships
 May be Inter-organizational or inter-functional
 Popular within strategic and other forms of alliances
 Logistics in a Matrix Organization
President

authority
Horizontal flows of project
ManufacturinEngineering Marketing Transportati Finance and
g on accounting
Production Product Sales Traffic Information
Logistics scheduling design forecasting processing
Procurement
Requirement Maintenance Customer Protective Management
Other determinatio service packaging science
programs n

Vertical flows of functional

authority
Source: Adapted from Daniel W. DeHayes, Jr., and Robert L. Taylor, “Making ‘Logistics’ Work in a Firm,”
Business Horizons 15, no. 3 (June 1972), p. 44.
Networks

 Exists as a collection of ‘small’ specialist organizations

 Organizations focus in individual specialization and core
competency
 Outsourcing
 ‘Virtual/Hollow’ Corporation
 Information sharing/flow is key
Generic Logistics Strategies

 Process-based
 Broad group of logistics activities managed as a value-added chain and
integrated system

 Market-based
 Limited group of logistics activities across multiple business units

 Channel-based
 Logistics activities performed jointly with supply chain partners.
Attention on external control