Mma6e Chapter 16

Marketing Management:
An Asian Perspective,
6th Edition
Instructor Supplements
Created by Geoffrey da Silva
Managing Retailing, Wholesaling, and Logistics
3 © Pearson Education South Asia Pte Ltd 2013. All rights reserved
16
Learning Issues for Chapter Sixteen
1. What major types of marketing intermediaries occupy this

sector?
2. What marketing decisions do these marketing intermediaries

make?
3. What are the major trends with marketing intermediaries?
4. What does the future hold for private label brands?
Chapter Outline
• In the previous chapter, we examined marketing

intermediaries from the viewpoint of manufacturers who
wanted to build and manage marketing channels.
• In this chapter, we view these intermediaries—retailers,

wholesalers, and logistical organizations—as requiring and
forging their own marketing strategies.
• Intermediaries also strive for marketing excellence and can

reap the benefits like any other company.
Chapter Outline
• The more successful intermediaries use strategic planning,

advance information systems, and sophisticated marketing
tools.
• They segment their markets, improve their market targeting

and positioning, and aggressively pursue market expansion
and diversification strategies.
Retailing
• Retailing includes all the activities involved in selling goods or

services directly to final consumers for personal, non-business
use.
• A retailer or retail store is any business enterprise whose

sales volume comes primarily from retailing.
• Any organization selling to the final consumer—no matter

how or where they are sold is doing retailing.
Types of Retailers
• Consumers today can shop

for goods and services at
store retailers, non-store
retailers, and retail
organizations.
• Store Retailers
– Perhaps the best known type

of store retailers is the
department store.
Department Stores
Department stores are the best-known type of retailers. Japan’s Takashimaya attracts millions each
year with special offerings such as art galleries, playgrounds, and restaurants.
Table 16.1: Major Retailer Types
Service Levels and Positioning of the Retailer
Retailers can position themselves as offering one of four levels

of service:
1.Self-service—Self-service is the cornerstone of all discount

operations. Many customers are willing to carry out their own
locate-compare-select process to save money.
2.Self-selection—Customers find their own goods, although they

can ask for assistance.
Service Levels and Positioning of the Retailer
3. Limited service—These retailers carry more shopping goods,

and customers need more information and assistance. The
stores also offer services (such as credit and merchandise-
return privileges).
4. Full service—Salespeople are ready to assist in every phase

of the locate-compare-select process. Customers who like to
be waited on prefer this type of store. The high staffing cost,
along with the higher proportion of specialty goods and
slower-moving items and the many services, results in high-
cost retailing.
Non-store Retailing
• Although the overwhelming bulk of goods and services is sold

through stores, non-store retailing has been growing much
faster than store retailing.
• Non-store retailing falls into four major categories:

i. Direct selling
ii. Direct Marketing (which includes telemarketing and Internet
selling)
iii. Automatic vending
iv. Buying service
Direct Selling
• Direct selling (also called multilevel selling and network marketing)

involves companies selling door-to-door or at home sales parties.
Avon, Tupperware, and Mary Kay Cosmetics are sold one-to-many:
a salesperson goes to the home of a host who has invited friends;
the salesperson demonstrates the products and takes orders.
• Pioneered by Amway, the multilevel (network) marketing sales

system consists of recruiting independent businesspeople who act
as distributors.
• The distributor’s compensation includes a percentage of sales of

those the distributor recruits as well as earnings on direct sales to
customers.
Direct Marketing
• Direct marketing has roots in direct-mail and catalog

marketing; it includes telemarketing, television direct-
response marketing, and electronic shopping.
• Sales through direct marketing are highest within Asia in

Japan, although home shopping TV channels are gaining
popularity in Korea and Taiwan.
• See “Marketing Insight: Enhancing Online Shopping in Asia”.
Marketing Insight: Enhancing Online Shopping in
Asia
South Korea has one of the most avid Internet shoppers. Hence, companies such as LG is
capitalizing on this online shopping fever.
Automatic Vending
• Automatic vending is used for a variety of merchandise, including

impulse goods like cigarettes, soft drinks, coffee, candy,
newspapers, and magazines, and other products like hosiery,
cosmetics, hot food, condoms, and paperbacks.
• Vending machines are found in factories, offices, large retail stores,

gasoline stations, hotels, restaurants, and many other places.
• They offer 24-hour selling, self-service, and merchandise that is

always fresh.
• Japan has the most vending machines per person
Vending Machines—Japan
Vending machines are an effective distribution system in Japan. Products sold through vending
machines range from the usual soft drinks, beers, and cigarettes to more exotic items such as hot
instant noodles and eggs. Coca-Cola alone operates more than a million drink machines there.
Buying Service
Buying service is a store-less retailer serving a specific clientele

—usually employees of large organizations—who are entitled to
buy from a list of retailers that have agreed to give discounts in
return for membership.
Corporate Retailing and Franchising
• Although many retail stores are independently owned, an

increasing number are part of some form of corporate
retailing.
• These organizations achieve economies of scale, greater

purchasing power, wider brand recognition, and better-trained
employees than independent stores can usually gain alone.
Corporate Retailing and Franchising
• The major types of corporate retailing:
a. corporate chain stores,
b. voluntary chains,
c. retailer and consumer cooperatives,
d. franchises, and
e. merchandising conglomerates
Table 16.2: Major Types of Corporate Retail
Organizations
Franchising in Asia
• Franchising is described in “Marketing Insight: Franchising

Fever in Asia.”
• China has the world’s largest number of franchise stores, with

more than 2,000 brands and over 120,000 outlets.
• In Shanghai alone, there are 16,000 franchise chain stores.
• The franchise business model has been adopted in nearly 50

sectors, including convenience stores, education, and
training.
The New Retail Environment
• In the past, retailers secured customer loyalty by offering

convenient locations, special or unique assortments of goods,
greater or better services than competitors, and store credit cards.
• All this has changed. Today, brands such as Timberland and Levi’s
are found in department stores, in their own shops, in merchandise
outlets, and in off-price discount stores.
•
In their drive for volume, manufacturers have placed their branded
goods everywhere.
• The result is that retail-store assortments have grown more alike.
The New Retail Environment
• Service differentiation also has eroded.
• Many department stores trimmed services, and many

discounters increased services.
• Customers become smarter shoppers. They do not want to

pay more for identical brands, especially when service
differences have diminished.
• There are 9 retail developments that are changing the way

consumers buy, and manufacturers and retailers sell.
The 8 Key Retail Developments:
1. New retail forms and combinations—To better satisfy

customers’ need for convenience, a variety of new retail forms
have emerged. Bookstores feature coffee shops. Gas stations
include food stores. Some retailers are experimenting with limited
time-only stores called “pop-ups” that let retailers promote brands,
reach seasonal shoppers for a few weeks in busy areas, and create
buzz.
2. Growth of intertype competition—Department stores do not

just compete with other department stores. They also compete
with different types of stores—discount stores, catalog showrooms,
department stores—for the same consumers by carrying the same
type of merchandise.
The 9 Key Retail Developments
3. Competition between store-based and non-store-

based retailing—Consumers now receive sales offers
through direct mail letters and catalogs, television, mobile
phones, and the Internet. These non-store-based retailers
are taking business away from store-based retailers.
4. Growth of giant retailers—Through their superior

information systems, logistical systems, and buying power,
giant retailers are able to deliver good service and immense
volumes of products at appealing prices to masses of
consumers.
Homeplus Retail Chain (Korea)
Tesco’s Homeplus introduced this integrated online and offline shopping concept in South Korea. On
their way to work, shoppers scan barcodes of items they want to order from a virtual store at a
subway station. These items are delivered by the time they return home from work.
5. The traditional trade is alive and well — Despite the

growth of modern retailing in Asia, traditional retail formats
are still abundant in many parts of the region. India, the
Philippines, Sri Lanka, and Indonesia have many grocery
stores. Traditional stores continue to remain in demand
because of their convenient locations, fresh food, and appeal
to the small basket and low-income shoppers.
6. Growing investment in technology — Modern retailers

use technology to produce better forecasts, control inventory
costs, and order electronically from suppliers. Technology is
also affecting what happens inside the store.
Traditional Retailing in Asia
Floating markets in Thailand are typical of how mobile traditional retailers are in location. The
floating market sells a wide range of products, including fruits, handbags, and cooked food.
Traditional Retailing in Asia
Wet markets such as this in Vietnam sell fresh vegetables and meat.
7. Global profile of major retailers—Retailers with unique

formats and strong brand positioning are increasingly
appearing in other countries.
– Retailers such as McDonald’s, Carrefour, IKEA, and Toys “R” Us have

become globally prominent.
– Among Asian retailers, the Japanese have the longest and largest
international presence.
– Foreign retailers are expanding their operations in China. While they had
bought or leased properties that suited their specific needs in the past,
market liberalization has allowed them to buy local shopping chains as
prime property becomes scarcer.
Japanese Retailers
Japanese retailers have a large international presence compared with other Asian retailers.
The 9 Key Retail Developments:
9. Upgrading of Asian retailers—Some Asian retailers are

reacting strongly to the entry of foreign players. Larger Asian
department stores have established their own hypermarkets
and discount outlets as a defensive strategy against foreign
chains. Malaysia’s Metrojaya has Cosmart and Indonesia’s
Matahari has Mega M.
10.Growth of factory outlets—Factory outlets are booming

business in China and Malaysia. Although these outlets sell
outdated models, they satisfy Asian consumers’ need for
branded merchandise and do not have to worry that they are
counterfeits.
Marketing Decisions
With the key changes in new retail environment, we can

examine retailers’ marketing decisions in the areas of
i. Target market
ii. Product assortment
iii. Procurement
iv. Price
v. Services
vi. Store atmosphere
vii. Store activities and experiences
viii. Communication
ix. Location
Target Market
• Until the target market is defined and profiled, the retailer

cannot make consistent decisions on product assortment,
store décor, advertising messages and media, price, and
service levels.
• Mistakes in choosing or switching target markets can be

costly.
• To better hit their targets, retailers are slicing the market into
finer and finer segments and introducing new lines of stores
to provide a more relevant set of offerings to exploit niche
markets.
Target Marketing in Retailing
Hong Kong’s Giordano targets at the value-for-money market looking for casual clothes that come in
cheerful colors.
Channels
• Based on a target market analysis and other considerations

that were covered in Chapter 15, retailers must decide which
channels to employ to reach their customers.
• Increasingly, the answer is multiple channels.
Product Assortment
• The retailer’s product assortment must match the target

market’s shopping expectations in breadth and depth.
• The real challenge begins after defining the store’s product

assortment, and that is to develop a product-differentiation
strategy.
• To better differentiate themselves and generate consumer

interest, some luxury retailers are making their stores and
merchandise more varied.
Using Technology to Determine Product Assortment
Tsutaya is one of the pioneers to use an electronic system to track consumer tastes, and use such
data in its product assortment and store location decisions.
Product Assortment Options
1. Feature exclusive national brands that are not

available at competing retailers. Robinsons in Singapore
carries exclusive lines.
2. Feature mostly private branded merchandise. Benetton,

Gap, and Giordano design most of the clothes carried in their
stores. Many supermarket and convenience chains carry their
own private branded merchandise.
3. Feature blockbuster distinctive merchandise events.

Isetan may run month-long shows featuring the goods of
another country, such as France, throughout the store.
4. Feature surprise or ever-changing merchandise. Off-

price apparel retailer Reject Shop offers surprise assortments
of overstocks and closeouts.
5. Feature the latest or newest merchandise first. Zara

excels in and profits from being first-to-market with
appealing new looks and designs.
6. Offer merchandise customizing services. The Imperial

Tailors department of Shanghai Tang features a team of
Shanghainese tailors who make exquisitely detailed clothing
to customer specifications.
7. Offer a highly targeted assortment. Retail stores may

carry goods just for taller men, expectant mothers, or larger
women.
Procurement
• The retailer must establish merchandise sources, policies, and

practices.
• In the corporate headquarters, specialist buyers (sometimes

called merchandise managers) are responsible for developing
brand assortments and listening to salespersons’
presentations.
Procurement
• Retailers are rapidly improving their skills in demand

forecasting, merchandising selection, stock control, space
allocation, and display.
• Some stores are experimenting with radio frequency

identification systems and electronic readers and use them to
monitor inventory and track goods in real time.
Procurement
• When retailers do study the

economics of buying and
selling individual products
there are typically findings.
Procurement
• Stores are using direct

product profitability (DPP) to
measure a product’s handling
costs (receiving, moving to
storage, paperwork,
selecting, checking, loading,
and space cost) from the
time it reaches the
warehouse until a customer
buys it in the retail store.
Prices
• Prices are a key positioning factor and must be decided in relation

to the target market, the product-and-service assortment mix, and
the competition.
• All retailers would like to achieve high volumes and high gross
margins.
• They would like high Turns x Earns, but the two usually do not go
together.
• Most retailers fall into the high-markup, lower-volume group (fine

specialty stores) or the low-markup, higher-volume group (mass
merchandisers and discount stores).
Prices
• Retailers must also pay attention to pricing tactics.
• Most retailers will put low prices on some items to serve as traffic
builders or loss leaders. They will run storewide sales.
• They will plan markdowns on slower-moving merchandise.
• As discussed in Chapter 14, some retailers such as Wal-Mart are

using Everyday Low Pricing (EDLP).
• EDLP could lead to lower advertising costs, greater pricing stability,

a stronger image of fairness and reliability, and, under certain
circumstances, higher retail profits than Hi-Lo pricing.
Services
• Retailers must decide on the services mix to offer

customers:
i. Prepurchase services include accepting telephone and mail
orders, advertising, window and interior display, fitting rooms,
shopping hours, fashion shows, and trade-ins.
ii. Postpurchase services include shipping and delivery, gift-
wrapping, adjustments and returns, alterations and tailoring,
installations, and engraving.
iii. Ancillary services include general information, check cashing,
parking, restaurants, repairs, interior decorating, credit, rest
rooms, and baby-attendant service.
Store Atmosphere
• Atmosphere is another element in the store arsenal.
• Every store has a look, and a physical layout that makes it

hard or easy to move around,
• See “Marketing Memo: Helping Stores to Sell”.
• Retailers must consider all the senses in shaping the

customer’s experience.
• Example, by varying the tempo of music affects average time

and dollars spent in the supermarket.
Store Activities and Experiences
• The growth of e-commerce has forced traditional brick-and-

mortar retailers to respond.
• In addition to their natural advantages, such as products that

shoppers can actually see, touch, and test, real-life customer
service, they also provide a shopping experience as a strong
differentiator.
• The store atmosphere should match shoppers’ basic

motivations.
Creating In-Store Experiences
Bookstores such as Kinokuniya include cafés to provide customers experiences beyond book buying
and reading.
Communications
• Retailers use a wide range of communication tools to

generate traffic and purchases.
• They place ads, run special sales, issue money-saving

coupons, and run frequent shopper-reward programs, in-store
food sampling, and coupons on shelves or at checkout points.
Communications
• Each retailer must use communications that support and

reinforce its image positioning.
• Retailers must carefully train salespeople to greet customers,

interpret their needs, and handle complaints.
• Off-price retailers will arrange their merchandise to promote

the idea of bargains and large savings, while conserving on
service and sales assistance.
Location
• Retailers are accustomed to saying that the three keys to

success are “location, location, and location.”
• Department store chains, oil companies, and fast-food

franchisors exercise great care in selecting locations.
• This can be broken down into selecting regions of the country

in which to open outlets, then particular cities, and then
particular sites.
Retail Location Options
1. Central business districts—This is the oldest and most heavily

trafficked city area, often known as “downtown.” As Asia becomes
more saturated with shopping malls, some retailers are branching
out from downtown areas to less competitive suburban locations to
obtain lower rent and to reach out to new segments.
2. Regional shopping centers—These are large suburban malls

containing 40–200 stores, typically featuring one or two anchor
stores, such as Isetan or Parkson Grand, and numerous smaller
stores, many under franchise operation.
3. Community shopping centers—These are smaller malls with one

anchor store and 20–40 smaller stores.
Retail Location Options
4. Shopping strips—These contain a cluster of stores, usually

housed in one long building, serving a neighborhood’s needs for
groceries, hardware, laundry, shoe repair, and dry cleaning.
5. A location within a larger store—Certain well-known retailers—

McDonald’s, Starbucks, Dunkin’ Donuts—locate new, smaller units
as concession space within larger stores or operations, such as
airports, schools, or department.
6. Stand-alone stores—Some retailers may avoid shopping centers

to locate new stores in free-standing sites on streets so that they
are not connected directly to other retail stores.
Considerations in Determining Retail Locations
Given the relationship between high traffic and high rents,

retailers must decide on the most advantageous locations for
their outlets, using:
– traffic count
– surveys of consumer shopping habits, and
– analysis of competitive locations
Impact of Feng Shui on Location and Other
Marketing Activities
• Aside from these practical considerations, many retailers in

Asia also employ feng shui (literally meaning “wind and
water”) in locating their retail outlets as well as in conducting
other marketing activities.
• This refers to the use of geomancy and is discussed in more

detail in “Marketing Insight: Feng Shui and Its Application to
Retailing and Marketing in the Far East.”
Impact of Geomancy on Architecture
The Marina Bay Sands Integrated Resort features a three-block structure which some superstitious
Singaporeans ascribed to as resembling traditional Chinese altar pieces.
Private Labels
• A private label (also called reseller, store, house, or

distributor brands) is one retailers and wholesalers develop.
• In the United States, one out of every four items sold is a

private labeled item.
• Some experts believe that 50 percent is the natural limit for

carrying private brands because:
– Consumers prefer certain national brands;
– Many product categories are not feasible or attractive on a
private-brand basis.
Private Labels in Asia
• Private label penetration remains low across all Asian countries, even in
countries where shopper awareness of house brands is high (85–95
percent).
• In Hong Kong, Korea, Singapore, and Thailand, the percentage of shoppers

who actually buy any private label is typically only 30–50 percent.
• The only two countries where more than half of urban shoppers claim to
buy private labels are Singapore (56 percent) and Korea (53 percent).
• Taiwan is the least developed market with only 27 percent of shoppers

claiming to purchase private label products.
Role of Private Labels
• Why do intermediaries sponsor their own brands?
• First, they are more profitable. Intermediaries search for manufacturers

with excess capacity who will produce the private label at a low cost. Other
costs, such as R&D, advertising, sales promotion, and physical distribution
are also much lower. This means that the private brander can charge a
lower price and yet make a higher profit margin.
• Second, retailers develop exclusive store brands to differentiate themselves

from competitors.
– For example, some domestic retailers in China have launched private
labels as part of their strategy of fighting back against foreign
competitors.
Branding Strategy of Muji
Mujirushi Ryohin’s full name translates into “no-brand quality products.” The Japanese retailer,
known simply as “Muji,” has become a huge success, with 387 outlets in 15 countries, including 34
in Europe. This store has ironically turned its no-brand into a brand name.
Private Labels versus Generics
• Private label or store brands should be distinguished from generics.
• Generics are unbranded, plainly packaged, less expensive versions

of common products such as soy sauce, paper towels, and canned
fruits.
• They offer standard or lower quality at a price that may be as much

as 20–40 percent lower than nationally advertised brands and 10–
20 percent lower than retailer private label brands.
• The lower price of generics is made possible by lower-quality

ingredients, lower-cost labeling and packaging, and minimal
advertising.
The Private-Label Success Factors
• In the confrontation between manufacturers’ and private

labels, retailers have many advantages and increasing market
power.
• Because shelf space is scarce, many supermarkets now

charge a slotting fee for accepting a new brand, to cover the
cost of listing and stocking it.
• Retailers also charge for special display space and in-store

advertising space. They typically give more prominent display
to their own brands and make sure they are well-stocked.
• Private label brands now come in attractive packaging, and

even offer premium items such as organic products.
• Retailers are now building better quality into their store

brands. Supermarket retailers are adding premium store-
brand items like organic products. They are also emphasizing
attractive, innovative packaging. Some are even advertising
aggressively.
• The growing power of store brands has also benefited from

the weakening of brands.
• Many consumers have become more price sensitive, a trend

reinforced by the continuous price specials that have trained a
generation to buy on price.
• Competing manufacturers and retailers copy and duplicate

the quality and features of the best brands in a category,
reducing physical product differentiation.
• Also by cutting marketing communications budgets, some

firms have made it harder to create any intangible differences
in brand image.
• A steady stream of brand extensions and line extensions has

blurred brand identity at times and led to a confusing amount
of product proliferation.
Success of Private Label Brands
Private label brands now come in attractive packaging, and even offer premium items such as
organic products.
Marketing Insight: Manufacturer’s Response to the
Private Label Threat
• Fight selectively where manufacturers can win against

private labels and add value for consumers, retailers, and
shareholders. This is typically where the brand is one or two
in the category or occupies a premium niche position.
• Partner effectively by seeking win-win relationships with

retailers through strategies that complement the retailer’s
private labels.
Marketing Insight: Manufacturer’s Response to the
Private Label Threat
• Innovate brilliantly with new products to help beat private

labels. Continuously launching incremental new products
keeps the manufacturer brands looking fresh, but this must
be punctuated by periodically launching radical new products.
• Create winning value propositions by imbuing brands with

symbolic imagery as well as functional quality that beats
private labels. Too many manufacturer brands have let private
labels equal and sometimes better them on functional quality.
In addition, to have a winning value proposition, the pricing
needs to be monitored closely to ensure that perceived
benefits are equal to the price premium.
Wholesaling
• Wholesaling includes all the activities involved in selling goods

and services to those who buy for resale or business use.
• Wholesaling excludes farmers, manufacturers, and retailers.
• Major Wholesaler Types

i. Merchant wholesalers
ii. Full-service wholesalers
iii. Limited-service wholesalers
iv. Brokers and agents
v. Manufacturers’ and retailers’ branches and offices
vi. Specialized wholesalers
Wholesalers Differ From Retailers
• Wholesalers pay less attention to promotion, atmosphere, and

location because they are dealing with business customers.
• Wholesale transactions are usually larger than retail

transactions.
• Wholesalers cover a larger trade area than retailers.
• The government deals with wholesalers and retailers

differently in terms of legal regulations and taxes.
Wholesaling Functions
1. Selling and promoting—Wholesalers’ sales forces help

manufacturers reach many small business customers at a
relatively low cost. Wholesalers have more contacts, and
often buyers trust wholesalers more than they trust a distant
manufacturer.
2. Buying and assortment building—Wholesalers are able to

select items and build the assortments their customers need,
saving the customers considerable work.
3. Bulk breaking—Wholesalers achieve savings for their

customers by buying in large carload lots and breaking the
bulk into smaller units.
4. Warehousing—Wholesalers hold inventories, thereby

reducing inventory costs and risks to suppliers and
customers.
5. Transportation—Wholesalers can often provide quicker

delivery to buyers because they are closer to the buyers.
6. Financing—Wholesalers finance customers by granting credit,

and finance suppliers by ordering early and paying bills on
time.
7. Risk bearing—Wholesalers absorb some risk by taking title

and bearing the cost of theft, damage, spoilage, and
obsolescence.
8. Market information—Wholesalers supply information to

suppliers and customers regarding competitors’ activities,
new products, price developments, and so on.
9. Management services and counseling—Wholesalers often

help retailers improve their operations by training sales
clerks, helping with store layouts and displays, and setting
up accounting and inventory-control systems. They may help
industrial customers by offering training and technical
services.
Trends in Wholesaling
• Wholesaler-distributors have faced mounting pressures in

recent years from new sources of competition.
• One major response has been to increase asset productivity

by managing inventories and receivables better.
• Each have had to improve their strategic decisions on target

markets, product assortment, and services, price, promotion,
and place.
• The trend toward vertical integration, in which manufacturers

try to control or own their intermediaries, is still strong.
Market Logistics
• Physical distribution starts at the factory.
• Managers choose a set of warehouses (stocking points) and

transportation carriers that will deliver the goods to final
destinations in the desired time or at the lowest total cost.
• Physical distribution has now been expanded into the broader

concept of supply chain management (SCM).
Supply Chain Management
• Supply chain management starts before the physical

distribution:
a. Procuring the right products

b. Converting them efficiently into finished products
c. Dispatching them to their final destinations
• The supply chain perspective can help a company identify

superior suppliers and distributors and help them improve
productivity.
Market Logistics
• Market logistics involves planning the infrastructure to meet

demand, then implementing and controlling the physical flows
of materials and final goods from points of origin to points of
use, to meet customer requirements at a profit.
• Market logistics represent a major challenge for distributors in

Asia. Geographic distances, population density, and
supporting infrastructure impact market access and logistics
efficiency.
Four Steps in Market Logistics
1. Deciding on the company’s value proposition to its

customers. (What on-time delivery standard should be
offered? What levels should be attained in ordering and
billing accuracy?)
2. Deciding on the best channel design and network strategy

for reaching the customers. (Should the company serve
customers directly or through intermediaries? What products
to source from which manufacturing facilities? How many
warehouses to maintain and where should they be located?)
Four Steps in Market Logistics
3. Developing operational excellence in sales forecasting,

warehouse management, transportation management, and
materials management.
4. Implementing the solution with the best information

systems, equipment, policies, and procedures.
Integrated Logistics Systems
The market logistics task calls for integrated logistics systems

(ILS), involving:
a. Materials management
b. Material flow systems
c. Physical distribution abetted by information technology
d. Information systems play a critical role in managing market
logistics especially computers, point-of-sale terminals, uniform
product bar codes, satellite tracking, Electronic Data
Interchange (EDI), and Electronic Funds Transfer (EFT).
Integrated Logistics System—Li & Fung
Li & Fung offers an integrated logistics system that its clients, including Avon, find beneficial
Market Logistics Encompass Several Activities
• Sales forecasting
• The company schedules distribution, production, and

inventory levels
• Production plans
• Materials to order
• Finished goods inventory
Key Concerns and Trends
• The total cost of market logistics can amount to 30 to 40

percent of the product’s cost.
• Lower market-logistics cost will permit lower prices.
• Many firms are embracing lean manufacturing, to produce

goods with minimal waste of time, materials, and money.
Market Logistics Objectives
• Many companies state their market-logistics objective as “getting the right

goods to the right places at the right time for the least cost.” Given that
market logistics involve strong tradeoffs, decisions must be made on a total
system basis.
• Given that market-logistics activities require strong tradeoffs, managers

must make decisions on a total-system basis. The company must research
the relative importance of each of their service outputs.
• The company must then research the relative importance of these service
outputs. For example, service-repair time is very important to buyers of
copying equipment. Company must consider competitors’ service
standards.
Market Logistics Objectives
• The company must also consider competitors’ service standards. It

will normally want to match or exceed the competitors’ service
level, but the objective is to maximize profits, not sales. Company
ultimately has to establish some promise to the market.
• The company ultimately must establish some promise it makes to

the market.
• Given the market-logistic objectives, the company must design a

system that will minimize the cost of achieving these objectives.
Market Logistics Costs
Each possible market-logistics system will lead to the following

costs:
M = T + FW + VW + S
Where M = total market-logistic cost of proposed system.

Where T = total freight cost of proposed system.
Where FW = total fixed warehouse cost of proposed system.
Where VW = total variable warehouse costs (including inventory).
Where S = total cost of lost sales due to average delivery delay under
proposed system.
Market Logistics Decisions
Four major decisions must be made with regard to market

logistics:
i. How should orders be handled (order processing)?
ii. Where should stocks be located (warehousing)?
iii. How much stock should be held (inventory)?
iv. How should goods be shipped (transportation)?
Order Processing
• Most companies today are trying to shorten the order-to-

payment cycle.
• That is the elapsed time between an order’s receipt, delivery,

and payment.
• The longer this cycle takes the lower the customer’s

satisfaction and the lower the company’s profits.
Warehousing
• Every company has to store finished goods until they are

sold, because production and consumption cycles rarely
match.
• The storage function helps smooth discrepancies between

production and quantities desired by the market.
• The company must decide on the number of inventory

stocking locations:
– More locations means that goods can be delivered to customers
more quickly.
– More locations also means higher warehousing and inventory
costs.
Warehousing
• Storage warehouses store goods for moderate-to-long periods

of time.
• Distribution warehouses receive goods from various company

plants and suppliers and move them out as soon as possible.
• Automated warehouses employ advanced materials-handling

systems under the control of a central computer.
• Some warehouses are now taking on activities formerly done

in the plant.
Inventory
• Salespeople would like their companies to carry enough stock to fill all
customer orders immediately.
• However, this is not cost-effective.
• Inventory cost increases at an accelerating rate as the customer-service

level approaches 100%.
• Management needs to know how much sales and profits would increase as
a result of carrying larger inventories and promising faster order fulfillment
times, and then make a decision.
• Inventory decision making involves knowing when to order and how much
to order.
Inventory
• As inventory draws down, management must know at what stock level to

place a new order.
• This stock level is called the order (reorder) point.
• The order point should balance the risks of stockout against the costs of
overstock.
• The company needs to balance order-processing costs and inventory-

carrying costs.
• Order-processing costs for a manufacturer consist of setup costs and

running costs (operating costs when production is running).
Order Processing versus Carrying Costs
• Order-processing costs must be compared with inventory-carrying costs.
• The larger the average stock carried, the higher the inventory-carrying
costs.
• These carrying costs include storage charges, cost of capital, taxes and
insurance, and depreciation and obsolescence.
• Carrying costs might run as high as 30 percent of inventory value.
• This means that marketing managers who want their companies to carry
larger inventories need to show that the larger inventories would produce
incremental gross profit to exceed incremental carrying costs.
Optimal Order Quantity
• The optimal order quantity can be determined by observing

how order-processing costs and inventory-carrying costs sum
up at different order levels.
• Figure 16.1 shows that the order-processing cost per unit

decreases with the number of units ordered because the
order costs are spread over more units.
Optimal Order Quantity
• Inventory-carrying charges per unit increase with the number

of units ordered because each unit remains longer in
inventory.
• The two cost curves are summed vertically into a total-cost

curve.
• The lowest point on the total-cost curve is projected down on

the horizontal axis to find the optimal order quantity Q*.
Figure 16.1: Determining Optimal Order Quantity
Controlling Inventory Costs
• Companies are reducing their inventory costs by treating

inventory items differently.
• They are positioning inventory items according to risk and

opportunity.
• They are also keeping slow-moving items in a central location

while keeping faster moving items closer to customers.
• The ultimate answer to carrying near-zero inventory is to

build for order.
Transportation
• Transportation choices will affect

product pricing, on-time delivery
performance, and the condition
of the goods when they arrive,
all of which affect customer
satisfaction.
• In shipping goods to its

warehouses, dealers, and
customers, the company can
choose among five
transportation modes: rail, air,
truck, waterway, and pipeline.
Transportation
• Shippers consider such criteria

as speed, frequency,
dependability, capability,
availability, traceability, and
cost.
• For speed, air, rail, and truck are

the prime contenders. If the
goal is low cost, then it is water
and pipeline.
Combining Transportation Modes
• Shippers are increasingly combining two or more transportation

modes, thanks to containerization.
• Containerization consists of putting the goods in boxes or trailers

that are easy to transfer between two transportation modes.
• Piggyback describes the use of rail and trucks; fishyback, water and
trucks; trainship, water and rail; and airtruck, air and trucks.
• Each coordinated mode offers specific advantages. For example,

piggyback is cheaper than trucking alone, yet provides flexibility
and convenience.
Private, Contract, and Common Carriers
• Shippers can choose from private, contract, and common

carriers.
• If the shipper owns its own truck or air fleet, the shipper
becomes a private carrier.
• A contract carrier is an independent organization selling

transportation services to others on a contract basis.
• A common carrier provides services between predetermined

points on a scheduled basis and is available to all shippers at
standard rates.
Organizational Lessons
• Market-logistics strategies must be derived from business

strategies, rather than solely from cost considerations.
• The company should set its logistics goals to match or exceed

competitors’ service standards and should involve members
of all relevant teams in the planning process.
Asahi Breweries
Asahi Breweries overhauled its

delivery system to ensure that
fresh beer is delivered within
five days of production.
Customer Demands
• Today’s stronger demands for logistical support from large

customers will increase suppliers’ costs.
• Customers want more frequent deliveries so that they do not

have to carry as much inventory.
• They want a shorter order-cycle time, which means that

suppliers will have to carry high in-stock availability.
• Customers often want direct store delivery rather than

shipments to distribution centers.
Customer Demands
• They want mixed pallets rather than separate pallets.
• They want tighter promised delivery times.
• They may want custom packaging, price tagging, and display

building.
Responding to Customer Demands
• Suppliers cannot reject many of these requests, but at least

they can set up different logistical programs with
different service levels and customer charges.
• Smart companies will adjust their offerings to each major

customer’s requirements.
• The company’s trade group will set up differentiated

distribution by offering different bundled service programs for
different customers.
Schema for Chapter Sixteen
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Marketing Management:

1. What major types of marketing intermediaries occupy this

2. What marketing decisions do these marketing intermediaries

3. What are the major trends with marketing intermediaries?

4. What does the future hold for private label brands?

• In the previous chapter, we examined marketing

• In this chapter, we view these intermediaries—retailers,

• Intermediaries also strive for marketing excellence and can

• The more successful intermediaries use strategic planning,

• They segment their markets, improve their market targeting

• Retailing includes all the activities involved in selling goods or

• A retailer or retail store is any business enterprise whose

• Any organization selling to the final consumer—no matter

• Consumers today can shop

– Perhaps the best known type

Retailers can position themselves as offering one of four levels

1.Self-service—Self-service is the cornerstone of all discount

2.Self-selection—Customers find their own goods, although they

3. Limited service—These retailers carry more shopping goods,

4. Full service—Salespeople are ready to assist in every phase

• Although the overwhelming bulk of goods and services is sold

• Non-store retailing falls into four major categories:

• Direct selling (also called multilevel selling and network marketing)

• Pioneered by Amway, the multilevel (network) marketing sales

• The distributor’s compensation includes a percentage of sales of

• Direct marketing has roots in direct-mail and catalog

• Sales through direct marketing are highest within Asia in

• See “Marketing Insight: Enhancing Online Shopping in Asia”.

• Automatic vending is used for a variety of merchandise, including

• Vending machines are found in factories, offices, large retail stores,

• They offer 24-hour selling, self-service, and merchandise that is

• Japan has the most vending machines per person

Buying service is a store-less retailer serving a specific clientele

• Although many retail stores are independently owned, an

• These organizations achieve economies of scale, greater

• The major types of corporate retailing:

a. corporate chain stores,

c. retailer and consumer cooperatives,

• Franchising is described in “Marketing Insight: Franchising

• China has the world’s largest number of franchise stores, with

• In Shanghai alone, there are 16,000 franchise chain stores.

• The franchise business model has been adopted in nearly 50

• In the past, retailers secured customer loyalty by offering

• The result is that retail-store assortments have grown more alike.

• Service differentiation also has eroded.

• Many department stores trimmed services, and many

• Customers become smarter shoppers. They do not want to

• There are 9 retail developments that are changing the way

1. New retail forms and combinations—To better satisfy

2. Growth of intertype competition—Department stores do not

3. Competition between store-based and non-store-

4. Growth of giant retailers—Through their superior

5. The traditional trade is alive and well — Despite the

6. Growing investment in technology — Modern retailers

7. Global profile of major retailers—Retailers with unique

– Retailers such as McDonald’s, Carrefour, IKEA, and Toys “R” Us have

9. Upgrading of Asian retailers—Some Asian retailers are

10.Growth of factory outlets—Factory outlets are booming

With the key changes in new retail environment, we can

• Until the target market is defined and profiled, the retailer

• Mistakes in choosing or switching target markets can be

• Based on a target market analysis and other considerations

• Increasingly, the answer is multiple channels.

• The retailer’s product assortment must match the target