Part Six Distribution Decisions

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Marketing Channels and Supply Chain Management

Objectives 1. To describe the nature and functions of marketing channels 2. To explain how supply chain management can facilitate distribution for the benefit of all channel members, especially customers 3. To identify the types of marketing channels 4. To examine the major levels of marketing coverage
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Objectives (cont¶d) 5. To explore the concepts of leadership, cooperation, and conflict in channel relationships 6. To specify how channel integration can improve channel efficiency 7. To examine the legal issues affecting channel management

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Chapter Outline ‡ ‡ ‡ ‡ ‡ The Nature of Marketing Channels Types of Marketing Channels Intensity of Market Coverage Supply Chain Management Legal Issues in Channel Management

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All rights reserved.The Nature of Marketing Channels ‡ Distribution ± The activities that make products available to customers when and where they want to purchase them ‡ Marketing Channel ± A group of individuals and organizations directing products from producers to customers Copyright © Houghton Mifflin Company. 15 | 5 .

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All rights reserved. .The Nature of Marketing Channels (cont¶d) ‡ Marketing Intermediary ± A middleman linking producers to other middlemen or to ultimate consumers through contractual arrangements or through the purchase and resale of products Producer Direct Dir ct nnel l Customer Indirect Indir ct Producer nnel Customer 15 | 7 Intermediary Copyright © Houghton Mifflin Company.

15 | 8 . All rights reserved. Copyright © Houghton Mifflin Company. ± Place utility: making products available in locations where the customers wish to purchase them (convenience stores). ± Possession utility: the customer has access to the product to use or to store for future use (raincoats).The Nature of Marketing Channels (cont¶d) ‡ Marketing Channels Create Utility ± Time utility: have products available when the customer wants them (newspaper delivery).

All rights reserved. 15 | 9 .The Nature of Marketing Channels (cont¶d) ‡ Marketing Channels Facilitate Exchange Efficiencies ± Reduce the overall costs of marketing exchanges ± Reduce search costs for customers ± Maintain order in the marketplace Copyright © Houghton Mifflin Company.

All rights reserved. 15 | 10 .Efficiency in Exchanges Provided by an Intermediary FIGURE 15.1 Copyright © Houghton Mifflin Company.

and redundancies and develop innovative approaches to satisfy customers ± Optimizes costs throughout the whole channel for efficiency and service ± Includes all entities that facilitate product distribution and benefit from cooperative efforts ± Arises from the need to achieve a more competitive position Copyright © Houghton Mifflin Company. 15 | 11 .Marketing Channels Form a Supply Chain ‡ Supply Chain Management ± Long-term partnerships among marketing channel members that reduce inefficiencies. All rights reserved. costs.

15 | 12 .Typical Marketing Channels for Consumer Products FIGURE 15. All rights reserved.2 Copyright © Houghton Mifflin Company.

Typical Marketing Channels for Business Products FIGURE 15. All rights reserved. 15 | 13 .3 Copyright © Houghton Mifflin Company.

All rights reserved. . ± Disadvantages ‡ ‡ ‡ ‡ Difficult to control Stocking of competing brands Less likely to handle bulky and slow-selling items Lack of technical knowledge 15 | 14 Copyright © Houghton Mifflin Company.Distribution Intermediaries ‡ Industrial Distributor ± An independent business that takes title to business products and carries inventories ± Advantages ‡ Perform needed selling activities in local markets ‡ Are aware of local needs and can pass market information on to producers ‡ Reduce producers¶ capital requirements by holding inventories for local markets.

15 | 15 . does not take title to or hold inventories. All rights reserved. on commission. ± Advantages ‡ Possesses technical and market information ‡ Has an established set of customers ‡ Serves as a substitute for a sales force ± Disadvantages ‡ Difficult to control ‡ Concentration on only large accounts ‡ Sales focus limited to commission-related activities Copyright © Houghton Mifflin Company.Distribution Intermediaries (cont¶d) ‡ Manufacturers¶ Agent ± An independent businessperson who sells. the complementary products of several producers.

15 | 16 .Debate Issue Does cutting out the intermediary cut costs? Copyright © Houghton Mifflin Company. All rights reserved.

All rights reserved.Multiple Marketing Channels and Channel Alliances ‡ Dual Distribution ± The use of two or more channels to distribute the same product to the same target market ‡ Strategic Channel Alliance ± An agreement whereby the products of one organization are distributed through the marketing channels of another Copyright © Houghton Mifflin Company. 15 | 17 .

15 | 18 .Is This Product Distributed Through Multiple Marketing Channels? Courtesy of Neutrogena Corp. Copyright © Houghton Mifflin Company. All rights reserved.

Intensity of Market Coverage ‡ Intensive Distribution ± Using all available outlets to distribute a product. All rights reserved. 15 | 19 . ‡ Convenience products with high replacement rates ± Provides availability and reduces search time ± Availability is more important than outlet type Copyright © Houghton Mifflin Company.

All rights reserved. and support products Copyright © Houghton Mifflin Company.Intensity of Market Coverage (cont¶d) ‡ Selective Distribution ± Using only some available outlets to Tuscaloosa s distribute a product ‡ Shopping products and durable goods with low replacement rates Only Authorized Dealer ± High qualification requirements for intermediaries to distribute. 15 | 20 . service. sell.

15 | 21 .Intensity of Market Coverage (cont¶d) ‡ Exclusive Distribution ± Using a single outlet in a fairly large geographic area to distribute a product ‡ Expensive. high-quality products purchased infrequently ± Exclusive outlets provide an incentive to sellers in limited markets ± Dealers carry complete inventory and have trained staff for sales and service Copyright © Houghton Mifflin Company. All rights reserved.

15 | 22 . Inc. All rights reserved. All rights reserved. Copyright © Houghton Mifflin Company. Selective. or Exclusive Distribution? Reprinted with permission of Apple Computer.Are iPods Distributed Through Intensive.

Range Rover vehicles Copyright © Houghton Mifflin Company. All rights reserved. 15 | 23 .Rolex watches 5.Carbonated beverages 7.Gucci handbags 3.Potato chips 2.Class Exercise Identify the intensity of market coverage for each of the following products: 1.Large-screen televisions 4.Clinique cosmetics 6.

Nintendo video games 15.Class Exercise (cont¶d) 8.Reebok shoes Copyright © Houghton Mifflin Company. 15 | 24 .Cannondale bicycles 13.Jaguar automobiles 14.Gasoline 12.Levi jeans 10.IBM personal computers 11.Stereo systems 9. All rights reserved.

All rights reserved.Supply Chain Management: Channel Leadership ‡ Channel Captain ± The dominant member (producer. wholesaler. or retailer) of a marketing channel or supply chain ‡ Establishes channel policies and coordinates development of the marketing mix ‡ Channel Power ± The ability of one channel member to influence another member¶s goal achievement Copyright © Houghton Mifflin Company. 15 | 25 .

15 | 26 .Supply Chain Management: Channel Cooperation ‡ Benefits of Cooperation ± Speeds up inventory replacement ± Improves customer service ± Reduces distribution costs ‡ Improving Channel Cooperation ± Unifying channel to maintain market order ± Agreeing to direct efforts toward common objectives ± Precisely defining each channel member¶s tasks Copyright © Houghton Mifflin Company. All rights reserved.

All rights reserved. 15 | 27 .Supply Chain Management: Channel Conflict ‡ Sources of Channel Conflict ± Disagreements arising among channel members ± Communication difficulties jeopardizing coordination ± Increased use of multiple distribution channels by manufacturers creating conflicts with distributors and retailers ± Intermediaries diversifying into and offering competing products ± Producers attempting to circumvent intermediaries and dealing directly with retailers Copyright © Houghton Mifflin Company.

Net Sights ‡ The Stanford Global Supply Chain Management Forum website (www.stanford. All rights reserved.edu/group/scforum/Welc ome/index. Copyright © Houghton Mifflin Company. It is an example of cooperation between industry and academia to improve the way business is conducted on an international scale.html) promotes excellence in global supply chain management. 15 | 28 .

Supply Chain Management: Channel Integration ‡ Vertical Channel Integration ± Two or more stages of the marketing channel are under one management ± Channel members coordinate their efforts to reach a target market ‡ Vertical Marketing System (VMS) ± A marketing channel managed by a single channel member to achieve efficient. low-cost distribution ‡ Corporate VMS ‡ Administered VMS ‡ Contractual VMS Copyright © Houghton Mifflin Company. All rights reserved. 15 | 29 .

15 | 30 .Legal Issues in Channel Management ‡ Dual Distribution ± A producer can use two different channels to reach the same target market as long as it is not trying to engage in unfair competition and put its independent distributors out of business ‡ Restricted Sales Territories ± Granting exclusive sales territory rights to distributors is permissible if the rights do not restrain trade ‡ Tying Arrangements ± Requiring a channel member to buy additional products from the supplier in order to purchase a particular product from the supplier Copyright © Houghton Mifflin Company. All rights reserved.

Legal Issues in Channel Management (cont¶d) ‡ Full-Line Forcing ± Requiring a channel member to carry a supplier¶s entire product line to obtain any of the supplier¶s products ‡ Exclusive Dealing ± Forbidding an intermediary to carry products of a competing manufacturer ± Is anticompetitive if ‡ it blocks competitors from 10% of the market ‡ sales revenues are sizable ‡ the manufacturer is larger than the dealer Copyright © Houghton Mifflin Company. All rights reserved. 15 | 31 .

product attributes. 15 | 32 . or environmental forces affect a manufacturer¶s decision to distribute through outlet stores? Copyright © Houghton Mifflin Company.Class Exercise Many manufacturers sell products in outlet stores at 25% to 70% off retail prices. 1. How could business objectives. buyer behavior. Retailers do not like the added competition from their own suppliers despite manufacturers¶ claims that they are only selling last season¶s merchandise. All rights reserved.

15 | 33 . how have these manufacturers changed their intensity of market coverage? How is customer service different at an outlet store? 3.By selling in outlet stores.Class Exercise (cont¶d) 2. All rights reserved.Which of the following may be responsible for the conflict between manufacturers and retailers? ‡ Lack of clear communication ‡ Deviation from role expectations ‡ Diversification into product lines traditionally handled by other intermediaries Copyright © Houghton Mifflin Company.

All rights reserved. Should retailers develop store brands. 15 | 34 .Class Exercise (cont¶d) 4. or focus their buying power on one supplier or group of suppliers? How should the conflict be resolved? Copyright © Houghton Mifflin Company. refuse to stock certain items.

Copyright © Houghton Mifflin Company. 15 | 35 . All rights reserved.Legal Issues in Channel Management (cont¶d) ‡ Refusal to Deal ± Suppliers can choose their distributors and refuse to deal with others so long as their decisions are not based on anticompetitive motives or are not part of an organized refusal-to-deal with certain channel members.

All rights reserved.After reviewing this chapter you should: ‡ Be able to describe the nature and functions of marketing channels. Copyright © Houghton Mifflin Company. ‡ Be familiar with the major levels of marketing coverage. ‡ Be able to explain how supply chain management can facilitate distribution for the benefit of all channel members. 15 | 36 . ‡ Be able to identify the types of marketing channels. especially customers.

After reviewing this chapter you should: ‡ Understand the concepts of leadership. Copyright © Houghton Mifflin Company. 15 | 37 . ‡ Be able to specify how channel integration can improve channel efficiency. ‡ Be aware of the legal issues affecting channel management. cooperation. All rights reserved. and conflict in channel relationships.

twenty-five b. there would be _________ transactions possible without an intermediary and _________ transactions possible with one intermediary. sixteen. thirty. All rights reserved. ten. 15 | 38 . ten c. In a simple economy of five producers and five consumers. eight e. a. twenty-five. twenty-five.Chapter Quiz 1. ten Copyright © Houghton Mifflin Company. fifteen d.

Producer. consumers d. wholesalers. Producer. 15 | 39 . Nationally distributed consumer convenience products are most likely distributed through which of the following channels? a. industrial distributor. wholesalers. agents. consumers e. consumers c. consumers Copyright © Houghton Mifflin Company. wholesalers. retailers. Producer. retailers. retailers. consumers b.Chapter Quiz (cont¶d) 2. Producer. Producer. All rights reserved. wholesalers.

All rights reserved. 15 | 40 .Chapter Quiz (cont¶d) 3. is the premier product in its FudgeDipped line. Exclusive e. Which form of distribution would Honey Farms be likely to use for its new product? a. The company¶s latest product. Selective c. Targeted d. Fudge-Dipped Strawberries. The product is very expensive and targeted to upscale consumers. Premier Copyright © Houghton Mifflin Company. Honey Farms is a maker of fine chocolates. Intensive b.

understanding b. power c. This action significantly increases the possibility of channel _________ with independent Goodyear dealers. All rights reserved. a. Goodyear allows companies like Sears and Discount Tire to distribute and discount its tires. leadership d.Chapter Quiz (cont¶d) 4. conflict Copyright © Houghton Mifflin Company. 15 | 41 . communication e.

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