Marketing Channels – Final

Lessons
Channel Behavior and Organization
Channel Conflicts – are disagreements between
marketing channel over goals, roles, and rewards.
Two Types:
1. Horizontal conflict – occurs among firms at
the same level of the channel.
examples: Ford dealers in one city might
complain that the other dealer in the city steal
sales form them by pricing too low or by
advertising outside their assigned territories.
 2. Vertical conflict – are conflicts between
different levels of the same channel (more
common).
example: Goodyear created hard feelings
and conflict with its premier independent- dealer
channel when it began selling through mass-
merchant retailers.
Vertical Marketing Systems
Producer
Retailer

Wholesaler
Wholesaler
Producer

Retailer

Consumer Consumer

Conventional
Marketing Vertical
System Marketing
System
Conventional distribution channel - consists of one
or more independent producers, wholesalers, and
retailer. Each is a separate business seeking to
maximize its own profits, perhaps even at the expense
of the system as a whole. No channel member has
much control over the other members, and no formal
means exists for assigning roles and resolving channel
conflict.
win - lose
Vertical marketing system (VMS) – consists of
producers, wholesalers, and retailers acting as a
unified system. One channel member owns the
others, has contracts with them, or wields so much
power that they must all cooperate. The VMS can be
dominated by the producer, wholesaler, or retailer.

win - win
Three Major Types of VMSs
1. Corporate VMS – A vertical marketing system that combines
successive stages of production and distribution under single
ownership – channel leadership is established through common
ownership.
Example: Giant Kroger owns and operates 42 factories that
crank out more than 8,000 private label items found on its
store shelves.
Safeway owns and operates nine milk plants, eight baker plants,
four ice cream plants, four soft drink bottling plants, and four
fruit and vegetable processing plants.
2. Contractual VMS – Consists of independent firms
at different levels of production and distribution who
join together through contracts to obtain more
economies or sales impact that each could achieve
alone.
Franchise organization – the most common
type of contractual relationship, is a contractual
vertical marketing system in which a channel
member, called a franchisor, links several stages in
the production-distribution process.
Three types of franchises:
a. Manufacturer-sponsored retailer franchise system
Example: Ford and its network of independent
franchised dealers.
b. Manufacturer-sponsored wholesaler franchise
system
Example: Coca-Cola licenses bottlers (wholesalers) in
various markets who buy Coca-Cola syrup concentrate
and then bottle and sell the finished products to retailers
in local markets.
3187/3188 START HERE NOV. 6
 c. Service-firm-sponsored retailer franchise
system
Examples: Hertz, Avis, McDonald’s, Burger King

3. Administered VMS – A vertical marketing system

that coordinates successive stages of production and
distribution, not through common ownership or
contractual ties, but through the size and power of
one of the parties.
Examples: GE, P&G, Kraft/Wal-Mart
Horizontal Marketing System
Horizontal marketing system – A channel
arrangement in which two or more companies at one
level join together to follow a new marketing
opportunity. By working
together, companies can combine their financial,
production, or marketing resources to accomplish
more than any one company could alone.
Examples: McDonald’s now places “express”
versions of its restaurants in Wal-Mart Stores.
Question: Have you noticed this system in Cebu?
Multichannel Distribution System
Multichannel distribution system – A distribution
system in which a single firm sets up two or more
marketing channels to reach one or more customer
segments.
This system offer many advantage to companies
facing large and complex markets.
With each new channel, the company expands its
sales and market coverage and gains opportunities to
tailor its products and services to the specific needs of
diverse customer segments.
Hybrid marketing channel (Multichannel Distribution
System)
Multichannel distribution system in which a single firm sets up two
or more marketing channels to reach one or more customer segments
Catalogs, telephone, internet Consumer
Segment 1

Consumer
Retailers
Segment 2
Producer
Consumer
Distributors Dealers Segment 1

Sales Force
Consumer
Segment 2
Changing Channel Organization
Disintermediation – The cutting out of marketing
channel intermediaries by product or service
producers, or the displacement of traditional resellers
by radically new types of intermediaries.

It occurs when product or service producers cut out

intermediaries and go directly to final buyers or when
radically new types of channel intermediaries displace
traditional ones.
 Examples: Southwest Airlines selling directly to
final buyers, cutting travel agents from their marketing
channels altogether

Online marketing is growing rapidly, taking

business form traditional brick-and-mortar retailers.
Quote for the day
“The most relaxing recreating
forces are a healthy religion,
sleep, music, and laughter.
Have faith in God – learn to
sleep well – Love good music – see
the funny side of life – And health
and happiness will be yours.” –
Dr. Israel Bram
 outbound distribution – moving
products from the factory to resellers and
ultimately to customers
 inbound distribution – moving products
and materials from suppliers to the factory
Reverse distribution – moving broken,
unwanted, or excess products returned by
consumer or resellers
Supply Chain Management

Inbound Outbound
Logistics Logistics

Suppliers Company Resellers Customers

Reverse Logistics

Marketing logistics involves entire supply chain management –

managing upstream and downstream value-added flows of
materials, final goods, and related information among suppliers,
the company, resellers, and final consumers.
Supply chain Management – managing
upstream and downstream value-added
flows of materials, final goods, and related
information among suppliers, the company,
resellers, and final consumers.

The logistics manager’s task is to

coordinate activities of suppliers,
purchasing agents, marketers, channel
members, and customers.
The importance of logistics
1. Companies can gain a powerful competitive
advantage by using improved logistics to give
customers better service or lower prices.
Competitive advantage – an advantage over
competitors gained by offering greater customer value,
either through lower prices or by providing more benefits
that justify higher prices.

2. Improved logistics can yield tremendous cost

savings to both the company and its customers
 20% of an average product’s price is
c```````````````````` its cost of shipping and
transport

American companies spent

over $1.3 trillion in 2009 - almost 10% of GDP
to wrap, bundle, load, unload, sort,
reload, and transport goods
3. The explosion in product variety has
created a need for improved logistics
management.
A&P Grocery
1911 - 270 items
2010 – 25,000 items
Wal-Mart - 100,000 items

4. Logistics affects the environment and a

firm’s environmental sustainability efforts.
Goals of the logistics system
1. To provide a targeted level of customer service at
the least cost.
Some companies state their logistics objective as providing
maximum customer service at the least cost. Unfortunately, no
logistics system can both maximize customer service and
minimize distribution costs.
Maximum customer service means rapid delivery, large
inventories, flexible assortments, liberal returns policies, and
other services – all of which raise distribution costs.
In contrast, minimum distribution costs imply slower delivery,
smaller inventories, and larger shipping lots – which represent a
lower level of overall customer service.
2. To maximize profits, not sales
The company must weight the benefits
of providing higher levels of service
against the cost.

Some companies offer less service than

their competitors and charge a lower
price. Other companies offer more
service and charge higher prices to cover
higher costs.
Total Cost Concept
It is the key to effectively managing
logistics processes. The goal of the
organization should be to reduce the total
cost of logistics activities.

Reducing costs in one area, such as

transportation, may drive up inventory
carrying costs as more inventory is required
to cover longer transit times.
Six Major Cost Categories
1. Customer service levels
customer service
parts and service support Key Logistics Activities
Return goods handling

2. Inventory carrying costs

inventory management
packaging
reverse logistics
3. Lot quantity costs
material handling
procurement

4. Order processing and information

costs
order processing
logistics communications
demand forecasting/planning
5. Warehousing costs
warehousing and storage
plant and warehouse site selection

6. Transportation costs
traffic and transportation
The Relationship of Logistics Activities to
Logistics Costs
Logistics costs are driven or created by the activities
that support the logistics process.
1. Customer Service Levels
The most important trade-off associated with
varying levels of customer service is the cost of
lost sales which includes not only the lost
contribution of the current sale, but also potential
future sales from the customer and from other
customers due to word-of-mouth negative
publicity from former customers.
 The objective is to minimize total
costs given the customer service
objectives.

Customer service is the output of

the logistics system. Good customer
service supports customer satisfaction,
which is the output of the entire
marketing process.
2. Transportation Costs
The activity of transporting goods drives
transportation costs. Costs vary
considerable with volume of shipment,
weight of shipment, distance, and point of
origin and destination.

Costs and service also vary considerably

with the mode of transportation chose.
3. Warehousing Costs
Warehousing costs are created by warehousing
and storage activities, and by the plant and
warehouse site selection process.

4. Order Processing/Information System

Costs
This category includes costs related to
activities such as order processing,
distribution communications, and forecasting
demand.
 Order processing costs include
such costs as order transmittal, order
entry, processing the order, and related
internal and external costs such as
notifying carriers and customers of
shipping information and product
availability.
5. Lot Quantity Costs
The major logistics lot quantity costs are due
to procurement and production quantities.
Lot quantity costs are purchasing – or
production-related costs that vary with changes
in order size or frequency and include:
a) Setup costs
a.1 Time required to set up a line or locate
a supplier and place an order
 a.2 Scrap due to setting up the production line
a.3 Operating inefficiency as the line begins to
run, or as a new supplier is brought on
board.

b) Capacity lost due to downtime during

changeover of line or changeover to a new supplier.
c) Materials handling, scheduling, and
expediting
d) Price differentials due to buying in different
quantities
e) Order costs associated with order placement
and handling
6. Inventory Carrying Costs
The logistics activities that make up inventory
carrying costs include inventory control,
packaging, and salvage and scrap disposal.
The four major categories of inventory cost
are:
a) Capital cost, or opportunity cost – the
return that the company could make on
the money that it has tied up in inventory
b) Inventory service cost – includes
insurance and taxes on inventory
 c) Storage space cost – includes those
warehousing space-related costs which
change with the level of inventory
d) Inventory risk cost – includes
obsolescence, pilferage, relocation within
the inventory system, and damage