THE SUPPLY

CHAIN, VALUE
CHAIN AND
DISTRIBUTION
MKT2B UNIT 1
 •By now, you would be familiar with the various marketing mix variables which is
product, price, place (distribution) and price. The course is focused on the
distribution of products and services. This study unit focuses on the supply chain
which is a very broad view of product development from raw materials till a time
Introduction when the product is discarded or recycled and present the principles used in the
management of the supply chain. We will then understand the concept of value
chain analysis and take a look at typical distribution channels. Functions of
intermediaries within the distribution channel will be presented followed by
trends within the South African supply chain environment. Finally, this study unit
examines distribution structure decisions.
 Supply Chain
1 of 3
A supply chain can be described as the chain of
activities involved in sourcing and processing
raw materials which are cultivated from the
earth to the final stages of the product where
it is discarded or recycled. It is a very broad
concept that takes into account all activities
from beginning to end. Supply chain activities
include all activities conducted by various
stakeholders which include suppliers,
customers, manufacturers and various
intermediaries. Within the supply chain,
primary decisions must be made. These
decisions include developing, planning,
sourcing, production, inventory and transport
logistics. These decisions will now be explored;
 Supply Chain
2 of 3
• Developing: These decisions involve new
product development processes, product
innovation and product adaptation. These
decisions may alter or require various
changes in existing supply chains for an
organisation or an industry.
• Planning: Planning decisions involve
determining specifications and quality
standards of final products as well as
planning the production processes for new
products or products that must be adapted
to market conditions.
• Sourcing: Developing and planning activities
have a direct influence on sourcing
decisions. New products or modified
products may require different materials
which may need to be sourced from
different and new suppliers.
 Supply Chain
3 of 3
• Production: Decisions here include location of
manufacturing facilities which can be local or
international, considering whether or not to buy or
make certain components of the product in house, as
well as decisions around capacity and production
schedules of plants.
• Inventory: Inventory costs make up one of the
largest costs for most production companies.
Production planning schedules have a direct impact
on inventory planning. Organisations must decide on
how much inventory levels of component products
to have on hand to aid manufacturing.
• Transportation logistics: Materials are sourced from
various suppliers. The final products after production
must be transported to various stakeholders or
intermediaries. There are many modes of transport
each having its own advantages and disadvantages
depending on the task at hand. Decisions here
involve who, what when and how will various
components and/or final products be transported
within the supply chain.
Food
Industr
y
Supply
Chain
https://
www.youtube.c
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v=FqLxJywe9Uc
&ab_channel=A
mericold
 Principles of supply chain management 1 of 4
•Every management activity must adhere to certain
principles if it is to achieve what it intends to achieve.
Principles are propositions that form a basis of a belief
system which guides behaviour, decisions making and
reasoning. Below are the main principles of supply
chain management;

•Communication: As information is considered a factor

of production from economic principles, and
considering that more than one entity, person and
department have roles to play in the transformation of
raw materials into final goods, communication
becomes central in achieving the production and
delivery of goods to final customers. Technology aids
the principles of communication

•Flexibility: There is a saying that the only constant is

change. Change is inevitable and all organisations must
make provision for changes in the environment that
flexible operating systems that allow for responsiveness
for change. The wider business environment such as a
change in the credit policy in a specific country may see
a rise in the purchases of homes. Within the supply
chain of houses, all entities may now need to increase
their output for all processes involved in the sale of
 Principles of supply chain management 2 of 4
•Inventories: Inventories refer to stock on
hand and can consist of raw materials for
production processes, as well as ancillary
components that are needed for the end
product such as tyres for a car. The direct and
indirect costs of holding inventories is high
for any organisation. This represents capital
that is tied up, waiting for revenue to be
received. This capital can be used in other
projects to generate revenue for the
organisation. Keeping inventories low is a
key principle of supply chain.

•Customer service: The supply chain exists so

that goods and services can be delivered to
customers that create a demand for the
product. The performance of the supply
chain can have a huge impact on customer
service and therefore activities such as
delivery and turnaround times are essential
elements of the supply chain.
Principles of supply chain
management 3 of 4
Decision-making
•Strategic: Strategic decisions are long term decisions that represent a
significant investment into activities that are normally fixed over the long run
for an organisation. Such decisions in the supply chain include items such as
location of the business and production facilities which impact long term
decisions on transportation. These decisions are normally fixed over the long
term. It becomes very expensive to change these. The decisions are made at
an executive level of the organisation and can have a significant impact in
terms of survival of the firm in the long run.

•Tactical- These decisions are normally medium term and does not represent
a significant investment in capital. This include planning production according
to weekly forecasts, materials planning, as well as distribution and
transportation planning.

•Operational- Operation decisions are normally even more short term than
tactical decisions. Often, there is a lack of clarity on whether or not certain
decisions made here are tactical or indeed operational. These are normally
short-term decisions that are made on a daily basis

•Metrics and data collection Data collection is an extremely important

principle of the supply chain. Data collection is needed to collect information
to make informed decisions on the measurement of performance in the
supply chain. The standard of the measurement of performance is referred to
as the metric. It is only when the organisation can measure performance in a
metric that is clearly understood that performance can be managed and
 Principles of supply chain
management 4 of 4
Quality
•The most basic understanding of quality is that quality is said to be achieved when certain
standards are met are exceeded. These standards can be described in the following
categories:
•Functionality- These are characteristics or features of a product that determine how well
a product works. An example of this is a 3 speed settings on a power drill may be deemed
to work better than a drill with only 1 speed.
•Conformance- This refers to the ability of the product to perform at a specified rate. An
example is the reduction of cooking time by 50% on a speed cooker versus an ordinary
pot.
•Reliability- This refers to the ability of the product to perform its conformance
specifications over a specified period of time without failing.
•Durability- This refers to the ability of the product to perform in adverse conditions over
its lifespan.
•Safety- Safety in the operation of the product is a critical quality component.
•Serviceability- A product should be easy and cost effective to repair, service and
maintain if it is to be deemed as a quality product along this dimension.

Aesthetics: Aesthetics of a product refers to its ability to appeal to a person’s five senses
such as look, sound, smell, taste and touch. Some of these senses become very important
in certain products. Taste and texture is extremely important in food products. Kitchen
appliances are becoming more and more contemporary in terms of style
Pitfalls in inventory
management 1 of 4
•Inventory in an organisation represents a significant cost to an
organisation. Managing inventory is essential if an organisation
is to meet its profitability goals and survive over the long term.
The following items represent the challenges in managing
inventory effectively and efficiently

•• No supply chain metrics: Within a supply chain, there are

many organisations and/or various departments within a same
organisation processing activities required for supply chain
output. The objectives of these various organisations or teams
within each organisation may differ. There is most likely to be a
situation where these teams have conflicting goals. A lack of
supply chain metrics results in the inability to evaluate the
supply chain performance as a whole and this impact’s supply
chain deliverables in a negative way.
•• Inadequate definition of customer service: Customer
requirements vary and can often conflict each other. One way of
defining customer satisfaction in the supply chain may be
deliveries by a specified time. This definition may often conflict
with the ability of the supply chain to be responsive to changing
customer requirements.
 Pitfalls in inventory
management 2 of 4
• Inaccurate delivery status data: Customers often
want to know exact details on delivery status of
goods, especially when goods are late. When goods
are late, it is important to provide customers with
feedback as to the exact status of delivery. This
information is not known in many instances as a
result of inaccurate delivery status data.
• Inefficient information systems: Each entity
within the supply chain may have an operating
system database that manages and process
information for their activities related to inventory,
production and transportation. Often, there is a
lack of efficiency as a result of databases amongst
various departments not being linked to each
other
• Ignoring the impact of uncertainties: A lack of the
ability to track uncertainties such as delivery times,
production times, transit times and quality if raw
materials leads to stock levels that are not ideal.
This results in overstocking and possibly even
understocking of items.
Pitfalls in inventory
management 3 of 4
• Simplistic inventory stocking policies: A
sound policy that makes provision for
uncertainties is often lacking in many
organisations. This could be a result of not
understanding or simply ignoring the impact of
uncertainties as mentioned earlier. Without a
sound policy that guides behaviour and
decision making, inefficiency and
underperformance of the supply chain is
inevitable.

• Discrimination against internal customers:

Too often exists a situation in many
organisations where priority is given to
external customers of a department at the
expense of ignoring internal customer
requirements. This is also a knock-on effect
from a lack of supply chain metrics described
earlier.
Pitfalls in inventory management 4 of 4

• Poor coordination: An organisation such as

Unilever who produces a wide range of products at
multiple manufacturing plants will have develop a
system that allows for efficient bundling of goods for
a customer that requires multiple orders. Often,
poor coordination amongst these internal
departments results in poor delivery times and/or
incorrect orders being delivered.

• Incomplete shipment methods analysis: Analysing

various shipping options is essential to determine
exact costs and benefits derived versus the costs of
a particular mode. Often, options that seems
cheaper in the long run may result in loss of
customer satisfaction in the long run. The benefits of
various modes versus the costs of the various modes
must be carefully evaluated.
Improving supply chain management

•Many of the issues highlighted in the previous

section are related to inventory management.
Since inventory management is a major
component of the supply chain, performance
of the supply chain is largely impacted by the
performance of inventory management. An
analysis of the pitfalls identified above reveal
that the key to improve overall supply chain
performance lies in integration and
coordination of supply chain activities.

•Integration is achieved through

communication between multiple production
sites in a supply chain. Two levels of
coordination can be identified. General
coordination refers to the integration of the
different functions within a manufacturing site.
These functions include production planning,
sales and distribution. Multiple coordination is
the integration of these functions amongst
multiple sites.
 Value-Chain
Analysis
•The term “Value Chain” was first coined by
Michael Porter. It is a systematic approach that
can be used to identify how more customer
value can be created in a supply chain. Michael
Porter also proposed that creating customer
value is key in creating a competitive advantage.

•The essence of the value chain is that

manufacturing activities can be divided into 9
value creating activities and that all these
activities contribute towards customer
satisfaction. This is a somewhat different chain of
thought that focuses mainly on production as a
means to achieving customer satisfaction.

•Micheal Porter categorised these 9 activities

into 5 primary and 4 support activities:
 Example

https://www.youtube.com/watch?
v=ktx2_Dzy3tM&ab_channel=OECD
 Primary
activities
• Inbound logistics: This is the activity that
brings goods (mostly raw materials) into
the organisation from suppliers and
includes the transport and storage of.
• Operations: This refers to production
processes that involve adapting,
modifying and processing the materials
and/or goods received in inbound
logistics into finished or semi-finished
goods.
• Outbound logistics: The finished or semi-
finished goods created in operation
activities are now warehoused,
transported and delivered to retailers,
wholesalers or final customers in this
stage.
• Marketing and sales: These activities
include branding, positioning, and sales.
• Service: Service activities include repairs,
after sales service, maintenance, and
installation and operating training.
 Support
activities
Support activities take place during primary
activities and as the name suggests, it supports the
primary activities.
• Firm infrastructure: The firm’s infrastructure
includes items such as vision and mission that
give rise to organisation structure and
subsequent planning activities. The firm’s
Management Information System also plays an
important role that supports all primary
activities within the organisation.
• Human resource management: This support
activity includes recruitment, selection and
training of all staff.
• Technology development: The impact of
developing technology in the modern world
can result in organisations ultimate peril if they
are not willing to adapt. Technology is capable
of adding efficiency into an organisation
provided that it is carefully integrated and staff
are properly trained.
• Procurement: This support function is
responsible for the procurement of goods and
services to the various functions of the
organisation in the correct quantities required
Amazon’s Smart
Warehouse

https://www.youtube.com/watch?v=IMPbKVb8y8s&ab_channel=TechVision
The Typical
Distribution
Channel
•Distribution channels: Distribution
channels consist of various intermediaries
that assist the manufacturing organisation in
delivering on customer requirements in
terms of product availability, convenience
and price. When designing a distribution
channel, marketers should first gain insight
into target market requirements and then
look for possible channel options that are
able to achieve customer requirements in a
cost-effective manner. Before we look at the
various distribution channels, let’s examine
the characteristics of the major
intermediaries in a typical South African
distribution channel.
 Intermediaries 1 of 2
Three typical intermediaries exist in South African
Distribution channels:
• Wholesalers: These are businesses that are
engaged with the re-selling of merchandise to
retailers. Wholesalers contribute to value by
engaging in bulk breaking and providing product
assortment offerings for retailers.
• Retailers: Retailers are businesses that are
engaged with re-selling of individual items to the
larger public. They too create value by bulk
breaking and also create value by making a wide
range of products and goods available for its
customers.
• Agents: Agents are businesses that are mainly
involved in international trade as well as
agricultural markets. They do not own goods but
rather source customers for producers and assist
in closing the sale for a commission.
Intermediaries 2 of 2
Many routes are available for a product to
reach its final consumer. Marketers search for
the most efficient channel from the various
channels available.
The following figure illustrates typical
marketing channels for consumer products.
Figure 1.2 Marketing Channels for various
Consumer Products

Direct channels provide for direct interaction

with the producer of the product or service
and the customer. Retailer channels have
three members; the producer, the retailer and
then the consumer. Products move from
producers to retailers before making its ways
to consumers. Wholesaler channels have one
more member which is the wholesaler. Here,
products are moved to the wholesaler first
from producers before making its way to
retailers

The Function and Activities
performed by Intermediaries 1 of
5
Intermediaries resolve discrepancies
Intermediaries are needed when their facilities
can contribute value by overcoming the
following discrepancies:
• When supply sources are located far from the
final customer and final customers require the
finished goods in small quantities, intermediaries
can close this gap. Your prescribed textbook
provides an example where most of South
Africa’s wine is produced in the Western Cape
and customers are distributed throughout the
country.
• Products are normally manufactured in large
quantities. Retailers normally order much
smaller quantities. This can lead to a discrepancy
in time. Retailers normally use techniques such
as Just-in-Time ordering systems that resolve this
discrepancy.

The Function and Activities
performed by Intermediaries 2 of
5
• Consumers often purchase goods in low volume or
single units and often require an assortment of goods in
a single transaction. Manufacturers often produce high
volume of a single or very closely related goods.
Intermediaries such as retailers close this gap through
the following methods:
• Standardisation: Intermediaries normally collect
products from various suppliers which are sorted
according to aspects such as size and weight.
• Accumulation: Intermediaries often assemble products
according to aspects such as size and weight for
transportation processes.
• Allocation: This refers to ensuring that adequate
supply are available for numerous customers.
• Assortment: Department stores provide product
assortment bundles such as various clothing lines.
• Intermediaries close gaps and provide utility- Before
goods can reach the customer in the distribution channel,
various gaps exist in the form of quantity, assortment,
time, spatial, knowledge and ownership. Manufacturers
produce and sell goods in bulk. Intermediaries close this
gap by performing activities such as bulk-breaking,
storage and packaging. Form utility is provided by
making available to customer a smaller assortment of
goods that are repackaged accordingly.
The Function and
Activities performed by
Intermediaries 3 of 5
Distribution activities
performed
• Transactional activities:
Transactional activities include
the purchasing of goods from
manufacturers, the reselling of
these goods and absorbing the
associated risk during the
ownership of the goods.
• Physical activities: These
activities include warehousing,
order-processing, storing
sorting and transporting.
• Facilitating activities: These
activities include assisting
customers with finance of the
product, proving after sales
service such as training and
support and also includes
target market studies to
identify specific needs of the
customer.
 • Specialisation in the distribution channel: Some
intermediaries are needed because of their
specialist capabilities. These intermediaries can
perform certain functions or provide certain
support activities that are needed. The following
are reasons why specialisation in a distribution
channel is needed.
• Economic justification: This justification refers
to a situation where an intermediary can perform
a certain task at a lower cost that the primary
channel member. Suppose and the manufacturer
wants to invest in trucks for transportation versus
outsourcing this trucking service. A trucking
service company is maximising output on its
trucks which means that operating costs will be
lower.
• Risk involvement: External services providers

The Function and Activities now share in the risk associated with the
transport and delivery of goods to customers.

performed by Intermediaries 4 of • Concentration and alliances

• Service specialist leadership
5
 The Function and Activities performed by Intermediaries
5 of 5

•Intermediaries in the
marketing channels
accomplish several
critical functions that
allow the flow of goods
between the
manufacturer and buyer.
The three basic functions
that intermediaries
perform are summarised
in the following figure.
Trends and Issues in Supply
Chain, Distribution and Logistics
1•The
ofworld
2 in which we live is subject to consistent
change. These changes can turn into trends if they are
sustained over a long period of time. Trends can have an
impact on supply chain activities. Changes in the
economic climate as well as competition in distribution
channels can create unique challenges for managers.

• Social trends: Online shopping is taking off in South

Africa, however, many distributors of these products
are having difficulty in keeping up with customer
deliveries. A large market in South Africa are fashion
conscious and supply chain channels need to be
responsive. Consider the changes to typical grocery
retailers.
• Economic environment: Economic factors such as
labour costs, interest rates, government policy and
tax have an impact on all markets particularly
consumers ability to purchase goods and services.
Increasing unemployment and uncertainty in the
economy can create a decrease in demand.
Economy’s that have a positive outlook may by
contrast experience an increase in demand in
consumer markets. Distribution channels must be
responsive to changes in the economic environment
 Trends and Issues in Supply
Chain, Distribution and Logistics
2 of 2

Competition in the distribution channel

•Competition in the market can decrease an organisations market share,
increase costs in tackling competition and ultimately profitability. For a firm
to formulate a strategy to counteract competitive activities, Michael Porter
has identified five sources of competition.
• Substitute products: As the name suggest, these products are substitute
for an organisations current products. Currently, domestic flights are the
fastest means of long distance transportation in South Africa. This may
change if high speed trains are introduced.
• Supplier power: In a situation where a key supply in an organisations
operations is provided by a single supplier, this supplier will have
monopolistic power over its customers. Supplier power may also come of
the form of high switching costs. Consider changing a Management
Information System in a large organisation.
• Threat of potential competitors: Large conglomerates in South Africa are
consistently engaging in backward and forward integration thereby gaining
control over majority of market share in a market. Organisations are
consistently facing threats from various forms of new competition.
• Buyer power: Buyer can increase competition by consistently negotiating
on prices, seeking alternate suppliers and requesting an increase in service
levels.
• Threat of new substitutes: Refers to how the organisation’s position in
the market can be affected by new entrants into the market.
 Distribution
Structure
Decisions 1 of 4
Distribution structure decisions consider the size of the
target market, target market characteristics, price
sensitivity of consumers and the organisations need for
control of a greater part of the distribution channel.

Intensive, selective or exclusive distribution

1. Intensive distribution refers to the decision to place
products in many locations using many intermediaries. This
strategy is mainly applicable to convenience goods such as
bread, milk and cigarettes.
2. Selective distribution is the location of goods at a limited
number of locations as compared to intensive distribution
and is a strategy used mainly for shopping goods. Sporting
equipment such as soccer, cricket and tennis balls are
examples of shopping goods that are selectively distributed.
3. Exclusive distribution involves placing goods at a very
small number of locations and is normally applicable to
speciality products such as jewellery. This strategy is also
used when a firm intends to create a specific image of
desirability for the specific product
 Distribution
Structure
Decisions 2 of 4
Cost leadership, differentiation and focus strategies
(1) A cost leadership strategy is an approach taken by
producers of convenience goods where it is important
to keep prices per unit low as customers are largely
price sensitive. The organisations focus a lot of its
efforts on efficient production technology, however, it
is equally important to keep distribution costs low.
(2) Differentiation is a method appropriate for goods
that are unique, are positioned in terms of their
uniqueness and are targeted at customers that are less
price sensitive. The uniqueness characteristics of these
products include design, performance and quality and
service. Distribution decisions of these products can
contribute towards service and total experience of the
customer which is valued by customers.
(3) A focus strategy is an approach used for products
that are specialised in nature and is targeted to niche
markets. A niche market is one that is that small but
decidedly profitable
Distribution Structure
Decisions 3 of 4
Innovative structure
An innovative channel structure is
one that must adapt to changes in
demand by using more than one
distribution channel. Your
prescribed textbook provides the
example of Verimark which has its
own store and uses intermediaries
such as Makro, Game and Dion.
Distribution Structure
Decisions 4 of 4
•Vertical Marketing Systems (VMS) arrangements
These are channel arrangements in which intermediaries
are united with mutual objectives. This structure design
differs from typical design structures in that the members
are aligned to their own goals instead of having joint goals.
The following elaborates on the different types of VMS
arrangements:
• Corporate VMS: This type of VMS is when one
organisation owns and operates more than two
intermediaries in a channel.
• Contractual VMS: This type of VMS is when there is a
formal agreement between organisations in a channel. A
franchise agreement is such an example.
• Alliance VMS: Some organisations form alliances with
each other such as retailer stores and clothing
manufacturers who manufacture exclusive brands for that
retailer.
 Let’s see what you have learned so far by taking
this short self-assessment. Please ensure the
above is read through and answer the questions
that follow:

Self- 1. Identify the key differences between services

and products and highlight the resulting

Assessment implications for distributing services.

2. Within the scope of supply chain management,
explain the two-main basis for customer
satisfaction.
3. Even though most organisations are customer
focused, many are not internally customer
focused. With the use of an example, highlight
the impact that a lack of internal customer
service has on external customer service.
4. Describe the methods in which an
intermediary overcomes a discrepancy of
quantity and assortment.
5. Using practical product or service examples,
provide an explanation of the various distribution
structure decisions that must be made when
developing a distribution channel.