Learning Objectives
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Week 2:
Physical Distribution &
International Marketing
Channels
Examine the escalating importance of international physical distribution as
competitiveness becomes increasingly dependent on cost efficiency
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Identify various channels of domestic and International distribution.
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Discuss the need for channel intermediaries
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Understand how the transportation infrastructure in host countries often
dictates the options available to the global logistics manager
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Understand how SCM facilitates partnering among channel members.
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Introduction to inventory management and its importance to global success
Marketing / Logistics Management Concept
Customer
satisfaction
Logistics decisions are based on
marketing/customer service strategy.
• Suppliers
• Intermediate customers
• Final customers
These decisions support the marketing effort
Integrated
effort
Company
profit
• Product
• Price
• Promotion
• Place (distribution)
• Maximize long-term
profitability
• Lowest total costs at
an acceptable level of
customer service
For global firms, this involves linking
country/region-specific channels to form
a coherent customer-support system
facilitated by logistics flows.
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Logistics Involves Both...
Channels of Distribution
Definitions
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Internal interactions between product
groups, departments and divisions
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A sequence of marketing organizations that directs a product from the
producer to the ultimate (or end) user.
Systems of relationships among businesses that participate in the process
of buying and selling products and services
May sometimes be referred to as a supply chain or marketing channel
Multiple Channels for Consumer Products
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External interactions with customers,
suppliers and third party providers
Manufacturers/Suppliers use different channels to reach different market segments
Formal (contract-based) vs. Informal (Partnerships) Channel Relationships
Channel Structure
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Determined by the functions specific organizations perform. Affects:
• Control over performance of functions
• Speed of delivery and communication
• Cost of operations
Definition: International Physical Distribution
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Designing and managing of a system that controls the flow of
materials into, through, and out of the international corporation.
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Encompasses the total movement concept by covering entire
range of operations concerned with product movement, including
both exports and imports simultaneously.
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This ‘system’ concept of logistics: Based on notion that
materials-flow activities within and outside firms are so complex
and can only be considered in the context of their interaction.
Total cost vs. Total after-tax profits (takes into account impact of
national tax policies)
The Physical Distribution System
Domestic/Import
Sourcing
Corporate Physical
Distribution
Management
Inbound Materials
Through flow
Domestic/Export
Marketing
Outbound Materials
Supplier
Order
Processing
Transportation
Inventory
Management
Customer
Order
Processing
Inbound
Materials
Management
Outbound
Distribution
Management
Domestic
Storage
Foreign
Storage
Transportation
Customer
Service
Inventory
Management
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Different Channel Flows
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Channel Flows
Products/Service
Ownership
Promotional Information
Supply Information
There are channels for the flow of information
There are channels for the flow of product/service
There are forward channels
There are reverse channels
Producer
Agent
Wholesaler
Retailer
Consumer
Money
Market research Information
Demand Information
Products/Service (returns)
Middleman (or marketing intermediary)
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An organization that links producers and users within
the channel.
– Merchant middleman—takes title to products by
buying them, e.g. retailer, distributor, wholesaler, etc.
– Functional middleman—helps in the transfer of
ownership of products but does not take title to the
products, e.g., 3pls.
Efficiency Provided by an Intermediary
The services of intermediaries reduce the number of contacts, or exchanges,
between producers and buyers, thereby increasing efficiency; especially across
longer distances. These intermediaries however ‘lengthen’ the supply chain.
Producer
Buyer
Producer
Producer
Buyer
Producer
Buyer
Buyer
Middleman or
intermediary
Producer
Buyer
Producer
Buyer
Producer
Buyer
Producer
Buyer
Source: William M. Pride and O. C. Ferrell, Marketing: Concepts and Strategies, 2000e.
Copyright © 2000 by Houghton Mifflin Company, Adapted with permission.
Figure 15.3
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Why Channels Develop
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Intermediaries evolve in the process of exchange because
they can increase the efficiency of the process by creating
time, place, and possession utility
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Intermediaries enable the adjustment of the discrepancy
of assortment by performing the functions of sorting and
assorting
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Marketing agencies form channel arrangements to make
transactions routine
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“Power”
Power” in the Channel
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Each channel member has strengths and weaknesses
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The channel member with the greater power (known as
the “Channel Captain”) will dictate roles within the
channel or even develop alternative channels
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What’s wrong with this picture?
Channels facilitate the searching process by consumers
Vendor Managed Inventories (VMI)
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Instead of worrying about inbound freight and ordering optimal
quantities, why not have the vendor manage a pocket of
inventory close to our manufacturing location
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Or, have vendor manage the inventory in our DC or stores
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Illustration: Multiple Vendor Managed Inventories (MVMI) at
Ryder Integrated Logistics
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Exploits the VMI concept by offering a consolidated approach
and value-added services
Matching SupplySupply-Chains with Products
Functional
Innovative
Products
Products
Efficient
SC - ‘Lean’
Match
Mismatch
Mismatch
Match
Responsive
SC - ‘Agile’
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Postponement and Speculation
Postponement and Speculation
Postponement
– Moving differentiation closer to the consumer
– Can result in shifting risk and uncertainty within the
channel
– Can reduce channel costs by:
• Postponing changes in the form and identity of a
product to the last possible point in the marketing
process
Speculation
– Channel member assumes risk rather than shifting it
– Reduces costs through:
• Economies of large-scale production
• Placement of large orders that reduce the costs of
order processing and transportation
• Reduction of stockouts and their associated costs
• Reduction of uncertainty
• Postponing inventory location to the last possible
point in time since risk and uncertainty costs
increase as the product becomes more
differentiated.
Channel Separation
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Occurs when ownership does not directly flow with
product, i.e., physical flow of goods (logistics channel)
is separate from ownership (transaction channel)
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Results in improved performance
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Requirements:
– Fast, reliable transportation system
– On-line interactive order processing system
– Swift, efficient information flows
Bucklin’
Bucklin’s Theory of Channel Structure
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Purpose of channel is to provide consumers with the
desired combination of its outputs at minimal costs
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Best channel forms when no other group of
institutions generates more profits or consumer
satisfaction per dollar of product cost
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Conclusion: Functions will be shifted from one
channel member to another in order to achieve the
most efficient and effective channel structure
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Channel Structure
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Most distribution channels are loosely structured
networks of vertically aligned firms.
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The specific structure depends to a large extent on
the nature of the product and the firm’s target market.
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There is no “best” channel structure for all
organizations producing or purchasing similar
products.
Distribution Channels
Manufacturer
Farmer
Service
Non-profit
Organization Organization
Broker
Wholesaler
Industrial User
E-Commerce: Restructuring
Distribution Channels
Retailer
Consumers
Domestic vs. Global Channels
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Country-specific logistics requirements
Complexity
Costs
Distances
Intermediaries
Alternative channel structures
Time
Control
Information
Decentralized decision making
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Channel Optimization
Alternative International Channel Structures
Involves Decomposing SC Costs & Determining the Most Efficient Total
Replenishment Path
Suppliers
Manufacturer
International
Division
Host Country
Buying Office
Wholesaler
Wholesaler
Trading Company
/Agent
Trading Company
/Agent
Manufacturers
Wholesaler
Parent
Company
Distribution
Centers
Trading Company
/Agent
Wholesaler
Distributor
Wholesaler
Distributors/
Retailers
Distributor
Wholesaler
Wholesaler
Wholesaler
Customers
Wholesaler
Retailer
Wholesaler
Retailer
Retailer
Retailer
Retailer
Customer
Designing Effective Channels - I
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Traditional Channels
No Integration
Large Inventories
No Information Exchange
Limited Mfg. Flexibility
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Channel Variability • Direct Shipments
Heavy Integration
• Value Added Services
Low Inventories
Information Sharing
Flexible Mfg./JIT
Designing Effective Channels - II
Management must consider environmental (external) & marketing (internal) factors to structure effective channels
External (Environmental) Issues
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Firms’ global presence → Increased distance, channel
complexity, market diversity and cost
Internal (Marketing) Issues
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Types of Distribution Strategies
– Intensive → Wide channels e.g., commodities
– Exclusive → Narrow channels e.g., cars
– Selective → Mixed & targeted e.g., soft-drinks
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Product Characteristics: Value, Technical/Knowledge
requirements, etc.
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Customer Service Objectives: Product availability, Return
policy, Delivery times and schedules, etc.
Government Regulatory Environment: Trade Initiatives;
Deregulation/Privatization; etc. → Need for flexible channel
systems
Corporate Reconfiguration → ‘Fluid’ Channel Structure:
Vertical & Horizontal Mergers, Acquisitions & Integration
Growth in, and use of, technological innovations to
establish competitive advantage over other channels
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Characteristics of Effective Channels
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Flexible, Adaptable & Dynamic
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Formal or Informal but Integrated Relationships
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Global Management of, (+ Foreign Participation in,)
region-specific distribution strategies
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“No boundaries”
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From Channel → Network
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“Slim” (No excesses): Elimination of non-value adding
activities
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Channel leader optimizing overall efficiency
Discussion – Home Work
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Discuss the ways in which channels change as
countries evolve from emerging to established
markets.
How do channels in Japan differ from those found in
Eastern Europe?
Future Trends in Channel Structures
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Supply Chain Management: Integrating inbound
and outbound flows and cross-functional processes
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QR & ECR: Increases value to customers.
Facilitates ‘faster’ channel flows. ‘Shortens’ channel
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Strategic Alliances & Partnerships: Transcending
firms’ boundaries to achieve channel goals
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Third-party Arrangements: Outsourcing functional
responsibilities to external specialists
QR: Typically implemented between manufacturers & retailers. ECR includes:
Continuous replenishment; Flow-through distribution; Cooperative
relationships between channel members; Use of POS data obtained by more
accurate use of bar coding; facilitated by EDI
Types of Channels
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Ownership channel (title)
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Negotiations channel (buy/sell)
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Financing channel (payment)
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Promotions channel (marketing)
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Logistics channel (movement/storage)
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Logistics Channel Functions
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Concentration (Accumulating)
– Combine multiple small shipments into larger shipments
– Accumulating from different sources (consolidating)
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Customization (Sorting out)
– A shipment of different pieces is assembled
– Sorting heterogeneous products into homogeneous stocks
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Dispersion (Allocation)
– Large shipments are broken down into smaller shipments
– Allocating into smaller lots (bulk-breaking)
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Assorting
– Building assortments of goods for use or sale in
association with each other
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