Chapter 8: Distribution and Supply Chain Management
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Chapter 8: Distribution and Supply Chain Management
I.
The Importance of Distribution and Supply Chain Management
A.
Distribution and supply chain management have moved to the top of the list when
it comes to achieving a sustainable advantage and true differentiation in the
marketplace.
1.
A solid distribution system, while costly to construct, will generate profits
for years.
2.
With great distribution you can overcome some weaknesses in pricing,
products, or promotion.
B.
Good distribution is essential because it can make a critical difference in how
easily and well customers are served.
1.
The development of a distribution strategy involves two basic categories-marketing channels and physical distribution.
a.
Marketing channels is a system of organizations through which
products, resources, information, funds, and/or product ownership
flows between producers and consumers.
b.
Physical distribution is moving products to the right place in the
right quantities at the right time, and in a cost-efficient manner.
2.
Logistics strategies address physical issues such as transportation, storage,
materials handling, and the systems and equipment necessary for these
activities.
3.
Evaluation of distribution is based on whether the channel is effective and
efficient (both equally important).
a.
Key concerns of effectiveness are the extent the channel provides
time, place, and possession utility.
1)
Consumers want to purchase products and have access to
information every hour of every day, every day of the
week, and every day of the year.
2)
Consumers want the convenience to purchase products
from their home or office.
3)
Consumers want the product to be delivered directly to
them or to the intended receiver.
b.
Possession utility relates to the ease of the actual purchase process.
c.
Consumers want to buy both goods and services in the amounts
they need—quantities large or small.
4. Managers need to develop their distribution strategy by knowing who the
best-chance customers are and provide them with the products they want in
the right quantity, at an acceptable price, when and where they want to buy
them.
II.
Strategic Issues in Distribution and Supply Chain Management
A.
While the terms are interchangeable, there is a key distinction that separates a
traditional channel from a true supply chain.
1.
Traditional channel – each member or level is concerned with how much
profit it makes, the size of one’s own slice of the pie.
Chapter 8: Distribution and Supply Chain Management
Supply chain – concern is the share of the market the entire channel
captures. [Exhibit 8.1]
Marketing Channel Structures
1.
There are many strategic options for the structure of a channel of
distribution, and these strategies are often complex and very costly to
implement.
a.
A good distribution strategy is essential because once a channel is
selected and commitments are made, distribution often becomes
highly inflexible due to long-term contracts, investments, and
commitments between channel members.
b.
There are three basic structural options of distribution in terms of
the amount of market coverage and level of exclusivity between
vendor and retailer.
1)
Exclusive distribution gives one merchant or outlet the
sole right to sell a product within a defined geographic
region.
a)
Commonly associated with prestige products.
b)
Targets a single, well-defined segment.
2)
Selective distribution gives several outlets the right to sell
a product in a defined geographic region.
a)
Customers need the opportunity to comparison
shop.
b)
After-sale services are important.
3)
Intensive distribution makes a product available in the
maximum number of outlets in each region to gain as much
exposure and as many sales opportunities as possible.
a)
Closely associated with consumer convenience
goods.
b)
Manufacturer gives up control in order to get as
much visibility as possible.
A key consideration in making strategic decisions about the structure of one’s
marketing channel is to know the value components target customers will see as
attractive as they make selections.
1.
Included here are information communication and sales, after-sale service,
delivery, enhancements, and solution development.
2.
Solution development involves the combination of complementary
products that yield a greater overall value.
Power and Conflict in the Supply Chain
1.
The implementation of a relationship driven by supply chain management
is difficult to achieve unless there is a fundamental change in how
distribution channel members work together.
a.
A change from a “win-lose” competitive attitude to a “win-win”
collaborative approach.
b.
Information flows move from an as need basis to open, honest, and
frequent communications.
2.
B.
C.
D.
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Chapter 8: Distribution and Supply Chain Management
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c.
2.
3.
III.
Points of contact expand from one-on-one to multiple interfaces at
all levels.
The sources of power or influence that are utilized also change with the
move from a traditional channel to a collaborative supply chain approach.
a.
Power, or influence, can be defined as the ability to get other
parties to do or say something they would otherwise not do or say.
b.
Channel power can be broken down into a limited set:
1)
Legitimate power—This power source has to do with the
firm’s position in the marketing channel.
2)
Reward power—The ability to help other parties reach
their goals and objectives.
3)
Coercive power—Is the ability to take positive outcomes
away from, or even to inflict punishment on, another
channel member.
4)
Information power—Having and sharing knowledge.
5)
Referent power—Like doing business with the other party
or organization.
c.
Whether the problems that naturally materialize in a marketing
channel are confronted successfully is dependent on the successful
development, communication, and utilization of information.
A further example of the move to form collaborative supply chains is the
ongoing and highly successful initiative called category management.
Category management should be: [Exhibit 8.3]
a.
Customer driven: Manufacturers and wholesalers should make all
decisions with a concern for the challenges backing retailers in the
channel.
b.
Strategically driven: The relationship between the parties should
be driven by a strategic plan to advance the relationship and to
advance the outcomes for the parties involved.
c.
Multifunctional: Contact points should include areas such as
finance, logistics, quality control, and facilities management.
d.
Financially based: Solid financial targets should be set and met in
terms of profitability and hard and soft cost management.
e.
Systems dependent: Systems should be designed and put in place
to support the activities of the relationship.
Trends in Marketing Channels
A.
Distribution activities have changed as a result of increased distribution from
producers directly to consumers.
1.
The move toward direct marketing has led to the elimination of some
retailers from marketing channels.
2.
While channels members may go away the functions those members
perform must continue to be fulfilled.
B.
Distribution strategy is also changing as a result of the growing power of discount
mass merchandise retailers which have gained increasing power relative to their
suppliers.
Chapter 8: Distribution and Supply Chain Management
C.
D.
IV.
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Distribution strategies often need multiple channels to reach various markets.
Multiple channels enable a producer to offer two or more lines of the same
merchandise through two or more means, thus increasing sales coverage.
1.
It spreads marketing mix resources across two or more channels, instead
of focusing them on just one.
2.
It can also create channel conflict, particularly when the target segments
are not clearly defined and distinct for each channel.
Order Fulfillment and e-Commerce
1.
Significant advances in information processing and computer-to-computer
communications have made possible the introduction of new ways to place
and fill orders.
2.
E-fulfillment is based on a true partnership between marketing and
logistics.
a.
Growth in e-commerce has been sparked by consumer demands for
convenience and safety.
b.
Faster, better, and cheaper is what business customers and
consumers alike have been demanding.
c.
Ownership of personal computers and Internet access has become
a critical channel component for both manufacturers and retailers
to consider.
Legal and Ethical Issues in Distribution Strategy
A.
Like every other aspect of marketing strategy, distribution decisions must be
made with an eye toward ethical and legal considerations.
B.
Counterfeit products abound today, particularly in the areas of clothing, audio and
video products, and computer software..
C.
Manufacturers are not the only ones that get hurt when counterfeit products are
purchased.
1.
Governments are affected by the loss of tax revenues.
2.
Jobs are lost at legitimate companies.
3.
Consumers are affected by the quality of counterfeit products.
4.
Counterfeiting has become a convenient way for organized crime to
support its activities.
D.
The Counterfeit Library Web site provides guidelines to reduce the probability of
purchasing counterfeit items online.
1.
Look for sites that accept credit cards. Banks and credit card companies
conduct checks on such firms.
2.
Avoid sending cash whenever possible.
3.
Check out any unfamiliar source with friends and trusted individuals.
4.
Avoid buying from contacts made via discussion groups or chat rooms.
5.
Beware of purchase price, it may be too good to be true.
E.
An exclusive arrangement benefits a manufacturer by requiring that an
intermediary, such as a wholesaler, broker, agent, or retailer, not carry or
represent products from any of the manufacturer’s competitors.
1.
Not all exclusive dealing agreements are legal. There are three tests that
determine their validity.
Chapter 8: Distribution and Supply Chain Management
a.
b.
c.
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First, the arrangement cannot block competitors from 10 percent or
more of the overall market.
Second, the sales revenue involved can’t be sizable.
Finally, the manufacturer can’t be much larger than the
intermediary.
Questions for Discussion
1. What do you see as the major differences you have experienced in buying a product
through a retail store, a manufacturer store, a catalog, and an eCommerce source?
What have some retailers in your area done to justify their ongoing presence in the
channel?
2. Talk about what makes a product something you would go to great lengths to get,
thus supporting the use of an exclusive distribution strategy by a manufacturer. What
items do you expect to find at any quick shop or grocery store? How much more
knowledgeable are the salespeople in explaining the product at an exclusive
distribution location versus an extensive distribution location? Why is this the case?
3. Some manufacturers and retailers advertise that you should shop with them because
“We eliminate the middle-man.” Evaluate this comment in light of the functions that
must be performed in a marketing channel. Does a channel with fewer members
always deliver cheaper products to customers? Defend your position.