Chapter 4 - Discussion Questions - Answers
1.
Why do businesses establish supply and distribution channel networks?
Answer:
There are basically six reasons. The first is to increase customer service by
expanding channel presence to better serve existing customers or to move
closer to new markets. Second, events such as shifts in product offerings,
markets, technologies, growth of competitors and other factors will force a
company to consider relocating channel distribution points. Third, companies
may design supply and distribution chains that are agile and flexible to be
able to easily expand, contract, relocate, and outsource to channel partners to
meet today’s challenging marketplace. Fourth, when a company diversifies a
product line, it might prove advantageous to locate it in a new facility closely
to product suppliers, raw materials, or markets. Fifth, by employing the latest
optimization tools and real estate expertise, companies can reduce channel
costs by consolidating inventories and resources and eliminating unnecessary
facilities. And finally, a distributor will seek to establish additional warehouses as a result of a decision to optimize inventory, transportation, and facility costs, or respond to changes in taxes, regulations, labor costs, and others.
2.
What are the four critical design considerations that guide channel design?
Answer:
Design decisions are critical because they determine the overall performance
goals of the channel configuration. The four critical design decisions are as
follows.
 Facility role. Planners must decide what role each proposed facility is to
play in the supply and distribution channel network. Included are decisions regarding what processes, inventories, and transportation requirements are to be performed by each proposed facility. These decisions are
critical because they determine the level of flexibility the channel network has to adapt to changes in costs and customer service.
 Facility location. Facility location decisions are very critical since they
represent a long-term commitment on the part of the firm. A good location is one that enables the facility to keep operating costs low while realizing high levels of customer service. Location decisions must take into
consideration macroeconomic and legal factors such as workforce availability, quality of life, operations costs, availability of utilities, and government restrictions and taxes.
 Capacity allocation. Decisions in this area determine the capabilities of
channel facilities to meet expected performance targets. Excess capacities
enable a facility to be flexible and scalable to meet changing demand patterns. On the negative side, excess capacities render a facility less efficient
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Supply and distribution integrative intensity. This decision area relates to
the depth of commitment a company decides to make in the ownership of
different echelons of its supply and distribution channels. Supply integration penetration increases channel master control of supply sources but
also increases supply channel costs.
3.
What are the three distribution channel attributes used in channel
Answer:
The three channel attributes are:
1. Market penetration intensity. This attribute describes how many echelons
deep in the delivery network producers or intermediaries must go to satisfy market objectives. The desired level of penetration will require the
formulation of strategies associated with capabilities and costs (executing
delivery activities), channel power (distribution of influence among channel players), and competitive actions (presence of competitors and buying
alternatives).
2. Distribution integrative intensity. This channel attribute determines the
level of integration forward or horizontally a company chooses to pursue
in the delivery channel. Forward integration identifies how much control
a company seeks over downstream customer-facing (forward) delivery
echelons. Horizontal integration refers to a level of control whereby a
company acquires a linked channel intermediary. According to the matrix
map, the more a product or service is customized, the more intense is the
control over downstream channel delivery functions.
3. Distribution intensity. This attribute determines the number of intermediaries needed to bring products to the customer. There are four strategies
that can be deployed: single source distribution in which a producer performs all distribution activities; intensive distribution in which a company seeks to utilize a broad and deep distribution network to reach as
many customers as possible; exclusive distribution, in which companies
limit the number of intermediaries who deal with customers; and finally
selective distribution in which a company permits only a select number
of intermediaries to handle and sell products.
4.
How do channel networks add value?
Answer
Distribution channels add value through a variety of functions. To begin with,
they enable companies to store inventories close to customer demand, thereby
increasing local sales, response time, and brand image. They enable companies to increase product variety, thereby offering customers more choices and
keeping out competition. They decrease transportation costs by reducing inbound transportation and consolidating orders for local sales. They facilitate
the movement of demand information from the local customer to the producer. They leverage the core competencies of independent channel partners
to expand on product and service offerings and remove logistics costs. Fi-
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nally, they utilize online Web-based ordering and fulfillment, thereby providing customers with new ways of ordering, pricing, and promoting goods and
services.
5.
What are some of the detailed design factors that will influence channel design?
Answer:
Essential to the structuring of efficient and profitable channel networks is the
consideration of several critical design factors. These factors will guide planners in making informed decisions about the placement, cost, and anticipated
function of channel facilities.
 Competitive strategy. Factors affecting channel design in this area reflect
a firm’s business strategy. Companies competing on cost leadership tend
to select low-cost locations for facilities. Firms focused on high-customer
responsiveness tend to locate closer to the target market and may select a
high-cost location. Firms engaging in global trade will construct networks with facilities in different countries playing different roles.
 Logistics costs. Logistics and facility costs in a channel network will
change as the number of facilities, their location, and capacity allocation
change. Inventory and facilities costs increase as the number of facilities
in the channel increase. Normally, transportation costs decrease as the
number of facilities increases, but could reverse if inbound transportation
economies of scale are lost. The number of facilities should at least equal
the number that minimizes total logistics costs.
 Regulation. Macroeconomic factors such as local taxes and tax incentives, tariffs, free trade zones, exchange rates, minimum requirements on
material content of products, limits on imports, and demand risks caused
by changes to the local economy can have an important influence on
channel design.
 Political. The political stability of a proposed location is important in location choice. This is particularly true of countries where the rules of
commerce, legal systems, and ownership are not well defined.
 Local infrastructure. The level of infrastructure directly affects the cost
of doing business in a particular location. Infrastructure choices are influenced by the availability of property; labor availability; utilities such
as water, electricity, and phone/Internet service; and distance to transportation terminals, traffic congestion, and local utilities.
6.
A key factor in channel design is the level of desired channel dependency.
What are the four types of channel dependencies?
Answer:
 Transaction-based system. In this model, there is minimal-to-no dependency among channel trading partners. Such systems, in fact, are formed for
the performance of an often non-repeatable transaction. The products or
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services sold are normally confined to very expensive durable goods, such
as machinery or other processing equipment, and the services rendered are
usually customized around a unique event. Once the transaction is completed, the likelihood of the delivery network reforming again is remote.
Limited channel system. This model is defined as loose arrangements of
businesses that intermittently and opportunistically coalesce with channel
specialists in the buying and selling of goods. The overriding objective is
to achieve the best selling price and delivery. The longevity of these arrangements depends on their ongoing value. There is little or no loyalty in
a limited channel, no effort to build collaborative partnerships, and no desire to improve channel efficiencies. Often channel relations are characterized as adversarial and arrangements can be dissolved at a moment’s notice. Each firm stands alone and autonomous, free to choose or disengage
from any trading partner as long as it augments its internal objectives.
Federated network system. In this model, channel members seek collaborative relationships that link their strategies and processes together. Examples include joint ventures, consortia, franchising, and royalty and licensing agreements. A critical dynamic is the role of channel power. For
example, channel masters, such as Wal-Mart or Home Depot, seek to control partner behavior and diminish opportunities for conflict, in exchange
for profitable economies of scale resulting from volume transactions, enhanced bargaining power, and removal of channel redundancies. This type
of federated delivery network describes about 80 percent of today’s consumer market.
Partnerships and alliances. Partnerships arise when two or more firms integrate core competencies and resources in the pursuit of a common strategy. Each participant agrees to surrender some of its independence to
achieve long-term benefits arising from cooperative marketing, operations,
and information sharing. When businesses agree not only to a partnership
but also to jointly undertake improvements to performance, cost effectiveness, and competitiveness, this type of channel network is called an alliance.
If a company decided on a distribution channel where it distributed directly to
the customer, how would the decision impact the following channel service
objectives: customer service level, product assortment, product availability,
delivery time, channel complexity, inventory, transportation, and facilities?
Answer:
A decision to construct a channel characterized by direct delivery would have
the following effects on channel service objectives:
 Customer service level: Since the customer is dealing directly with the
producer, this model provides a high level of customer service and direct
communication regarding inventory, product information, order status,
price control, and financial settlement.
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Product assortment. The customer has access to the full range of products offered by the producer.
Product availability. The producer has direct control over product quantities.
Delivery time. Because distribution occurs on a worldwide basis from a
single location, delivery times can be very long. In addition, since this
model offers predominately make-to-order products, long production lead
times must be added to delivery.
Channel complexity. This model supports a very simple channel structure.
Inventory. Because finished goods are normally made to customer order,
this channel model has very low inventory carrying costs.
Transportation. Due to often very long distances the product must travel
to the customer, transportation costs will be very high. Cost may be compounded if the manufacturer cannot manage small shipment quantities.
Facilities. Because operations are consolidated, facility costs are low. Because of distance, reverse logistics functions may be difficult to execute
economically.
Describe some of the micro-factors influencing channel design.
Answer:
The micro decisions are detailed as follows:
 Determining overall network objectives. Defining objectives such as
providing higher levels of customer service or reducing delivery lead
time.
 Determining transportation costs. Determine ease of accessibility to
trucking services and specialized water, rail, and air carriers. Also, the
cost of channel replenishment, transit times, possibility of damage and
theft, service reliability, and others must be considered.
 Personnel considerations. Facility expansion must consider the effect on
existing employees, the availability of new labor, and legal and social issues relating to equal opportunity employment.
 Real estate considerations. Issues in this area center on location, real estate costs, and possibility of property appreciation.
 Tax considerations. The taxes levied on property, inventory, and payroll
by local governments are important determination criteria used in warehouse selection.
 Communications infrastructure. A critical element in site selection is the
existence of adequate telephone, Internet, wireless, and other communication infrastructures.
 Proximity to customers. Travel issues refer to delivery time to customers,
availability and cost of transportation, and travel time for the customer to
reach the facility.
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Proximity to other warehouses. The distance between warehouses in the
channel network is a critical factor in measuring trade-off costs between
customer service and transportation, communications, inventory carrying
costs, and facilities.
Facility cost and value. These issues are concerned with the price of the
land or leasing cost, facilities construction, engineering, fees and permits,
and financing.
Operating costs. These costs consist of those elements necessary to run
the facility such as heat, electricity, fuel sources, insurance, and labor and
management.
Company image. The impression that the facility makes on customers
and the community can be very important to the business enterprise and
deserves serious consideration. Companies seeking marketplace name
recognition need to be located in areas that favorably promote the company's name and presence to the public at large.
Community resources. Community services, such as adequate police and
fire departments, community attitude, availability of schools and professional education, lack of environmental dangers, public transportation,
and availability of affordable housing for employees, are also critical factors in location selection.