MARKETING
17e
Hult • Pride • Ferrell
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Part 5
Distribution
Decisions
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14: Supply-Chain Management
and Marketing Channels
15: Retailing, Wholesaling, and
Direct Marketing
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15-2
Objectives
 To describe the foundations of supply-chain
management
 To explore the role and significance of marketing
channels and supply chains
 To identify types of marketing channels
 To understand factors that influence marketing channel
selection
 To identify the intensity of market coverage
 To examine strategic issues in marketing channels,
including leadership, cooperation, and conflict
 To examine physical distribution as a part of supplychain management
 To explore legal issues in channel management
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15-3
Foundations of the
Supply Chain
Distribution
 The decisions and activities that make products
available to customers when and where they
want to purchase them
Supply Chain
 All the activities associated with the flow and
transformation of product from raw materials
through to the end consumer
Operations Management
 The total set of managerial activities used by an
organization to transform resource inputs into
products, services, or both
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15-4
Foundations of the
Supply Chain
Logistics Management
 Planning, implementing and controlling the
efficient and effective flow and storage of
products and information from the point of
origin to consumption to meet customers’
needs and wants
Supply Management
 The processes that enable the progress of
value from raw materials to final customer and
back to redesign and final disposition
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15-5
Supply-Chain Management
A set of approaches used to integrate the
functions of operations management, logistics
management, supply management and
marketing channel management so products are
produced and distributed in the right quantities,
the right locations and at the right time
 The goal is to achieve optimal levels of
efficiency and service
 The supply chain includes all entities that
facilitate product distribution and benefit from
cooperative efforts
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15-6
Key Tasks in Supply Chain
Management
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15-7
Supply Chain Management
Issues
 Technology
 Information technology has created almost
seamless distribution processes
 Information sharing has reduced costs
 Increased speed, flexibility, and cooperation
 Technology has improved service
 Increasing number of innovative goods
 Increased involvement of firms in management
supply chain
 Effective supply-chain management is closely
linked to a market orientation
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15-8
Role of Marketing Channels in
Supply Chains
Marketing Channel (Channel of Distribution,
Distribution Channel)
 A group of individuals and organizations that
direct the flow of products from producers to
customers within the supply chain
Marketing Intermediaries
 Middlemen that link producers to other
intermediaries or ultimate consumers through
contractual arrangement or through the
purchase and reselling of products
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15-9
Marketing Channel Activities
Performed by Intermediaries
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15-10
Discussion Point
Role of Marketing Channels
? How is the marketing
channel for premium
beef different from
the one for regular
beef?
? How can the
characteristics of a
marketing channel
influence customers’
perceptions of
products?
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15-11
The Significance of
Marketing Channels
 Marketing channel decisions influence the
rest of the marketing mix
 Channel decisions determine:
 A product’s market presence
 Buyer’s accessibility to the product
 Effective marketing channels required for
organizational success
 Entail long-term commitments among a
variety of firms
 Difficult to change/undo marketing channel
decisions
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15-12
Marketing Channels
Create Utility
 Time Utility – Having products available when
the customer wants them
 Place Utility – Making products available in
locations where customers wish to purchase
them
 Possession Utility – Customers have access to
the product to use now or store for future use
 Form Utility – Formed by assembling,
preparing, or otherwise refining the product to
suit customer needs
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15-13
Marketing Channels Facilitate
Exchange Efficiencies
 Marketing intermediaries can reduce the costs
of exchanges by performing certain services
or functions efficiently
 Intermediaries are specialists in facilitating
exchanges
 Access to and control over important resources
used in the proper functioning of marketing
channels
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15-14
Marketing Channels Facilitate
Exchange Efficiencies
 Critics accuse wholesalers of being inefficient
and parasitic
 While eliminating wholesalers may lower
customer prices it does not eliminate the need
for the services the wholesalers provide
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15-15
Efficiency in Exchanges
Provided by an Intermediary
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15-16
Typical Marketing Channels
for Consumer Products
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15-17
Channels for
Consumer Products
 A long channel may be the most efficient
distribution channel for some consumer goods
 When several channel intermediaries perform
specialized functions, cost may be lower than
when one channel member tries to perform
them all
 Firms that specialize in certain elements of
producing a product or moving it through the
channel are more effective and efficient at
performing specialized tasks
 Results in cost efficiencies and added value to
customers
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15-18
Typical Marketing Channels
for Business Products
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15-19
Channels for Business Products
Industrial Distributor
 An independent business organization that
takes title to industrial products and carries
inventories
 Usually sells standardized items, although
some carry a wide variety of items
 Cost effective when a product has broad
market appeal, is easily stocked and serviced,
is sold in small quantities and is needed on
demand
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15-20
Channels for Business Products
Manufacturers’ Agent
 An independent businessperson who sells
complementary products and is compensated
by commissions
• Does not acquire title or take possession
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15-21
Discussion Point
 The Internet and smartphones have created
new distribution channels
 Magazines and newspapers sell content via
smartphone and iPad apps
? How does this change the distribution system
for print media?
? From a marketers perspective, what are
potential problems with selling books,
magazines, and newspapers via apps?
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15-22
Multiple Marketing Channels
and Channel Alliances
Dual Distribution
 The use of two or more marketing channels to
distribute the same products to the same
target market
Strategic Channel Alliance
 An agreement whereby the products of one
organization are distributed through the
marketing channels of another
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15-23
Selecting Marketing Channels
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15-24
Selecting Marketing Channels
Customer Characteristics
 Consumer market or business market?
 Business customers often prefer to deal
directly with producers; are more likely to buy
complex products and in large quantities
Product Attributes
 Complex/Expensive or standardized?
 Durable or Fragile?
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15-25
Selecting Marketing Channels
Type of Organization
 Large or small?
 Large firms are often in a better position to
have more distribution centers, which reduce
delivery times
 Smaller firms may be in a better position to
serve smaller-scale regional needs
Competition
 High or low?
 Highly competitive markets require companies
to keep costs and prices low
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15-26
Selecting Marketing Channels
Environmental Forces
 Economic considerations will force
organizations to make compromises
 Technology may help a firm modify/improve its
channel strategy
 Government regulations and trade agreements
can affect channel strategy
Characteristics of Intermediaries
 If an intermediary is not adequately promoting
an organization’s products, it may reconsider
channel choices
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15-27
Intensity of Market Coverage
Intensive Distribution
 Uses all available outlets to distribute a
product
 For most convenience products
 Multiple channels may be used
Selective Distribution
 Uses only some available outlets to distribute
a product
 For shopping products
 Desirable when a special effort is important to
customers
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15-28
Intensity of Market Coverage
Exclusive Distribution
 Uses a single outlet in a fairly large geographic
area to distribute a product
 For products purchased infrequently,
consumed over a long period of time, or
requiring service and information
 Only authorized dealers are used
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15-29
Intensity of Market Coverage
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15-30
Discussion Point
? What intensity of coverage is most common
for the distribution of soft drinks? Shoes, like
Merrell?
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15-31
Strategic Issues in
Marketing Channels
Competitive
Priorities
Strategic Issues
Channel
Integration
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Channel
Leadership,
Coordination, and
Conflict
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15-32
Competitive Priorities in
Marketing Channels
 Supply chains can provide a competitive
advantage for many marketers
 Supply chain decisions cut across all
functional areas of a business
 An effective and efficient supply chain can
sustain a business in a variety of competitive
environments
 Inefficient supply chains can lead to increased
costs
 Integrated supply chains lead to a holistic view
of the supply chain
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15-33
Channel Leadership
Channel Captain (Channel Leader)
 The dominant leader of a marketing channel or
a supply channel
 May be a producer, wholesaler, or retailer
Channel Power
 The ability of one channel member to influence
another channel member’s goal achievement
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15-34
Channel Cooperation
 Cooperation is vital if each channel member is
to gain something from the others
 Enables retailers, wholesalers, suppliers and
logistics providers to:
 Speed up inventory replenishment
 Improve customer service
 Cut the costs of bringing products to customers
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15-35
Channel Cooperation
 A marketing channel should be viewed as a
unified supply chain
 Members should work toward common
objectives
 Channel member tasks must be clearly
defined
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15-36
Channel Conflict
 Channel conflict occurs when:
 Self-interest creates misunderstanding about
role expectations of channel members
 Communication is poor between channel
members
 There is increased use of multiple channels
has increased the chance for
miscommunication and conflict
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15-37
Channel Integration
Vertical channel integration
 Combines two or more stages of the marketing
channel under one management
 Participants coordinated efforts to reach a
desired target market
 Often effective against competition because of
increased bargaining power and shared
information and responsibilities
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15-38
Channel Integration
Vertical marketing systems (VMSs)
 A single channel member coordinates or
manages channel activities to achieve low-cost
distribution aimed at satisfying target market
customers
 Takes on corporate, administered, or
contractual forms
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15-39
Channel Integration
Horizontal channel integration
 Combining organizations at the same level of
operation under one management
 Creates economies of scale
 Not the best method for improving distribution
 Large size may decrease flexibility, increase
coordination problems and require additional
research and planning
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15-40
Physical Distribution in
Supply-Chain Management
Physical Distribution (Logistics)
 Activities used to move products from
producers to consumers and other end users
Outsourcing
 The contracting of physical distribution tasks to
third parties
 Most distribution activities can be outsourced
to firms with expertise in specific areas
Cycle Time
 The time needed to complete a process
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15-41
Goals of Physical Distribution
Right
Goods
Cycle
Time
Right
Support
System
Right
Place
Goals of
Physical
Distribution
Right
Quantity
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Right
Price
Right
Time
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15-42
Proportional Cost of Each Physical Distribution
Function as a Percentage of Total Distribution Costs
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15-43
Order Processing
The receipt and transmission of sales order
information
 Order Entry – Begins when customers place
orders
 Order Handling – Product availability and customer
credit-worthiness is verified; order assembly
occurs
 Order Delivery – Delivery is scheduled with carrier
Electronic Data Interchange (EDI)
 A computerized means of integrating order
processing with production, inventory,
accounting, and transportation
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15-44
Inventory Management
 Developing and maintaining adequate
assortments of products to meet customers’
needs
 Stockouts – Shortages of products that can
result in loss of customers
 Reorder point – The inventory level that signals
the need to place a new order
 Order lead time – The average time lapse
between placing the order and receiving it
 Usage rate – The rate at which inventory is
used/sold
 Safety stock – The extra inventory a firm keeps
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15-45
Inventory Management
Reorder point =
(order lead time x usage rate) + safety stock
Just-in-Time (JIT)
 An inventory-management approach in which
supplies arrive just when needed for
production or resale
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15-46
Materials Handling
Physical handling of tangible goods, supplies,
and resources
 Also involves transportation from points of
production to points of consumption
 Efficient materials handling can reduce costs,
the number of times a good is handled,
improve customer service and increase
customer satisfaction
 Radio frequency identification (RFID) – Radio
waves are used to track materials using
scanners
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15-47
Warehousing
The design and operation of facilities for storing
and moving goods
 Creates time utility
 Helps stabilize prices and the availability of
seasonal items
 The choice of warehouse is an important
strategic consideration
 The correct warehouse can reduce
transportation and inventory costs and improve
customer service
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15-48
Types of Warehouses
Private Warehouses
 Company-operated facilities for storing and
shipping products
Public Warehouses
 Storage space and related physical distribution
facilities that can be leased by companies
Distribution Centers
 Large, centralized warehouses that focus on
moving rather than storing goods
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15-49
Transportation
The movement of products from where they are
made to intermediaries and end users
 The most expensive physical distribution function
Transportation
Mode
Railroads
Heavy, bulky freight; long distances over land
Trucks
The most flexible schedules and routes; more expensive
and vulnerable to weather; size and weight restrictions
Waterways
Cheapest method; heavy, low-value nonperishables;
markets must be accessible by water
Airways
Fastest and most expensive; high-value, low-bulk, or
perishable goods
Pipelines
Most automated; dependable; contents subject to shrinkage
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15-50
Characteristics and Ratings of
Transportation Modes by Selection Criteria
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15-51
Discussion Point
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Coordinating Transportation
Intermodal Transportation
 Two or more transportation modes are used in
combination
 Containerization:
 Piggyback (truck and rail)
 Fishyback (truck and water)
 Birdyback (truck and air)
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Coordinating Transportation
Freight Forwarders
 Organizations that consolidate shipments from
several firms into efficient lot sizes
Megacarriers
 Freight transportation firms that provide
several modes of shipment
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Legal Issues in
Channel Management
Dual Distribution
 Runs the risk of being viewed as anticompetitive
Restricted Sales Territories
 Courts have conflicting opinions on restricting
intermediaries to certain sales territories
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Legal Issues in
Channel Management
Tying Agreement
 A supplier furnishes a product to a channel
member with the stipulation that the channel
member purchases other products
 Courts only accept tying agreements when the
supplier is the only one able to provide
products of a certain quality and the
intermediary can also carry competing
products
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Legal Issues in
Channel Management
Exclusive Dealing
 A manufacturer forbids an intermediary to
carry products of competing manufacturers
 Only considered legal if the deal blocks
competitors from less than 15% of the market,
the sales volume is small and the producer is
smaller than the retailer
© 2014 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with
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Legal Issues in
Channel Management
Refusal to Deal
 Producers have the right to choose channel
members
 Suppliers cannot legally refuse to deal with
wholesalers or dealers merely because these
wholesalers or dealers resist policies that are
anticompetitive or in restraint of trade
© 2014 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with
content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a
publicly accessible website, in whole or in part.
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