Value Chain Management
and Logistics
Evans & Berman
Chapter 14
Chapter Objectives
To discuss the role of the value chain and the value
delivery chain in the distribution process
To explore distribution planning and review its
importance, distribution functions, the factors used in
selecting a distribution channel, and the different types
of distribution channels
To consider the nature of distribution contracts,
cooperation and conflict in a channel of distribution,
the special aspects of a distribution channel for
industrial products, and international distribution
To examine logistics and demonstrate its importance
To discuss transportation alternatives and inventory
management issues
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The Distribution Process
Supplier/
Manufacturer
Goals
Value Chain
Distribution
Intermediary
Goals
Total Delivered
Product
Level of
Satisfaction
Value Delivery
Chain
Customer
Goals
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Key Points of the Distribution Process
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Goals
The goals of various channel members are considered as
inputs to the value chain and value delivery chain.
The value chain and value delivery chain are parallel
processes.
The total delivered product is the actual result of the
value chain and value delivery chain.
Satisfaction is based on the perceived value received
from the value chain and value delivery chain.
Feedback regarding service gaps and breakdowns must
be handled systematically in the process.
Satisfaction
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Channel Functions
Distribution
Marketing
Research
Buying
Promotion
Pricing
Functions
Performed in
a Channel
of Distribution
Product
Planning
Customer
Services
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Distribution and the Web
The Internet affects marketing
functions and logistics by:
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Speedily conveying information.
Improving communication with
channel members.
Allowing firms to reach distant parts of
the world.
Providing customers with the option of
worldwide vendors.
Offering Web-enhanced services for
each distribution function.
Copyright Atomic Dog Publishing, 2002
Factors to Consider in Selecting a
Distribution Channel
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The Consumer
The Company
The Product
The Competition
Distribution Channels
Legalities
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A Direct Distribution Channel
Manufacturer
200,000
Customers
In this direct channel, an
umbrella manufacturer sells
directly to final consumers. It
makes 200,000 separate
transactions, one for each
customer.
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An Indirect Distribution Channel
Manufacturer
Wholesaler
(East U.S.)
Wholesaler
(South U.S.)
Wholesaler
(North U.S.)
Wholesaler
(West U.S.)
50 Retailers
50 Retailers
50 Retailers
50 Retailers
1,000
Customers
per Retailer
1,000
Customers
per Retailer
1,000
Customers
per Retailer
1,000
Customers
per Retailer
In this indirect
channel, an
umbrella
manufacturer
makes only 4
transactions. It sells
to regional
wholesalers, which
resell to 50 retailers
each. The retailers
each sell to 1,000
final consumers.
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Typical Indirect Channels of Distribution
1
2
Manufacturer/
Manufacturer/
Service Provider Service Provider
Retailer
Wholesaler
Final
Consumer
Retailer
Final
Consumer
3
4
Manufacturer/
Service Provider
Manufacturer/
Service Provider
Merchant
Wholesaler or
Sales Agent
Merchant
Wholesaler or
Sales Agent
Organizational
Consumer
Distributor
Organizational
Consumer
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Pushing Versus Pulling Strategies
Pushing
Manufacturer/
Service Provider
Distribution
Intermediaries
Consumers
Distribution
Intermediaries
Consumers
Pulling
Manufacturer/
Service Provider
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Intensity of Channel Coverage
Exclusive
Distribution
A firm severely limits the number of resellers in
an area. It seeks a prestige image, channel
control, and high profit margins and
accepts lower total sales.
Selective
Distribution
A firm employs a moderate number of resellers in
an area. It tries to combine some channel control
and a solid image with good sales volume
and profits.
Intensive
Distribution
A firm uses a large number of resellers in an area.
Its goals are to have wide market coverage,
channel acceptance, and high total sales and
profits. Per-unit profits are low.
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International Distribution Planning
International distribution requires
additional considerations and planning:
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The channel length may depend on a
nation’s stage of economic
development.
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Less-developed and developing nations
tend to use shorter, more direct
channels than industrialized ones.
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Limited transportation and
communication networks foster local
shopping.
 Cultural norms always affect channel
member interactions.
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Logistics
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Logistics, also known as physical
distribution, encompasses the broad range
of activities concerned with efficiently
delivering raw materials, parts, semi-finished
items, and finished products to designated
places.
Logistics includes customer service,
shipping, warehousing, inventory control,
trucking operations, packaging, receiving,
materials handling, and plant, warehouse,
and store location planning.
Logistics affects costs, the value of customer
service, and its relationship with other
functional areas.
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Logistics and Other
Functional Areas
There is a critical interaction between logistics
and each of the firm’s marketing functions
and this requires careful coordination.
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Product variations (color, size, features,
styles) may impose a burden on distribution
facilities.
 Logistics planning is related to overall
channel strategy.
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Promotion campaigns must realistically
coordinate with potential logistics delivery.
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Pricing may be the firm’s differential
advantage based on superior logistical
service.
$
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Selected Physical Distribution Activities
Involved in a Typical Order Cycle
Insufficient goods in
stock
Customer places
an order
Supplier receives
and enters order
Inventory on
hand checked
Production
scheduled
Sufficient goods
in stock
Orders shipped
to individual
customers
Goods stored
until enough
orders are
placed
Goods
packaged,
sorted, tagged,
and sent to local
warehouse
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An Illustration of the Total-Cost
Approach in Distribution
Carrier
$100,000
Air
$1.5 mil.
Rail
$300,000
Truck
$500,00
$1.6 mil.
$800,000
$300,000
$500,000
$1.4 mil.
$1.2 mil.
$200,000
Costs
Annual
freight
costs
Annual
warehousing
costs
Annual costs
of lost sales
due to being
out of stock
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What Happens When a Firm
Has Stock Shortages
When a firm runs
out of stock,
customers can
Wait until
merchandise is
available
Most Desirable Action
Purchase a
substitute
product from
the same seller
Switch to a new
seller while
merchandise is
not available
Permanently
switch to a new
seller for all
purchases
Least Desirable Action
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5 Transportation Forms
for Shipping
• Railroads carry heavy, bulky items over long distances but have high fixed
costs due to facility investments.
• Motor Carriers usually transport small shipments over short distances and
handle 80% of U.S. shipments weighing less than 500 or 1,000 pounds.
• Waterways in the U.S. include barges on inland rivers, and tankers and
freighters on Great Lakes, and intercoastal shipping.
• Airways are fast and expensive but move high-value perishable and
emergency goods. Speed may provide a differential advantage.
• Pipelines move gas and petroleum products with minimum handling and
labor costs.
Wal Mart
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Inventory Management
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Good inventory management provides a continuous flow of goods and
matches the quantity of goods kept in inventory as closely as possible with
customer demand.
To improve their inventory management, many firms are applying a just-intime inventory system and electronic data interchange.
Four specific aspects of inventory management are stock turnover, when to
reorder, how much to reorder, and warehousing.
Stock turnover refers to the number of times during a stated period (usually
one year) that average inventory on hand is sold. It shows the relationship
between a firm’s sales and the inventory level it maintains.
A reorder point depends on order lead time, the usage rate, and safety stock
The economic order quantity (EOQ) is the order volume corresponding to the
lowest sum of order-processing and inventory-holding costs.
Copyright Atomic Dog Publishing, 2002
Chapter Summary
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This chapter discusses the role of the value chain and the
value delivery chain in the distribution process.
It explores distribution planning and examines its
importance, distribution functions, the factors used in
selecting a distribution channel, and the different types of
distribution channels.
It considers the nature of distribution intermediary
contracts, cooperation and conflict in a channel of
distribution, the special aspects of a distribution channel for
industrial products, and international distribution.
It examines logistics and demonstrates its importance.
It discusses transportation alternatives and inventory
management issues.
Copyright Atomic Dog Publishing, 2002