Chapter 14:
Supply Systems
Wholesaling
 wholesaling involves any sale that is not a retail sale;
to other businesses for resale, for use in other
products, or use in the business
 wholesalers provide a valuable service in bringing
manufacturers and retailers together
 wholesaling requires bringing together the economies
of skill, scale, and transactions
 the wholesale market is bigger than the retail
market.... how can that be?
Figure 14-1
The Economy of Transacting in Wholesaling
Figure 14-2
Types of Wholesaling Institutions
Figure 14-3
Wholesale Trade Customers
Categories of Wholesalers
 merchant wholesalers take title to the products
that they handle; perform wide range of services
 manufacturers’ sales branches and offices are
owned and operated by the manufacturers
 agents and brokers negotiate sales but do not take
title to the products they sell
 primary products dealers deal primarily in raw
materials such as agricultural products
Merchant Wholesalers
 full-service wholesalers perform a wide range of
services for the suppliers they represent
 they take title to the products that they carry
 they generally operate warehouses, create
assortments, and arrange delivery
 they buy in very large quantities and sell to small
customers in the assortments they need
 other wholesalers include truck jobbers and drop
shippers
Agent Wholesalers
 these are independent businesses which may
represent a number of suppliers
 they do not take title to the products they sell
 manufacturers’ agents are generally smaller firms
that operate on commission; they are usually
assigned to a specific territory
 brokers often do not work on a continuing basis with
suppliers but will bring buyers and sellers together;
may not ever see the product
Distribution Channels
 the distribution channel includes both the
producer or supplier and the customer
 intermediaries perform a number of functions
on behalf of both producers and consumers
 some producers shorten the channel by
performing distribution functions themselves
 regardless of who performs them, the
distribution functions must be performed
Designing the Channel
 channel design is a strategic marketing tool
 the firm must first decide what role
distribution is to play in achieving objectives
 what type of channel is needed? with or
without intermediaries?
 what level of intensity of distribution?
 which specific intermediaries to use? which
will be best suited to achieve objectives?
Figure 14-4
Sequence of Decisions to Design a Distribution Channel
Selecting the Type of Channel
 some firms will distribute directly; others will
use a number of intermediaries:
 producer  consumer (direct)
 producer  retailer  consumer
 producer  wholesaler  retailer  consumer
 producer  agent  retailer  consumer
 producer  agent  wholesaler  retailer  consumer
 when would each of these be considered?
Figure 14-5
Major Marketing Channels for Different Categories of Products
Multiple Distribution Channels
 some firms will use several distribution
channels to reach specific markets or segments
 dual distribution is used, for example, to reach
business and consumer markets, or to carry
different groups of products
 or may be used to reach different segments of
the seller’s market; different sizes of buyers or
different regions of the country
 some companies operate their own stores
Vertical Marketing Systems
 VMS is a tightly-controlled distribution system
 may be achieved through common ownership of
firms at several levels of the channel (corporate)
 a contractual VMS such as franchising involves
channel members operating under contract
 an administered VMS involves market coordination through the economic power of one
channel member, usually the supplier, whose
brand equity or market position is strong
Factors Affecting Channel Choice
 the selection of the shape, length, and nature of
the distribution channel depends on:
the needs, structure and behaviour of the
market, including number of customers
the nature of the product or service
nature and availability of intermediaries
characteristics and situation of the company
 these factors will point the company toward
the selection of a certain channel type
Intensity of Distribution
 the number of intermediaries to be used depends
on how consumers buy the product
 intensive distribution has convenience products
sold in a large number of outlets
 selective distribution involves using fewer
outlets to sell mostly shopping goods
 specialty products are usually sold through
exclusive distribution as consumers are prepared
to search for them
Figure 14-6
The Intensity-of-Distribution Continuum
Channel Conflict
 conflicts occasionally arise in distribution
channels
 horizontal conflict involves firms competing at
the same level of distribution
 vertical conflict occurs when producers bypass
intermediaries to sell direct, or set up dual
distribution and compete with retailers
 retailers have achieved considerable power in the
distribution channel through information
Legal Aspects of Distribution
 generally it is illegal for a supplier to refuse to
supply an intermediary with products
 exclusive dealing is not illegal unless it severely
limits business in an area
 tying contracts involve an intermediary being
required to carry a supplier’s full line
 exclusive sales territories are not considered to be
illegal unless they lessen competition
Physical Distribution
 firms have to be concerned with how products
actually reach intermediaries and customers
 physical distribution or logistics involves all
activities that ensure that the right quantity of
products get to the right place at the right time
 activities include inventory handling and
warehousing, materials handling, inventory control,
order processing, and transportation
 all of these activities are interrelated
Strategic Physical Distribution
 good physical distribution systems can
dramatically improve customer service
 it is a very important component in an overall
program to keep a company’s costs in line
 it can provide a competitive advantage through the
creation of time and place utility
 it can serve to stabilize prices, can influence the
firm’s channel selection decision, and reduce
shipping and transportation costs
Figure 14-7
Economic Order Quantity