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