Chapter 14 – Marketing Channels and Supply Chain Management
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Explain the nature of marketing channels
Identify different channel intermediaries and their functions
Describe the types of marketing channels
Summarize how to make channel strategy decisions
Recognize how to handle channel relationships
List channel and distribution challenges in global markets
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Distribution (place) is the forgotten P
It is the element of the marketing mix that focuses on getting a finished product to the end customer
The activities involved in distribution do not seem to coincide with what most people consider marketing
It can provide a source of competitive advantage that is unrivalled by the other three Ps
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Place can work with the other three Ps, helping determine the price or provide insights into packaging
What makes the P of place work à channels of distribution can achieve competitive advantage through a
strategy that takes advantage of trends – push for growth in most companies, increased power of retailers,
and greater role of IT
A well-operated channel of distribution is very difficult and expensive to emulate
Amazon is known more for its distribution than any other aspect of its business
Cost to create and maintain such a system is very high
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Market channel (channel of distribution) à business structure of interdependent organizations that reach
from the point of product origin to the customer, whose purpose is to move products to their final
consumption destination
Represents the place or distribution function in the marketing mix
Channel members (intermediaries and resellers) à all parties in the marketing channel that negotiate with
one another, buy and sell products, and facilitate the change of ownership between buyer and seller as they
move products from the manufacturer into the hands of the consumer (e.g., Best Buy)
Supply chain à connected chain of all business entities, both internal and external to the company, that
perform or support the marketing channel functions
Channel members facilitate the distribution process through three key actions: providing specialization and
division of labour, overcoming discrepancies, and providing contact efficiency
Specialization and division of labour à breaking down a complex task into smaller, simpler tasks and
allocating them to specialists will both create greater efficiency and lower average production costs
Manufacturers achieve economies of scale through producing large quantities of a product; marketing
channels can also attain economies of scale through specialization and division of labour by aiding
producers who lack the motivation, financing, or expertise to market directly to end-users or consumers
The cost of marketing directly to individual consumers – taking and shipping individual orders (millions for
pop) makes no sense
Hire channel members to do what producers are not equipped to do or what channel members are better
prepared to do
Overcoming discrepancies à quantity, assortment, time, and space created by economies of scale in
production
Discrepancy of quantity à quantity produced to achieve low unit costs (the difference between amount of
product produced and amount an end-user wants to buy) à store and make desired quantities available
Discrepancy of assortment à when a consumer does not have all the items needed to receive full
satisfaction from a product (e.g., pancakes need knife, fork, plate, butter, and syrup) à assemble products
needed to complete customers’ assortment
Temporal discrepancy à when a product is produced by a consumer is not ready to buy it à maintain
inventory in anticipation of demand (e.g., Halloween merchandise is available year-round)
Spatial discrepancy à potential buyers scattered over large geographic regions à making products
available in locations convenient to customers
Providing contact efficiency à reducing the number of stores customers must shop in for purchases
Reducing number of transactions
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Channel intermediaries must find a way to work together while simultaneously achieving their business
goals and objectives
Negotiate with one another, decide on terms of ownership transfer between buyers and sellers, and
coordinate the physical movement of finished products from the manufacturer to the final consumer
Taking title à intermediary made the decision to own the merchandise and control the terms of the sale
(e.g., price and delivery date)
Retailers à firms that sell mainly to consumers and business customers
What type of intermediary should be used by a manufacturer (producer)
Product characteristics à whether the product is standardized or customized (insurance – agent or broker,
chocolate bar – wholesaler – sells to retail), the complexity of the product, and the gross margin of the
product
Buyer considerations à how often the product is purchased and how long the buyer is willing to wait to
receive the product (e.g., waiting to buy textbook if price will be lower by ordering online, need it right
away – buy from bookstore)
Market considerations à the number of buyers in the market and whether they are concentrated in a
general location or are dispersed (chocolate bars - wholesaler)
Functions of retailing and wholesaling intermediaries à transactional functions (contacting and promoting,
negotiating, and risk taking – owning inventory), logistical functions (physically distributing, storing,
sorting, sorting out – heterogenous supply to homogenous stocks, accumulating, and allocating – breaking
homogenous supply into smaller lots), and facilitating functions (researching – gathering information about
channel members and customers and financing – extending credit and other financial services to facilitate
the flow of goods through the channel to the final consumer)
Nonmember channel participants provide essential functions that may have been provided by a channel
member
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Consumer products
A product can take many routes to reach its final customer
Marketers search for the most efficient channel from the alternatives available
Direct channel à sell directly to customers (producer-owned stores and factory outlets)
Agent/broker channel à agents or brokers bring manufacturers or wholesalers together for negotiations but
they do not take title to merchandise (e.g., food broker)
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Retailer channel à retailer is large and buys in directly from the manufacturer (e.g., Indigo)
Wholesaler channel à low-cost and low-involvement items that are frequently purchased
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Business and industrial products
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Direct channels (e.g., manufacturers buy large quantities of raw materials, major equipment, processed
materials, and supplies directly from other manufacturers) à meeting detailed technical specifications
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Channel from producer to government buyers is also a direct channel
Companies selling standardized items of moderate or low value rely on industrial distributors (wholesalers)
Small manufacturers rely on selling agents to sell to either industrial distributors or users
Many manufacturers and customers are bypassing distributors and going direct, often online
Exchanges and private exchanges (automate supply chain while sharing info. only with select suppliers)
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A producer usually employs several different or alternative channels, which include multiple channels,
nontraditional channels, and strategic alliances
Dual distribution/multiple distribution à selects two or more channels to distribute the same product to
target markets
Nontraditional channel arrangements help differentiate a firm’s product from the competition
Strategic channel alliance à cooperative arrangements between business firms to use one of the
manufacturer’s already established channels (e.g., Starbucks drinks being sold through Pepsi)
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Supply chain managers must decide what role distribution will play in marketing strategy
Must be sure that the channel strategy chosen is consistent with product, promotion, and pricing strategies
Decide which factors will influence the choice of channel and appropriate level of distribution intensity
Market factors à target customer considerations (who are the potential customers? what do they buy?
where do they buy? when do they buy? how do they buy?); consumers or industrial customers; geographic
location
Product factors à more complex and expensive do not need intermediaries; more standardized can have a
long distribution channel; life cycle; perishable goods have shorter marketing channels
Producer factors à producers with large financial, managerial, and marketing resources are better able to
use more direct channels; producers selling several products in a related area can choose channels that are
more direct; expensive products avoid discount retailers
Intensive distribution à maximum market coverage
Coverage à ensuring product availability in every outlet where potential customers might want to buy it
Not willing to look a long time for product
Wholesalers and retailers’ willingness to handle items tends to control manufacturers’ ability to achieve
intensive distribution
Selective distribution à screening dealers and retailers to eliminate all but a few in any single area
Exclusive distribution à only one or a few dealers within a given area
Retailers and wholesalers may be unwilling to commit the time and money necessary to promote and
service a product unless the manufacturer guarantees them an exclusive territory (shield from competition
and main beneficiary of promotion efforts in geographic area)
Managing social relationships among channel members to achieve synergy
The basic social dimensions of channels are power, control, leadership, conflict, and partnering
Channel power à capacity of channel member to control or influence the behaviour of other channel
members
Channel control à when one member intentionally affects another member’s behaviour
To achieve control, a channel member assumes channel leadership and exercises authority and power
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Channel leader à channel member achieving control
Inequitable channel relationships often lead to channel conflict à clash of goals and methods among
distribution channel members
Channel members have conflicting goals (e.g., Apple and its distributors) or when channel members fail to
fulfill expectations of other channel members, or ideological differences and different perceptions of reality
Horizontal conflict à occurs among channel members on the same level (e.g., two wholesalers) à found
most often when manufacturers practise dual or multiple distributions
Vertical conflict à between different levels in a marketing channel
Channel partnering (channel cooperation) à joint effort of all channel members to create a supply chain
that serves customers and creates a competitive advantage
Channel partnering is vital if each member is to gain something from other members
By cooperating, retailers, wholesalers, manufacturers, and suppliers can speed up inventory replenishment,
improve customer service, and reduce the total costs of the marketing channel
Help supply chain managers create parallel flow of materials and information required to leverage supply
chain’s intellectual, material, and marketing resources
Supply chain management à coordinate and integrate activities performed by supply chain members into a
seamless process, from the source to the point of consumption
By visualizing the entire supply chain, supply chain managers can maximize strengths and efficiencies at
each level of the process to create a highly competitive, customer-driven supply system that is able to
respond immediately to changes in supply and demand
Products are being driven by customers, who expect to receive product configurations and services matched
to their unique needs
Pulling products into the marketplace and partnering with members of the supply chain to enhance
customer value
Supply chain management is both a communicator of customer demand that extends from the point of sale
all the way back to the supplier, and a physical flow process that engineers the timely and cost-effective
movement of goods through the entire supply pipeline
Supply chain management is both a key means of differentiation for a firm and a critical component in
marketing and corporate strategy
Companies that focus on supply chain management commonly report lower costs of inventory,
transportation, warehousing, and packaging; greater supply chain flexibility; improved customer services;
and higher revenues
Logistics à the process of strategically managing the efficient flow and storage of raw materials, inprocess inventory, and finished goods from point of origin to point of consumption
The supply chain consists of several interrelated and integrated logistical components: (1) sourcing and
procurement of raw materials and supplies, (2) production scheduling, (3) order processing, and (4)
inventory control
Logistics information system à connects logistics components of the supply chain
Supply chain team à orchestrates the movement of goods, services, and information from the source to the
consumer
Procurement à process of buying goods and services for use in the operations of an organization
Reduce the costs of raw materials and supplies
Mass customization (build-to-order) à products are not made until an order is placed by the customer;
products are made according to customer specifications (e.g., BMW)
Just-in-time production (JIT) à process that redefines and simplifies manufacturing by reducing inventory
levels and delivering raw materials just when they are needed on the production line
Supplying customers with products in just a few days or even a few hours
Order processing system à processes the requirements of the customer and sends the information into the
supply chain via the logistics information system
Monitoring flow of goods and flow of information as an order enters system
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Electronic data interchange (EDI) à replace paper documents that usually accompany business
transactions, such as purchase orders and invoices (before and after), with electronic transmission of the
needed information
Inventory control system à develops and maintains an adequate assortment of materials or products to
meet a manufacturer’s or a customer’s demands
Goal of inventory management is to keep inventory levels as low as possible while maintaining an adequate
supply of goods to meet customer demand
Halt production of existing products in favour of those gaining popularity with consumers
The more highly developed a nation is economically, the more specialized its channel type
One of the most critical global logistical issues for importers of any size is coping with the legalities of
trade in other countries à permits, licenses, and registrations needed to acquire
Transportation can be a major issue for companies dealing with global supply chains à poor infrastructure