CHAPTER 13: DISTRIBUTION AND PRICING
Right Product, Right Person, Right Place, Right Price
DISTRIBUTION: GETTING YOUR
PRODUCT TO YOUR CUSTOMER
Distribution is a key element of the marketing mix
 Where should the product be sold?
 How will it get to the location(s) from the factory?
Producer
Wholesaler
Consumer
Channel of Distribution –
the network of organizations and processes
that links producers to consumers
DISTRIBUTING DIRECTLY TO THE CONSUMER
Producer
Consumer
Direct Channel –
Distribution process that links the
producer and the customer with
no intermediaries.
For example, Dell
CHANNEL INTERMEDIARIES
Producer
Wholesaler
Consumer
Channel Intermediaries – informally called
middlemen. They facilitate the movement of
products from the producer to the consumer.
THE ROLE OF DISTRIBUTORS: ADDING
VALUE (Utility)
Form Utility:
Turning inputs into finished goods
Time Utility:
Providing products at the right time
Place Utility:
Offering products at the right place
Ownership Utility:
Providing credit, cashing checking, delivering
Pay Pal
products
Information Utility:
Offering helpful information
Service Utility:
Providing fast, friendly, personalized service
Jamba Juice
Vending Machines
ATM’s, Gas Stations
Home Depot Service
Makeover stations
DISTRIBUTORS: STREAMLINING
CONSUMER TRANSACTIONS
THE MEMBERS OF THE CHANNEL
Wholesalers –
distributors that buy
products from producers
and sell them to other
businesses or
non-final users.
Retailers – the
distributors that sell
products directly to
the ultimate users
WHOLESALERS: SORTING OUT THE OPTIONS

Merchant Wholesalers
 Take
legal possession/title
 Full-service
 Limited Service
 Drop
Shippers
 Cash and Carry
 Truck Jobbers

Agents/Brokers
 Don’t
take title of the goods
RETAILERS: THE CONSUMER CONNECTION


Store Retailers
Non-Store Retailers
 Online
eBay, Amazon
 Direct
Catalogs, telemarketing
Response
 Direct Selling
 Vending
Door-to-door
Best Buy at airports
DISTRIBUTION STRATEGY
EXCLUSIVE DISTRIBUTION
Placing your products
with only one retail
outlet in a given area
Tiffany, Bentley automobiles
SELECTIVE DISTRIBUTION
Placing your products
with “preferred
retailers”
Paintball equipment
INTENSIVE DISTRIBUTION
Price / Product
Placing your product
in as many stores as
possible
Starbucks, People magazine
MULTICHANNEL RETAILING
Store
Retailers are
encouraging consumers
to buy through multiple
channels
Online
PHYSICAL DISTRIBUTION: PLANES,
TRAINS, AND MUCH, MUCH MORE
Determining the best distribution channels for your
product is only half the distribution strategy.
Supply Chain Management –
planning and coordinating the
movement of products along
the supply chain
Logistics – focuses on
the tactics involved in
moving the products
How will the product flow through the channel
from producer to consumer?
ELEMENTS OF THE SUPPLY CHAIN
SUPPLY CHAIN MANAGEMENT
DECISIONS







Warehousing
Materials Handling
Inventory Control
Order Processing
Customer Service
Transportation
Security
TRANSPORTATION DECISIONS
MODES OF TRANSPORTATION:
Mode
Percentage
of U.S.
Volume
Speed
On-Time
Dependability
Flexibility
in
Handling
Frequency
of
Shipments
Cost
Availability
Rail
40.2%
Medium
Slow
Medium
Medium
Low
Extensive
Truck
40.0%
High
Fast
High
Medium
High
Most
Extensive
Ship
9.0%
Lowest
Slowest
Lowest
Highest
Lowest
Limited
Plane
0.2%
Highest
Fastest
Medium
Low
Medium
Medium
Pipeline
**
Low
Slow
Highest
Lowest
Highest
Most
Limited
PRICING : A HIGH STAKES GAME


Pricing plays a key role in the demand for
products
Price is a tough variable
 Legal
constraints
 Intermediary pricing

Stable pricing is not the norm
 Prices
must constantly be evaluated
PRICING OBJECTIVES AND STRATEGIES

Building Profitability

Matching the Competition

Creating Prestige


Skimming Pricing
Boosting Volume
 Penetration
Pricing
 Every-day-low Pricing
 High/Low Pricing
 Loss Leader Pricing
“SLIPPERY FINGER” ONLINE PRICING GOOFS





Free flights from Los Angeles to Fiji.
Round-trip tickets from San Jose, California, to
Paris for $27.98.
$1,049 televisions wrongly listed for $99.99 on
Amazon.
$588 Hitachi monitors mistakenly priced at $164.
$379 Axim X3i PDAs wrongly priced at $79 on
Dell’s site.
PRICING IN PRACTICE: A REAL WORLD
APPROACH
Total fixed cost (FC)
Breakeven Point (BP) =
Price/Unit (P) – Variable cost/unit (VC)
Breakeven analysis –
the process of determining the number of units that must be sold to cover costs.
USING BREAKEVEN ANALYSIS
Businesses make decisions to adjust the product
price and/or costs.
 Raise
prices
 Decrease
variable costs
Outsource labor, use cheaper components?
 Decrease
fixed costs
Move your plant to Mexico, advertise less?
FIXED MARGIN PRICING
 Profit Margin – the gap
between cost and the price
per product.

Cost-Based Pricing

Demand-Based Pricing
CONSUMER PRICING PERCEPTIONS: THE
STRATEGIC WILD CARD


Consumer price perceptions can defy logic!
The link between price and perceived quality can
be powerful
 Consumers

will use price as a quality indicator
Does odd pricing like $196 or $199 always mean
a bargain?
PSYCHOLOGICAL PRICING
CHAPTER 18: OPERATIONS
MANAGEMENT
Putting It All Together
OPERATIONS MANAGEMENT: IT ISN’T
GLAMOROUS, BUT IT MATTERS….
Operations Management – planning, organizing, leading
and controlling all the activities in creating value by
producing goods and services and distributing them to
customers


Good Operations Management:

Most efficient and effective processes

Produce the right goods and services

Produce the right quantities

Distribute products to the right customers at the right time
EFFECTIVENESS VS. EFFICIENCY
Effectiveness –
completing tasks
and producing
products that
create the
greatest value.
Efficiency –
producing output
or achieving
a goal at the
lowest cost.
“There is nothing so useless as doing efficiently that which should not be
done at all”
- Peter Drucker
GOODS VS. SERVICES
GOODS
SERVICES
Tangible, physical form, can be
touched, seen, handled
Intangible, they can be
“experienced”, no physical form
Can be stored and inventoried
Must be consumed when they are
produced
Can be shipped
Must be consumed, where they are
provided
Are produced independently of the Often require customer involvement
consumer
Can measure some aspects of
quality
Quality is based on customer
perceptions
WHAT DO OPERATIONS MANAGERS DO?


Facility Location
Process Selection and Facility
Layout

Inventory Control

Scheduling

Quality
FACILITY LOCATION
General Location Factors
Examples of Specific Considerations
Adequacy of utilities
Is the supply of electricity reliable? Is clean water
available?
Land
Is adequate land available for a facility? How
much does the land cost?
Labor market conditions
Are workers with the right skills available? How
expensive is labor?
Transportation factors
Is the location near customers and suppliers? Is
appropriate transportation nearby?
Quality of life
What is the climate like? Are adequate health
care facilities available?
Legal and political
environment
Does the local government support new business?
What are the local taxes, fees, and regulations?
GOING OVERSEAS



Low-wage labor is a key reason firms focus
overseas but, low wages do not always translate
into low cost
There are a variety of opportunities in rapidly
growing foreign markets
Key to balance advantages with drawbacks:
Different laws and customs
 Inadequate infrastructure
 Inexperienced workers
 Political instability

PROCESS SELECTION AND FACILITY LAYOUT

Flow Shops
Produce Large Batches
 Standardized Products
 Specialized Machinery
 Standardized Tasks
 Assembly Line is a Flow Shop Process


Job Shops
Produce Small Batches
 Variety of Products
 General-purpose Machinery
 Flexible Processes

TECHNOLOGY OF OPERATIONS
AUTOMATION: LET THE MACHINES DO IT
Automation – replacing
human operations and
control of machinery
and equipment with some
form of programmed control.
Robot – a
programmable machine that
is capable of manipulating
materials in order
to perform tasks.
ROBOTS
• Robots are well suited for
dangerous, tedious, dirty
and physically demanding
tasks.
• Robots don’t get tired
• Robots are flexible
INVENTORY CONTROL: DON’T JUST SIT THERE

Why hold inventories…
Smooth out production schedules
 Meet demand increases
 Reduce switching costs
 Compensate for forecast errors


Why not…
Unsold inventory ties up funds
 Inventory must be warehoused and managed
 Risk of losses due to spoilage, obsolescence and pilferage

INVENTORY CONTROL
• Complete inventory and stock management
• Quickly create invoices
• Maintain a client database
• Create Picking Lists and Receipts
• Stock balance and reorder management
• Import existing inventory
• Barcode reader support
• Warranty returns
• Group inventory items
• Pre-defined and custom reports available
REDUCING INVESTMENT IN INVENTORY: JUSTIN-TIME TO THE RESCUE
Produce goods and services to meet actual
demand. Minimize inventories
at all stages of the supply chain through
coordination.
MANAGING PROJECTS


Production of some products are projects
Projects are usually complex and expensive
 New
House/Building
 Filming a Movie

Managers use Gantt charts and critical path method
to manage projects
PROJECT SCHEDULING
Activity


Immediate
Predecessor
Time
(Weeks)
None
2
B. Determine site for Arena
A
5
Operations Managers must
manage and schedule
projects
A. Survey of Needs
C. Preliminary Design
Developed
A
5
Scheduling starts with
identifying the required
activities, the time required
and the order in which they
must happen
D. Obtain Major Donation
for Funding
C
6
E. Obtain Board Approval
B,D
4
F. Select Architect
E
3
G. Establish Budget
E
2
H. Obtain Remaining
Financing
F,G
10
I. Finalize Design
G
6
J. Hire Contractor
H,J
2
GANTT CHART
CRITICAL PATH METHOD
The essential technique for using CPM is to construct a model of the project
that includes the following:
• A list of all activities required to complete the project
• The time (duration) that each activity will take to completion
• The dependencies between the activities.
MANAGING SUPPLY CHAINS

Supply chains can be
complex
 Wide
range of functions
 Involve
many firms
 Heavy
use of technology
 RFID
Chips
 Internet
has provided great
tools for supply chain
management

TRADE-OFF BETWEEN VERTICAL INTEGRATION
AND OUTSOURCING

Vertical Integration
 Gain
control over
supply chain
 Begin producing its
own parts
 Buying suppliers

Outsourcing
 Use
outside firm for
producing supplies
 Focus on key
production areas
 Cost savings
The trend has been to rely more on outsourcing which has become a
controversial issue.
ENTERPRISE RESOURCE PLANNING
(ERP) : CREATING ONE BIG SYSTEM



The goal of ERP is to integrate the flow of
information
ERP systems can be costly and challenging to
implement
Most firms that complete implementation of ERP
systems, report being satisfied with the results
FOCUS ON QUALITY




Quality improves effectiveness and
efficiency
Quality helps achieve competitive
advantage
Lower costs, increases value
Poor quality costs
DEMING CHAIN REACTION
Improve Quality
W. Edwards Deming,
viewed as the father
of the quality
movement, first
proposed the
relationship between
quality and business in
the early 1950s.
Costs decrease because of less rework,
fewer mistakes, fewer delays and snags,
and better use of time and materials
Productivity Improves
Capture the market with better
quality and lower price
Stay in business
Provide jobs and more jobs
HOW AMERICAN FIRMS RESPONDED
TO THE QUALITY CHALLENGE

A broad concept of quality: Total Quality
Management:
 Customer
Focus
 Build quality throughout the organization
 Empowerment of employees
 Focus on prevention of errors
 Long-run commitment to continuous improvement
SIX SIGMA


Focus on quality improvement and commitment
Standard is no more that one error (defect) per
3.4 million opportunities

Requires a high level of expertise

Focus on employee training
INTERNATIONAL ORGANIZATION FOR
STANDARDIZATION



Founded in 1947
Network of national standards institutes in 150
nations
ISO 9000 Certification

Generic quality standards

Updated and modified, latest version is ISO 9000:2005

Environmental management focused standards: ISO
14000
THE BALDRIGE NATIONAL QUALITY PROGRAM

Created by Congress in 1987 to
encourage global competition

Participating firms are extensively
evaluated

Detailed reports of company
strengths and weaknesses
The 2009 Baldrige Award recipients include:
 Honeywell Federal Manufacturing & Technologies, KC, MO, Manufacturing Winner
 MidwayUSA, Columbia, MO, Small Business Winner
 AtlantiCare, Egg Harbor Township, NJ, Healthcare Winner
 Heartland Health, St. Joseph, MO, Healthcare Winner