Chapter 14:
“Value Chain Management
and Logistics”
Joel R. Evans & Barry Berman
Marketing, 10e: Marketing in the 21st Century
Copyright Atomic Dog Publishing, 2007
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
Copyright Atomic Dog Publishing, 2007
The Distribution Process
Supplier/
Manufacturer
Goals
Value Chain
Distribution
Intermediary
Goals
Total Delivered
Product
Value Delivery
Chain
Customer
Goals
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Level of
Satisfaction
Key Points of the Distribution Process
• 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.
Goals
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Satisfaction
Channel Functions
Distribution
Marketing
Research
Buying
Promotion
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Pricing
Functions
Performed in
a Channel
of Distribution
Product
Planning
Customer
Services
Distribution and the Web
The Internet affects marketing functions and
logistics by:
 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.
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Factors to Consider in Selecting a
Distribution Channel
• The Consumer
• The Company
• The Product
• The Competition
• Distribution Channels
• Legalities
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A Direct Distribution Channel
Manufacturer
200,000
Customers
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In this direct channel, an
umbrella manufacturer
sells directly to final
consumers. It makes
200,000 separate
transactions, one for
each customer.
An Indirect Distribution Channel
Manufacturer
Wholesaler
Wholesaler
Wholesaler
Wholesaler
(East U.S.)
(South U.S.)
(North U.S.)
(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
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In this indirect
channel, an
umbrella maker
has only 4
transactions. It
sells to regional
wholesalers,
which resell to
50 retailers
each. The
retailers each
sell to 1,000
final consumers.
Typical Indirect Channels of Distribution
1
2
Manufacturer/
Service Provider
Manufacturer/
Service Provider
Retailer
Wholesaler
Final Consumer
Retailer
Final
Consumer
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3
Manufacturer/
Service Provider
Merchant Wholesaler
or Sales Agent
Organizational
Consumer
4
Manufacturer/
Service Provider
Merchant Wholesaler
or Sales Agent
Distributor
Organizational
Consumer
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.
Copyright Atomic Dog Publishing, 2007
International Distribution Planning
International distribution requires
additional considerations and planning:
 The channel length may depend on a
nation’s stage of economic
development.
 Less-developed and developing nations
tend to use shorter, more direct
channels than industrialized ones.
 Limited transportation and
communication networks foster local
shopping.
 Cultural norms always affect channel
member interactions.
Copyright Atomic Dog Publishing, 2007
Logistics
• Logistics, also known as physical distribution,
encompasses the activities concerned with
efficiently delivering raw materials, parts, semifinished items, and finished products to
designated places.
• It includes customer service, shipping,
warehousing, inventory control, trucking
operations, packaging, receiving, materials
handling, and plant, warehouse, and store
location planning.
• It affects costs, the value of customer service,
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.
 Product variations (color, size, features, styles)
may impose a burden on distribution facilities.
 Logistics planning is related to overall channel
strategy.
 Promotion campaigns must realistically
coordinate with potential logistics delivery.
 Pricing may be the firm’s differential advantage
based on superior logistical service.
Copyright Atomic Dog Publishing, 2007
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
Sufficient
goods in stock
Orders shipped
to individual
customers
Goods stored
until enough
orders are
placed
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Goods packaged,
sorted, tagged,
and sent to local
warehouse
Production
scheduled
An Illustration of the Total-Cost Approach
in Distribution
$100,000
Carrier
Air
Rail
Truck
Annual
freight
costs
$1.6 mill.
$1.5 mill
$300,000
$500,00
$800,000
$300,000
$500,000
$200,000
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$1.4mil.
$1.2 mil.
Costs
Annual
warehousing
costs
Annual costs
of lost sales
due to being
out of stock
What Happens When a Firm Has Stock
Shortages
When a firm runs
out of stock,
customers can
Wait until
merchandise is
available.
Purchase a
substitute
product from the
same seller.
Most Desirable Action
Copyright Atomic Dog Publishing, 2007
Switch to a new
seller while
merchandise is not
available.
Permanently
switch to a new
seller for all
purchases.
Least Desirable Action
5 Transportation Forms for Shipping
Next Day, Inc.
 Railroads carry heavy, bulky items over long distances but have




high fixed costs due to facility investments.
Motor Carriers usually transport small shipments short distances
and handle most U.S. shipments 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 low costs.
Copyright Atomic Dog Publishing, 2007
Inventory Management
• Good inventory management matches the quantity of
goods kept in inventory with customer demand.
• To improve efficiency, many firms use a just-in-time
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 that average inventory on hand is sold.
• A reorder point depends on lead time, usage, 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, 2007
Chapter Summary
• This chapter discusses the role of the value chain
and the value delivery chain in distribution.
• 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 distribution intermediary contracts,
cooperation and conflict in a distribution channel,
special aspects of a distribution channel for
industrial products, and international distribution.
• It examines logistics and shows its importance.
• It discusses transportation alternatives and
inventory management issues.
Copyright Atomic Dog Publishing, 2007