CHAPTER 8

Distribution Channels and Logistics Management Objective: examining the nature and role of the channels in attracting and satisfying customers

The Nature of Distribution Channels • Distribution channels are intermediaries used by

the producers to bring their products to the market.

• Why? Because the use of intermediaries bring greater efficiency in making goods available to target markets. In other words, they match the supply with the demand.

• Most important benefit of using intermediaries is that they provide economies. They reduce the amount of work that must be done by both producers and consumers.

How a distributor reduces the number of channel transactions

• •

A. Number of contacts B. Number of contacts without a distributor with a distributor

Distribution Channel Functions • A distribution channel moves goods from producers to

consumers. Therefore they; • give information about the product and consumers • promote the offer • contact with the consumers • match the offer with the consumer’s needs • negotiate with the buyers about the price and offer • physically distribute (transport) the product • may finance the manufacturer to cover the costs of the channel

work therefore may take risk. • All these functions can be carried out by the manufacturers

but they then increases their costs and prices.

Number of Channel Levels • The number of intermediary levels used by the producers

vary; • a direct marketing channel; has no intermediary levels. Here, the

producer sells directly to consumers e.g. Avon sells their products door to door or through home parties.

• An indirect marketing channel; contains 1 (retailer) ,2 (wholesaler + retailer) or 3 (wholesaler + jobber + retailer) intermediary levels.

Channel Behavior • All channel firms should work together to be

successful. Each channel member is dependent on the others e.g. a Ford dealer (retailer) depends on the Ford Motor Company to design cars that meet consumer needs. In turn, Ford depends on the dealer to attract consumers, persuade them to buy Ford cars, and service cars after the sale. The Ford dealer also depends on the other dealers to create a good overall reputation for the entire distribution channel.

• Although channel members are dependent on one another, they often concentrate on their short-term benefits. Channel conflict occurs when disagreement among channel members on goals and roles - who should do what and for what rewards. • Horizontal conflict; occurs among firms at the same

level of the channel. In other words, one dealer may complain about the other.

• Vertical conflict; occurs among different levels of the same channel. In other words, the producer may complain about its dealers or vise versa.

• Conflict may be healthy or damaging for the channel. Healthy competition would encourage dealers to improve their services.

Vertical Marketing Systems • Vertical Marketing Systems (VMS) consists of

producers, wholesalers, and retailers acting as a unified system - that seek to maximize profits for the whole channel.

• Here, one channel members owns the others, has contracts with them or use so much power that they all cooperate.

• Such systems occur to control channel behavior and manage channel conflict.

• There are three major types of VMSs which has different means for setting up leadership and power in the channel; • Corporate VMS • Contractual VMS

• Wholesaler-sponsored voluntary chains • Retailer cooperatives • Franchise organizations

• Administered VMS

Types of Vertical Marketing Systems

CorporateVMS

Wholesaler-sponsoredvoluntarychains

Retailercooperatives

Franchiseorganizations

ContractualVMS

AdministeredVMS

Verticalmarketing

systems (VMS)

Corporate VMS

• In a corporate VMS, production and distribution stages are combined under single ownership, in order to manage cooperation and conflict management e.g. AT&T markets its products through its own chain of distributors.

Contractual VMS

• A contractual VMS consists of independent firms at different levels of production and distribution who join together through contracts to obtain more economies or sales impact than each could achieve alone.

• There are three types of contractual VMSs; • wholesaler-sponsored voluntary chains; are

contractual marketing systems in which wholesalers organize voluntary chains of independent retailers to help them compete with large corporate chain organizations.

• retailer cooperatives; are contractual marketing systems in which retailers organize a new, jointly owned business to carry on wholesaling and possibly production.

• franchise organizations; are contractual marketing systems in which a channel member, called a franchiser, links several stages in the production-distribution process. There are three forms of franchisees; • manufacturer-sponsored retailer franchise system e.g. Ford

licenses dealers to sell its cars. The dealers are independent businesspeople who agree to meet various conditions of sales and service.

• manufacturer-sponsored wholesaler franchisee system e.g. Coca-Cola licenses bottlers (wholesalers) in varius markets who buy Coca-Cola syrup concentrate and then carbonate, bottle and sell the finished product to retailers in local markets.

• service-firm-sponsored retailer franchise system in which a service firm e.g. Hertz, Avis, McDonald’s, Burger King, Holiday Inn, Ramada Inn licenses a system of retailers to bring its service to consumers.

Administered VMS

• A vertical marketing system that coordinates production and distribution stages, not through common ownership or contractual ties, but through the size and power of one of the parties e.g. Procter & Gamble, Kraft, Campbell Soup (or retailers like Wal-Mart, Toys `R` Us) are very strong that they can command special displays, shelf space, promotions and prices form the other parties.

Horizontal Marketing Systems

• Horizontal marketing systems is a channel arrangement in which two or more companies at one level join together to follow a new marketing opportunity.

• The major benefit is that companies combine their capital, production capabilities, marketing resources and therefore accomplish more.

• Companies might join forces with competitors or noncompetitors. They might work with each other on a temporary or permanent basis or they may create a separate company.

• E.g. Coca-Cola and Nestle formed a joint venture to market ready-to-drink coffee and tea worldwide. Coke provided worldwide experince in marketing and distribution beverages and Nestle contributed two established brand names - Nescafe and Nestea.

Hybrid Marketing Systems

• Hybrid marketing systems is also called multichannel distribution systems where the company uses several marketing channels (e.g. direct mail - telemarketing, retailers, distributors, dealers, own sales force) to sell its products to different customer segments.

• E.g. IBM uses its own sales force + IBM direct which is the catalog and telemarketing operation of IBM + independent IBM dealers + IBM dealers for business segments + large retailers like Wal-Mart.

• The major benefit is that when the company has large and complex markets (consumers) the company can expand its sales and market coverage by providing services to the specific needs of diverse customer segments.

• The disadvantage is that they are harder to control and generate more conflict.

Channel Design Decisions Designing a channel system include; • analyzing consumer service needs • setting the channel objectives and constraints • identifying the major channel alternatives • evaluating the major alternatives

Analyzing Consumer Service Needs

• Designing the distribution channel begins with determining what (e.g. convenient location to buy the products, immediate delivery, credit, repairs, long-term warranty…) the consumers want from the channel.

• The company must balance the consumer service needs with the feasibility and costs plus prices.

Setting the Channel Objectives and Constraints • The company must decide which segments to

target and the best channels to use in each segment. Here, the objective of the company is to minimize the total channel cost.

• Besides the target market, the company’s channel objectives are influenced by; • the nature of its product, e.g. perishable products

require more direct marketing to avoid delays and too much handling.

• company characteristics, e.g. the company’s size and financial situation determine which functions it can

handle, how many channels it can use, which transportation can be used…

• characteristics of intermediaries, intermediaries differ in their abilities to handle promotions, customer contact, storage and credit e.g. the company’s own sales force is more intense in selling.

• competitors’ channel, some companies may prefer to compete in or near the same outlets that carry competitors’ products, some may not e.g. Burger King wants to locate near McDonald’s

• environmental factors, economic conditions and legal constraints affect channel design decisions e.g. in a depressed economy, producers want to distribute their goods in the most economical way, using shorter channels.

Identifying Major Alternatives

After the channel objective have been determined, the company should identify its major channel alternatives in terms of (1) types of intermediaries, (2) number of intermediaries, and (3) the responsibilities of each channel member.

• Types of Intermediaries A firm should identify the types of channel

members that are available to carry out its channel work.

• Number of Marketing Intermediaries Companies must also determine the number of

channel members to use. There are three strategies; • intensive distribution; is a strategy in which companies

stock their products in as many outlets as possible. Convenience products and common raw materials must be available where and when consumers want them e.g. toothpaste, candy… Procter & Gamble, Coca-Cola distributes its products in this way. Here, the advantages are maximum brand exposure and consumer convenience.

• exclusive distribution; is a strategy (opposite to intensive distribution) in which the producer gives only a limited number of dealers the exclusive right to

• distribute its products in their territories. Often found in new automobiles and prestige women’s clothing e.g. Rolls-Royce. Here, the advantages are establishing image and getting higher markups.

• selective distribution; (is between intensive and exclusive distribution) is a strategy in which the company uses more than one but fewer than all of the intermediaries. Most television, furniture brands are distributed in this way. Here, the advantages are; it provides good market coverage with more control and less cost than intensive distribution + it does not spread its efforts over many outlets as in intensive distribution.

• Responsibilities of Channel Members The producer and intermediaries must agree on

price policies, discounts, territories, and services

to be performed by each party. E.g. McDonald’s provides franchisees with promotional support, training, management assistance, in turn, franchisees must meet company standards for physical facilities, buy specific food products...

Evaluating the Major Alternatives

In order to select the channel that satisfy the company objectives in the best way, each alternative should be evaluated by using;

• economic criteria; the company compares the projected profits and costs of each channel.

• control issues; the company prefers to keep the channel where it has the highest control.

• adaptive criteria; the company prefers to keep the channel which is the most flexible to the changing marketing environment.

Designing International Distribution Channels • Channel systems can vary from country to country. Each

country may have its own unique distribution system. International marketers have to adapt their channel strategies to the existing structures within each country.

Physical Distribution and Logistics Management • Companies must decide on the best way to store, handle and

move their products and services so that they are available to customers in the right amount, at the right time, and in the right place.

• Logistics effectiveness has a major impact on (1) customer satisfaction and (2) company costs (15% of the product’s price).

Nature and Importance of Physical Distribution and Marketing Logistics • Physical distribution or marketing logistics

includes planning, implementation, and controlling the physical flow of materials, final goods, and related information from points of origin to points of consumption to meet customer requirements at a profit.

• Market logistic thinking starts with the marketplace and works backwards to the factory. Logistics deal with (1) outbound distribution - moving products from the factory to customers,

• and (2) inbound distribution - moving products and materials from suppliers to the factory.

• The logistics manager’s task is to coordinate the whole-channel physical distribution system - the activities of suppliers, purchasing agents, marketers, channel members and customers.

Goals of the Logistics System

• The goal of the marketing logistics system should be to provide a targeted level of customer service at the least cost.

• Here, the objective is to maximize profits, not the sales. So, the company must compare the benefits of providing higher levels of service with the costs. Some companies may offer less services and charge less, but others may offer more services than its competitors and charge higher prices to cover their costs.

Major Logistics Functions

The major logistics functions include; • order processing • warehousing • inventory management • transportation

Order Processing

• Orders can be submitted in many ways; by mail, telephone, through salespeople, or via computer.

• Order processing systems prepare invoices and order information. The warehouse receives instructions to pack and ship the ordered items. And bills send out.

Warehousing

• Every company stores its goods while they wait to be sold.

• A company must decide on (1) how many and (2) what types of warehouses it needs and (3) where they will be located.

• The company might own private warehouses or rent space in public warehouses or both.

• Both has advantages and disadvantages. Owning a private warehouse; • bring more control

• ties up capital • is less flexible if locations change

On the other hand, public warehouses; • charge for rented space • provide additional services for inspecting, packaging,

shipping and invoicing goods but at a cost • offer wide choice of locations and warehouse types

• Basic types of warehouses are; (1) storage warehouses and (2) distribution centers. • storage warehouses store goods for moderate to long

periods • distribution centers are designed to move goods rather

than just store them. They are large and automated warehouses desinged to receive goods from suppliers, take orders and deliver goods to customers.

Inventory

• Inventory decisions involve (1) when to order and (2) how much to order.

• In deciding when to order, the company must think of the risks of running out of stock and costs of carrying too much.

• In deciding how much to order, the company must think of order-processing costs and inventory-carrying costs.

• Just-in-time logistic systems are used by some companies in which the producers carry only small inventories only enough for a few days of operations. Such systems result in savings in inventory carrying and handling costs.

Transportation

• The choice of transportation carriers affects (1) the pricing of products, (2) delivery performance, (3) condition of the goods when they arrive - all affect customer satisfaction.

• In shipping goods, there are five transportation modes: rail, water, truck, pipeline, and air. • Rail; is the most cost-effective mode for shipping large

amounts products e.g. coal, farm and forest products over long distances.

• Truck; trucks are very flexible in their routing and time scheduling. They can move goods door to door, saving

the need to transfer goods from truck to rail and back again. They are efficient for short hauls of high-value products. They can offer faster service.

• Water; the cost is very low for shipping bulky, low-value, nonperishable products e.g. coal, oil, metallic ores. It is the slowest mode and affected by the weather.

• Pipeline; are specialized means of shipping petroleum, natural gas and chemicals from sources to markets. It costs less than rail but more than water.

• Air; costs higher than rail and truck but ideal when speed is needed and distant markets have to be reached. Products are perishables (fresh fish, cut flowers), high-value, low-bulk items (technical instruments, jewellery).

• In choosing a transportation mode, shippers consider five criteria; (1) speed - door to door delivery time, (2) meeting schedules on time, (3) ability to handle various products, (4) number of geographic points served, (5) cost per tone-mile.