12 Principles of Marketing Marketing Channels and Supply Chain Management Learning Objectives After studying this chapter, you should be able to: 1. Explain how companies use marketing channels and discuss the functions these channels perform 2. Discuss how channel members interact and how they organize to perform the work of the channel 3. Identify the major channel alternatives open to a company 4. Explain how companies select, motivate, and evaluate channel members 5. Discuss the nature and importance of marketing logistics and integrated supply chain management 12-2 Chapter Outline 1. Supply Chains and the Value Delivery Network 2. The Nature and Importance of Marketing Channels 3. Channel Behavior and Organization 4. Channel Design Decisions 5. Channel Management Decisions 6. Public Policy and Distribution Decisions 7. Marketing Logistics and Supply Chain Management 12-3 Supply Chains and the Value Delivery Network Supply Chain Partners Upstream partners include raw material suppliers, components, parts, information, finances, and expertise to create a product or service Downstream partners include the marketing channels or distribution channels that look toward the customer 12-4 Supply Chains and the Value Delivery Network Supply Chain Views Supply chain “make and sell” view includes the firm’s raw materials, productive inputs, and factory capacity Demand chain “sense and respond” view suggests that planning starts with the needs of the target customer and the firm responds to these needs by organizing a chain of resources and activities with the goal of creating customer value 12-5 Supply Chains and the Value Delivery Network Value Delivery Network The value delivery network is the firm’s suppliers, distributors, and ultimately customers who partner with each other to improve the performance of the entire system 12-6 Supply Chains and the Value Delivery Network Marketing Channel Questions • What is the nature of marketing channels and why are they important? • How do channel firms interact and organize to do the work of the channel? • What role do physical distribution and supply chain management play in attracting customers? 12-7 The Nature and Importance of Marketing Channels Marketing Channel Defined Marketing channel is a set of independent organizations that help make a product or service available for use or consumption by the consumer or business users 12-8 The Nature and Importance of Marketing Channels How Channel Members Add Value Channel members add value by bridging the major time, place, and possession gaps that separate goods and services from those who would use them 12-9 The Nature and Importance of Marketing Channels How Channel Members Add Value Producers use intermediaries because they create greater efficiency in making goods available to target markets. 12-10 The Nature and Importance of Marketing Channels How Channel Members Add Value Intermediaries offer the firm more than it can achieve on its own through their contacts, experience, specialization, and scale of operations 12-11 The Nature and Importance of Marketing Channels How Channel Members Add Value From an economic view, intermediaries transform the assortment of products into assortments wanted by consumers 12-12 The Nature and Importance of Marketing Channels How Channel Members Add Value Information refers to the gathering and distributing research and intelligence information about actors and forces in the marketing environment needed for planning and aiding exchange Promotion refers to the development and spreading persuasive communications about an offer Contacts refers to finding and communicating with prospective buyers 12-13 The Nature and Importance of Marketing Channels How Channel Members Add Value Matching refers to shaping and fitting the offer to the buyer’s needs, including activities such as manufacturing, grading, assembling, and packaging Negotiation refers to reaching an agreement on price and other terms of the offer so that ownership or possession can be transferred 12-14 The Nature and Importance of Marketing Channels How Channel Members Add Value Physical distribution refers to transporting and storing goods Financing refers to acquiring and using funds to cover the costs or carrying out the channel work Risk taking refers to assuming the risks of carrying out the channel work 12-15 The Nature and Importance of Marketing Channels Number of Channel Members Channel level refers to each layer of marketing intermediaries that performs some work in bringing the product and its ownership closer to the final buyer Direct marketing channel has no intermediary levels; the company sells directly to consumers Indirect marketing channels contain one or more intermediaries 12-16 The Nature and Importance of Marketing Channels Number of Channel Members Connected by types of flows: • Physical flow of products • Flow of ownership • Payment flow • Information flow • Promotion flow 12-17 Channel Behavior and Organization Channel Behavior Marketing channel consists of firms that have partnered for their common good with each member playing a specialized role 12-18 Channel Behavior and Organization Channel Behavior Channel conflict refers to disagreement over goals, roles, and rewards by channel members • Horizontal conflict • Vertical conflict 12-19 Channel Behavior and Organization Channel Behavior Horizontal conflict is conflict among members at the same channel level Vertical conflict is conflict between different levels of the same channel 12-20 Channel Behavior and Organization Conventional Distribution Systems Conventional distribution systems consist of one or more independent producers, wholesalers, and retailers. Each seeks to maximize its own profits and there is little control over the other members and no formal means for assigning roles and resolving conflict. 12-21 Channel Behavior and Organization Vertical Marketing Systems Vertical marketing systems (VMS) provide channel leadership and consist of producers, wholesalers, and retailers acting as a unified system and consist of: • Corporate marketing systems • Contractual marketing systems • Administered marketing systems 12-22 Channel Behavior and Organization Vertical Marketing Systems Corporate vertical marketing system integrates successive stages of production and distribution under single ownership 12-23 Channel Behavior and Organization Vertical Marketing Systems Contractual vertical marketing system 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. The most common form is the franchise organization. 12-24 Channel Behavior and Organization Vertical Marketing Systems Franchise organization links several stages in the production distribution process • Manufacturer-sponsored retailer franchise system • Manufacturer-sponsored wholesaler franchise system • Service firm-sponsored retailer franchise system 12-25 Channel Behavior and Organization Vertical Marketing Systems Administered vertical marketing system has a few dominant channel members without common ownership. Leadership comes from size and power. 12-26 Channel Behavior and Organization Horizontal Marketing Systems Horizontal marketing systems include two or more companies at one level that join together to follow a new marketing opportunity. Companies combine financial, production, or marketing resources to accomplish more than any one company could alone. 12-27 Channel Behavior and Organization Multichannel Distribution Systems Hybrid Marketing Channels Hybrid marketing channels exist when a single firm sets up two or more marketing channels to reach one or more customer segments 12-28 Channel Behavior and Organization Multichannel Distribution Systems Hybrid Marketing Channels • Advantages • Increased sales and market coverage • New opportunities to tailor products and services to specific needs of diverse customer segments • Challenges • Hard to control • Create channel conflict 12-29 Channel Behavior and Organization Changing Channel Organization Disintermediation occurs when product or service producers cut out intermediaries and go directly to final buyers, or when radically new types of channel intermediaries displace traditional ones 12-30 Channel Design Decisions Analyzing Consumer Needs Designing a channel system requires: • Analyzing consumer needs • Setting channel objectives • Identifying major channel alternatives • Evaluation 12-31 Channel Design Decisions Analyzing Consumer Needs Designing a marketing channel starts with finding out what target customers want from the channel 12-32 Channel Design Decisions Setting Channel Objectives In terms of: • Targeted levels of customer service • What segments to serve • Best channels to sue • Minimizing the cost of meeting customer service requirements 12-33 Channel Design Decisions Setting Channel Objectives Objectives are influenced by: • Nature of the company • Marketing intermediaries • Competitors • Environment 12-34 Channel Design Decisions Identifying Major Alternatives In terms of: • Types of intermediaries • Number of intermediaries • Responsibilities of each channel member 12-35 Channel Design Decisions Identifying Major Alternatives Types of intermediaries refers to channel members available to carry out channel work. Examples include: • Company sales force • Manufacturer’s agency • Industrial distributors 12-36 Channel Design Decisions Identifying Major Alternatives Company sales force strategies • Expand direct sales force • Assign outside salespeople to territories • Develop a separate sales force • Telesales 12-37 Channel Design Decisions Identifying Major Alternatives Manufacturer’s agencies are independent firms whose sales forces handle related products from many companies in different regions or industries 12-38 Channel Design Decisions Identifying Major Alternatives Industrial distributors • Find distributors in different regions or industries • Exclusive distribution • Margin opportunities • Training • Support 12-39 Channel Design Decisions Identifying Major Alternatives Number of marketing intermediaries to use at each level • Strategies: • Intensive distribution • Exclusive distribution • Selective distribution 12-40 Channel Design Decisions Identifying Major Alternatives Intensive distribution is a strategy used by producers of convenience products and common raw materials in which they stock their products in as many outlets as possible 12-41 Channel Design Decisions Identifying Major Alternatives Exclusive distribution is a strategy in which the producer gives only a limited number of dealers the exclusive right to distribute its products in their territories • Luxury automobiles • High-end apparel 12-42 Channel Design Decisions Identifying Major Alternatives Selective distribution is a strategy when a producer uses more than one but fewer than all of the intermediaries willing to carry the producer’s products • Televisions • Appliances 12-43 Channel Design Decisions Responsibilities of Channel Members Producers and intermediaries need to agree on: • Price policies • Conditions of sale • Territorial rights • Services provided by each party 12-44 Channel Design Decisions Evaluating the Major Alternatives Each alternative should be evaluated against: • Economic criteria • Control • Adaptive criteria 12-45 Channel Design Decisions Evaluating the Major Alternatives Economic criteria compares the likely sales costs and profitability of different channel members Control refers to channel members’ control over the marketing of the product Adaptive criteria refers to the ability to remain flexible to adapt to environmental changes 12-46 Channel Design Decisions Designing International Distribution Channels Channel systems can vary from country to country Must be able to adapt channel strategies to the existing structures within each country 12-47 Channel Management Decisions Channel management involves: • Selecting channel members • Managing channel members • Motivating channel members • Evaluating channel members 12-48 Channel Management Decisions Selecting Channel Members Selecting channel members involves determining the characteristics that distinguish the better ones by evaluating channel members • Years in business • Lines carried • Profit record 12-49 Channel Management Decisions Selecting Channel Members Selecting intermediaries that are sales agents involves evaluating: • Number and character of other lines carried • Size and quality of sales force 12-50 Channel Management Decisions Selecting Channel Members Selecting intermediaries that are retail stores that want exclusive or selective distribution involves evaluating: • Store’s customers • Locations • Growth potential 12-51 Channel Management Decisions Managing and Motivating Channel Members Partner relationship management (PRM) and supply chain management (SCM) software are used to forge long-term partnerships with channel members and to recruit, train, organize, manage, motivate, and evaluate channel members 12-52 Public Policy and Distribution Decisions Exclusive distribution is when the seller allows only certain outlets to carry its products Exclusive dealing is when the seller requires that the sellers not handle competitor’s products 12-53 Public Policy and Distribution Decisions Benefits of exclusive distribution include: • Seller obtains more loyal and dependable dealers • Dealers obtain a steady and stronger seller support 12-54 Public Policy and Distribution Decisions Exclusive territorial agreement refers to an agreement where the producer may agree not to sell to other dealers in a given area or the buyer may agree to sell only in its own territory Tying agreements, while not necessarily illegal as long as they do not substantially lessen competition, are agreements where there is a strong brand that producers sometimes sell to dealers only if the dealers will take some or all of the rest of the line 12-55 Marketing Logistics and Supply Chain Management • Nature and importance of logistics management in the supply chain • Goals of the logistics system • Major logistics functions • Need for integrated supply chain management 12-56 Marketing Logistics and Supply Chain Management Nature and Importance of Marketing Logistics Marketing logistics (physical distribution) involves planning, implementing, and controlling the physical flow of goods, services, and related information from points of origin to points of consumption to meet consumer requirements at a profit 12-57 Marketing Logistics and Supply Chain Management Nature and Importance of Marketing Logistics Marketing logistics involves: • Outbound distribution: Moving products from the factory to resellers and consumers • Inbound distribution: Moving products and materials from suppliers to the factory • Reverse distribution: Moving broken, unwanted, or excess products returned by consumers or resellers 12-58 Marketing Logistics and Supply Chain Management Nature and Importance of Marketing Logistics Supply chain management is the process of managing upstream and downstream value- added flows of materials, final goods, and related information among suppliers, the company, resellers, and final consumers 12-59 Marketing Logistics and Supply Chain Management Nature and Importance of Marketing Logistics Importance of logistics • Competitive advantage by giving customers better service at lower prices • Cost savings to the company and its customers • Product variety requires improved logistics • Information technology has created opportunities for distribution efficiency 12-60 Marketing Logistics and Supply Chain Management Goals of the Logistics System To provide a targeted level of customer service at the least cost with the objective to maximize profit, not sales 12-61 Marketing Logistics and Supply Chain Management Major Logistics Functions • Warehousing • Inventory management • Transportation • Logistics information management 12-62 Marketing Logistics and Supply Chain Management Major Logistics Functions Warehousing is the storage function that overcomes differences in need quantities and timing, ensuring that the products are available when customers are ready to buy them • Storage warehouses • Distribution centers 12-63 Marketing Logistics and Supply Chain Management Major Logistics Functions Storage warehouses are designed to store goods, not move them Distribution centers are designed to move goods, not store them 12-64 Marketing Logistics and Supply Chain Management Major Logistics Functions Inventory management balances carrying too little and too much inventory • Just-in-time logistics systems • RFID 12-65 Marketing Logistics and Supply Chain Management Major Logistics Functions Just-in-time logistics systems allow producers and retailers to carry small amounts of inventories of parts or merchandise RFID (radio frequency identification devices) are small transmitter chips embedded in or placed on products or packages to provide greater inventory control 12-66 Marketing Logistics and Supply Chain Management Major Logistics Functions Transportation affects the pricing of products, delivery performance, and condition of the goods when they arrive • Truck • Rail • Water • Pipeline • Air • Internet 12-67 Marketing Logistics and Supply Chain Management Major Logistics Functions Intermodal transportation combines two or more modes of transportation • Piggyback uses rail and truck • Fishyback uses water and truck • Airtruck uses air and truck 12-68 Marketing Logistics and Supply Chain Management Logistics Information Management Logistics information management is the management of the flow of information, including customer orders, billing, inventory levels, and customer data • EDI (electronic data interchange) • VMI (vendor-managed inventory) 12-69 Marketing Logistics and Supply Chain Management Integrated Logistics Management Integrated logistics management is the recognition that providing customer service and trimming distribution costs require teamwork internally and externally • Cross-functional teamwork inside the company • Building partner relationships 12-70 Marketing Logistics and Supply Chain Management Integrated Logistics Management Cross-functional teamwork inside the company refers to the inter-relationship of different departments within the company to achieve the goals of integrated supply chain management 12-71 Marketing Logistics and Supply Chain Management Integrated Logistics Management Building partner relationships refers to the understanding that one company’s distribution is another company’s supply system 12-72 Marketing Logistics and Supply Chain Management Integrated Logistics Management Third-party logistics is the outsourcing of logistics functions to third-party logistics providers (3PLs) • Provide logistics functions more efficiently • Provide logistics functions at lower cost • Allow the company to focus on its core business • Are more knowledgeable of complex logistics 12-73 PowerPoint created by: Ronald Heimler Dowling College, MBA Georgetown University, BS Business Administration Adjunct Professor, LIM College, NY Adjunct Professor, Long Island University, NY Lecturer, California Polytechnic State University, Pomona, CA President, Walter Heimler, Inc.
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