Marketing Channels and Supply Chain Management Chapter 5 Supply Chains and the Value Delivery Network • Producing a product or service and making it available to buyers, requires building relationships not just with customers, but also with key suppliers and resellers in the companies supply chain. • Supply chain • A supply chain consists of upstream and downstream partners • Upstream: from the company is the set of firms that supply the raw materials, components, parts, information, and expertise needed to create a product or services. • Down stream: Marketing channels or Distribution channels. Such as wholesalers and Retailers. Supply Chain vs Demand chain • Marketers have traditionally focused on the downstream side – Supply chain – make-and-sell view – Demand chain – sense-and-respond-view • Supply chain: The term supply chain is too limited: like make and sell view. Its mean that marketing planning starts from the raw material, product input. • Demand chain: It suggest a sense and response: like marketing planning starts with the needs of target customer. • Value Delivery Network: The network made up of the company, suppliers, distributors, and ultimately customers who “partner” with each other to improve the performance of the entire system. The nature and importance of marketing channels • Few producers sell their goods directly to the final users. Most use intermediaries to bring their product to market. Most producers do not sell their goods directly to the final users; between them stands a set of intermediaries performing a variety of functions. These intermediaries constitute a marketing channel (also called distribution channel) Distribution channels: A set of interdependent organizations that help make a product or service available for use or consumption by the consumer or business users. 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 market. Through their contacts, experience, specialization and scale of operation, intermediaries usually offer the firm more than it can achieve on its own. The nature and importance of marketing channels • How channel members add value • In making products and services available to consumers, channel members add value by bridging the major time, place and possession (ownership) gaps that separate goods and services from those who would use them. • Members of the marketing channel perform many key functions. Such as: • Information: Gathering key information about potential and current customers, and competitors. • Promotion Developing and spreading communications about offers • Contact Finding and communicating with prospective (potential) buyers. The nature and importance of marketing channels • Negotiation Reaching agreement on price and other terms of the offer. • Physical distribution Transporting and storing goods • Risk taking Assuming some commercial risks by operating the channel (e.g. holding stock) • All of the above functions need to be undertaken in any market. The question is - who performs them and how many levels there need to be in the distribution channel in order to make it cost effective. Number of Channel level • Companies can design their distribution channels to make products and services available to customers in different ways. Each layer of marketing intermediaries that performs some work in bringing the product and its ownership closer to the final buyer is a channel level. • 0-Level: Direct Marketing: A marketing channel that has no intermediary level. That is direct from manufacturer to end users. For example Dell. • 1-Level: Indirect Marketing Channel: Producer-Retailer-Consumer. • 2-Level: Indirect Marketing Channel: Producer-Wholesaler-Retailer- Consumer. • 3-Level: Indirect Marketing Channel: Producer-Wholesaler-Jobber- Retailer-Consumer. Channel behavior • Each channel member depends on the others. • For example: Ford Dealer depends on Ford to design cars that meet consumer needs. Ford depends on their dealers to attract consumers, convince them to buy Ford cars. • Samsung role to produce consumer electronic products that consumer will like and to create demand through advertising and then distribute these Samsung products in convenient location. Channel behavior • Channel Conflict: Disagreement among marketing channel members on goals and roles. • Horizontal conflict: occurs among firms at the same level of the channel. For example some Ford dealer in Chicago might complain the other dealers in the city steal sales from them by pricing to low or by advertising outside their assigned territories. • Vertical Conflict: A conflict occur between different levels of same channel. • Far example: A retail distributor may refuse to carry a manufacturer's product because of low sales, further decreasing the manufacturer's total sales. Channel Dynamics • Vertical marketing System: consists of producers, wholesalers and retailers acting as a unified system. One channel members owns the others, has contracts them, or wield (hold) so much power that they must all cooperate. • Corporate VMS: A vertical Marketing System that combines successive stages of production and distribution under single ownership. For example ZARA’s success secret is its control over almost every aspect of the supply chain. • Contractual VMS: A VMS in which independent firms at different levels of production and distribution join together through contracts to increase sales than they could achieve alone. For example Franchise. Channel Dynamics • Horizontal Marketing System: A channel arrangement in which two or more companies at one level join together to follow a new marketing opportunity. For example: McDonald’s now places “express” version of its restaurants in Wal-Mart stores. • Multichannel Distribution System: In cases where a marketer utilizes more than one distribution design the marketer is following a multi-channel distribution system. • Starbucks follows this approach as their distribution design includes using a direct retail system by selling in company-owned stores, a direct marketing system by selling via direct mail, and a single-party selling system by selling through grocery stores (they also use other distribution systems). Channel design decision • Push Strategy: With a push-based supply chain, products are pushed through the channel, from the production side up to the retailer. It takes longer for a push-based supply chain to respond to changes in demand, which can result in overstocking • Pull Strategy: In a pull-based supply chain, procurement, production and distribution are demand-driven so that they are coordinated with actual customer orders, rather than forecast demand. Channel design decision • Designing a channel system calls for analyzing consumer needs, setting channel objectives, identifying major channel alternatives, and evaluating them. • Analyzing Consumer Needs: • Do customers want to buy from nearby location or they willing to travel to more centralized distant location? • Would they rather buy in person, over the phone, through the email, or online? • Do consumers want many add-on services (delivery, credit, repairs, installation), or will they obtain these elsewhere? Channel design decision • Setting channel Objectives: • Companies should state their marketing objectives in terms of targeted levels of customer service. • A company can identify several segments wanting different levels of service. • The company should decide which segment to serve and the best channel to use in each case. • For example: for convenience product they will require widespread distribution and for shopping they may require few outlets. • Identifying Major Alternatives: When company has defined its channel objectives, it should next identify its major channel alternatives in terms of : • Types of Intermediaries. • Number of marketing Intermediaries. • Responsibilities of Channel Members. Channel design decision • Types of Intermediaries. • Number of marketing Intermediaries. • Responsibilities of Channel Members. • Types of Intermediaries: • Company Sales force: Expand the company’s direct sales force. • Manufacturer’s agency: Hire manufacturer’s agent. • Industrial distribution: Find distributors in the different regions. Channel design decision • Number of Market Intermediaries: companies must also determine the number of channel members to use at each level. Three strategies are available: • Intensive Distribution: A strategy in which they stock their products in as many outlets as possible. These product must be available where and when consumers want them. For example toothpaste, candy. • Exclusive Distribution: In which producer gives only a limited number of dealers the exclusive right to distribute its products in their territories. Such as Automobiles. • Selective Distribution: The use of more than one but fewer than all, of the intermediaries who are willing to carry a company’s product. Such as television, furniture, home appliances Channel design decision • Responsibilities of Channel Members: • The producer and intermediaries need to agree on the terms and responsibilities of each channel member. They should agree on • Price policies: This out the price at which middlemen will get the product from the manufactures and the discount schedule. It also mentions the price at which middlemen may sell the product. • Condition of sales: The manufacturing firm stipulates mode or payment terms. For example, some firms ask middlemen to put a deposit with them. Some other firms insist payment to reach them on the day the intermediary takes physical possession of the goods. Others may accept a letter of credit as a payment mode .Credit policy of the manufacturer stipulates the period in which it must get paid. Channel design decision • Returns Policy: This indicates the warranty that the manufacturer extends to the intermediary .Some firms offer spot replacement for any of its products returned by the customer .Others take time to settle these claims .A distribution policy should lay down the clauses related to returns and refunds precisely outlining the responsibility of each party-manufacturer and intermediary .Failure to do so can lead to a vertical conflict between the manufacturer and the intermediary. • • Territorial Rights: The manufacturer should spell out the territorial jurisdiction of each of the distributor to avoid any territory jumping. This will also help in the distributor’s evaluation . Channel design decision • Evaluating the Major Alternatives: • Suppose a company has identified several marketing channel alternatives and wants to select the one that will best satisfy its long-run objectives. Alternative should be evaluated against the following: • Economic criteria: Sales, costs and Profitability. What will be the investment required by each channel alternative, and what returns will result? • Control criteria: Intermediaries require some control over the marketing of the product, but some intermediaries take more control. Company prefers to keep as much control as possible. • Adoptive Criteria: The company wants to keep the channel flexible so that it can adopt to environmental changes. Channel Management Decision • In managing its channels, a company must convince distributors that they can succeeds better by working together. • Procter & Gamble and Wal-Mart work together to create superior value for final customers. • General Electric Appliances has created CustomerNet to coordinate, support and motivate its dealer. Gives dealers instant online access to GE Appliances, distribution and order-processing system, 24 hours a day, 7 days a week. They can check the product availability, price and place orders and review order status. • McDonald’s provides franchisees with promotional support, a record keeping system, training at Hamburger University, and general management assistance. Channel Management Decision Evaluating Channel Members • The producer must regularly check channel member performance against standards such as sales quotas, average inventory levels customer delivery time, treatment of damaged goods, cooperation in company promotion and training programs and services to the customer.