Value Delivery Network

Supply Chain Management

Distribution Channels

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. A Value Delivery is a company's supply chain and how it partners with specific suppliers and distributors in the process of producing goods and delivering them to market. It involves using competitive advantages external to the firm (suppliers, distributors, customers)

Marketing Channels
Set of interdependent organizations involved in the process of making a product or service available for use or consumption by the consumer or business user

Importance of Marketing Channels

Channel choices affect other decisions in the marketing mix
Pricing, Marketing communications

A strong distribution system can be a competitive advantage Channel decisions involve long-term commitments to other firms

How channel members add value?

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Nature & Importance of Marketing Channels

Key Functions Performed by Channel Members
Information Promotion Contact Matching Negotiation Physical Distribution Financing Risk taking

Intermediaries offer greater efficiency. Intermediaries have better contacts, experience, specialization and scale of operations, Intermediaries transform the assortment of products into assortment wanted by consumers.

Producers lose more control and face greater channel complexity as additional channel levels are added.

Specialization and Division of Labor

Provides economies of scale Aids producers who lack resources to market directly Builds good relationships with customers

Overcoming Discrepancies
Discrepancy Discrepancy of of Quantity Quantity Discrepancy Discrepancy of of Assortment Assortment Temporal Temporal Discrepancy Discrepancy Spatial Spatial Discrepancy Discrepancy The The difference difference between between the the amount amount of of product product produced produced and and the the amount amount an an end end user user wants wants to to buy. buy. The The lack lack of of all all the the items items a a customer customer needs needs to to receive receive full full satisfaction from a product satisfaction from a product or or products. products. A A situation situation that that occurs occurs when when a a product product is is produced produced but but a a customer customer is is not not ready ready to to buy buy it. it. The The difference difference between between the the location location of of a a producer producer and and the the location location of of widely widely scattered scattered markets. markets.

Distribution Channels Facilitate Specialization Intermediaries provide Exchange efficiencies

Contact Efficiency
Motorola Motorola LG LG
Sony Sony Ericssons Ericssons

Nokia Nokia

Intermediaries Producer Customer Producer Customer

Motorola Motorola

LG LG

Sony SonyEricssons Ericssons

Nokia Nokia

Mobile Mobile Zone Zone

Connectivity is King for product delivery when and where

Channel Functions Performed by Intermediaries

Contacting/Promotion

The types of channel intermediaries and their functions and activities.

Transactional Transactional Functions Functions

Negotiating Risk Taking Physically distributing

Logistical Logistical Functions Functions

Storing Sorting Researching Financing

Facilitating Facilitating Function Function

Distribution Channel Designs

Organizations through which a product passes to reach the end user. Zero-level: (Direct)
Manufacturer Manufacturer

Channel Intermediaries
Retailer Retailer Merchant Merchant Wholesaler Wholesaler Agents Agents and and Brokers Brokers
A A channel channel intermediary intermediary that that sells sells mainly mainly to to customers. customers. An An institution institution that that buys buys goods goods from from manufacturers, manufacturers, takes takes title title to to goods, goods, stores stores them, them, and resells and ships them. and resells and ships them. Wholesaling Wholesaling intermediaries intermediaries who who facilitate facilitate the the sale sale of of a a product product by by representing representing channel channel member. member.

Intermediaries: (Traditional) Producer

Manufacturer Manufacturer Wholesaler Wholesaler

Intermediaries

Retailer
Consumer Consumer

Retailer Retailer Consumer Consumer

Consumer

Direct Channel
The channel structures for consumer and businessbusiness-toto-business products and alternative channel arrangements.
A distribution channel in which producers sell directly to consumers.

Direct Channel

Channels for Consumer Products

Direct Channel Producer Retailer Channel Producer Wholesaler Agent/Broker Channel Channel Producer Producer
Agents or Brokers Wholesalers Retailers Consumers Consumers Retailers Consumers Wholesalers Retailers Consumers

Channels for Business-to-Business Products

Direct Channel Industrial Distributor Agent/Broker Agent/Broker Channel Industrial Channel Direct Channel

Electronic Marketing Channels

Producer

Producer

Producer

Producer

Producer

Agents or Brokers Industrial Distributor Industrial User Industrial User Industrial User

Agents or Brokers Industrial Distributor Industrial Government User Buyer

Electronic Marketing Channels

1.

Alternative Channel Arrangements

Multiple Channels Nontraditional Channels Adaptive Channels

Using the Internet to make goods & services available to consumers or business buyers. Combine electronic and traditional intermediaries to create utility. Electronic intermediaries can not perform some logistical functions Inability of many electronic intermediaries to master the logistical function in a cost-effective manner contributed to their demise in the dot-com crash of 2001.

2.

3.

Different Channels May be Used

4.

Strategic Channel Alliances

Multiple Channels
In some situations producers use dual distribution, an arrangement whereby a firm reaches different buyers by employing two or more different types of channels for the same basic product. For instance, GE sells its large appliances directly to home and apartment builders but uses retail stores including Walmart to sell to consumers.

Multiple Channels-2
In some instance firms pair multiple channels with a multi-brand strategy. This is done to minimize cannibalization of the firms family brand and to differentiate the channels. For example Hallmark sells its Hallmark greeting cards through Hallmark stores and select department stores and its Ambassador brand of cards through discount stores and drug stores chains

Adaptive Channels
Adaptive channels help companies meet infrequent but critical situations such as a rush order on an item that is out of stock or a request for a service that that the distributor has never supplied. In these situations channel member share their resources to meet the demand instead of loosing the business to a competitor By sharing resources and capabilities in novel ways, the channel members can take advantage of profit making opportunities that they could not avail themselves acting alone.

Adaptive Channels
1. 2. 3.

Auxiliary Support Systems Reseller Supply Alliances Capabilities Sharing Arrangements

Auxiliary Support Systems

Help in coping with the unexpected demand of product or services. In this system a manufacturer and its resellers agree to share their inventories and support services in crucial situations. Both distributors are compensated on some previously agreed-to schedule

Reseller Supply Alliances

Such an alliance lets a channel provide one-stop shopping Companies carrying complementary product lines agree to pool their resources to broaden each others market offerings Each alliance member gains a share of resulting sales and profits

Capabilities Sharing Arrangements

Improve the quality of important services provided by channel members. Under this arrangement superior service capabilities of one company are substituted for the inferior service capability of another. The provider of the service is compensated for his services.

Strategic Channel Alliances

One firm marketing channel is used to sell another firms products Strategic alliances are common in global marketing, where the creation of marketing channel is expensive and time consuming. e.g. Nestle have an extensive marketing system that spans 70 countries and many companies use Nestl's marketing channel to marketing their products.

Channel Strategy Decisions

Issues Issues that that Influence Influence Channel Channel Strategy Strategy

The issues that influence channel strategy.

Factors Factors Affecting Affecting Channel Channel Choice Choice Market Market Factors Factors Product Product Factors Factors Producer Producer Factors Factors

Levels Levels of of Distribution Distribution Intensity Intensity Intensive Intensive Distribution Distribution Selective Selective Distribution Distribution Exclusive Exclusive Distribution Distribution

Factors Influencing Marketing Channel Strategies

Characteristics of Short Channels Market factors
- Business users - Geographically concentrated -Extensive technical knowledge and regular servicing required Large orders Perishable Complex Expensive

Factors Influencing Marketing Channel Strategies (Continued)

Characteristics of Short Channels Characteristics of Long Channels
Manufacturer lacks adequate resources to perform channel functions Limited product line Channel control not important Manufacturer feels dissatisfied with marketing intermediaries performance in promoting products

Characteristics of Long Channels

- Consumers - Geographically diverse - Little technical knowledge and regular servicing not required Small orders Durable Standardized Inexpensive

Producer factors

Manufacturer has adequate resources to perform channel functions Broad product line Channel control important

Product factors

Competitive factors

Manufacturing feels satisfied with marketing intermediaries performance in promoting products

Levels of Distribution Intensity

Intensity Intensity Level Level Intensive Intensive Objective Objective
Achieve Achievemass massmarket market selling. selling. Convenience goods. Convenience goods. Work Workwith with selected selected intermediaries. intermediaries. Shopping Shopping and and some some specialty specialty goods. goods. Work Workwith with single single intermediary. intermediary.Specialty Specialty goods goodsand andindustrial industrial equipment. equipment.

Number Number of of Intermediaries Intermediaries

Many Many

Channel leadership, conflict, and partnering.

Selective Selective

Several Several

Exclusive Exclusive

One One

Sources of Channel Conflict

Channel Conflict occurs when channel members disagree on roles, activities, or rewards. Disagreements on responsibilities Communication difficulties reduce coordination Increased use of multiple distribution channels by manufacturers creating conflicts with distributors and retailers Intermediaries diversifying into and offering competing products Producers try to circumvent intermediaries and deal directly with retailers

Types of Conflict
Horizontal conflict: occurs among firms at the same channel level Vertical conflict: occurs among firms at different channel levels

Channel Behavior and Organization

Conventional Distribution Channels Vertical Marketing Systems

Conventional Distribution Channels

Conventional distribution systems consist of one or more independent producers, wholesalers and retailer. Each seeks to maximize its own profits and there is little control over the other members and no formal means of assigning roles and resolving conflicts

Vertical Marketing Systems (VMS)

Vertical marketing systems (VMS) provide channel leadership and consist of producers, wholesalers and retailers acting as a unified system and consist of
Corporate VMS Contractual VMS Administered VMS

Channel Behavior and Organization

Vertical Marketing Systems
Corporate VMS Contractual VMS Administered VMS Corporation owns production and distribution Coordination and conflict through regular organizational channels

Channel Behavior and Organization

Vertical Marketing Systems
Corporate VMS Contractual VMS Administered VMS
Individual firms who join through contracts Franchise organizations
Manufacturer-sponsored retailer franchise system Manufacturer-sponsored wholesaler franchise system Service-firm-sponsored retailer franchise system

Channel Behavior and Organization

Vertical Marketing Systems
Corporate VMS Contractual VMS Administered VMS Leadership through the size and power of dominant channel members Leadership could be manufacturer or retailer

Channel Relationships
Supply Chain Management Channel Captain: The dominant member (producer,
wholesaler, or retailer) establishes channel policies & coordinates the marketing mix Leadership by example Cooperation.. common objectives Conflict resolution Power to enforce

Types of Channel Power

(The ability of one channel member to influence another members goal achievement)
Reward Power Legal Power Expert Power Coercive Power

Power

Control

Performance

Distribution Decisions
Exclusive distribution: channel policy in which a firm grants exclusive rights to a single wholesaler or retailer to sell its products and a particular geographic area Intensive distribution: Stocking the product in as many outlets as possible Selective distribution: channel policy in which a firm chooses only a limited number of retailers to handle its product line Exclusive-dealing agreement: arrangement between manufacturer and marketing intermediary that prohibits the intermediary from handling competing product lines Tying agreement: Arrangement that requires a marketing intermediary to carry items other than those they want to sell

Disintermediation
Occurs when product and service producers cut out intermediaries and go directly to final buyers, or when radically new types of channel intermediaries displace traditional ones.
The Internet has made the disintermediation of many traditional retailers possible.

Public Policy and Distribution Decisions

Exclusive distribution Exclusive dealing Exclusive territorial agreements Tying agreements

Vertical Channel Integration

seeks to control 2 or more levels
Oil field, Oil rig, Pipeline transport, Refinery, transport,

Producer Wholesaler Retailer

Pak Court

If Xerox required every business who bought or leased their copiers to also buy their brand of paper, it would be a tying agreement.

Station storage,

Consumer

Consumer

Consumer

Horizontal Channel Integration

seeks economies of scale via advertising, purchasing, etc

Questions
1.

(Contractual Systems)
2.

Wholesaler Sponsored: (Mobile Zone) Retailer Sponsored: Franchise Systems: (McDonaldss)

3.

4.

Explain what is meant by a marketing channel of distribution and why intermediaries are needed? Distinguish among traditional marketing channels, electronic marketing channels, and different types of vertical marketing systems. Describe the factors and considerations that affect a company's choice and management of a marketing channel. Recognize how conflict, cooperation, and legal considerations affect marketing channel relationships.