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 Value Delivery Chain Customer Goals

Total Delivered Product

Level of Satisfaction

Copyright Atomic Dog Publishing, 2007

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 Satisfaction

Copyright Atomic Dog Publishing, 2007

Channel Functions
Distribution Marketing Research
Functions Performed in a Channel of Distribution

Pricing

Buying

Product Planning

Promotion

Customer Services

Copyright Atomic Dog Publishing, 2007

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.

Copyright Atomic Dog Publishing, 2007

Factors to Consider in Selecting a Distribution Channel

The Consumer
The Company The Product

The Competition
Distribution Channels Legalities

Copyright Atomic Dog Publishing, 2007

A Direct Distribution Channel

Manufacturer

200,000 Customers

In this direct channel, an umbrella manufacturer sells directly to final consumers. It makes 200,000 separate transactions, one for each customer.

Copyright Atomic Dog Publishing, 2007

An Indirect Distribution Channel

Manufacturer 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.

Wholesaler
(East U.S.)

Wholesaler
(South U.S.)

Wholesaler
(North U.S.)

Wholesaler
(West U.S.)

50 Retailers
1,000 Customers per Retailer

50 Retailers
1,000 Customers per Retailer

50 Retailers
1,000 Customers per Retailer

50 Retailers
1,000 Customers per Retailer

Copyright Atomic Dog Publishing, 2007

Typical Indirect Channels of Distribution

1
Manufacturer/ Service Provider

2
Manufacturer/ Service Provider

3
Manufacturer/ Service Provider Merchant Wholesaler or Sales Agent

4
Manufacturer/ Service Provider

Retailer

Wholesaler

Merchant Wholesaler

or Sales Agent
Distributor

Final Consumer

Retailer

Organizational Consumer

Final Consumer

Organizational Consumer

Copyright Atomic Dog Publishing, 2007

Pushing Versus Pulling Strategies

Pushing

Manufacturer/ Service Provider

Pulling

Distribution Intermediaries

Consumers

Manufacturer/ Service Provider

Distribution Intermediaries

Consumers

Copyright Atomic Dog Publishing, 2007

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. 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. 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.

Selective Distribution

Intensive Distribution

Copyright Atomic Dog Publishing, 2007

International Distribution Planning

International distribution requires
additional considerations and planning: The channel length may depend on a nations 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.
Copyright Atomic Dog Publishing, 2007

Logistics and Other Functional Areas

There is a critical interaction between logistics and each of the firms 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 firms 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

Production scheduled

Sufficient goods in stock

Orders shipped to individual customers

Goods stored until enough orders are placed

Goods packaged, sorted, tagged, and sent to local warehouse

Copyright Atomic Dog Publishing, 2007

An Illustration of the Total-Cost Approach in Distribution

Annual freight costs Annual warehousing costs
Annual costs of lost sales due to being out of stock

Carrier

$100,000 $1.5 mill

Air

$1.6 mill.

Rail

$300,000

$800,000

$300,000

$1.4mil.

Truck

$500,00

$500,000 $200,000

$1.2 mil.

Costs

Copyright Atomic Dog Publishing, 2007

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.

Switch to a new seller while merchandise is not available.

Permanently switch to a new seller for all purchases.

Most Desirable Action

Least Desirable Action

Copyright Atomic Dog Publishing, 2007

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