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Ch. 14: Channel Relationships and Supply Chains. Rationale for Channel Design. V1. V1. C1. C1. C2. C2. V2. V2. V3. V3. C3. C3. V4. V4. C4. C4. Channels Can Create Efficiency. Direct: V x C transactions. Via Reseller: V + C transactions. RS.

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slide2

Rationale for Channel Design

V1

V1

C1

C1

C2

C2

V2

V2

V3

V3

C3

C3

V4

V4

C4

C4

Channels Can Create Efficiency

Direct: V x C

transactions

Via Reseller:

V + C transactions

RS

V = Vendors; C=Customers; RS=Reseller

marketing channels economic utility form
Marketing Channels & Economic Utility:Form
  • The usable quantity or mode of the product most preferred by the customer
marketing channels economic utility time
Marketing Channels & Economic Utility:Time
  • The availability of the product when the customer needs it
marketing channels economic utility place
Marketing Channels & Economic Utility:Place
  • “Locational Convenience,” the availability of the product where the customer needs it
marketing channels economic utility possession
Marketing Channels & Economic Utility:Possession
  • Methodology by which the customer obtains ownership or the right to use of the product or service
slide8

Marketing Channel Flows Supplier to Customer

Financing

Promotion

Insurance

Transportation

Manufacturers’ Representatives

Value-added Resellers

Direct Sellers

Specialized Installation & Service Providers

Distributors

Missionary Sellers/Field Marketing

Real estate/ Storage

Exhibit 14-2a

Manufacturers/Suppliers

Sales and Marketing Flows

Product & Ownership Flows

Ancillary Members of the Channel (Facilitating Agencies)

Install, Train, & Service Flows

End Users

This Exhibit is not intended to imply that all channels contain all flows shown or that all possible flows are shown here.

slide9

Marketing Channel Flows Customer to Supplier

Financial Institutions

Value-added Resellers

Manufacturers’ Representatives

Specialized Installation & Service Providers

Direct Sellers

Distributors

Missionary Sellers/Field Marketing

Exhibit 14-2b

Manufacturers/Suppliers

Payment Flows

Customer and Market Information Flows

End Users

This Exhibit is not intended to imply that all channels contain all flows shown or that all possible flows are shown here.

backward vertical integration
“Backward” Vertical Integration
  • Henry Ford developed his own iron ore mining operation, steel mills, glass factories, tire manufacturing, and so on
forward vertical integration
“Forward” Vertical Integration
  • Apple owns its own retail channels
vertical integration
Vertical Integration

Advantages

  • Economies of Scale
  • Complete Control
  • Reliability and Availability

Disadvantages

  • Lack of Flexibility
  • Significant Investment
  • Slow to Innovate (Myopia)
functional spin off
Functional Spin-Off
  • Alternative to Vertical Integration
  • Ancillary services are provided most efficiently by experts in each service
    • a basic application of the principle of division of labor
a value network
A Value Network

Exhibit 14-5

MARKETING/DISTRIBUTION

CHANNEL

CUSTOMER

SUPPLIER

OFFERING

SUPPLY CHAIN

SUPPLIER PARTNERS

value networks
Value Networks
  • “Fast Vertical Integration” create a lot of the advantages without the disadvantages
    • Greater flexibility
    • Lower initial investment
    • Fast response to market
distributors serve buyers and sellers
Distributors Serve Buyers and Sellers

Exhibit 14-4

Seller Benefits

  • Buy and hold inventory.
  • Combine supplier outputs (reduce discrepancy of assortment).
  • Share credit risk.
  • Share selling risk.
  • Forecast market needs.
  • Provide market information.

Buyer Benefits

  • Provide fast delivery.
  • Provide market segment-based product assortment.
  • Provide local credit.
  • Provide product information.
  • Assist in buying decisions.
  • Anticipate needs.
business logistics
Business Logistics
  • The management of movement, sorting, and storage of goods  an important tactical function
supply chain management
Supply Chain Management
  • Creation of value for customers through effective and efficient flow of materials, components, finished goods, and services
  • Extends from raw materials through to end use customers
physical distribution concept
Physical Distribution Concept

System design aimed at minimizing costs while maintaining a given level of customer service through the simultaneous management of three elements

  • Inventory
  • Transportation
  • Warehousing
physical distribution concept inventory management
Physical Distribution Concept:Inventory Management
  • Often largest cost associated with logistics system
  • Inventory implies carrying and finance charges and costs of storage and creating assortment
  • Tools to manage include, JIT inventory and manufacturing methods and facility location, and so on
  • Lower inventory quantities lead to lower costs but can result in more costly transportation needs and/or stockouts
physical distribution concept transportation
Physical Distribution Concept: Transportation
  • Tradeoff of speed versus cost
  • Slower transportation implies larger safety stocks
  • If transportation costs are minimized with out regard necessary inventory levels, carrying costs increase
physical distribution concept warehousing
Physical Distribution Concept: Warehousing

Two primary functions of warehousing

  • Product flow/movement (associated with the creation of assortment) (Distribution Centers)
  • Product storage (Warehouses)
logistics of a competitive edge
Logistics of a Competitive Edge
  • As technology and product advantages become more fleeting, efficient supply chains have become a competitive advantage
  • Best designs match “the way a customer buys” in that the marketing channel is differentially invisible to the customer
differentially invisible
Differentially Invisible
  • Customer should not be required to adapt to the vendor
    • The process should be invisible
channel design dual distribution
Channel Design – Dual Distribution
  • Different market segments require different channel design

Example: Goodyear Tires

Manufacturer

Goodyear may or may not use the same distributor/logistics provider as the independent stores.

Multi-brand Distributor

Logistics Provider

Independent Retailers

Integrated Retailers

Large Customer – Direct Channel

Sears, Wheel Works, etc.

Auto Manufacturers – GM, Ford, Honda, etc.

Goodyear Sponsored/ Franchised Dealers

channel design multi distribution
Channel Design – Multi-Distribution
  • Customers within a segment with similar needs will expect locational convenience

Example: Honda Automobiles

Manufacturer

Dealer/Retailer

Dealer/Retailer

Dealer/Retailer

Dealer/Retailer

Number of dealers with same channel design relates to the desired intensity of distribution.

channel design reduce the discrepancy of assortment
Channel DesignReduce the Discrepancy of Assortment
  • Channels convert manufacturers’ product lines to product assortments desired by particular market segments
when to use distributors
When to Use Distributors

Favoring

  • Product requires local stock.
  • Product line is small, unable to support direct sales.
  • Product is somewhat generic.
  • Product has low unit value.
  • Product is near end of PLC.
  • Customers are widely dispersed.
  • Local repackaging, sizing, or fabrication is required.
  • Market has many small-volume buyers.
  • Product requires extensive sales effort directed at buying professionals.
  • Start-up venture or established company is entering a new market.
  • Competition Uses distributors.
  • Customers prefer distributors.

Not Favoring

  • Product is highly customized.
  • Product is new or innovative.
  • Product is technically sophisticated.
  • Significant missionary selling is required.
  • Manufacturer requires control over product application.
  • Large buyers are geographically concentrated.

Exhibit 14-6

selecting and caring for distributors
Selecting and Caring for Distributors
  • Determine right distributor for your marketing plan
  • Ask customers who they recommend
  • Train and support them well, at both your facilities and theirs
  • Make calls on them
  • Make calls with them
bases of power in marketing channels
Bases of Power in Marketing Channels
  • “Soft” Bases of Power
      • Expertise
      • Information
      • Identification
  • “Hard” Bases of Power
      • Reward
      • Coercion
      • Legitimate
slide31

Control and Cooperation in Vertical Marketing Systems

Value Networks

Horizontal Sprawl

Conventional Systems

Administered systems

Contractual systems

Corporate vertical marketing systems(CVMS)

Increasing Voluntary Cooperation

Exhibit 14-7

Increasing centralized control

Value Networks are almost totally dependent on relationships that create cooperation and win-win scenarios. The assembled team creates a solution to a particular customer need. The team will be unified in the approach at that customer, but there is not necessarily any agreement to participate together beyond the immediate collaboration. Today’s may be part of a competing network tomorrow.

Conventional systems, not a vertical channel patterns, are similar to administered channels but without agreement on goals. Intermediaries are independent businesses with concerns only for their own operations.

CVMS were likely developed when there were no other channel alternatives. In a CVMS all functions and flows are performed by (or contracted by) the integrator. CVMS have the greatest degree of centralized control but less flexibility. Many Goodyear tire dealers are forms of a forward integrated CVMS; Sears is a backward integrated CVMS.

Contractual systems include wholesaler and retailer sponsored voluntary chains, and franchise Systems. Ace and Tru-Value Hardware and IGA are voluntary chains. New car dealers and fast food restaurants (e.g., McDonalds, Burger King) are franchises.

By most traditional views, administered marketing systems are the closest to conventional systems. Independent intermediaries agree on goals related to a particular administrative leader’s market segment while maintaining disparate goals associated with their own operations.

Horizontal Sprawl is a term applied to the Japanese keiretsu channel pattern. A keiretsu is a group of loosely associated companies that may have many ties at the ownership and management level. A keiretsu is often a complete supply chain with many buyers, sellers, and ancillary service providers. There is significant sharing of goals, risks, and benefits among members of the chain.

Mutual Goals

Directed Goals

slide32

Mutual Goals

Directed Goals

Increasing Voluntary Cooperation

Control and Cooperation in Vertical Marketing Systems

Exhibit 14-7

Increasing centralized control

Value

Networks

Conventional Systems

Contractual systems

Corporate Vertical Marketing Systems

Administered Systems

Horizontal Sprawl / Keiretsu

web opportunities for b2b marketers
Web Opportunities for B2B Marketers
  • Better and faster channel flows  market data more readily available
  • Faster communications provides rapid ordering and order tracking
  • Reduced transaction costs through online processing and tracking
  • Product information available at the customers’ convenience
new channel types
New Channel Types
  • Affiliates - link on a web site that refers to a product or service supplier’s site
  • Hubs – Intermediate that brings buyers and sellers together in a market