Week 11: Week 11: International International Marketing & Logistics Marketing & Logistics Channels Channels

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Week 11:

International International

Marketing & Logistics Marketing & Logistics

Channels

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Learning Objectives Learning Objectives

 Understand logistics’ impact on company strategy & competitive advantage

 Identify various channels of domestic and International distribution

 Discuss the need for channel intermediaries

 Introduce the concept of supply chain management (SCM)

 Distinguish among types of channel intermediaries and describe their role in the supply chain

 Explore the integration of multiple logistics strategies and principles

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Customer satisfaction

• Suppliers

• Intermediate customers

• Final customers

Integrated effort

• Product

• Price

• Promotion

• Place (distribution)

Company profit

• Maximize long-term profitability

• Lowest total costs at an acceptable level of customer service

Marketing / Logistics Management Concept

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Logistics and Competitive Advantage Logistics and Competitive Advantage

High

Low

High Low

Differential Differential

(Value) (Value) Advantage Advantage

Cost / Productivity Cost / Productivity

Advantage Advantage Focus on

Focus on Customer Customer Value-Added Value-Added

Cost and Cost and Service Service Leader Leader

Commodity Commodity

Focus on Focus on Process Process Improvement Improvement

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Logistics Involves Both...

Internal interactions between product groups, departments and divisions

External interactions with customers, suppliers and third party providers

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Supply Chain Management (SCM)

“Supply chain management involves the management of upstream and downstream relationships with

suppliers, distributors and customers to achieve greater customer value-added at less total cost.”

(Christopher, M. 1998)

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Partnering Through Supply Chain Management

 SCM involves (& often requires)

– Partnerships among channel members working to

create a distribution system that reduces inefficiencies, costs, and redundancies while creating competitive

advantage and satisfying customers.

– The use of technology e.g., bar code data, electronic data interchange, etc. to link supply chain partners. This increases productivity by reducing inventory, shortening cycle time, and removing wasted human effort.

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Channels of Distribution Channels of Distribution

Definitions

 A sequence of marketing organizations that directs a product from the producer to the ultimate (or end) user.

 Systems of relationships among businesses that participate in the process of buying and selling products and services

 May sometimes be referred to as a supply chain or marketing channel

Multiple Channels for Consumer Products

 Manufacturers/Suppliers use different channels to reach different market segments

Formal (contract-based) vs. Informal (Partnerships)

Channel Relationships

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Distribution Channels – Consumer Products

 Producer  Consumer (Direct Channel)

– Includes no intermediaries.

– Used by services and consumer goods sold directly to the consumer

 Producer  Retailer  Consumer

– Producers sell directly to large retailers (e.g., Wal-Mart) – Used where shipping and handling costs are high, or with

perishable products and/or fashion products with short product life cycles.

Producer Retailer Consumer

Producer Consumer

CONSUMER PRODUCTS

Figure 15.1

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Distribution Channels – Consumer Products

 Producer  Agent  Wholesaler  Retailer  Consumer

– Agents market products to wholesalers on commission basis.

 Producer  Wholesaler  Retailer  Consumer

– Traditional channel where the wholesaler services numerous retailers for the producer.

Producer Agent Wholesaler Retailer Consumer

Producer Wholesaler Retailer Consumer

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Distribution Channels – Business Products

 Producer  Business user

– Direct channel

– Manufacturer’s sales force sells directly to the consumer.

 Producer  Agent middleman  Business user

– Independent intermediary represents the manufacturer to the consumer.

Producer Agent

middleman

Business customer Producer

BUSINESS PRODUCTS

Business customer

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Domestic vs. Global Channels Domestic vs. Global Channels

 Country-specific logistics requirements

 Complexity

 Costs

 Distances

 Intermediaries

 Alternative channel structures

 Time

 Control

 Information

 Decentralized decision making

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Alternative International Channel Structures Alternative International Channel Structures

Manufacturer

International Division

Customer

Wholesaler

Distributor Host Country

Buying Office

Parent Company

Trading Company /Agent Trading Company

/Agent Wholesaler

Wholesaler

Wholesaler Wholesaler

Trading Company /Agent

Distributor

Wholesaler

Retailer Retailer

Retailer

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Channel Flows Channel Flows

Producer Agent Wholesaler Retailer Consumer

Products/Service Ownership

Promotional Information Supply Information

Money

Market research Information Demand Information

Products/Service (returns)

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Middlemen

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Middleman (or marketing intermediary) Middleman (or marketing intermediary)

 A marketing organization that links a producer and user within a marketing channel.

– Merchant middleman—takes title to products by buying them, e.g. distributors.

– Functional middleman—helps in the transfer of ownership of products but does not take title to the products, e.g., 3pls.

– Retailer—buys from producers or other middlemen and sells to consumers.

– Wholesaler—a middleman that sells products to other firms.

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Efficiency Provided by an Intermediary Efficiency Provided by an Intermediary

The services of intermediaries reduce the number of contacts, or exchanges, between producers and buyers, thereby increasing efficiency; especially across longer distances. These intermediaries however ‘lengthen’ the supply chain.

Producer

Buyer

Middleman or intermediary Producer

Producer

Buyer

Figure 15.3

Source: William M. Pride and O. C. Ferrell, Marketing: Concepts and Strategies, 2000e.

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Initial manufacturer must arrange for six interfaces or interactions

1 X 6 = 6

Retailer Retailer Retailer Retailer Retailer Retailer

Manufacturer

Efficiency Provided by an Intermediary

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As the industry grows, the number of As the industry grows, the number of interfaces or interactions continue to grow interfaces or interactions continue to grow

3 X 6 = 18 3 X 6 = 18

Manufacturer

Manufacturer Manufacturer

Efficiency Provided by an Intermediary

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Eventually, it will be economical for a middle man to improve

transaction efficiency 3 + 6 = 9

Manufacturer

Manufacturer Manufacturer

Middle Man

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Losing the Middle Man

 Can a company or product grow so large that as middle man does not make sense?

 At what point do we lose the middle man?

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Wholesalers – Services to Manufacturers Wholesalers – Services to Manufacturers

 Provide instant, ready-made sales forces.

 Reduce manufacturers’ inventory costs by

purchasing finished goods in sizable quantities.

 Assume credit risks associated with selling to retailers.

 Furnish market information (from customers) to manufacturers.

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Wholesalers - Services to Retailers Wholesalers - Services to Retailers

 Promotion: Promote products to retailers.

 Market Information: Two-way source of market information for both producers and retailers.

 Financial Aid: Provide timely product deliveries that reduce inventory costs for retailers and extend credit to retailers for inventory purchases.

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Designing Effective Channels - I Designing Effective Channels - I

External (Environmental) Issues

 Firms’ global presence  Increased channel complexity, market diversity and cost

 Government Regulatory Environment: Trade Initiatives;

Privatization; etc.

 Corporate Reconfiguration: Vertical & Horizontal;

Integration

 Technological Innovations

 TQM

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Designing Effective Channels - II Designing Effective Channels - II

Internal (Marketing) Issues

 Types of Distribution Strategies

– Intensive  Wide channels e.g., commodities – Exclusive  Narrow channels e.g., cars

– Selective  Mixed & targeted

 Product Characteristics: Value, Requirements, etc.

 Customer Service Objectives: Return policy, Delivery times and schedules

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Characteristics of Effective Channels Characteristics of Effective Channels

 Flexible & Adaptable

 Dynamic

 Integrated Relationships

 Global Management (+ Foreign Participation) but region-specific

 “No boundaries”

 From Channel  Network

 “Slim” (No excesses)

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Types of Channels Types of Channels

 Ownership channel (title)

 Negotiations channel (buy/sell)

 Financing channel (payment)

 Promotions channel (marketing)

 Logistics channel (movement/storage)

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Logistics Channel Functions Logistics Channel Functions

 Concentration

– Combine multiple small shipments into larger shipments – Accumulating from different sources (consolidating)

 Customization

– A shipment of different pieces is assembled

– Sorting heterogeneous products into homogeneous stocks

 Dispersion

– Large shipments are broken down into smaller shipments – Allocating into smaller lots (bulk-breaking)

 Assorting

– Building assortments of goods for resale

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Different Channel Flows

 There are channels for the flow of information

 There are channels for the flow of product/service

 There are forward channels

 There are reverse channels

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“Power” in the Channel

 Each channel member has strengths and weaknesses

 The channel member with the greater power (known as the “Channel Captain”) will dictate roles within the channel or even develop alternative channels

 What’s wrong with this picture?

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Vendor Managed Inventories (VMI)

 Instead of worrying about inbound freight and ordering optimal quantities, why not have the vendor manage a pocket of

inventory close to our manufacturing location

 Or, have vendor manage the inventory in our DC or stores

 Illustration: Multiple Vendor Managed Inventories (MVMI) at Ryder Integrated Logistics

 Exploits the VMI concept by offering a consolidated approach and value-added services

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Evolution Evolution

of of

Logistics

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Evolution of Logistics

Functional Functional

Trans/

WhseWhse Activity Activity

CostCost

Area Area

Metric Metric Stage Stage

Driver Driver

1970 1970

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1970s: Functional

Focused on integrating direct distribution activities such as transportation and warehousing. The primary metric or

measurement device is the cost of performing that activity.

Dominant focus from the mid-1960s until the mid-1970s.

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Information Information

Evolution of Logistics

Trans/

CostCost

Customer Customer

Service Service Information Information

Response Response

Area Area

Metric Metric Stage Stage

Driver Driver

1970 1970 1980 1980

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1980s: Information Integration

Logistics viewed as a system with both activity and information as part of the logistics process.

Customer service focus provided the primary functionality with the metric becoming system response time to customer service requirements.

Dominant from around the mid-1970s until early in the decade of the 1980s.

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Evolution of Logistics

Trans/

CostCost

Integration Integration Inter/Intra Inter/Intra Functional Functional

Trade-of Trade-of Managerial Managerial

Efficiency Efficiency

Area Area

Metric Metric Stage Stage

Driver Driver

1970 1970 1980 1980 1990 1990

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1990s: Interfunctional Integration

The stage many firms are currently in. Requires managerial integration between major corporate functions.

Perspective is total material flow integration with fully visible tradeoffs. Decisions are made in accordance with

marginal contribution (or efficiency) of the individual functions to the overall objectives of the firm.

Dominant theme into the 1990s.

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Evolution of Logistics

Trans/

CostCost

Integration Integration Inter/Intra Inter/Intra Functional Functional

Trade-of Trade-of Managerial Managerial

Efficiency Efficiency

Strategic Strategic

Global Global Profit Profit

RiskRisk Strategy Strategy

Area Area

Metric Metric Stage Stage

Driver Driver

1970 1970 1980 1980 1990 1990 2000 2000

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2000s: Strategic Integration

The logistics function becomes the cornerstone to the strategic thrust of the firm. Functionality is global in that the logistics function spans both geographic and

ownership boundaries. Shifts from a cost center to an important source of profitability for the firm.

Logistics performance is measured in terms of risk rather than in terms of cost.

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Evolution of Business Structures

Divisions

Matrix Management

Networks

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Functional ‘Silos’

 Structured around individual functional areas (divisions)

 “Silo Mentality” focuses primarily on internal operations – ignores “overall picture”

 Little consideration for cross-functional interaction

 Adversarial and competitive cross-functional relationships

 Often conflicting goals and objectives across functions and within overall corporate objectives

 Conflicting goals and poor communication results in higher total costs and reduced productivity

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Matrix Organization

 Provides linkages between divisions and overall corporate organization

 Developed from combinations of horizontal and vertical interactions

 Structured around cross-functional projects

Teams

 Structured around cross-product/service relationships

 May be Inter-organizational or inter-functional

 Popular within strategic and other forms of alliances

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Logistics in a Matrix Organization

Source: Adapted from Daniel W. DeHayes, Jr., and Robert L. Taylor, “Making ‘Logistics’ Work in a Firm,”

Business Horizons 15, no. 3 (June 1972), p. 44.

Manufacturing Engineering Marketing Transportation Finance and accounting Information

processing Product

design Sales

forecasting Production

scheduling Traffic

Management science Protective

packaging Customer

service Requirement

determination Maintenance Procurement

President

Logistics

Other programs

Horizontal flows of project authority

Vertical flows of functional authority Vertical flows of functional authority

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Networks

 Exists as a collection of ‘small’ specialist organizations

 Organizations focus in individual specialization and core competency

 Outsourcing

 ‘Virtual/Hollow’ Corporation

 Information sharing/flow is key

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Generic Logistics Strategies

 Process-based

– Broad group of logistics activities managed as a value- added chain and integrated system

 Market-based

– Limited group of logistics activities across multiple business units

 Channel-based

– Logistics activities performed jointly with supply chain partners. Attention on external control

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Logistics Principles

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Rules of Logistics Rules of Logistics

L L

ean toward Velocityean toward Velocity

O O

ptimize the Overageptimize the Overage

G G

o for the flowo for the flow

I I

nformation for inventorynformation for inventory

S S

egregate customersegregate customers

T T

otal Cost - Optimize to minimizeotal Cost - Optimize to minimize

I I

ntegrate or mate (Partner or perish)ntegrate or mate (Partner or perish)

C C

ore competency - outsource the restore competency - outsource the rest

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Principles of Logistics Principles of Logistics

 Selective riskSelective risk

 Information selectivityInformation selectivity

 Information substitutionInformation substitution

 Transaction simplificationTransaction simplification

 Variance reductionVariance reduction

 Inventory velocityInventory velocity

 PostponementPostponement

 Shared/shifted riskShared/shifted risk

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Principle of Selective Risk Principle of Selective Risk

Shift from a policy of 100% in stock to a policy of Shift from a policy of 100% in stock to a policy of

“selective risk.”

The logistics manager should design logistics The logistics manager should design logistics

systems so that the system performance systems so that the system performance

objectives are directly related to the importance objectives are directly related to the importance

of the product or customer to the firm.

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Principle of Information Principle of Information

Selectivity Selectivity

 Assumes information is as much of a resource Assumes information is as much of a resource to the decision maker as capital, human

to the decision maker as capital, human resources, and facilities.

resources, and facilities.

 Information should be treated with the same Information should be treated with the same operational, tactical, and strategic importance operational, tactical, and strategic importance

as any other resources of the firm.

 Design and implement logistics information Design and implement logistics information systems that produce a focus on actionable systems that produce a focus on actionable

and significant events.

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Principle of Information Principle of Information

Substitution Substitution

The primary target for the logistics manager should The primary target for the logistics manager should

be the transformation of information for be the transformation of information for inventory. Another key area is the tradeof inventory. Another key area is the tradeof

between information and transportation.

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Principle of Transaction Principle of Transaction

Simplification Simplification

Improve the efficiency and efectiveness of Improve the efficiency and efectiveness of

the transactional processes of the firm:

 Upgrade systems to remove human intervention.Upgrade systems to remove human intervention.

 Link the collection, transmission, and storage of Link the collection, transmission, and storage of data or information sets within the system or data or information sets within the system or

between the system and outside suppliers, between the system and outside suppliers,

customers, or third party providers.

 Efficiencies gained from cooperation among Efficiencies gained from cooperation among parties involved in the transaction.

parties involved in the transaction.

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Principle of Variance Reduction Principle of Variance Reduction

In any logistics system there are a series of In any logistics system there are a series of

linkages between demand and supply linkages between demand and supply points. Failure to accurately anticipate points. Failure to accurately anticipate

demands leads to erosion of system demands leads to erosion of system

productivity (excessive inventory, productivity (excessive inventory,

overtime, increased stockouts) overtime, increased stockouts) A logistics manager can significantly A logistics manager can significantly

influence the productivity of the system influence the productivity of the system

by reducing unplanned variance in the by reducing unplanned variance in the

system.

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Principle of Inventory Velocity Principle of Inventory Velocity

Facilitating the flow of inventory from raw Facilitating the flow of inventory from raw

material to end user. A logistics manager material to end user. A logistics manager

must focus efort on both the level of must focus efort on both the level of inventory and the velocity of inventory inventory and the velocity of inventory

(inventory turnover).

Inventory turnover is not a particularly new Inventory turnover is not a particularly new concept to many managers; measuring it concept to many managers; measuring it

for the entire firm rather than a single for the entire firm rather than a single

profit center is.

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Principle of Postponement Principle of Postponement

A strategy aimed at reducing the amount of A strategy aimed at reducing the amount of

inventory necessary to meet target customer inventory necessary to meet target customer service levels. The primary cost trade-of is a service levels. The primary cost trade-of is a reduction in inventory investment against the reduction in inventory investment against the cost of transportation, information systems, or cost of transportation, information systems, or

additional production/processing systems.

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Principle of Principle of

Postponement Postponement

The two basic types of postponement are:

 Geographic postponement Geographic postponement where the product is where the product is not committed to a specific geographic location not committed to a specific geographic location

but is stored at a central location but is stored at a central location

 Value-add postponementValue-add postponement delays the delays the personalization of the product

personalization of the product

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Principle of Shared/Shifted Principle of Shared/Shifted Risk Risk

Shift the logistics cost structure from a Shift the logistics cost structure from a

fixed cost base to a variable cost base.

Shifting costs to a supplier upstream in Shifting costs to a supplier upstream in the channel (e.g. Kanban) or downstream the channel (e.g. Kanban) or downstream

to a customer (e.g. placing order by to a customer (e.g. placing order by

computer terminal), the logistics computer terminal), the logistics

manager can shift fixed investment cost manager can shift fixed investment cost

and risk outside the firm.