Strategic supply chain issues

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The importance of the supply chain ultimately comes down to providing time, place, and possession utility for consumer and business buyers. Without good distribution, buyers would not be able to acquire goods and services when and where they need them. However, the expense of distribution requires that firms balance customers’ needs with their own need to minimize total costs. Exhibit 6.7 provides a breakdown of total distribution costs across key activities. Note that 42 percent of these expenses are associated with storing and carrying inventory—key factors in ensuring product availability for customers. To manage these costs efficiently, distribution strategy must balance the needs of customers with the needs of the firm.
 

 Marketing Channel Functions 

Marketing channels make our lives easier because of the variety of functions performed by channel members. Likewise, channel members, particularly manufacturers, can cut costs by working through channel intermediaries
 

The most basic benefit of marketing channels is contact efficiency, where channels reduce the number of contacts necessary to exchange products. Without contact efficiency, we would have to visit a bakery, poultry farm, slaughterhouse, and dairy just to assemble the products necessary for breakfast. Likewise, contact efficiency allows companies such as Del Monte Foods to maximize product distribution by selling to select intermediaries. For Del Monte, Walmart stores account for over 31 percent of the company’s sales volume. Del Monte’s next nine largest customers account for another 30 percent of the company’s sales. These percentages will increase if additional consolidation among food retailers and growth of mass merchandisers continues.  Throughout a marketing channel, some firms are good at manufacturing, some are good at transportation or storage, and others are better at selling to consumers. Given  the costs involved, it is virtually impossible for a single firm to perform all channel

functions well. As a result, channel intermediaries typically attain a level of specialization in one or more of the following functions:

• Sorting. Manufacturers make one or a few products while customers need a wide  variety and deep assortment of different products. By sorting products in the channel, intermediaries overcome this discrepancy of assortment.
• Breaking Bulk. Manufacturers produce large quantities of a product to gain the benefits of economies of scale. However, customers typically want only one of a particular item. By breaking bulk in the channel, intermediaries particularly retailers overcome this discrepancy of quantity.
• Maintaining Inventories. Since manufacturers cannot make products on demand, the channel must provide for the storage of products for future purchase and use. By maintaining inventories, intermediaries overcome this temporal (time) discrepancy. Note that this does not apply to services such as haircuts or airline flights where the product is produced and consumed simultaneously.

• Maintaining Convenient Locations. Since manufacturers and customers are separated geographically, the channel must overcome this spatial discrepancy by making products available in convenient locations.
• Provide Services. Channels add value to products by offering facilitating services (e.g., insurance, storage, financing) and standardizing the exchange process (e.g., payment processing, delivery, pricing).

With the exception of highly intangible services like consulting, education, or counseling, the fulfillment of these functions occurs in every marketing channel. Also, these functions must be fulfilled in order for the channel to operate effectively. It does not matter which intermediary performs these functions; the fact remains that they must be performed. For example, Sam’s Club does not break bulk in the traditional sense. Sam’scustomers buy in large quantities and actually break bulk after purchase. Further, many  emerging trends in distribution and supply chain management have blurred the responsibilities of different intermediaries. Today, large retailers are essentially a one-stop channel of distribution. Due to their immense size and bulk buying ability, these firms now fulfill virtually all traditional channel functions.


Marketing Channel Structure There are many strategic options for the structure of a marketing channel; these strategies are often complex and very costly to implement. However, a good distribution strategy is essential for success because once a firm selects a channel and makes commitments to it, distribution often becomes highly inflexible due to long-term contracts, sizable investments, and commitments among channel members. There are three basic structural options for distribution in terms of the amount of market coverage and level of exclusivity between vendor and retailer:

• Exclusive Distribution. Exclusive distribution is the most restrictive type of market coverage. Firms using this strategy give one merchant or outlet the sole right to sell a product within a defined geographic region.
• Selective Distribution. Firms using selective distribution give several merchants or outlets the right to sell a product in a defined geographic region. Selective distribution is desirable when customers need the opportunity to comparison shop, and after-sale services are important
• Intensive Distribution. Intensive distribution makes a product available in the maximum number of merchants or outlets in each area to gain as much exposure and as many sales opportunities as possible.

Channel structure is clearly linked to other elements in the marketing program and can be an integral part of both branding strategy and product positioning. For example, exclusive distribution is commonly associated with prestige products, major industrial equipment, or with firms that attempt to give their products an exclusive or prestige image (for example, BMW, Jaguar, and Mercedes). Firms that pursue exclusive distribution usually target a single, welldefined market segment. Selective distribution is used across many product categories, including clothing (Tommy Hilfiger), cosmetics (Clinique), electronics (Bose), franchising (McDonald’s), and premium pet food (Science Diet). These and other companies carefully screen the image and selling practices of merchants to ensure that they match those of the manufacturer and its products. Intensive distribution is the best option for most consumer convenience goods, such as candy, soft drinks, over-the-counter drugs, or cigarettes; and for business office supplies like paper and toner cartridges. To gain this visibility and sales volume, the manufacturer must give up a good degree of control over pricing and product display. If a customer cannot find one firm’s products in a given location, they will simply substitute another brand to fill the need.

Power in the Supply Chain True supply chain integration requires a fundamental change in how channel members work together. Among these changes is a move from a “win–lose” competitive attitude to a “win–win” collaborative approach in which there is a common realization that all firms in the supply chain must prosper. Consider the Toro Company that sells turf maintenance equipment, irrigation systems, landscaping equipment, and yard products to both professional and residential markets. This requires many different distributors and dealers (many of which are quite small), as well as supplying products to large national retailers such as Home Depot. If one of Toro’s products is made available in Home Depot, it is likely to have a lower retail price (due to bulk buying) than the same or similar product at a local tractor supply company. This situation is clearly not in the best interests of the local firm, so it will strive to put its interests ahead of others in the supply chain. However, the local tractor supply company also understands that it must service Toro equipment no matter where it was purchased  if it is to remain a certified service facility. For the local firm, putting the needs of the supply chain ahead of its own needs is likely to create tension and conflict with the Toro Company. In situations like this, each firm will exhibit a different degree of authority or power in managing or controlling the activities within the supply chain. There are five basic sources of power in a supply chain:

• Legitimate Power. This power source is based on the firm’s position in the supply chain. Historically, manufacturers held most of the legitimate power, but this power balance shifted to retailers in the 1990s. In today’s economy, retailers still wield a great deal of power; but consumers are clearly in charge.
•  Reward Power. The ability to help other parties reach their goals and objectives is the crux of reward power. Rewards may come in terms of higher volume sales, sales with more favorable margins, or both. Individual salespeople at the buyer end of the channel may be rewarded with cash payments, merchandise, or vacations to gain more favorable presentation of a manufacturer’s or wholesaler’s products
•  Coercive Power. The ability to take positive outcomes away from other channel members, or the ability to inflict punishment on other channel members. For example, a manufacturer may slow down deliveries or postpone the availability of some portions of a product line to a wholesaler or retailer. Likewise, a retailer can decide to not carry a product, not promote a product, or to give a product unfavorable placement on its shelves.
•  Information Power. Having and sharing knowledge is the root of information power. Such knowledge makes channel members more effective and efficient. Information power may stem from knowledge concerning sales forecasts, market trends, competitive intelligence, product uses and usage rates, or other critical pieces of information. In many supply chains, retailers hold the most information power because their close proximity to customers gives them access to data and information that is difficult to obtain from other sources
•  Referent Power. Referent power has its basis in personal relationships and the fact that one party likes another party. It has long been said that buyers like to do business with salespeople they enjoy being around. This is still true, but increasingly referent power has its roots in firms wanting to associate with other firms, as opposed to individual one-on-one relationships. Similar cultures, values, and even information systems can lead to the development of referent power.

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