In addition to the strategic supply chain issues discussed to this point, a number of trends have shaped the structure of marketing channels and the ways that supply chains function. In this section, we examine a number of these trends
Technological Improvements Significant advancements in information processing and digital communication have created new methods for placing and filling orders for both business buyers and consumers. The growth of the Internet and electronic commerce is the most obvious sign of these changes. As business buyers and consumers more fully embrace these technologies, the growth of e-commerce is expected to flourish. For example, e-commerce accounted for fewer than 20 percent of transactions in the manufacturing sector in 2002. Today, that number is over 46 percent. In the wholesaling sector, e-commerce accounts for roughly 25 percent of all transactions. Conversely, ecommerce accounts for only 4.4 percent of all retail transactions, and only 2.3 percent of transactions in service-based industries. Still, e-commerce in these consumer markets is growing at roughly 16 percent per year. These statistics show that electronic commerce still has a great deal of room to grow, especially in consumer markets
Another promising technology is radio frequency identification (RFID), which involves the use of tiny computer chips with radio transmission capability that can be attached to a product or its packaging. The radio signals reflected from the chip can be used to track inventory levels and product spoilage, or prevent theft. They can also be used for instantaneous checkout of an entire shopping cart of items. As addressed in Beyond the Pages 6.3, large retailers and packaged goods manufacturers have adopted RFID, which will eventually replace bar codes as a means to manage inventory. Innovations in web-based communication technologies such as global positioning, are also taking rail and truck equipment to a new level of service in supply chain integration.
Outsourcing Channel Functions Outsourcing shifting work activities to businesses outside the firm is a rapidly growing trend across many different industries and supply chains. In the past, outsourcing was used primarily as a way of cutting expenses associated with labor, transportation, or other overhead costs. Today, though cutting expenses is still a main factor, the desire of many firms to focus on core competencies drives outsourcing. By outsourcing non-core activities, firms can improve their focus on what they do best, free resources for other purposes, and enhance product differentiation all of which lead to greater opportunities to develop and maintain competitive advantages. The hourly labor costs in countries such as China, India, and Mexico are far less than in the United States or Europe. These developing countries have improved their manufacturing
capabilities, infrastructure, and technical and business skills, making them more attractive regions for global sourcing. On the other hand, the costs and risks of outsourcing halfway around the world must be taken into consideration. Firms that outsource give up a measure of control over key factors such as data security and the quality of service delivered to customers. To combat these issues, many firms have shifted from outsourcing to offshoring of their own activities. These companies set up their own offshore operations (called captives) to handle business processes where wage rates are lower. ANZ Bank (Australia and New Zealand Banking Group), for example, uses a captive operation in India to handle back-office processing for credit cards, mortgages, wealth management, human resources, and IT development.
As illustrated in Exhibit 6.8, information technology is the primary activity outsourced today. Currently, however, firms are shifting supporting processes to outside businesses. These supporting processes include administrative activities, distribution, human resources, financial analysis, call centers, and even sales and marketing. When a firm has significant needs and insufficient in-house expertise, the importance of outsourcing will increase. For example, an entire industry known as 3PLs (third party logistics providers) has emerged in the United States and Europe as retailers look toward outside expertise as a way to reduce costs and make their products more readily available. In fact, roughly 77 percent of Fortune 500 firms use 3PLs to manage inventories and handle the physical movement of products in the supply chain to ensure that items are in the right amounts and in the right places when needed.
Technological Improvements Significant advancements in information processing and digital communication have created new methods for placing and filling orders for both business buyers and consumers. The growth of the Internet and electronic commerce is the most obvious sign of these changes. As business buyers and consumers more fully embrace these technologies, the growth of e-commerce is expected to flourish. For example, e-commerce accounted for fewer than 20 percent of transactions in the manufacturing sector in 2002. Today, that number is over 46 percent. In the wholesaling sector, e-commerce accounts for roughly 25 percent of all transactions. Conversely, ecommerce accounts for only 4.4 percent of all retail transactions, and only 2.3 percent of transactions in service-based industries. Still, e-commerce in these consumer markets is growing at roughly 16 percent per year. These statistics show that electronic commerce still has a great deal of room to grow, especially in consumer markets
Another promising technology is radio frequency identification (RFID), which involves the use of tiny computer chips with radio transmission capability that can be attached to a product or its packaging. The radio signals reflected from the chip can be used to track inventory levels and product spoilage, or prevent theft. They can also be used for instantaneous checkout of an entire shopping cart of items. As addressed in Beyond the Pages 6.3, large retailers and packaged goods manufacturers have adopted RFID, which will eventually replace bar codes as a means to manage inventory. Innovations in web-based communication technologies such as global positioning, are also taking rail and truck equipment to a new level of service in supply chain integration.
Outsourcing Channel Functions Outsourcing shifting work activities to businesses outside the firm is a rapidly growing trend across many different industries and supply chains. In the past, outsourcing was used primarily as a way of cutting expenses associated with labor, transportation, or other overhead costs. Today, though cutting expenses is still a main factor, the desire of many firms to focus on core competencies drives outsourcing. By outsourcing non-core activities, firms can improve their focus on what they do best, free resources for other purposes, and enhance product differentiation all of which lead to greater opportunities to develop and maintain competitive advantages. The hourly labor costs in countries such as China, India, and Mexico are far less than in the United States or Europe. These developing countries have improved their manufacturing
capabilities, infrastructure, and technical and business skills, making them more attractive regions for global sourcing. On the other hand, the costs and risks of outsourcing halfway around the world must be taken into consideration. Firms that outsource give up a measure of control over key factors such as data security and the quality of service delivered to customers. To combat these issues, many firms have shifted from outsourcing to offshoring of their own activities. These companies set up their own offshore operations (called captives) to handle business processes where wage rates are lower. ANZ Bank (Australia and New Zealand Banking Group), for example, uses a captive operation in India to handle back-office processing for credit cards, mortgages, wealth management, human resources, and IT development.
As illustrated in Exhibit 6.8, information technology is the primary activity outsourced today. Currently, however, firms are shifting supporting processes to outside businesses. These supporting processes include administrative activities, distribution, human resources, financial analysis, call centers, and even sales and marketing. When a firm has significant needs and insufficient in-house expertise, the importance of outsourcing will increase. For example, an entire industry known as 3PLs (third party logistics providers) has emerged in the United States and Europe as retailers look toward outside expertise as a way to reduce costs and make their products more readily available. In fact, roughly 77 percent of Fortune 500 firms use 3PLs to manage inventories and handle the physical movement of products in the supply chain to ensure that items are in the right amounts and in the right places when needed.
The Growth of Nontraditional Channels While the traditional marketing channel of manufacturer to wholesaler to retailer is alive and well today, customers’ demands for lower prices and greater convenience have put pressure on all channel intermediaries to justify their existence. Every time a different intermediary handles a product, the cost to the final customer increases. This places a great deal of downward pressure on profit margins as firms struggle to balance their need for profit with the need to offer customers good value and fair prices. Under such circumstances, the channel typically evolves into a more direct form. Keep in mind, however, that channel evolution does not replace or alter the basic functions that all channels must perform (e.g., sorting, breaking bulk, holding inventory, etc.). Even after the elimination of certain channel intermediaries, other firms or even the customer will have to step in and fulfill these basic functions.
A number of nontraditional channels have emerged to expand opportunities for more direct distribution. The fastest growing example of this trend is e-commerce. However there are other forms of direct distribution that occur outside the traditional “bricksand- mortar” of physical stores:
Catalog and Direct Marketing. Some of the most popular and successful direct merchants, including Lands’ End, J. Crew, IKEA, Cabela’s, and GEICO Insurance, are catalog and direct marketers.
• Direct Selling. These merchants sell through face-to-face contact with sales associates. Examples include Avon, Tupperware, Discovery Toys, and Pampered Chef. Avon is far and away the largest with over $11 billion in sales each year.
• Home Shopping Networks. Networks like QVC and the Home Shopping Network serve millions of satisfied customers every week.
• Vending. The advantage of vending is 24/7/365 product availability in virtually any location. Though soft drinks account for over 50 percent of vending sales, products such as flowers, toothpaste, movies, and fishing bait can now be purchased via vending machines
Direct Response Advertising. Many companies sell music, toy, and book products via television commercials and 1-800 phone numbers. One of the largest is Time Life, which sells millions of books, CDs, and DVDs each year. Infomercials, a cross between an advertisement, a news program, and a documentary, are also popular programs for products such as exercise equipment and kitchen appliances.
One of the benefits of nontraditional channels for manufacturers is the ability to offer two or more lines of the same merchandise through two or more channels (often called dual distribution), thus increasing sales coverage. For example, Hallmark sells its highly respected Hallmark line of greeting cards primarily through selective distribution at Hallmark stores. They make their Ambassador and Shoebox Greetings card lines available on an intensive basis through supermarkets, drug stores, and discount retailers. In addition,Hallmark offers both cards and e-cards online. One of the consequences of using multiple channels, however, is that it increases the risk of disintermediation, where customers deal directly with manufacturers and bypass traditional channel intermediaries. Consequently, the use of multiple channels can create conflict between the manufacturer and its supply chain partners. For example, Apple sells the same products in its online store, its physical stores, at large retailers (Best Buy, Walmart, Target), and at Amazon, among others. It is quite common for customers to look at Apple products in retail stores, but then make the actual purchase online at either Apple or Amazon (sometimes even while standing in the store). Amazon’s low prices, free shipping, and lack of sales tax in many states also puts physical stores at a disadvantage. For these reasons, manufacturers must carefully weigh the benefits of dual distribution against its potential drawbacks.
A number of nontraditional channels have emerged to expand opportunities for more direct distribution. The fastest growing example of this trend is e-commerce. However there are other forms of direct distribution that occur outside the traditional “bricksand- mortar” of physical stores:
Catalog and Direct Marketing. Some of the most popular and successful direct merchants, including Lands’ End, J. Crew, IKEA, Cabela’s, and GEICO Insurance, are catalog and direct marketers.
• Direct Selling. These merchants sell through face-to-face contact with sales associates. Examples include Avon, Tupperware, Discovery Toys, and Pampered Chef. Avon is far and away the largest with over $11 billion in sales each year.
• Home Shopping Networks. Networks like QVC and the Home Shopping Network serve millions of satisfied customers every week.
• Vending. The advantage of vending is 24/7/365 product availability in virtually any location. Though soft drinks account for over 50 percent of vending sales, products such as flowers, toothpaste, movies, and fishing bait can now be purchased via vending machines
Direct Response Advertising. Many companies sell music, toy, and book products via television commercials and 1-800 phone numbers. One of the largest is Time Life, which sells millions of books, CDs, and DVDs each year. Infomercials, a cross between an advertisement, a news program, and a documentary, are also popular programs for products such as exercise equipment and kitchen appliances.
One of the benefits of nontraditional channels for manufacturers is the ability to offer two or more lines of the same merchandise through two or more channels (often called dual distribution), thus increasing sales coverage. For example, Hallmark sells its highly respected Hallmark line of greeting cards primarily through selective distribution at Hallmark stores. They make their Ambassador and Shoebox Greetings card lines available on an intensive basis through supermarkets, drug stores, and discount retailers. In addition,Hallmark offers both cards and e-cards online. One of the consequences of using multiple channels, however, is that it increases the risk of disintermediation, where customers deal directly with manufacturers and bypass traditional channel intermediaries. Consequently, the use of multiple channels can create conflict between the manufacturer and its supply chain partners. For example, Apple sells the same products in its online store, its physical stores, at large retailers (Best Buy, Walmart, Target), and at Amazon, among others. It is quite common for customers to look at Apple products in retail stores, but then make the actual purchase online at either Apple or Amazon (sometimes even while standing in the store). Amazon’s low prices, free shipping, and lack of sales tax in many states also puts physical stores at a disadvantage. For these reasons, manufacturers must carefully weigh the benefits of dual distribution against its potential drawbacks.
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