CHAPTER 15
I. THE ROLE OF
DISTRIBUTION IN BUSINESS.
LEARNING GOAL 1.
Explain the value of marketing intermediaries.
A. THE THIRD 'P.'
1. PHYSICAL
DISTRIBUTION is the movement of goods from producers to users.
a. It involves
functions such as transportation and storage.
b. Other activities
include purchasing goods, receiving them, inventorying them, storing them, and
shipping finished goods to final users.
2. MARKETING
INTERMEDIARIES are organization that assist in moving goods and services from
producer to industrial and consumer users.
a. They are
organizations in the middle of a series of organizations that join together to
help distribute goods.
b. A CHANNEL OF
DISTRIBUTION consists of marketing intermediaries who join together to
transport and store goods in their path.
c. A WHOLESALER is
a marketing intermediary that sells to other organizations.
d. A RETAILER is an
organization that sells to ultimate consumers.
3. CHANNELS OF
DISTRIBUTION enhance communication flows and the flow of money and title to
goods.
4. There are many
career opportunities in logistics, as more firms move into international
distribution.
5. Logistics costs
are about 10% of the total gross domestic product in the U.S.
B. FROM LOGISTICS
TO SUPPLY CHAIN MANAGEMENT.
1. The management
of global distribution flows has changed so dramatically that a new term has
evolved.
2. SUPPLY CHAIN
MANAGEMENT (SCM) is the overall process of minimizing inventory and moving
goods through the channel faster by using computers to improve communication
among the channel members.
3. The whole system
is often called the VALUE CHAIN because the value created by such an efficient
system is so great.
4. Much lower
levels of inventory are possible because firms now have better communication
links with, and faster response times from, their suppliers.
5. QUICK RESPONSE
is the term used to describe the efforts by producers and suppliers to send
goods to retailers and to each other as quickly as possible.
C. ELECTRONIC DATA
INTERCHANGE AND EFFICIENT CONSUMER RESPONSE.
1. ELECTRONIC DATA
INTERCHANGE (EDI) enables the computers of producers, wholesalers, and
retailers to 'talk' with each other.
a. The supplier
knows that new goods must be shipped as soon as the retail sale is made.
b. Shippers are
assisting their customers by providing information as well as moving goods
efficiently.
c. Some companies
are working together on functions including forecasting, distribution, and
marketing.
d. The higher the
level of trust becomes among the companies involved, the more efficient the
system becomes.
2. EFFICIENT
CONSUMER RESPONSE (ECR) is the term used in the grocery industry to describe
the linking of firms to provide more efficient response to consumer needs.
a. Cost reductions
using supply chain management have been 30% or more, with similar reductions in
inventory.
b. The effect of such
systems has been to eliminate some intermediaries because the manufacturer is
now performing those functions.
D. WHY MARKETING
NEEDS INTERMEDIARIES
1. Manufacturers
don't always need marketing intermediaries to sell their goods to consumer and
industrial markets.
2. In the past,
intermediaries performed certain functions better than most manufacturers.
These functions include transportation, storage, selling, and advertising.
3. BROKERS are
marketing intermediaries who bring buyers and sellers together and assist in
negotiating an exchange, but do not take title to the goods.
E. HOW
INTERMEDIARIES CREATED EXCHANGE EFFICIENCY.
1. Intermediaries
CREATE EXCHANGE EFFICIENCY by decreasing the number of contacts needed to
establish marketing exchanges.
2. Not only are
intermediaries more efficient, but they are more effective than manufacturers
as well.
3. Intermediaries
were often better at performing their functions than a manufacturer or consumer
could be.
4. Recently,
technology has made it possible for manufacturers to reach consumers much more
efficiently.
a. Some
manufacturers reach consumers directly on the Internet.
b. Retailers are
now so closely linked with manufacturers that they can get delivery several
times a day.
5. Wholesalers are
not yet obsolete, but must change their functions to remain viable.
H. THE VALUE
CREATED BY INTERMEDIARIES.
1. Some people
think that if we could get rid of intermediaries, we could greatly reduce the
cost of the things we buy.
2. The text uses
the example of Fiberiffic to illustrate how marketing intermediaries facilitate
the movement of goods.
3. Values discussed
include: the value of not driving to Michigan to buy a box of cereal, the value
of saving time and effort by not having to drive to a wholesaler's on the
outskirts of town.
4. The text
emphasizes three basic facts about intermediaries:
a. Intermediaries
CAN BE ELIMINATED, BUT THEIR ACTIVITIES CANNOT BE ELIMINATED.
(i) Today many
activities are being performed on the World Wide Web, and intermediaries ARE
being eliminated.
(ii) The term for
eliminating intermediaries is 'DISINTERMEDIATION.'
b. Intermediaries
have survived in the past BECAUSE THEY PERFORM FUNCTIONS MORE EFFECTIVELY AND
EFFICIENTLY THAN MOST MANUFACTURERS.
c. Intermediaries
ADD COSTS TO PRODUCTS, BUT THESE COSTS ARE OFFSET BY VALUES THEY CREATE.
II. HOW
INTERMEDIARIES ADD UTILITY TO GOODS.
LEARNING GOAL 2.
Give examples of how intermediaries perform the five utilities.
A. UTILITY is an
economic term for the value, or want-satisfying ability, that is added to goods
or services by organizations because the products are made more useful or
accessible to consumers.
B. FORM UTILITY.
1. Form utility
consists of taking raw materials and changing their form so that they become
useful products.
2. It is performed
by producers; the four other forms of utility (time, place, possession, and
information) are performed by marketers.
C. TIME
UTILITY-Intermediaries, such as retailers, add time utility to products by
making them available when they are needed.
D. PLACE
UTILITY-Intermediaries add place utility to products by having them where
people want them.
E. POSSESSION
UTILITY-Intermediaries add possession utility by doing whatever is necessary to
transfer ownership from one party to another, including providing credit.
1. Activities
include delivery, installation, guarantees, and follow-up service.
2. For those who
don't want to own goods, possession utility makes it possible for them to use
goods through renting.
F. INFORMATION
UTILITY-Intermediaries add information utility by opening two-way flows of
information between marketing participants.
G. SERVICE UTILITY.
1. Intermediaries
add service utility by providing fast, friendly service during and after the
sale and teaching customers how to best use products.
2. Service utility
is fast becoming the most important utility for retailers.
H. For consumers to
receive the maximum benefit from marketing intermediaries, the organizations
must work together.
III. BUILDING
COOPERATION IN CHANNEL SYSTEMS.
LEARNING GOAL 3.
Discuss how a manufacturer can get wholesalers and retailers in a channel
system to cooperate by the formation of systems.
A. Firms are often
linked together in formal relationships to form efficient DISTRIBUTION SYSTEMS.
B. A CORPORATE
DISTRIBUTION SYSTEM is one in which all the organizations in the channel are
owned by one firm.
C. CONTRACTUAL
DISTRIBUTION SYSTEM is one in which members are bound to cooperate through
contractual agreements.
1. In FRANCHISING
SYSTEMS (such as McDonald's, KFC, Baskin-Robbins, and AAMCO), the franchisee
agrees to all of the rules, regulations, and procedures established by the
franchiser.
2. In
WHOLESALER-SPONSORED CHAINS (Western Auto and IGA food stores), each store
agrees to use the name, participate in chain promotions, and cooperate even
though each store is independently owned.
3. RETAIL
COOPERATES (Associated Grocers) is like a wholesaler-sponsored chain except it
is initiated by the retailers.
D. ADMINISTERED
DISTRIBUTION SYSTEM.
1. The management
by producers of all the marketing functions at the retail level is called an
ADMINISTERED DISTRIBUTION SYSTEM.
2. Retailers
cooperate because they get so much free help.
E. VALUE CHAINS.
1. The VALUE CHAIN
is the sequence of linked activities performed by various organizations to move
goods from the sources to ultimate consumers.
2. Any one company
assumes just a few activities, relying on other members of the channel of distribution
to handle the others.
3. By sharing
information and providing fast service, these united firms are becoming
competitive entities in the global market.
IV. PHYSICAL
DISTRIBUTION (LOGISTICS) MANAGEMENT.
LEARNING GOAL 4.
Describe in detail what's involved in physical distribution management.
A. Historically,
intermediaries helped to perform the distribution function.
1. A MODE refers to
the various means used to transport goods such as trucks, trains, planes,
ships, and pipelines.
2. Today, logistics
systems involve whatever it takes to see that the right products are sent to
the right place quickly.
3. Many firms have
introduced JUST-IN-TIME (JIT) INVENTORY CONTROLS. Manufacturers:
a. Can cut back on their
inventory in warehouses.
b. Count on
suppliers to deliver needed parts just in time to go onto production lines.
4. Some problems
have emerged with JIT systems, such as weather slowing the flow of goods.
5. As a result,
companies often keep a small inventory on hand to assure goods will be
available.
B. METHODS USED TO
MOVE RAW MATERIALS AND FINISHED GOODS.
1. One concern is
selecting a transporting mode that will minimize costs and ensure a certain
level of service.
2. The largest
percentage of goods is shipped by RAIL.
a. Railroad
shipment is best for bulky items.
b. Railroads
continue to handle about 35 to 40% of the total volume of goods in the U.S.
c. PIGGYBACK refers
to shipping the cargo-carrying part of a truck on a railroad car.
3. The
second-largest surface transportation mode is MOTOR VEHICLES (a little over 25%
of the volume.)
a. Trucks can
deliver almost any commodity door-to-door.
b. Now piggybacking
methods involve railroad cars 20 feet high called double- stacks.
4. WATER TRANSPORTATION
carries 15 to 17% of the total.
a. When truck
trailers are placed on ships, the process is called FISHYBACK.
5. About 21% of the
total volume moves by PIPELINE.
a. Pipelines are
used primarily for transporting petroleum and petroleum products.
b. There have been
experiments with sending other solids in pipelines.
6. Only a small
part of shipping is done by AIR.
a. The primary
benefit is SPEED.
b. The air freight
industry is starting to focus on global distribution.
C. INTERMODAL
SHIPPING.
1. INTERMODAL
SHIPPING uses multiple modes of transportation to complete a single
long-distance movement of freight.
2. It accounts for
about 15% of trailerload shipments moving more than 500 miles.
D. THE STORAGE
FUNCTION.
1. Storage accounts
for 25 to 30% of physical distribution costs.
2. A STORAGE
WAREHOUSE stores products for a relatively long time.
3. DISTRIBUTION
WAREHOUSE gather and redistribute products (UPS).
F. MATERIALS
HANDLING is the movement of goods within a warehouse, factory, or store.
V. WHOLESALE
INTERMEDIARIES.
LEARNING GOAL 5.
Describe the various wholesale organizations in the distribution system.
A. DIFFERENCES
BETWEEN WHOLESALERS AND RETAILERS.
1. Some producers
won't sell directly to retailers but only to wholesalers.
2. Some
organizations sell much of their merchandise to other intermediaries, but also
sell to ultimate consumers.
3. A RETAIL SALE is
the sale of goods and services to consumers for their own use.
4. A WHOLESALE SALE
is the sale of goods and services to businesses and institutions for use in the
business to others for resale.
B. MERCHANT
WHOLESALERS are independently-owned firms that take title to goods that they
handle.
1. FULL-SERVICE
WHOLESALERS perform all eight distribution functions: transportation, storage,
risk bearing, credit, market information, grading, buying, and selling.
2. LIMITED-FUNCTION
WHOLESALERS perform only selected functions, but do them especially well.
3. RACK JOBBERS
furnish racks or shelves full of merchandise to retailers, display products,
and sell on consignment.
4. CASH-AND-CARRY
WHOLESALERS serve mostly smaller retailers with a limited assortment of
products.
a. Cash-and-carry
wholesalers also sell to the general public in warehouse clubs.
b. One function of
these clubs is to provide small businesses with merchandise and supplies at low
prices.
5. DROP SHIPPERS
solicit orders from retailers and other wholesalers and have the merchandise
shipped directly from a producer to a buyer.
6. A FREIGHT
FORWARDER puts many small shipments together to create a single, large shipment
that can be transported more cost-efficiently to the final destination.
VI. RETAIL
INTERMEDIARIES.
LEARNING GOAL 6.
List and explain the ways that retailers compete.
A. A RETAILER is a
marketing middleman that sells to consumers.
1. The U.S. has
about 2.3 million retail stores.
2. About 11 million
people work for retail organizations.
B. HOW RETAILERS
COMPETE: BENCHMARKING AGAINST THE BEST.
1. PRICE
COMPETITION.
a. Discount stores
such as Wal-Mart succeed with low prices.
b. Price
competition from warehouse stores has hurt many retailers.
c. Service
organizations, such as Southwest Airlines, also compete on price.
2. SERVICE
COMPETITION.
a. Retail service
involves putting the customer first and providing follow-up service.
b. Consumers are
frequently willing to pay a little more if the retailer offers outstanding
service.
c. The benchmark
companies are Dayton's, Lord amp; Taylor, Dillard's, and Nordstrom.
3. LOCATION
COMPETITION-Many services compete effectively by having good locations.
4. SELECTION
COMPETITION.
a. Selection is the
offering of a wide variety of items in the same product category, such as Toys
'R' Us.
b. CATEGORY KILLER
STORES offer wide selection at competitive prices.
c. Smaller
retailers compete with category killers by offering more selection within a
smaller category of items.
d. Service
organizations that compete successfully on selection include Blockbuster Video
and most community colleges.
5. TOTAL QUALITY
COMPETITION.
a. A total quality
retailer offers low price, good service, wide selection, and total quality
management.
b. The benchmark
retailer in this category is Wal-Mart.
C. RETAILERS AND
COMPUTER TECHNOLOGY.
1. Few small
retailers can thrive without the use of computers, such as Gene's Books in King
of Prussia, Pennsylvania.
2. He installed a
sophisticated inventory and point-of-sale computer system so he can keep track
of his inventory and link with suppliers.
D. RETAIL
DISTRIBUTION STRATEGY.
1. Different
products call for different retail distribution strategies.
2. INTENSIVE
DISTRIBUTION puts products into as many retail outlets as possible, including
vending machines.
3. SELECTIVE
DISTRIBUTION is the use of only a preferred group of the available retailers in
an area.
4. EXCLUSIVE
DISTRIBUTION is the use of only one retail outlet in a geographic area.
VII. NONSTORE
RETAILING.
LEARNING GOAL 7.
Explain the various kinds of non-store retailing.
A. TELEMARKETING.
1. TELEMARKETING is
the sale of goods and services by telephone.
2. Telemarketing is
predicted to be one of the fastest-growing areas in marketing.
B. VENDING
MACHINES, KIOSKS AND CARTS.
1. The benefit of
vending machines is their convenient location.
2. Carts and kiosks
have lower costs that stores, so they can offer lower prices.
C. DIRECT SELLING
1. DIRECT SELLING
is selling to consumers in their homes or where they work.
2. Because so many
women now work, many companies are sponsoring parties at workplaces and on
weekends and evenings.
D. MULTILEVEL
MARKETING.
1. Each MLM
salesperson works as an independent contractor.
2. They earn
commissions on their own sales and create commissions for the 'upliners' who
recruited them.
3. They also receive
commissions from 'down liners' who they recruit to sell.
4. Multilevel
marketing has been successful around the world.
5. The main
attraction of multilevel marketing is the low cost of entry.
6. Be careful not
to confuse multilevel marketing with 'pyramid' schemes that are illegal.
E. DIRECT MARKETING
GOES ONLINE.
1. One of the
fastest-growing aspects of retailing is DIRECT MARKETING, includes any
marketing activity that directly links manufacturers or intermediaries with the
ultimate consumer.
2. Direct retail
marketing includes direct mail, catalog sales, telemarketing, and on-line
shopping.
3. Examples are
L.L. Bean, Lands' End, Dell Computers, and Gateway 2000.
4. Direct marketing
has become popular be cause it is more convenient for consumers.
5. Interactive
online selling is expected to pro vide major competition for retail stores in
the future.