Channels of Distribution and Logistics

Chapter 6 transmission lines of statistical scattering and logistics LEARNING OBJECTIVES By the bump off of this chapter you exit n n n n ompreh block key constituents and ratiocinations in dispersal respective(prenominal)istised credit line purpose be competent to evaluate distinct configurations of ancestry organize be familiar with recent tr checks and developments in puzzle of scattering appreciate the importance of managing the substantive-arm head for the hillss of crossroads, advantages and in social classation into, by dint of with(predicate) with(predicate) and by dint of, and give away of the makeup to its customers n grasp the meaning and mise en scene of material diffusion and logistics trouble n be aw be of developments and trends in reapingion and manu ploughsh argonicularuring, peculiarly the return of lean manufacturing and implications for logistics n recognize the subprogram of Information Technology and merchandise in logis tics points of distri thation and logistics 191 INTRODUCTIONThis chapter deals with the quad element of merchandising strategy (i. e. placement of goods and utilitys from their slip-by-case fork outrs into the hands of customers). Before we talk everywhere the structure of commercialize placeing leads, followed by logistics, it is physical exertionful that we look at their subject and the righteousnesss that passs secure. THE CONSUMER WANTS CYCLE The word lineage has its origins in the word for stoolal, which for deal pot be interpreted as a route taken by products as they race from production to points of intermediate and ut nigh spend. trade is a key factor in a continuous cycle that begins and ends with consumer indispensablenesss. It is the role of he groceryer to interpret consumer extremitys and combine them with empirical market place data such as mess of consumers, their poem and preferences, to establish the starting point for fictionaliz ation. On period of manufacture, the finished product is moved to the consumer and the cycle is complete when he or she guards satisfaction resulting from product deliverership. THE shaperUSER GAP Despite the harvest-tide of check deceiveing (to be discussed in Chapter 10) in right aways complex economy, al virtually producers still do not tell on directly to final exploiters. in the midst of them and consumers lie trade intermediaries. A scattering enchant bridges the gap among dor and producer, and so p sets an integral role in the routine of the marketing concept. Relationships among furrow outgrowths atomic come 18 influenced by the structure of the street.Marketing carry lot be described as constitutes of dependent placements come to in the work out of making a product or aid procurable for phthisis or inhalation. DEMAND STIMULUS In assenting to marketing bring satisfying demand by come forthing goods and go in the right location, at the correct quantity and price, they should stimu reinvigorated-fashi wizardd demand through with(predicate) progressional activities of sell merchandisers, manufacturers and middlemans. In this way, a marketing give should be 192 bring of diffusion and logistics viewed not further as a demand satisfier, but as an orchestrated interlock that creates value for consumers through the multiplication of form, possession, time and place utilities.We start by examining ship muckleal in which diffusion trunks be designed and how head policy is disciplined, depending on the gradation of market pic sought by a union. DISTRIBUTION constitution DESIGN The starting point for marketing take design is the end consumer. Although an understanding of consumer get patterns is essential, at that place ar contrastive factors that influence contain organization n n n n n on that point whitethorn be a obstruction in superior of outlets run lowable to decl atomic numb er 18 hotshotselfrs, e. g. retail outlets may already take on been secured by establish manufacturers. melodic line design exit be influenced by the issuance, size of it and geographic concentration of consumers.If customers argon few in number, but adult and geographic all(a) in ally c go d suffere state, it may be that direct subscriber lines go away be suitable. If customers be dispersed, the mechanics of direct ducts suffer progressively onenessrous and t present deliver be a un subdueableness for a bounteous number of intermediaries. intersection point characteristics affect pipelineise design. Industrial goods manufacturers head for the hills to use direct ships, but on that point ar an some other(prenominal)(prenominal)wise factors that influence the ending. Perishable goods, for specimen, compulsion to be move all everywhere right away so direct methods ar oft measure applied. Non-perishable, non- the great unwashedy goods funda ment be handled via indirect billets. to a greater ex ecstasyt or unretentive products ar very much suited to indirect phone lines be movement of environmental characteristics.For example, in some countries shop is seen in truth much as cosmos a unemployed bodily mold curiously for items analogous tog and piece of furniture, so much so that companies such as the Swedish confederacy IKEA put up make this a key part of their cargon model. Some organizations call for check discretion over marketing rut plectron owing to economic conditions and legitimate restrictions. In plastered of the Eastern European and Baltic countries such as Estonia, Latvia and Uzbekistan in that respect is still restricted choice in foothold of the range and scope of retail outlets for marketers. whatsoever blood line decision allow for kick in longsighted implications for the club, e. g. price go away be affected depending on the number of take aims between the manufacture r and the end user.A decision to metamorphose transfers is likely be long term so it is in-chief(postnominal) that pull throughing have a bun in the oven structures be unvaryingly reviewed to exploit opport altogetheries. STRATEGIC driveway CHOICES An authorized deal outation when formulating line of work policy is the distributor point of market exposure sought by the caller. Choices addressable include transmit of dispersion and logistics 193 n n n Intensive distribution where products be laid in as umteen outlets as feasible. This is some prevalent when customers obtain goods frequently, e. g. dwelling goods such as detergents or toothpaste. Wide exposure gives customers many another(prenominal) opport unities to procure and the image of the outlet is not grievous.The aim is to strive maximum coverage. Selective distribution where products atomic number 18 move in a more than than(prenominal) than than contain number of outlets in defined ge ographic argonas. Instead of far-flung exposure, selective distribution renders to show products in the most promising or paid outlets, e. g. mellowed-end designer clothes. single(a) distribution where products are placed in mavin outlet in a detail area. This brings s sillyly a immobileer partnership between seller and re-seller and results in strong bonds of loyalty. Part of the carryment commonly haves the dealer not to carry competing lines, and the result is a more aggressive selling effort by the go aroundr of the companys products, e. g. n exclusive en privilegement to sell a vehicle reproach in a specific geographical area, in r to all(prenominal) one for which the franchisee agrees to supply an appropriate by and by gross sales advantage back-up. We spate see that in that respect are some(prenominal)(prenominal) key decisions to make when determining the companys distribution system. Its importance is accentuated by the fact that the choice of distrib ution convey has an effect on all elements of the marketing mix and these are long term. TYPES AND potpourri OF CHANNELS Marketing bring screw be characterized according to the number of avenue directs. apiece initiation that works to bring the product to the point of consumption is included. The number of intermediaries involved in communicate operation determines on how many takes it dates.There are quartet briny personas of argument direct in consumer markets as shown in common fig tree 6. 1. The first three levels (zero, one and 2) are self explanatory. The three level channel includes a jobber, or merchant Zero level channel manufacturer Consumer One level channel manufacturer Retailer Consumer Two level channel manufacturer come through Retailer Consumer Three level channel manufacturer double 6. 1 contact Jobber Retailer Consumer Channel kindreds 194 Channels of distribution and logistics wholesaler who intervenes between the wholesaler and retailer. I t is the jobbers role to buy from wholesalers and sell to dinkyer retailers, who are not unremarkably sufficed by gargantuanr wholesalers.Within separately channel, intermediaries are connected by three grammatical cases of race 1 Physical flow describes movement of goods from tippy material that is helped in motley stages of manufacture until it r distributively(prenominal)es the final consumer. In the face of a towel manufacturer raw material is cotton train of thought which flows from the grower via transporters to the manufacturers stores and plants. Title flow is the passage of self-command from one channel mental hospital to another when manufacturing towels, backup to raw materials passes from the supplier to the manufacturer. ownership of finished towels passes from manufacturer to the wholesaler or retailer and then to the final consumer. Information flow involves the enjoin flow of influence from activities such as publicise, personal selling, sales pro motion and furtherance from one fraction to other phalluss in the system.Manufacturers of towels direct promotion, and training flows to retailers or wholesalers, cognize as trade promotion. This type of body process may also be directed to end consumers, i. e. end user promotion. 2 3 effected marketing convey comp prink autonomous blood units, all(prenominal) performing a defined set of marketing functions. Co-ordination among channel members is through the negociate process. social station of the channel is relatively easy, loyalty is low and this type of ne cardinalrk tends to be unstable. Members sublimely co-operate with each member working freelancerly of others. Decision makers are more interested with appeal and investment relationships at a single stage of the marketing process and tend to be pull to established working practices.Most nourishment grocery products in the European Union are marketed through stodgy marketing take independent food and grocery producers are responsible for growing, education and manufacturing products and mugs. These are sold through a series of wholesalers and retailers such as Sainsburys, Aldi, Lidl, Tesco or Carrefour each in operation(p) as independent crinkle organizationes in the filament and selling to their own customers. Vertical marketing systems are in contrast to conventional channels where members set up activities between antithetical levels of the channel to draw a sought after gull market. The essential feature is that participants pick out and proclivity interdependence, and view it as beingness in their trounce longterm interests.For the channel to function as a upended marketing system, one of the member firms moldiness be acknowledged as the leader typically the plethoric firm, which piece of ass be send for to take a signifi stomacht risk maculation and usually has the sterling(prenominal) relative ability inwardly the channel. An example of a straight mark eting system is that of franchising. The franchiser, usually on the basis of having a formerful brand or perhaps a patent/copyright, for a fee, allows franchisees to produce or distribute the product or serve up. The franchiser in force(p)ly overlooks the channel, including aspects such as product ingredients, advert and marketing, price, etc. through clump and legally enforceable agreements. Franchising is an example of what are termed tweetual tumid marketing systems which we consider again shortly.Corporate vertical marketing is when a company owns both or more traditionalistic levels of the channel. In many economies incarnate vertical channels have fancy upn as a result of a desire for growth on the part of companies through vertical desegregation. Two types of vertical integration are possible with respect Channels of distribution and logistics 195 to the thrill inwardly which the vertical integration moves a company in the supply chain when a manufacturer buys, say, a retail chain, this is referred to as fore integration with respect to the chain. Backward integration is moving upriver in the supply chain, e. g. when a retailer invests in manufacturing or a manufacturer invests in a raw material source.Although the end result of such movements is a corporate vertical marketing channel, a lottimes the stimulus to such movement is less to do with channel economies and efficiencies, and more with visit over price of admission to supply or demand, entry into a breadable chore or overall scale and in operation(p) economies. Much vertical integration activity which took place during the 1990s in many economies resulted in inflict overall profitability levels, and in some cases, the decease of companies involved, as companies overextended themselves and/or moved into areas where they had shortsighted respectableise. Because of this, many companies have now flakeed their attention towards contractual systems for achieving growth and more hold through the vertical marketing system. umteen of the walloping oil companies are examples of corporate vertical marketing. They prospect for oil, extract it, process it, distribute and retail it through their petrol place. Other companies operate partial corporate vertical marketing systems in that they integrate only one way. Zara (the clothing retailer) is co-ordinated vertically backward with manufacturing facilities. Firestone (the tyre manufacturer) on the other hand, is vertically integrated forward owning its own tyre retailers. Many companies formalize their obligations indoors channel networks by employing legitimate role as a pith of manoeuvre contactd by apply contractual agreements.Nearly all transactions between businesses are covered by some form of contract, and as such the contractual agreement determines the marketing roles of each company indoors the contract. Indeed, the locus of authorization usually lies with idiosyncratic members. The m ost common form of contractual agreement are franchises and self-imposed and co-operative groups. Franchises are where the parent company grants an unmarried person or relatively small company the right or privilege to do business in a prescribed manner over a certain time period in a specified place. The parent company is referred to as the franchiser (or franchisor) and may occupy any position in the channel network. The franchise retailer is termed the franchisee.There are four elementary types of franchise system n n n n Manufacturer/retailer franchise, e. g. service stations where most of the garage petrol stations such as Shell and Esso are franchisees of the large oil exploration and refining companies. Manufacturer/wholesaler franchise e. g. Coca-Cola sell drinks they manufacture to franchised wholesalers, who in romp bottle and distribute soft drinks to retailers. This type of parade is common in the food and drinks markets with many of the large companies franchising part of their manufacturing and or wholesaling activities to others. The wholesaler/retailer franchise. Many retail chains are franchisees of large wholesalers.These wholesalers proverb the value of securing a measure of arrest, and of course a shell out of the retail profits, from marketing their products and brands. The most worthy example is Spar which advertises itself as Spar, your 8. 00 till late shop, and of course all retail members essential abide by this promise. The service/sponsor retailer franchise e. g. McDonalds, Kentucky Fried Chicken, Subway, Car Rental companies like Avis and Hertz and services like DynoRod and Prontaprint. This is the best known and certainly most ubiquitous of franchising set outs and it has enabled many organizations to promptly throw a fit their global operations. 196 Channels of distribution and logistics There are divers(prenominal) types of franchise arrangement, e. g.McDonalds insists that franchisees purchase from official suppli ers they provide building and design specifications, spiritual service locate finance for franchisees and impose quality standards to which each unit mustiness adhere in enunciate to hold its franchise. Rigorous inspection through reclusive shoppers (explained in Chapter 12) ensures franchise rules are being obeyed. Franchises share a set of common features and operating procedures 1 2 3 4 A franchise basically sells a fieldly, or internationally, recognized trade name, process, or business format to the franchisee. The franchiser normally avers expert advice e. g. location selection, capitalization, operation and marketing. Most franchises operate a central purchasing system at national or international level to enable cost savings to be made at the individual franchise level.The franchise is subject to a contract binding some(prenominal)(prenominal)(prenominal) parties that normally requires the franchisee to pay a franchise fee and royal house fees to the franchiser , but the franchisee owns the business as opposed to being employed. The franchiser ofttimes provides initial and continuous training to the franchisee. 5 Contractual vertical marketing systems like franchising have been one of the prompt growing areas of marketing and distribution. Substantial advantages derive from the franchising system. From a system that essentially involves two independent parties voluntarily agreeing to contract with each other, advantages accrue to both the franchisee and franchiser. Advantages to the franchisee are n n n n n n The franchisee gains the benefit of being able to sell a wellspring-known product or service which has been market tested and known to work.The franchisee enjoys access to the knowledge, experience, disposition and image of the franchiser. Because of this the franchisee is able to enter a business much more easily than climb up from scratch. The learning curve is shortened, expensive mistakes can be vitiateed, and there is less c hance of business failure. Although the franchisee has the bread and butter of what is often the large organization of the franchiser, the franchisee is still essentially an independent business with all that this implies for motivation to succeed. The franchisee is often benefactored by national or international advertise and promotion by the franchiser which would be beyond the inwardness of a small independent business.The franchisee enjoys the use of the franchisers trademark, continuous research and development and market education. The franchiser depart normally provide a system of answerment controls such as studyancy, sales and filiation control procedures. Advantages to the franchiser are n Finding and recruiting a network of franchisees enables rapid growth as wider distribution can be achieved with less capital. Channels of distribution and logistics 197 n n n n The individual franchisee is more rund than a hired manager qualification be. The franchiser secures captive outlets for products or services, especially in the case of trade name franchising and private labels. Franchise and royalty fees provide a regular stream of income for the franchiser.The term of the franchise contract normally give the franchiser unattackable control over how the franchise is operated and normally the franchiser can terminate a contract should the relationship turn out to be unsatisfactory. The cost of such terminations are likely to be less than if the franchiser was operating a corporate owned facility with lag on the payroll. unremarkably, foothold and restrictions on location and sale of the business by the franchisee ensure that the franchiser is able to maintain territorial reserve exclusivity for its franchisees. There are disadvantages, but the franchise relationship combines the strengths of both small and large scale businesses. The franchisee is the small business person who is able to respond to local anesthetic market conditions and offer personal services to customers.The franchiser passes on economies of scale in national ad and loudness purchasing. For a franchise to be palmy both parties need to work towards a common coating and avoid meshings which requires frequent and open intercourse between partners if the system is to pertain changing market conditions term maintaining its integrity. What constitutes the main disadvantages of franchising depends from whose perspective we are looking the franchisee or the franchiser. The main disadvantages of franchising from each perspective are Disadvantages to franchiser n The franchiser loses some control over the provision and marketing of the brand. Poor service on the part of the franchisee can result in problems for brand image. Ideas and techniques can be copied withal if seemingly well protected by patents and copyright arrangements. n Some proportion of profit has to be foregone. n There may be less commitment and enthusiasm from the franchisee. n oft franchisees wish business skills or experience. Disadvantages to the franchisee n deprivation of support from franchiser n franchiser may go out of business n lack of flexibility/scope to use initiative n sloshed control from franchiser. Franchising is not merely confined to consumer products like unshakable food. It is used for a wide range of products and services in both consumer and industrial markets. Voluntary and co-operative groups emerged in the 1930s as a response to opposition from chain entrepots.The scope of co-operative effort has expanded from concentrated buying former to the development of political programs involving centralized consumer advertising and promotion, store location and layout, financing, accounting and a package of support services. 198 Channels of distribution and logistics Generally, wholesale sponsored wilful groups have been more in force(p) competitors than retail sponsored co-operative groups. to begin with this is because of the d ifference in channel organization between the two. In the former, a wholesaler can provide strong lead, because it represents the locus of place within the voluntary system and this is normally supported by a brand name like Spar.In the latter, power is diffused throughout the retail rank and file and role specification and allocation of resources are more difficult to fulfill. The principal purpose here is in bulk purchasing. In voluntary groups, retail members have reach some of their autonomy by making themselves exceedingly dependent on specific wholesalers for expertness. In retail co-operative chains, individuals retain more autonomy and this tends to depend much less strongly on the supply unit for assistance and direction. This type of organization is not to be confused with the Co-operative movement that was founded in 1844 by the Rochdale, Lancashire, fellowship of Equitable Pioneers who were a group of 28 weavers and other workers.As mechanization of the Industrial Revolution pushed more and more skilled workers into poverty, tradesmen banded together to open their own store selling items they could not other afford. e rattlingplace four months they pooled together ? 28 of capital. They opened their store with a basic selection of dry goods and foodstuffs and quickly moved into higher quality unadulterated produce. They devised the internationally famous Rochdale Principles 1 2 3 4 5 6 7 open membership democratic control (one person, one vote) distribution of trim in proportion to trade payment of traped interest on capital political and religious neutrality cash trading (no credit) promotion of education.Administered vertical marketing systems (VMS) do not have the formal arrangements of a contractual system or the clearness of power dependence of a corporate system. It is a co-ordinated system of distribution channel organization in which the flow of products from the producer to the end user is controlled by the power and size of one member of the channel system rather than by common ownership or contractual ties. Member organizations acknowledge the instauration of dependence and adhere to the lead of the dominant firm, which may operate at any level in the channel. Large retail organizations like label & Spencer typify this system. In administered systems like Marks & Spencer, units can exist with disparate objects, but there is informal coaction on inclusive goals.Decision making occurs by rectitude of interaction between channel members in the absence seizure of a formal inclusive structure. still, the locus of authority still remains with individual channel members. As in conventional channels commitment is selforiented and there is a minimum amount of system-wide orientation among the members. As McCammon1 observes Manufacturing organizations . . . have historically relied on administrative expertise to coordinate reseller marketing efforts. Suppliers with dominant brands have call upably experi enced the least difficulty in securing strong trade support, but many manufacturers with Channels of distribution and logistics 199 fringe items have been able to elicit reseller co-operation through the use of liberal distribution policies that take the form of attractive discounts, financial assistance, and mingled types of concessions that protect resellers from one or more of the risks of doing business. An example of a successful administered VMS in is that of the furniture/lifestyle retailer, IKEA who has developed close working relationships with its suppliers. Acting as the channel co-ordinator, IKEA is committed to cost-effective supply and their suppliers benefit from the channel leadership of an effective and marketing-oriented retailer. Administered VMS are one step removed from conventional marketing channels. In an administered system, co-ordination of marketing activities is achieved by the use of programmes developed by one or a limited number of firms.Successful a dministered systems are conventional channels in which the principles of effective inter-organizational management have been correctly applied. Before we discuss how such marketing channels are co-ordinated, it is important that we discuss their structure. bodily structure OF MARKETING CHANNELS The marketing channel has two basic aspects 1 2 the placement of go-between types of channel in relation to each other i. e. the order in which they occur the number of different mediator levels or stages in the channel i. e. how many different separate types of intermediary are involved, so types of intermediary and number of levels determine the structure of a marketing channel. There are several types of channel structure, dependent on the type of goods.An example of a structure for consumer goods such as food and clothing is shown in Figure 6. 2. This figure is old bagd on three assumptions 1 2 3 The channel consists of complete organizations. Manufacturers agents and selling agents ar e included with the merchants even though they do not take title to the goods. Physical movement follows exactly the movement of ownership. We must understand the underlying reasons for the emergence of channel structures. 4 logical steps can be place 1 2 3 4 The competency of the process can be increased via an intermediary. Channel intermediaries arise to ad however the discrepancy of assortments through the action of the cast processes.Marketing agencies remain together in channel arrangements to provide the routine of transactions. Channels exist to drive deliveries and to avoid inventory stock-outs. 200 Channels of distribution and logistics 1 M 2 M 3 M 4 M 5 M 6 M 7 M 8 M 9 M C W R A R W W A C W W C R W W W C C C R C R C R C R C M = Manufacturer W = Wholesaler A = Agent (sells for manufacturers) R = Retailer C = Consumer FIGURE 6. 2 A typical example of structure for consumer goods Rationale for intermediaries As numbers of transactions increase, the need for intermediar ies becomes greater. The marketing channel is a canal which contains the physical flow of products.Because of the complex array of intermediaries operating within a channel, which may be involved in one or all aspects of channel function, the channel may also be visualized as a chain-link arrangement where each intermediary unit is effectively a link. Manufacturers are dependent on the effectiveness of their intermediaries if their channels of distribution are to meet their marketing goals. Intermediaries of a channel secern in more than one function. Their inclusion primarily depends on their superior efficiency in the implementation of basic marketing travails. such(prenominal) intermediaries, through their experience, specialization, contacts and scale of operation, offer other channel members more than they can achieve on their own. However, this type of specialization leads to some important demeanoural concepts. Position and role Each channel member chooses a position or l ocation in the channel. Role refers to the functions and stop of mathematical operation expected of the firm filling a position. Channel intermediaries perform the distribution function at a spurn unit cost than the manufacturer who is the intermediary most distanced from the consumer, and they rest period the production efficiencies of the supplier to the purchasing ask of the customer. Another reason is to break down large volumes into smaller quantities, termed breaking bulk, e. g. a furniture retailer places an order for 100 tables, but the individual buys only one. When we consider the selling process, the number of intermediaries can reduce the number of transactions Channels of distribution and logistics 201 ontained within the selling process. See Figure 6. 3. Figure 6. 3 shows that there are four manufacturers and ten retailers who buy goods from each manufacturer. Here the number of contact lines amounts to 40 (i. e. 4 10). If all four manufacturers sell to 10 retaile rs through one intermediary, the number of contacts is decreased to 14 (i. e. 4 10). The number of contacts increases as the number of intermediaries increases, e. g. when the number of wholesalers is increased to 2, contacts forget increase from 14 to 28 (i. e. 4 2 10 2). Thus, greater numbers of intermediaries result in diminishing returns per contact. (a) Selling directly ManufacturersRetailers 40 contact lines (b) Selling through one wholesaler Manufacturers Wholesaler Retailers 14 contact lines (c) Selling through two wholesalers Manufacturers Wholesalers Retailers 28 contact lines FIGURE 6. 3 The economic science of intermediary systems 202 Channels of distribution and logistics Assortment and sorting In addition to increasing the efficiency of transactions, intermediaries self-possessed the flow of goods and services by creating what economists refer to as possession, place and time utilities. This smoothing requires that intermediaries perform a sorting function to overc ome the discrepancy that arises between goods produced by manufacturers and goods demanded by the consumer.In addition, intermediaries bring together a range of similar or related items into a large stock, thus facilitating the buying process. A supermarket will buy in thousands of lines to provide shoppers with choice, and a builders merchant will provide everything from sand and gravel to light fittings that the builder can use. In this way, intermediaries play an important role in facilitating the flow of products from the manufacturer to the consumer. phone number transactions The cost of distribution can be minimized if transactions are routinized. In effect, through routinization, a sequence of marketing agencies is able to hang together in a channel arrangement or structure.A good example is automatic say, whereby the cost of placing orders is reduced when retail inventory levels reach the inevitable re-order point. Searching Buyers and sellers are often engaged in similar activities within the marketplace. There is a degree of uncertainty if manufacturers are unsure of customer wants and require, and consumers are not always sure what they will knock. In this respect, marketing channels facilitate the searching process in two ways 1 2 Wholesale and retail bases are organized by different product groups for example, fashion, hardware, grocery. Many products are widely available from wide ranging locations. FLOWS IN MARKETING CHANNELSWhen we discuss marketing flows, there will be times when the word function could be used, but here we refer to marketing flows in channels as a better method of describing movement. In this way, we can show that various intermediaries that make up a marketing channel are connected by several distinguishable types of flow, summarized in Figure 6. 4, which depicts octet universal flows. The figure shows that physical possession, ownership and promotion are typically forward flows from producer to consumer. Each of the se moves is down the channel a manufacturer promotes the product to a wholesaler, who in turn promotes it to a retailer, and so on. Negotiation, financing and risking flows move in both directions, whereas ordering and payment are backward flows.Financing is the most important of these flows at any one time, when stocks are being held by one member of the channel, financing is in operation. When a wholesaler takes ownership and physical Channels of distribution and logistics 203 Physical possession Ownership advance Producers Retailers Negotiation Financing Rising Ordering remuneration Wholesalers Customers household and industrial FIGURE 6. 4 Marketing flows in channels Woolly Thinking to a sink place the auspices of the alinement of British Wool Textiles (CBWT), groups of British wool textile manufacturers ex tack breeding and ideas. The Confederation is organized into distinct groups in the industry with each group representing a event stage in the manufacturing and process ing of wool.For example, there is a group representing lovesome Fibre Producers, another representing Spinners, another representing Fabric Manufacturers and one representing the interests of Dyers and Finishers. possession of a portion of the create of a manufacturer, the wholesaler is essentially financing the manufacturer. This notion is likely if the cost of stock are considered. Stock held in stores as dormant stock is dead property, but if this is freed via a wholesaler, this dead accounts is available for reinvestment. The furniture industry exemplifies the flow. Traditional furniture retailers operating on a sold-order basis do not participate in the backward financing flow.However, warehouse type furniture retailers participate in this flow directly, and receive benefits from manufacturers in the form of lower prices and prejudiced treatment. This backward flow of financing is not solely associated with stockholding, another example being prepayment for merchandise. The problem is that in the event of any downturn in sales the warehouse type retailer with large sums of money tied up in stock is very vulnerable to cash flow and liquidity problems. To underline this, blaming the downturn in the UK ho exploitation market in July 2009, the UKs second largest carpet retailer, Allied Carpets, called in the receiver. 204Channels of distribution and logistics Forward flow of financing is more common. All terms of sale, with the exception of cash on pitching and prepayment, may be viewed as elements of the forward flow of financing. In addition to these flows there is discipline flow. Typically, information regarding product attributes is passed down the channel, often with the dominant channel member having greater influence on this function. Marketing information is passed back up the channels. In addition, information flows horizontally, i. e. with intermediaries operating at the corresponding level, such as fibre manufacturers, communicating for mutual benefit.CHANNEL CO-ORDINATION However well designed a marketing channel may be it is important that it is organized and coordinated, otherwise activities and flows will not operate effectively, and the full probableity of the system will not be realized. ferocity should be placed on understanding deportmental dimensions of inter-organizational relationships, because through such understanding, the manager can organize, see to it and exploit available resources. The long-term fair game of channel management is to achieve, at a reasonable cost, the greatest possible impact at the end user level, so that individual members of the channel can obtain satisfactory returns (e. g. rofits, market share) as compensation for their specific contributions. The behaviour of intermediaries within any condition structural arrangement should thus be directed towards achieving high yield performance. Once the marketing management of an organization isolates the market targets to attack, and the products and services which it must supply in order to satisfy needs and wants in those various segments, the question of how best to make products and services available for consumption arises. Figure 6. 5 identifies four major steps that represent the co-ordination process. The first step is to determine the level of service outputs demanded by end users of the commercialized channel system.Service outputs that are among the most significant in distribution are, for example, lot size. Some companies insist on a minimum order level. Under this limit they will not accept the order. In contrast, often smaller companies are unable or unvoluntary to supply orders over a certain size. A second type of service output is delivery or waiting time, or how long it takes from order to delivery. A triad service output relates to market decentralization or spatial convenience, namely, to where the provider will deliver. For example, some suppliers will only deliver locally whereas at the other extreme some will undertake to deliver anywhere in the world. Finally, there is breadth and depth of product or service assortment.This refers to whether or not the provider is able to supply a full range of products and services or only a selected range, i. e. a one -stop shopping facility. The second step involves identifying the marketing occupations that need to be carried out in order to achieve the service outputs, and which channel members have the capability to perform the tasks. circumspection must then determine whether, through the use of channel control strategies, they will be able to control the behaviour of existing channel members or be compelled to integrate channel flow vertically so the required service outputs are provided to end users. Channels of distribution and logistics 205 touchstone 1 trammel service output levels required by customersStep 2 Analyse the roles which channel members must perform to assure delivery of the required service ou tputs Step 3 Use economic and other power bases to motivate channel members to carry out their assigned roles Step 4 Devise mechanisms for dealing with strifes that occur within the channel FIGURE 6. 5 Stages in the channel co-ordination process For example, if a desired level of service output is that orders must be fulfilled within five working days then the channel and logistics system must be designed to reach this service level. If intermediaries in the channel are unwilling or unable to meet this service output then alternative channel arrangements must be found.Without effective channel management and control there is no guarantee that the desired service outcomes will be achieved, so a major fill out in channel management relates to where, and to what extent, marketing flow participation should be assumed to generate the desired service outputs e. g. if a car buyer needs finance, the manufacturer, the retailer or an outside intermediary should provide it, but lending ser vices must be readily available if the consumer is going to discover homely in considering a specific purchase that requires finance. In a stance where no channel intermediary is willing to accept the risk of financing, the initial supplier may have to assume this, i. e. it would prefer to define in those flows that it can perform at a comparative advantage.The third step in the co-ordinative process is to determine which strategies should be used to achieve the desired results, irrespective of whether management decides to invest in integrating functions or whether it deals with independent companies. Essentially this is an answer of where and how power is applied in the channel. Power is the ability to get somebody to do a task. In the scene of a marketing channel it can be defined in terms of how one channel member can exert influence on another channel member. For example, collectible to their size and purchasing power, many retail multiples in the UK like Marks & Spence r are able to exercise substantial power over their suppliers.Power is the mechanism by which congruent and effective roles become specified, roles become realigned when necessary, and appropriate role performance is enforced. There are several bases of power, which include reward, coercion and expertise. 206 Channels of distribution and logistics The fourth step involves setting up mechanisms to deal with employment issues that may arise so that the channel will continue to provide the desired service outputs even if channel members disagree. really often channel members perform unique roles. Thus, manufacturers alter in production and national promotions, while retailers specialize in merchandising, distribution and promotion at a local level. This specialization bureau that channel members become reliant on each other to achieve objectives.There has to be co-operation between channel members, as without it, the task will not be completed. such(prenominal) co-operation does n ot always come easy and needs to be cultivated. CHANNEL CONFLICT There is a endangerment that there will be fightings of interest and distribution channels will exhibit levels of contravene. For example, suppliers may want to deliver weekly to a retailer, but the retailer wants to hold less stock, so may want daily deliveries. Ideally, channel members should attempt to coordinate their objectives, plans and activities with other intermediaries such that performance of the total distribution system to which they belong is enhanced.Evidence supports the view that such integrated activity throughout the length of the marketing channel is rare and channel participants are not too concerned with transactions that occur between each of the various channel links. Channel intermediaries are more concerned approximately dealings between channel members outright adjacent to themselves, from whom they buy, and to whom they sell. Channel intermediaries do not function as component members of a distribution system, but operate independently, making decisions concerning their own methods of operation, functions performed and clients served as well as deciding their own objectives, policies and programmes.Therefore, a marketing channel should be a set of involution and mutually dependent elements and it is in the interests of all channel members for there to be a substantial degree of co-operation, but an almost inevitable feature is potential departure between members which should be taken into account when making channel arrangements. It is possible that wellnessy tilt can lead to contrast and management should seek ways to reduce this scrap. infringe in distribution channels can occur in different forms as follows 1 2 Horizontal conflict is related to competition among similar types of intermediaries at the same level in the channel e. g. two household textile stores in competition with each another.Intertype conflict refers to competition among different types of intermediaries at the same level in the channel. This kind of competition has intensified since the orgasm of scrambled merchandising by retailers (where retailers add youthfulborn product lines that are unrelated to their normal lines of business) e. g. supermarkets have added homewares and clothing to their product lines, offering consumers a wider product range and attaining higher margins. Intertype conflict is significant as it reflects a way in which industries remain economic and respond to changing market conditions. Vertical conflict refers to competition among different levels in a channel.Such problems can be damaging to existing co-operative relationships e. g. in recent days some of the major car producers have been in conflict with their distributors over matters like pricing and discount policies, stockholding levels and exclusivity agreements. 3 Channels of distribution and logistics 207 Stress and conflict can be in a dormant state times of change cau se existing accent to peak, leading to enmity among channel members. Some conflict is inevitable in channels and may even be constructive in that it can prompt needed changes. The foregoing example regarding retailers selling manufacturers brands at lower prices than manufacturers wish is an example of vertical conflict.Selling of brands like Levis and Calvin Klein at prices lower than those recommended by manufacturers has given rise to vertical conflict in the channel. Other examples of this type of conflict in the UK recently have been the selling of discounted books and discounted pharmaceutical products by the large retail supermarket groups. Goal incompatibility Channel members appear to share a common goal maximizing the efficiency and effectiveness of the total system. However, each firm exists as a separate legal entity, each with its own employees, owners and other interested parties who help shape its goals and strategies. Some firms goals may be inappropriate with the aims and objectives of other channel members.This incompatibility can be a primary cause of emphasis which will ultimately result in conflict. The distribution of channel profits is a typical example. Each institution will desire the highest possible profit for the whole channel and the natural tendency will be towards co-operation to achieve maximum profit levels. However, each individual firm can be expected to desire the largest obtainable share of total channel profits. The foreseeable result is conflict over the allocation process. take down if goals are compatible, there may be disagreements most methods employed all channel members may agree that increases in volume of a product are desirable, but may disagree on the manner employed to accomplish it.Wholesalers may desire more shelf quad for better positioning of products in retail stores retailers may feel that more advertising and promotional effort by the manufacturer would accomplish the objective of an increase in sales. The result is conflict over which method to use. Position, role and country incongruence In a channel consisting of a manufacturer exploitation only wholesalers who sell to retailers, there will be a realignment of the roles and domains of each party. By serving large retailers direct, positions will be re-specified. Changes in position specification, or poorly defined positions, can precipitate conflict among channel members, so the manufacturer must anticipate and understand the expected behaviour of such members. In situations where consensus does not exist, conflict can be expected.Because each role represents a code of conduct specify the channel members expected contribution, able performance is critical to maintaining harmony within the channel system. Inadequate performance, or failure to behave in the prescribed manner, frustrates attempts by one firm to predict what the other will do and such defeat is a major cause of channel conflict. Conflict may also ar ise when there is lack of agreement concerning who is the channel leader (termed the channel passkey). If channel members disagree on the domain of firms in the system, there will be conflict and an softness to achieve goals. If domains overlap, and two or more firms lay claim to the same functions, products or customers, disagreement business leader lead to hostility.The conflict between car producers and their distributors just described, in part stems from the issue of 208 Channels of distribution and logistics who controls the channel. In the past it has been the car companies who have been channel captains but market and legislative changes have shifted the balance more towards distributors, giving rise to conflict. Communication crack-up Communication breakdowns may cause conflict in two ways 1 The failure of one firm to pass on vital information to other channel members. A manufacturer lack to maintain a competitive advantage may decide not to announce a new product unti l a national distribution programme has been developed.Retailers, on the other hand, need information about new products as soon as possible to prepare their own strategy for the introductory period. aberration within the message process is called noise that often arises from confused language nuances. When channel members attach different meanings to language and terminology (e. g. if their roles are unclear and confused) stress results and there is potential for conflict. Speculation surrounding the health of Apple boss Steve Jobs caused problems for the company and its distributors. In January 2009 the yearbook MacWorld conference normally used to announce new products and developments was cancelled.This caused speculation in the trade about whether or not Jobs would continue. The problem was not so much Jobs illness bur rather the rumours about it. In July 2009 it was announced that Jobs was making a good recovery from a liver transplant. 2 Communication breakdowns are common in specialist business areas. fray arises when functional specialists develop terminology that means little to those outside that business environment. Unclear intercourse with non-specialists can play a part in maturation conflict so the specialist should ensure that communication theory have been understood. Differing perceptions of reality Different consequences to mutual problems can lead to confliction behaviour.Even when channel members have a strong desire to co-operate and goal agreement exists, conflict can occur when perceptions of the real facts differ. Bare Bellies Update nigh all, further to my e-mail yesterday, Ive had clarification that a new system for producing bare belly information will be in place. Please note there will no longer be space bare belly sheets available in departments. Confused? So was this organizations staff who received this e-mail. The e-mail was from the organizations publicity department and was sent to all staff. Bare bellies is a ter m used by printers to denote blank sheets to be printed on. The e-mail related to the production of company promotional material. Channels of distribution and logistics 209Each channel member brings to the relationship different backgrounds and prejudices facts are likely to be interpreted according to prior experience. All members may agree that the channel is not functioning as effectively as desired each channel member may perceive a different reason for this lack of effectiveness. Manufacturers may feel that a retailers lack of stock is due to failure to maintain adequate safety stock levels and realistic reorder points. The retailer may feel that inventory policies are realistic and that the problem is caused by the manufacturers inability to meet plan delivery times. Each party is interpreting the situation based upon experience and natural prejudices associated with its own position and role. Ideological differencesSometimes there may be a fundamental ideological conflict in channels which stems from big business and small business perceptions of management, particularly concerning the appropriate level of sales effort. For example, a manufacturer may be so satisfied with the performance of a wholesaler in a given territory that pressure is exerted on the wholesaler to expand the line of products on offer, whereas the wholesaler may be satisfied with allowing the business to continue to run in its present form. In this way, pressures exerted by the manufacturer will lead to stress and conflict in the relationship. If this is an established channel, it is in the interests of everybody to turn up the strife or mistake quickly.There are several methods of resolving conflict, and it is a task of management to seek ways in which to manage it to avoid it becoming dysfunctional and to harness the energies in conflict situations to produce resolutions. Depending on which underlying cause is identified, different strategies can be employed in isolation. Ano ther important factor in the block of the conflict will be the weight of power of the channel member seeking to resolve the conflict. conundrum solving Adopting superordinate goals is a method that refers to goals that are desired by all members caught up in the conflict. oft such goals cannot be achieved by individual channel members, as concerted efforts of all parties are required.Such difference of opinions become more pronounced when the channel is confronted by an external threat, and conflict only dissipates when alternative channel systems emerge. The threat to existing channel members of new channel arrangements for car retailing in the UK has brought about a drop-off in conflict between traditional channel members. Car manufacturers and dealers were challenged by the fact that consumers were increasingly purchasing new cars through a variety of new channels including sourcing them from countries where prices might be lower, the growth of car hypermarkets where cars ar e sourced on the grey market and through the Internet.The result has been for existing traditional channel members to adopt superordinate goals and this has resulted in a reduction of conflict between them in an effort to survive. ageless conflict resolution requires an integration of the needs of both sides to the dispute so they find a common goal without sacrificing their basic economic and ethical principles. The problem is developing a common goal on which all parties agree. 210 Channels of distribution and logistics A solution exists to alleviate communications noise in distribution channels. A more efficient flow of information and communications in channels permits members to find solutions to their conflict based on common objectives. Channel communication efforts should be designed to decrease or avoid conflict, e. g. sing sales interpretive programs to convey information from wholesalers or retailers implies that the manufacturer is trying to encourage the attainment of both individual and common goals the function of the sales representative in such cases is that of problem solver. vox populi This implies that institutions involved draw on their leadership potential. If effective channel management is to be achieved, it is often the case that there will be a need to locate an institution or an agency within the system that is willing to assume this role. Channel leadership is the intentional use of power to affect the behaviour of other channel members and cause them to act in a manner that contributes to the maintenance or work of a desired level of performance.Often channel control results from channel leadership and like channel power, the level of control achieved by one firm over others in a channel may be issue specific, e. g. while the manufacturer may have control over pricing, retailers may have control over stock levels. Whether or not control can be exerted depends on the power base of each channel member. By its nature, thinking in volves communication between counterpoint parties. Emphasis is on influencing behaviour to resolve conflict the primary intention is to avoid or reduce conflict concerned with domain or sphere of influence. Persuasion allows members to reach a consensus resulting in agreement without formal bargaining. Some years ago a well-known company launched its own brand of green goddess. The new brand was eagerly tocked by many leading grocery supermarkets who were persuaded to make space for the new brand on their shelves. Inevitably this meant less shelf space for existing brands including some of the best known poop brands in the world. As if this red of shelf space was not bad enough, the worlds leading cola brand claimed piercingly that at first glace the new stark(a) cola looked remarkably like their own cola brand. They subsequently asked Virgin to withdraw the new brand in its present form and at the same time asked their supermarket customers not to stock it. Needless to say, t here were protracted discussions, but after a little time all parties were persuaded to come to a agree which avoided costly litigation and loss of face.The new cola was altered slightly in appearance, some of the preoccupied shelf space was restored and the new brand stepwise made inroads into the market. Bargaining/negotiations The difference between bargaining and persuasion is that in the bargaining process stress continues to exist in the system long after agreement is reached. In negotiation, no attempt is made to fully satisfy a channel member. Instead, the objective is to reach an accommodation to stop conflict among members. Such a compromise may resolve the episode, but not necessarily the fundamental stress over which the conflict erupted. If stress continues, it is likely that some issue will cause conflict again at some later date. Compromise is a means by which bargains can be reached in the channel.Each party gives up something it desires to prevent or end conflict . Often compromise is necessary to reach domain consensus where persuasion and negotiation draw on abilities of parties involved to communicate. Channels of distribution and logistics 211 Politics Politics refers to resolution of conflict involving new organizations in the agreement-reaching process. Mediation involves a third party, usually to secure settlement of a dispute by persuading the parties to continue negotiation or consider recommendations made by the mediator. Mediation involves understanding the inappropriate views of parties in such a way that opportunities are perceived that otherwise may have been missed.The fact that solutions are being offered by a mediator, i. e. somebody external to the dispute, can often lead to a settlement if both parties deem the solutions acceptable. Effective intermediation keeps the parties together and clarifies facts so the communication process does not break down. While mediation offers solutions to disputes, channel members are not obliged to accept the solutions. In arbitration, however, the solution suggested by the third party is binding upon the conflicting parties. Arbitration can be compulsory or voluntary, and when it is the former, parties are required by law to pack their dispute to the third party and be wince by the decision.Voluntary arbitration is a similar process whereby parties are bound by the decision, but the dispute is settled voluntarily. The question of relying on law enforcement to settle disputes in distribution is imprecise as it is indefinite whether solutions enforced by law can be applicable to future channel disputes in different circumstances. In purely domestic channel management, these mechanisms are not greatly used because of the inability to find a neutral third party whose decision will be accept by everybody involved in the dispute. However, arbitration is a normal and accepted part of international channel management and is part of the contractual agreement between the parties in channel activities.For example, if an exporter feels that an overseas agent has not fulfilled the terms of an agreement between him or herself and the principal, but the two parties cannot agree as to the remedies for this, then normally the terms and conditions for instituting an arbitration process are written into the passe-partout contract and will be instituted to resolve the problem. delicacy Channel diplomacy is the normal method by which inter-organizational relations are conducted, adjusted and managed by ambassadors, envoys or other persons operating at the boundaries of member organizations. Normally channel members rely on diplomatic procedures, especially in nonintegrated systems. Channel diplomats should be the eyeball and ears of the firms they work for, and should report anything that may be of interest. Such diplomats are commonplace in distribution channels at executive level.In this way, the diplomats power base is such that it is obvious to the par ties with whom the diplomat will interact. Effective channel management strategies provide for more rational decision making within the channel. THE self-propelling NATURE OF CHANNELS Marketing is characterized by constant change, and there is a need for the marketer to admit to these changes, making marketing channels subject to change and innovation. Channels represent a 212 Channels of distribution and logistics dynamic area of marketing as they are constantly evolving to meet changing customer and market needs which reflect underpinning wider changes and trends in demography and lifestyles. Marketers must be aware of the changing nature of channels and respond to them.An example of recent developments that are revelatory of the innovation and changing nature of this area is the growth of multi-channel systems of direct marketing and Internet marketing which are dealt with in Chapter 10. The growth of multi-channels Companies now use a variety of channel arrangements to reach their target customers. Once, companies tended to use only one type of channel configuration in their marketing now they use several. The use of multi-channel systems can be for a number of reasons n n n to increase market coverage by reaching new customers to reduce costs of selling to certain customers where for example such customers require less service than that provided through the companys normal channels to achieve a more customized service to particular customers than would be available through the companys normal channels.In multi-channel marketing, a company might sell to one group of customers using telephone selling and no intermediaries, while another target group may be marketed to through a network of dealers, since these customers require after-sales service and technical advice. Although there are advantages to be gained through using several different channel configurations to different target customers, multi-channels can give rise to increased costs if not cont rolled. They can also give rise to problems of conflict between different channel members where several channels are used, particularly where one type of channel member feels that their contractual rights are being infringed. An example is where the marketer uses a system of prescribed distributors for the companys products.In return for being disposed(p) exclusive distribution rights in a particular g