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CHAPTER 10
Marketing Channels
and Supply Chain
Management
Roadmap: Previewing the Concepts
 Explain why companies use distribution




channels and discuss the functions these
channels perform.
Discuss how channel members interact and
how they organize to perform the work of the
channel.
Identify the major channel alternatives open to
a company.
Explain how companies select, motivate,
and evaluate channel members.
Discuss the nature & importance of marketing
logistics and supply chain management.
Copyright 2007, Prentice-Hall Inc.
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CATERPILLAR – The Vital Role of Dealers
Background
Building Partnerships
 Caterpillar dominates the  Distribution system is built
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
world’s markets for heavy
construction and mining
equipment.
Independent dealers are
key to success, providing
customer service, market
intelligence, and more.
Distribution system is a
competitive advantage.
Copyright 2007, Prentice-Hall Inc.

on a base of mutual trust
and shared dreams.
Caterpillar stresses dealer
profitability; extraordinary
dealer support; personal
relationships; dealer
performance; and full,
honest, and frequent
communications.
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Supply Chains, Distribution Channels,
and Value Delivery Networks
 Supply Chains
– Producing & making products available to buyers
requires building relationships with “upstream”
and “downstream” supply chain partners.
 Value Delivery Networks
– Partnering among the company, suppliers,
distributors, and customers improves the
performance of the whole system.
 Distribution Channel:
– Set of interdependent organizations involved in
making a product or service available for use or
consumption by the consumer or business user.
Copyright 2007, Prentice-Hall Inc.
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Marketing in Action
Innovative Distribution
Calyx & Corolla
sells fresh flowers
and plants direct
to consumers
over the phone
and via the Web,
cutting a week or
more off the time
it takes flowers to
reach consumers
via conventional
retail channels.
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How Channel Members Add Value
 The use of intermediaries results from
their greater efficiency in making
goods available to target markets.
 Offers the firm more than it can
achieve on its own through the
intermediaries:
– Contacts
– Experience
– Specialization
– Scale of operation
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Figure 10-1
How Distributors Reduce the Number of
Channel Transactions
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Key Channel Functions
 Transaction
Completing:
– Information
– Promotion
– Contact
– Matching
– Negotiation
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 Transaction
Fulfilling:
– Physical
distribution
– Financing
– Risk taking
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Figure 10-2
Consumer and Business Marketing Channels
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Channel Behavior
 The channel will be most effective when:
– Each member is assigned tasks it can do best.
– All members cooperate to attain overall channel
goals.
 If this does not happen, conflict occurs:
– Horizontal Conflict occurs among firms at the
same level of the channel (e.g., retailer to retailer).
– Vertical Conflict occurs between different levels of
the same channel (e.g., wholesaler to retailer).
 Some conflict can be healthy competition.
Copyright 2007, Prentice-Hall Inc.
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Marketing in Action
Channel Conflict
Goodyear’s
conflicts with its
independent dealers
have caused hard
feelings and
flattened the firm’s
replacement tire
sales.
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Let’s Talk!
Branded goods using
the Wolfgang Puck,
T.G. I. Friday’s, Taco
Bell, Emeril’s, and
Starbuck’s names are
now being sold in
grocery stores.
Look at the items at
right. Which stands
the greatest risk of
causing channel
conflict? Why?
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Vertical Marketing System
 A distribution channel structure in
which producers, wholesalers, and
retailers act as a unified system.
 One channel member owns the other,
has contracts with them, or has so
much power that they all cooperate.
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Figure 10-3
Conventional Marketing Channel Vs. Vertical
Marketing System
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Types of Vertical Marketing Systems
 Corporate VMS
– Corporation owns production and distribution.
– Coordination and conflict through regular
organizational channels.
 Contractual VMS
– Individual firms who join through contracts.
– Includes franchise organizations.
 Administered VMS
– Leadership through the size and power of
dominant channel members.
– Leadership could be manufacturer or retailer.
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Franchise Organizations
 Manufacturer-Sponsored
Retailer Franchise
– Ford and its independent
franchised dealers
 Manufacturer-Sponsored
Wholesaler Franchise
– Coca-Cola’s licensed bottlers
 Service-Firm Sponsored
Retailer Franchise
– McDonald’s, Avis, and
Holiday Inn
What type of franchises
are illustrated above?
http://www.franchise.org/
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Innovations in Marketing Systems
 Horizontal Marketing System
– Two or more companies at one level join
together to follow a new marketing
opportunity.
 Multichannel Distribution System
– Occurs when a single firm sets up two or
more marketing channels to reach one or
more customer segments.
– Also called hybrid marketing system.
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Figure 10-4
Marketing Channels
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Disintermediation
Occurs when product and service
producers cut out intermediaries and go
directly to final buyers, or when
radically new types of channel
intermediaries displace traditional
ones.
The Internet has made the disintermediation
of many traditional retailers possible.
Copyright 2007, Prentice-Hall Inc.
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Marketing in Action
Disintermediation
Black & Decker chose to avoid disintermediation by not
using the Internet to sell their products, but rather direct
consumers to stores that carry the firm’s products.
Copyright 2007, Prentice-Hall Inc.
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Channel Design Decisions
 Analyzing Consumer Needs
– Firm must balance needs against costs
and consumer price preferences.
 Setting Channel Objectives
– State objectives in terms of targeted levels
of customer service.
 Identifying Major Alternatives
 Evaluating the Major Alternatives
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Identifying Major Alternatives
 Types of Intermediaries
– Company sales force
 Employed directly by the firm in outside
sales or insides sales capacity.
– Manufacturer’s agency
 Independent firms whose sales people
handle several companyies’ products
simultaneously
– Industrial distributors
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Identifying Major Alternatives
 Number of intermediaries
– Intensive distribution
 Stocking the product in as many outlets as
possible.
– Exclusive distribution
 Granting a limited number of outlets the
exclusive right to sell a firm’s brands in their
territory.
– Selective distribution
 The use of more than one, but fewer than all
outlets that are willing to carry a product.
Copyright 2007, Prentice-Hall Inc.
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Marketing in Action
Selective Distribution
Maytag uses selective distribution
like many furniture and appliance
manufacturers.
The “Where to Buy” page on their
Web site assists buyers in finding
stores that carry the Maytag brand.
http://www.maytag.com
Copyright 2007, Prentice-Hall Inc.
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Let’s Talk!
The Roomba by iRobot is a
self-propelled vacuum
cleaner that avoids falling
off of stairs, vacuums
along walls and furniture,
and recharges itself. Prices
range from $150 - $399.
How many intermediaries
would be appropriate for
this product? Why?
Copyright 2007, Prentice-Hall Inc.
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Identifying Major Alternatives
 Channel Member Responsibilities:
– The terms and responsibilities of
intermediaries must be agreed upon by
the producer and intermediary.
 Agreements should cover:
– Pricing policies
– Conditions of sale
– Territorial rights and territorial boundaries
– Specific services to be performed
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Evaluating the Major Alternatives
 Economic Criteria:
– A company compares the likely sales,
costs, and profitability of different channel
alternatives.
 Control Issues:
– How and to whom should control be
given?
 Adaptive Criteria:
– Consider long-term commitment vs.
flexibility.
Copyright 2007, Prentice-Hall Inc.
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International Channel Decisions
 Every country has its own unique

distribution system that has evolved over
time.
Channel systems vary widely from country
to country.
– Countries such as Japan have complex, multilayered distribution systems that are hard for
Western firms to penetrate.
– India and China have inefficient distribution
systems, despite their enormous size.
Copyright 2007, Prentice-Hall Inc.
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Channel Management Decisions
 Selecting channel
members
– Many factors should
be considered.
 Managing and
motivating channel
members
– Partner relationship
management
 Evaluating channel
members
Copyright 2007, Prentice-Hall Inc.
GE’s CustomerNet is a partner
relationship management tool that
offers dealers 24/7 access to GE’s
prices and product availability.
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Public Policy and Distribution Decisions
 Exclusive
distribution
 Exclusive dealing
 Exclusive
territorial
agreements
 Tying
agreements
Copyright 2007, Prentice-Hall Inc.
If Xerox required every business
who bought or leased their copiers
to also buy their brand of paper, it
would be a tying agreement.
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Marketing Logistics
 Planning, implementing, and controlling
the physical flow of goods, services,
and related information from points of
origin to points of consumption to meet
customer requirements at a profit.
 Includes:
– Outbound distribution
– Inbound distribution
– Reverse distribution
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Figure 10-5
Supply Chain Management
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Goals of the Logistics System and
Major Logistics Functions
 Goals of the Logistics System:
– Deliver a targeted level of customer service at the
least cost.
 Major Logistics Functions:
– Warehousing
– Inventory
management
– Transportation
– Logistics
information management
Copyright 2007, Prentice-Hall Inc.
Video Snippet
Hasbro recognizes the
importance of superior
logistics. Learn more by
watching the snippet.
10-33
Warehousing
 How many, what
Some warehouses
automate the storage
and retrieval of
palletized loads.
Copyright 2007, Prentice-Hall Inc.
types, and
where?
 Storage
warehouses
 Distribution
centers
 Automated
warehouses
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Inventory Management
 Must strike a balance
between too much
and too little
inventory.
 Just-in-time logistics
systems
 RFID or Smart Tag
technology
Copyright 2007, Prentice-Hall Inc.
RFID technology could make
the entire distribution chain
automated, resulting in
significant cost savings.
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Marketing in Action
RFID – The Wave of the Future
Key benefits of RFID
include fewer sales lost
due to stock-outs and
reduced labor costs.
RFID Systems highlights
these facts in their ad, and
suggests in a different ad
execution that retailers will
soon mandate supplier use
of RFID. Learn more:
www.rfidsystemsinc.com/
Copyright 2007, Prentice-Hall Inc.
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Transportation
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Trucks
Railroads
Water carriers
Pipelines
Air
Internet
Intermodal
transportation
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Marketing in Action
Intermodal Transportation
Intermodal transportation combines two or more modes of
transportation. Fishyback = water and trucks; Piggyback = trucks
and rail; Trainship = water and rail; Airship = air and water.
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Integrated Logistics Management
 The logistics concept that emphasizes

teamwork, both inside the company and
among all the marketing channel
organizations, to maximize the performance
of the entire distribution system.
Involves:
– Cross-functional teamwork inside the company
– Building logistics partnerships
– Third-party logistics
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Marketing in Action
Third-Party Logistics
UPS’s Supply Chain
Solution Group can
help a firm shorten its
supply chain and
convert the supply
chain into a strategic
asset.
Copyright 2007, Prentice-Hall Inc.
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Rest Area: Reviewing the Concepts
 Explain why companies use distribution




channels and discuss the functions these
channels perform.
Discuss how channel members interact and
how they organize to perform the work of the
channel.
Identify the major channel alternatives open to
a company.
Explain how companies select, motivate,
and evaluate channel members.
Discuss the nature & importance of marketing
logistics and supply chain management.
Copyright 2007, Prentice-Hall Inc.
10-41