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Chapter 5
Managing the Supply
Learning Objectives
• Discuss the retailer’s role as one of the
institutions involved in the supply chain
• Describe the types of supply chains by length,
width, and control
• Explain the terms dependency, power, and
conflict and their impact on supply-chain
• Understand the importance of a collaborative
supply-chain relationship
The Supply Chain
• Set of institutions that move goods from the
point of production to that of consumption
• Channel: Term used for supply chain
• Broadened view incorporates:
• The materials that go into manufacturing the good
• The process consumers use to dispose of or
recycle the product
LO 1
Corporate owned vertical marketing channel
Run each step below full capacity
Limited runs of each style
Zday the days the new stuff comes (feeding
The Supply Chain
• Is affected by five external forces:
• Consumer behavior
• Competitor behavior (big retailers going straight to
• Socioeconomic environment (dirt to dirt)
• Technological environment
• Legal and ethical environment
LO 1
The Supply Chain
• Must perform eight marketing functions:
• Sorting
• Financing (car
• Information gathering
• Risk taking
LO 1
The Supply Chain
• Sorting - Breaking down heterogeneous
products into homogenous groups
• Logistics network
• The entities that are involved in moving physical
inventory from the source to the retail store
• Logistics inventory
• Total business cost: All direct and indirect
costs of manufacturing, distributing, and
marketing a product
LO 1
The Supply Chain
• Institutions involved in performing the eight
marketing functions
• Primary marketing institutions
• Channel members that take title to the goods as they
move through the marketing channel (drop shippers)
• Facilitating marketing institutions: Channel
members that:
• Do not actually take title
• Assist in the marketing process by specializing in the
performance of certain marketing functions
LO 1
Exhibit 5.2- Institutions Participating
in the Supply Chain
LO 1
Facilitating Marketing Institutions
• Public warehouse: Stores goods for
safekeeping for any owner in return for a fee
• Third-party logistics provider
• Provides service to retailers of outsourced logistics
services for their:
• Storage, transporting, sorting, information and risk
management functions
• Other facilitating institutions
• Provide information through out the supply chain
• Aid in financing
LO 1
Types of Supply Chains
• Strategic decisions for efficient and
competitive supply chain require deciding:
• Supply-chain length
• Supply-chain width
• Control of the supply chain
LO 2
Exhibit 5.3 - Strategic Decisions in
Supply-Chain Design
LO 2
Exhibit 5.4 - Direct and Indirect Supply
LO 2
Supply-Chain Length
• Direct supply chain: Manufacturer sells its
goods directly to the final consumer
• Desired length is determined by:
• The size of the customer base
• Geographical dispersion
• Behavior patterns like purchase frequency
LO 2
Supply-Chain Length
Average purchase size
The particular needs of customers
The nature of the product
Size of the manufacturer, its financial capacity, and
its desire for control
LO 2
Supply-Chain Width
• Intensive distribution: All possible retailers
are used in a trade area
• Selective distribution: Moderate number of
retailers are used in a trade area
• Exclusive distribution: Only one retailer is
used to cover a trading area
LO 2
Exhibit 5.5 - Width of Supply-Chain
LO 2
Exhibit 5.6 - Marketing Channel
LO 2
Control of the Supply Chain
• Conventional marketing channel: Each
channel member is:
• Loosely aligned with the others and takes a short
term orientation
• Vertical marketing channels
• Capital-intensive networks of several levels
• Professionally managed and centrally
programmed to:
• Realize the technological, managerial, and promotional
economies of long-term relationships
LO 2
Control of the Supply Chain
• Quick response (QR) systems/ efficient
consumer response (ECR) systems
• Integrated information, production, and logistical
systems that:
• Obtain real-time information on consumer actions by
capturing sales data at point-of-purchase terminals
• Transmit customer information back through the entire
• Enable efficient production and distribution scheduling
LO 2
Control of the Supply Chain
• Corporate vertical marketing channels
• One channel institution owns multiple levels of
• Consists of either a manufacturer that has
integrated vertically forward to reach the
consumer or:
• A retailer who has integrated vertically backward to
create a self supply network
LO 2
Control of the Supply Chain
• Contractual vertical marketing channels
• A contract governs the working relationship
between channel members and includes:
• Wholesaler-sponsored voluntary groups
• Wholesaler brings together a group of
independently owned retailers and
offers them a coordinated
merchandising and buying
LO 2
Control of the Supply Chain
Retailer-owned cooperatives
• Wholesale institutions, organized and owned by
member retailers
• Offer scale economies and services to member retailers
• Retailers make greater transaction-specific investments
or investments in assets
• Form of licensing
• The owner of a product, service, or business methods
obtains distribution through affiliated dealers
LO 2
Exhibit 5.6 - Advantages and
Disadvantages of Franchising
LO 2
Control of the Supply Chain
• Administered vertical marketing channels –
• Channel members takes the
initiative to lead the channel by:
• Applying the principles of
effective interorganizational
LO 2
Managing Retailer-Supplier Relations
• Dependency
• In channel arrangement:
• Each member firm, whether primary or facilitating,
depends on the others to perform a job
• Interdependency is:
• At the root of the collaboration found in today’s supply
• The major cause of conflict found in supply
• Power: Ability of one channel member to
influence the decisions of the other channel
LO 3
Managing Retailer-Supplier Relations
Types of power
Reward power
Based on B’s perception that A has the ability to provide
rewards for B
Expertise power
Based on B’s perception that A has some special
Referent power
Based on the identification of B with A
Coercive power
Based on B’s belief that A has the capability to punish or
harm B if B doesn’t do what A wants
Legitimate power
Based on A’s right to influence B, or B’s belief that B should
accept A’s influence
LO 3
Managing Retailer-Supplier Relations
• Types of power
• Reward, expertise, referent, and informational
power foster a healthy working relationship
• Use of coercive and legitimate power tends to
elicit conflict and harm cooperation
Managing Retailer-Supplier Relations
• Conflict
• Major sources of conflict between retailers and
their suppliers:
• Perceptual incongruity regarding the:
Quality of the supplier’s merchandise
Potential demand for the supplier’s merchandise
Consumer appeal of the supplier’s advertising
Best shelf position for the supplier’s merchandise
LO 3
Managing Retailer-Supplier Relations
• Goal incompatibility
• Dual distribution
• Domain disagreements
• Diverter
• Gray marketing
• Free riding
Managing Retailer-Supplier Relations
The retailer and supplier have different perceptions of
Achieving the goals of either the supplier or the retailer
would hamper the performance of the other.
Dual distribution
Manufacturer sells to independent retailers and also through
its own retail outlets.
Disagreement about which member of the marketing
channel should make decisions.
Unauthorized member of a channel who buys and sells
excess merchandise to and from authorized channel
LO 3
Managing Retailer-Supplier Relations
Gray marketing
Branded merchandise flows through unauthorized channels.
Consumer seeks product information, usage instructions,
and sometimes even warranty work from a full-service store
but then, armed with the brand’s model number, purchases
the product from a limited service discounter or over the
LO 3
Exhibit 5.8 - Supply Chain
Management Best Practices
LO 4
Facilitating Channel Collaboration
Mutual trust
Both the retailer and its supplier have faith that each will be
truthful and fair in their dealings with the other; allows the
channel to grow and prosper
Both retailer and supplier communicate openly their ideas,
concerns, and plans
High value is placed on the relationship between
a supplier and retailer; results in flexible dealings
where adaptations are made as circumstances
LO 4
Category Management
• Category management (CM)
• Process of managing all the SKUs within a product
• Involves the simultaneous management of:
• Price, shelf space, merchandising strategy, promotional
efforts, and other elements of the retail
• Based on the firm’s goals, changing environment,
and consumer behavior
LO 4
Category Management
• Advantages
Increase in sales for both parties
Decrease in markdowns
Better in-stock percentages on key items for the retailer
Increase in turnover rates
Decrease in average inventory for both retailers and
• Increase in both members’ ROI and profit
LO 4
Category Management
• Category manager
• Creates various store displays based on local
market conditions and knowledge of:
• Consumer trends
• Point-of-sale information
• Analysis provided by each supplier
• Ensures that the retailer has the best assortment
for each store
• A supplier may serve as the retailer’s category
LO 4