Download Managing the Supply Chain

Chapter 5
Managing the Supply Chain
Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved.
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Learning Objectives
•
Discuss the retailer’s role as one of the institutions
involved in the larger 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 relations.
• Understand the importance of having collaborative
supply chain relationships.
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The Supply Chain
LO 1

Supply Chains
Is a set of institutions that moves goods from the point
of production to the point of consumption.
• Channel
Used interchangebly with chain.
2
The Supply Chain
LO 1

The supply chain, or channel, is affected by five
external forces:

Consumer behavior

Competitor behavior

Socioeconomic environment

Technological environment

Legal and ethical environment
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The Supply Chain
LO 1

A supply chain or channel must perform eight
marketing functions:
Buying
 Selling

Storing
 Transporting

Sorting
 Financing
 Information gathering


Risk taking
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The Supply Chain
LO 1

A marketing function does not have to be shifted in its
entirety to another institution or to the consumer but
can be divided among several entities.
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The Supply Chain
LO 1
• Marketing System
Is the set of institutions performing marketing
functions (activities), the relationships between these
institutions, and the functions that are necessary to
create exchange transactions with target populations
or consumers.
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The Supply Chain
LO 1
• Primary Marketing Institutions
Are those channel members that take title to the goods
as they move through the marketing channel. They
include manufacturers, wholesalers, and retailers.
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Primary Marketing Institutions
LO 1

Costco is a primary
marketing institution
that acts as both a
wholesaler (selling to
small businesses) and a
retailer (selling to
households).
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The Supply Chain
LO 1
• Facilitating Marketing Institutions
Are those that do not actually take title but assist in
the marketing process by specializing in the
performance of certain marketing functions.
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The Supply Chain: Institutions Participating in
The Supply Chain
LO 1: Exhibit 5.1
Primary (Take
Title)
Facilitating (Do Not
Take Title)
Manufacturers
Wholesalers
Agents/Brokers Financial Institutions
Market Researchers Transporters
Retailers
Advertising Agencies Warehouses
Insurers
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The Supply Chain
LO 1
• Public Warehouse
Is a facility that stores goods for safekeeping for any
owner in return for a fee, usually based on space
occupied.
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Facilitating Institutions
LO 1
•
•
•
•
Freelance broker
Manufacturer’s agent
Sales agent
Purchasing agents
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The Supply Chain: Sorting Process
LO 1
SOURCE: Virginia Newell Lusch, used with permission.
13
The Supply Chain: Sorting Process
LO 1
SOURCE: Virginia Newell Lusch, used with permission.
14
The Supply Chain: Sorting Process
LO 1
ASSORTMENT
SOURCE: Virginia Newell Lusch, used with permission.
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Types of Supply Chains
LO 2

Length

Width

Control
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Supply Chain Length
LO 2

Direct Supply Chain
Is the channel that results when a manufacturer sells
its goods directly to the final consumer or end user.
• Indirect Supply Chain
Is the channel that results once independent channel
members are added between the manufacturer and the
consumer.
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Supply Chain Length: Strategic Decisions in
Supply Chain Design
LO 2: Exhibit 5.2
Supply Chain
Length
Direct
Indirect
Supply Chain Width
(Intensive, Selective,
and Exclusive)
Controlling
the
Supply Chain
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Supply Chain Length: Direct and Indirect
Supply Chains
Direct Supply Chain
Manufacturer
LO 2: Exhibit 5.3
Indirect Supply Chains
Manufacturer
Manufacturer
Wholesaler
Consumer
Retailer
Retailer
Consumer
Consumer
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Supply Chain Width
LO 2
• Intensive distribution
Means that all possible retailers are used in a trade
area.
• Selective distribution
Means that a moderate number of retailers are used in
a trade area.
• Exclusive distribution
Means only one retailer is used to cover a trading area.
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Width of Marketing Supply Chain:
Exclusive Distribution
LO 2: Exhibit 5.4
Manufacturer
Retailer
Only one retailer in trading
area sells the product(s)
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Width of Marketing Supply Chain:
Selective Distribution
LO 2: Exhibit 5.4
Manufacturer
Retailer
Retailer
Moderate number of retailers in
each trading area sell the product(s)
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Width of Marketing Supply Chain:
Intensive Distribution
LO 2: Exhibit 5.4
Manufacturer
Retailer
Retailer
Retailer
Retailer
All possible retailers in the trading area
sell the product(s)
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Control of the Supply Chain
LO 2
• Conventional Marketing Channel
Is one in which each channel member is loosely aligned with the
others and takes a short-term orientation.
• Vertical Marketing Channels
Are capital-intensive networks of several levels that are
professionally managed and centrally programmed to realize the
technological, managerial, and promotional economies of a longterm relationship orientation.
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Marketing Channel Patterns
LO 2: Exhibit 5.5
Marketing
Channels
Conventional
Marketing
Channels
Vertical
Marketing
Channel System
Corporate
Systems
Contractual
Systems
Administered
Systems
WholesalerSponsored
Groups
RetailerOwned
Cooperatives
Franchised
Retail
Programs
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Vertical Marketing Channels
LO 2

Quick Response (QR) Systems
Also known as Efficient Consumer Response (ECR)
Systems, are integrated information, production,
and logistical systems that obtain real-time
information on customer actions by capturing sale
data at point-of-purchase terminals and then
transmitting this information back through the
entire channel to enable efficient production and
distribution scheduling.
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Vertical Marketing Channels
LO 2

Stock-Keeping Units
Are the lowest level of identification of merchandise.
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Vertical Marketing Channels
LO 2

Corporate Vertical Marketing Systems
Exist where one channel institution owns multiple
levels of distribution and typically consists of either a
manufacturer that has integrated vertically forward to
reach the consumer or retailer that has integrated
vertically backward to create a self-supply network.
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Vertical Marketing Channels
LO 2

Contractual Vertical Marketing Systems
Use a contract to govern the working relationship
between channel members and include wholesalersponsored voluntary groups, retailer-owned
cooperatives, and franchised retail programs.
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Vertical Marketing Channels
LO 2

Wholesaler-Sponsored Voluntary Groups
Involve a wholesaler that brings together a group of
independently owned retailers and offers them a
coordinated merchandising and buying program that
will provide them with economies like those their chain
store rivals are able to obtain.
30
Wholesale Sponsored Voluntary Group
LO 2
• Wholesale sponsored
voluntary groups, such
as NAPA, have been a
major force in marketing
channels since the mid1960s. These marketing
institutions offer
members coordinated
merchandising and
buying programs that
help lower costs.
31
Vertical Marketing Channels
LO 2

Retailer-Owned Cooperatives
Are wholesale institutions, organized and owned by
member retailers, that offer scale economies and
services to member retailers, which allows them to
compete with larger chain-buying organizations.
TRU*SERV, Ace, Handy Hardware
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Vertical Marketing Channels
LO 2

Franchise
Is a form of licensing by which the owner of a product,
service, or business method (the franchisor) obtains
distribution through affiliated dealers (franchisees).
33
Advantages to Franchise Ownership
LO 2: Exhibit 5.6

Advantages to Franchisee
• Franchisor provides managerial skills that are taught to
franchisee.
• Franchisee can begin a business with a relatively small capital
investment.
• Franchisee can acquire a relatively well known or established line
of business.
• Franchisee can acquire rights to a well-defined geographical area.
• The standardized marketing programs and operating procedures
enable the franchisee to be competitive immediately.
• Because they own a piece of the action, franchisees tend to be
more motivated and bottom-line oriented than managers of
corporate chain stores.
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Disadvantages to Franchise Ownership
LO 2: Exhibit 5.6

Disadvantages to Franchisee
• Too many franchises can be located in a geographical area.
• Too many franchisors make promises they cannot keep (e.g.,
overstating the income potential of a franchise).
• Franchisors can include a buyback agreement whereby the
franchisee must sell back the franchise at a given point in time or
the franchise agreement is for a short duration.
• Under most franchise agreements, payments to the franchisor are
a percentage of a franchisee’s profitability.
• Franchise systems may be too inflexible in terms of operating
procedures (hours, product selection, etc.) for the franchisee. In
short, the franchisee must surrender to freedom to make many
decisions.
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Yum! Brands Inc.
LO 2
• Yum! Brands Inc. (YUM), the
parent of Pizza Hut, has nearly
33,000 restaurants in 100
countries and territories.
These restaurants are
operated by the company or,
under the terms of franchise
or license agreements, by
franchisees or licensees that
are independent third parties
or by affiliates in which the
company owns a
noncontrolling equity interest.
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Vertical Marketing Channels
LO 2

Administered Vertical Marketing Channels
Exist when one of the channel members takes the
initiative to lead the channel by applying the principles
of effective interorganizational management.
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Managing Retailer-Supplier Relations
LO 3
• Dependency
• Power
• Conflict
• Managing Cooperative Relations
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Managing Retailer-Supplier Relations
LO 3
• Dependency
Every supply chain needs to perform eight marketing
functions, which can be performed by any combination
of the members. None of the respective institutions
and isolate itself; each depends on the others to do an
effective job.
39
Managing Retailer-Supplier Relations
LO 3
• Power
Is the ability of one channel member to influence the
decisions of the other channel members.
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Managing Retailer-Supplier Relations:
LO 3
Types of Power
• Reward Power is based on B’s perception that A has
the ability to provide rewards for B.
• Expertise Power is based on B’s perception that A has
some special knowledge.
• Referent Power is based on the identification of B with
A.
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Managing Retailer-Supplier Relations:
Types of Power
LO 3
• Coercive Power is 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 is based on A’s right to influence B,
or B’s belief that B should accept A’s influence.
• Informational Power is based on A’s ability to provide
B with factual data.
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Managing Retailer-Supplier Relations
LO 3
• Conflict
Conflict is inevitable in every channel relationship
because retailers and suppliers are interdependent;
that is, every channel member is dependent on every
other channel member to perform some specific task.
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Managing Retailer-Supplier Relations:
LO 3
Conflict
• Perceptual Incongruity occurs when the retailer and
supplier have different perceptions of reality.
• Goal Incompatibility occurs when achieving the goals
of either the supplier or the retailer would hamper the
performance of the other.
• Dual Distribution occurs when a manufacturer sells to
independent retailers and also through its own retail
outlets.
44
Managing Retailer-Supplier Relations:
Conflict
LO 3
• Domain Disagreements occur when there is
disagreement about which member of the marketing
channel should make decisions.
• Diverter is an unauthorized member of a channel who
buys and sells excess merchandise to and from
authorized channel members.
• Gray Marketing is when branded merchandise flows
through unauthorized channels.
45
Managing Retailer-Supplier Relations:
LO 3
Conflict
• Free Riding is when a 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 internet.
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Conflict Process Role of Channel Interdependency
Interdependency
Dependency of
Retailer on Supplier
Supplier’s
Power
Sources
LO 3
Dependency of
Supplier on Retailer
Power of
Retailer Over
Supplier
Power of
Supplier Over
Retailer
Conflict
Potential
Conflict
Potential
Conflict
Conflict
Retailer’s
Power
Sources
Conflict
Resolution
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Collaboration in the Channel
LO 4

Facilitating Channel Collaboration

Category Management
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Facilitating Channel Collaboration
LO 4
• Mutual trust
occurs when both the retailer and its suppliers have
faith that each will be truthful and fair in their dealings
with the other.
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Facilitating Channel Collaboration: Supply Chain
Best Management Practices
LO 4: Exhibit 5.7
• All supply chain members must remember that
satisfying the retail consumer is the only way anyone
can be successful.
• Successful partners work together in good times and
bad.
• Never abandon a supply chain partner at the first sign
of trouble.
• Never abuse power in negotiations. Rather, understand
your partner’s needs prior to negotiations and work to
satisfy those needs.
50
Facilitating Channel Collaboration: Supply Chain
Best Management Practices
LO 4: Exhibit 5.7
• Share profits fairly among partners.
• Limit the number of partners for each merchandise
line. By doing so you can signal greater commitment
and trust to your partners, thus building stronger
relationships.
• Set high ethical standards in your business
transactions.
• Successful partners plan together to help the supply
chain operate efficiently and effectively.
• Treat your partner as you wish to be treated.
51
Facilitating Channel Collaboration
LO 4
• Two-Way Communication occurs when both retailer
and supplier communicates openly their ideas.
Concerns, and plans.
• Solidarity exists when a high value is placed on the
relationship between a supplier and retailer.
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Category Management
LO 4
• Category Management (CM)
Is the process of managing all the SKUs within a
product category and involves the simultaneous
management of price, shelf space, merchandising
strategy, promotional efforts, and other elements of
the retail mix within the category based on the firm’s
goals, the changing environment, and consumer
behavior.
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Question to Ponder
• How can a manufacturer employ an e-tailing strategy
while maintaining a strong partnership with its
retailers?
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