Unit L: Place: Distribution Channels

sing Channels of Distribution

Instructions

Write a post for the Discussion on this topic, addressing the questions below. You may use either written paragraph or bullet point format. Part 1 should be 2–3 paragraphs in length or an equivalent amount of content in bullet point form. Responses to your classmates’ posts should be 1–2 paragraphs or several bullet points in length.

Part 1: Distribution Strategy

What is your current distribution strategy? What missed opportunities or disconnects are you seeing in this distribution approach? Make recommendations about your future distribution strategy based on the following:

• What are the best distribution channels and methods for you to use, and why?
• Will you have a retail outlet and if so, where will it be located?
• In what geographic area(s) will your product/service be available?

Part 2: Respond to Classmates’ Posts

After you have created your own post, look over the discussion posts of your classmates and respond to at least two of them.

Part 3: Incorporate Feedback

Review the feedback you receive from classmates and your instructor. Use this feedback to revise and improve your work before submitting it as part of the “Complete Marketing Plan” assignment.

Grading Rubric for Discussion Posts

The following grading rubric may be used consistently for evaluating all discussion posts.

Discussion Grading Rubric

Criteria	Response Quality: Not Evident	Response Quality: Developing	Response Quality: Exemplary	Point Value Possible
Submit your initial response	No post made – 0 pts	Post is either late or off-topic – 2 pts	Post is made on time and is focused on the prompt – 5 pts	Point value possible – 5 pts
Respond to at least two peers’ presentations	No response to peers – 0 pts	Responded to only one peer – 2 pts	Responded to two peers – 5 pts	Point value possible –5 pts

Total Points Possible for Discussion Assignment: 10pts.

• Discussion: Distribution Strategy. Provided by: Lumen Learning. License: CC BY: Attribution

Let’s return to our earlier example of Whole Foods’ and Trader Joe’s distribution strategies now that we understand much more about marketing channels and supply chains. Whole Foods and Trader Joe’s use very different approaches to source their products, place stores, and get the products to the stores. Both companies have developed these strategies because of their missions and their focus on delivering value to target customers. Is one of the distribution strategies better than the other, or are they both using successful but different strategies?

Marketing Channels

Both companies use the retail channel and deal directly with suppliers.

In the case of fruits and vegetables, Whole Foods has buying relationships with local farmers (producers) who supply the store with seasonal produce. Thus, if one farmer is unable to produce a sufficient amount of yellow corn or heirloom tomatoes, the shortfall can be made up by another farmer. Although challenging to perfect, these short supply chains are agile and difficult for other big retailers to duplicate.

Trader Joe’s also buys directly from producers. It offers manufacturers detailed specifications for new products along with the price it will pay, but then it leaves it up to the vendors to create innovative high-quality items. In return, Trader Joe’s expects a high level of secrecy from its suppliers, even going so far as to force them to not publicly acknowledge their business relationship. Trader Joe’s does this because it doesn’t want other vendors, customers, or competitors to know where it gets its products. In most cases vendors agree to this cloak of secrecy because they are typically producing a lower-cost version of a product for Trader Joe’s than for their other customers, and they do not want to create pricing pressure with other customers by disclosing this.

Sourcing

Whole Foods emphasizes the quality of its products, requiring that stores must not stock products with artificial flavors, preservatives, colors, sweeteners, or hydrogenated oils.^[1] Due to this focus on quality, customers pay a premium for Whole Foods’ one-of-a-kind produce selection and quality. Because of its high prices, Whole Foods has been dubbed “Whole Paycheck.” Nonetheless, loyal customers are happy to pay them. Whole Foods does not compete with other grocers on price and has no intention of ever competing in that arena. And since many of its products cannot be found anywhere else, Whole Foods exerts enormous leverage in terms of its pricing power. Furthermore, Whole Foods filters its product offerings and only carries pure, unadulterated foods. This is a strong differentiator, which adds value from the customer’s perspective. Historically, Whole Foods has been able to sell this high-quality merchandise at a price that provides strong profits, in spite of the higher costs.

Trader Joe’s manages its supply chain by relying on its successful private-label brands. Eighty percent of Trader Joe’s products are developed either in-house or are created by suppliers exclusively for Trader Joe’s; average stores carry only 16 percent local products. This strategy allows Trader Joe’s to differentiate from its competitors and reduce its marketing costs, and selling its own in-house brands reduces the number of SKUs in its stores. This collapses the number of supplier relationships and leads to a more efficient and controllable supply chain.^[2]

Distribution Networks and Inventory Management

As Whole Foods has increased the number of retail centers it operates, it has suffered growing pains in efficiently managing distribution of products to its stores. The chain is growing at such a fast rate that it struggles to keep up with demand for products and keep shelves stocked. The single biggest reason for inefficiency is Whole Foods’ almost completely decentralized back end. It has twelve geographic divisions, a national headquarters in Austin, regional distribution centers, bakery facilities, kitchens, seafood processing facilities, meat and produce procurement centers, and a specialty-coffee/tea procurement operation.^[3] Each geographic division has its own office, regional president, and oversees its own store network. Many outsiders scoff at its supply chain and consider it amateurish and lacking in professionalism. But with the ample margins that Whole Foods commands for its products, it doesn’t face immediate pressure to improve efficiencies.

The stores operate under minimal governance and are given maximum freedom to source a product mix that is appropriate for their location. Whole Foods stores operate under the premise that they need these freedoms to meet the unique buying needs of its local customers. The only governing rule put in place by the corporate office is that stores must not stock products with artificial flavors, preservatives, colors, sweeteners, or hydrogenated oils. A down side to this local purchasing policy is that consistency is compromised across the chain. Every retail location carries a variety of products that distinguishes it from other stores in the same chain. Not surprisingly, it is difficult to achieve economies of scale.

Trader Joe’s manages its distribution networks by minimizing the number of hands that touch the product, thereby reducing costs and making products quickly available to their customers. You’ll recall that Trader Joe’s orders directly from the manufacturer. The manufacturer, in turn, is responsible for bringing the product to a Trader Joe’s distribution center. At the distribution center, trucks leave on daily resupply trips to local stores. Because of the average store’s small size, there is little room for excess inventory, and orders from distribution centers need to be incredibly accurate.

Trader Joe’s primary success factor has been its inventory-sourcing and pricing model: it limits its stock to specialty products that it can sell at very low prices. This is accomplished by purchasing large quantities of specialty goods (that do not interest conventional supermarkets), thereby securing low prices. Customers are able to purchase unique products that guarantee value. This strategy also means that customers buy more because Trader Joe’s sells twice as much per square foot compared to other supermarkets. It achieves these quantities by focusing on a smaller range of products—typically carrying around 2,000 SKUs, whereas the typical grocery store carries upwards of 30,000.^[4] This small figure is likely exacerbated by the size of the store (one-third the square footage of an average supermarket) and cramped aisles.

The Results

Whole Foods’ stock price has declined sharply since February 2015, while Trader Joe’s continues to thrive. Lower-cost competitors like Wal-mart and Kroger’s saw Whole Foods’ high prices and margins and have been able to add high-quality organic products to their offerings at a lower price because of supply chain and distribution efficiencies. In other words, Whole Foods’ sourcing strategy, once thought to be a sustainable competitive advantage, can in fact be replicated more efficiently by competitors. The press coverage of some of the challenges is highlighted below:

Whole Foods Market Inc., which has long given its local managers and regional bosses broad discretion over everything from buying cheese to store design, is whittling away at some of that autonomy in an effort to reduce costs and boost its clout with suppliers.

As stiffer competition erodes its profit growth, the natural and organic foods retailer is tweaking its management style by centralizing and streamlining some functions. The changes could be risky for the company as it tries to wring more efficiency from its stores without sacrificing the local flavor and specialty offerings that have been a cornerstone of its success.

Whole Foods is shifting more responsibility for buying packaged foods, detergents, and other nonperishable items for the more than 430 stores to its Austin, Texas, headquarters. It is deploying software to simplify labor-intensive tasks like scheduling staff and replenishing shelves.^[5]

In the meantime, Trader Joe’s continues to lead the industry in sales per square foot and has carefully accelerated the addition of new stores. The graph below shows sales per square foot and new store openings for both chains and their competitors.

When consumers are asked, “When you are next in the market to purchase products in this specific category, from which of the following would you consider purchasing?” many more consumers turn to Trader Joe’s than Whole Foods. The graph below charts consumer responses to this question.

Trader Joe’s emphasis on sustained differentiation in its sourcing and a highly efficient supply chain and distribution network have proven to be the winning combination. Whole Foods is now trying to replicate that, but with intense competitive pressure and industry scrutiny.

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Earlier in this module we discussed the definition of supply chain and the difference between the supply chain and marketing channels. As a reminder, the supply chain is a system of organizations, people, activities, information, and resources involved in moving a product or service from supplier to customer. Supply chain activities involve the transformation of natural resources, raw materials, and components into a finished product that is delivered to the end customer.^[1]

The marketing channel generally focuses on how to increase value to the customer by having the right product in the right place at the right price at the moment the customer wants to buy. The emphasis is on the providing value to the customer, and the marketing objectives usually focus on what is needed to delivery that value.

The primary differences between the two are the following:

1. The supply chain is broader than marketing channels.
2. Marketing channels are purely customer facing, while supply chain encompasses internal objectives as well.
3. Marketing channels are one part of the marketing mix that must be balanced with product, price, and promotion.

In this section we are going to get into the supply chain in more detail. Our goal here is to understand the contributions of integrated supply chain management in order to be able to create a more effective distribution strategy.

The specific things you’ll learn in this section include:

• Identify the components of a supply chain
• Define integrated supply chain management
• Explain the impact of the supply chain on the distribution strategy

 

Components of a Supply Chain

The interconnected teams and organizations that comprise the supply chain provide a range of different functions. The supply chain for every organization is different. In fact, each product can have different supply chain needs and challenges, leading to different players. In general, the supply chain spans a fairly common set of functions that are accomplished in very different ways.

Sourcing and Procurement

Sourcing is the process of finding, evaluating, and engaging suppliers to provide goods and services to a business. Procurement is the process of purchasing the goods and services. In a B2B sale, the procurement function will usually manage both the sourcing and the procurement functions.

In the earliest days of the automobile, Henry Ford made a decision to own or control the full supply chain—from the mines that provided the ore to the factories that made the glass. Raw materials—iron ore, coal, and rubber, all from Ford-owned mines and plantations—came in through one set of gates at the plant while finished cars rolled out the other.^[2] Today it is exceptionally rare for a company to try to own all the raw materials for a physical product. Even software products use preexisting software frameworks and code.

Businesses have shown success in managing external suppliers and have found that it is beneficial to source some materials and services in order to focus on particular areas of specialization. A business may choose to source raw materials that it does not own. It may also choose to outsource services that it could do itself but has found advantageous to source externally. Outsourcing is the process of contracting out a business process to another party.^[3]

In sourcing a product or service, businesses will generally conduct a thorough analysis of their needs, evaluating the material requirements, the service requirements, and the financial requirements. Next the company will research potential suppliers, understanding what offerings exist in the market and how well they seem to match with the company’s requirements. Often companies select suppliers based on existing relationships or on the results of the analysis they have done. Other times the company may decide to go to a competitive bid and solicit proposals from a number of firms. (Government entities are usually required to go to public bid.)

Whether it is through a formal bid process or through another market analysis, the supply chain team will analyze the capabilities of potential suppliers and craft a sourcing strategy. The company may prefer to build a deep relationship with a single supplier or work with a number of different suppliers to benefit from different capabilities or reduce the risk of dependency. Then the team will negotiate contracts with the suppliers that align with the business needs.

Hewlett Packard (HP) developed a framework for evaluating and managing suppliers called the TQRDC framework. Supplier contracts and evaluations addressed five factors: technology, quality, responsiveness, delivery, and cost. By negotiating supplier contracts with goals and commitments identified for each of the five areas, and evaluating performance over time, HP was able to engage more collaboratively with its suppliers to continuously improving processes, relationships, and results.^[4]

Demand Planning, Order Fulfillment, and Inventory

Demand planning begins early in the new-product development process in order to develop the business case, but as the product goes to market, the accuracy of the demand forecast becomes much more important.

The supply chain organization contracts with suppliers to meet the projected demand. If the forecast is too high, the company not only loses revenue but it may also incur costs for products that are never sold. It the marketer projects demand too low, then the company cannot fulfill orders, resulting in product shortages. This also results in lost revenue and negatively impacts the buyers’ shopping experience. It’s difficult to forecast demand and get it just right.

Supply chain management can help with the forecast and fulfillment process. If suppliers have visibility into the company’s forecast and sales data, they can react immediately when demand is high or low. Otherwise, suppliers will continue to produce and deliver at a level that is not aligned with the latest sales data or the revised forecasts. They will either be building or depleting inventory.

Inventory is an asset that is intended to be sold in the ordinary course of business. Inventory may not be immediately ready for sale and can fall into one of the following three categories:

• Be held for sale in the ordinary course of business
• Be in the process of being produced for sale
• Be materials or supplies intended for consumption in the production process^[5]

In managing the supply chain, many businesses prefer to use a just-in-time (JIT) inventory management approach. This means that the company will keep very little inventory on hand at each step in the supply chain. Let’s revisit a real example to see why this might be a good idea.

In our Monster Beverage channel example we can see the product flow in the column on the left. If the manufacturer produces enough concentrate for the production of 100,000 Monster Beverages each week and sends them off with the transportation company, then over time there will be 100,000 beverages each week available to consumers. What if consumers only demand 40,000 beverages each week? Initially there will be an extra 60,000 beverages in supermarkets, but quickly the supermarkets will reduce their purchases to match demand. Next, the extra inventory is likely to build up with the bottlers and lastly in the warehouse. The manufacturer could overproduce for several weeks or more before beginning to realize that there is too much product and inventory.

If Monster uses a JIT inventory process, then new orders from the manufacturer will only be generated as stock is pulled from the warehouse, because the bottler requires it to fulfill orders from the supermarket. Each of the organizations in the supply chain will know when demand is slowing or growing and will be able to react more quickly to changes in demand.

Warehousing and Transportation

In our global economy, it is a huge task to transport and store commercial products. The supply-chain and logistics firm MWPLV International completed a comprehensive analysis of Walmart’s distribution network and found the following:

• Walmart and Sam’s Club distribution centers total 124.2 million square feet. If airlifted to Manhattan they would cover nearly 19 percent of the total borough of Manhattan.
• Approximately 81 percent of the merchandise sold at Walmart is shipped through Walmart’s distribution network. The balance is serviced through direct store delivery in which the manufacturer ships directly to the store.
• There are 42 regional distribution centers that are 1.0–1.5 million square feet. Each has a mechanized conveyor system that sorts products to the correct loading dock for shipment. Each regional center employs around 1,000 employees.
• The regional distribution centers are, on average, 124 miles from the Walmart stores that they serve.

A distribution center is a warehouse or storage facility where the emphasis is on processing and moving goods on to wholesalers, retailers, or consumers. As we see from the Walmart distribution network, warehouses are not only storage facilities. They are increasingly equipped with technology systems that support the efficient counting, management, and transportation of goods. In the warehousing and transportation process, the goal is to efficiently move the right product to the location where it will be purchased by a customer.

How are all of these products tracked? Each product has a unique identifier called a stock-keeping unit (SKU). The SKU is scanned and tracked at each step in the process from receiving, through storage, to retrieval and shipping.Once loaded on the truck, the entire order is sent between the warehouse, the shipper, and the receiving company using another data format called electronic data interchange (EDI). EDI allows the trucking company to know exactly what it is shipping, and it gives the sending and receiving companies detailed, real-time tracking and status reports.

Logistics and Information Management

The physical movement of goods is called logistics, and as you can guess, it is a staggeringly complex and important function. Imagine trying to keep track all of this information—from the initial order forecast to production, warehousing, and transportation. It’s obviously not a job that a human, or even a team of humans, could easily do on a large scale. As global supply chains have grown more complex, businesses have created systems to manage and optimize the supply chain. In 2013, the market for supply chain management software was $8.944 billion.^[6]. Put simply, companies are buying expensive systems to help manage the complexity of the supply chain.

Have you ever tracked a package that you were sending or receiving and seen its progress through the supply chain? This is done using track-and-trace software that monitors the progress of physical goods through the supply chain process, often by means of a radio-frequency identification tag. Radio-frequency identification (RFID) uses electromagnetic fields to automatically identify and track tags attached to objects. The tags contain electronically stored information. Passive tags collect energy from a nearby RFID reader’s interrogating radio waves. RFID tags are used in many industries—for example, an RFID tag attached to an automobile during production can be used to track its progress through the assembly line, and RFID-tagged pharmaceuticals can be tracked through warehouses in the supply chain process.

Information throughout the supply chain process is captured in systems that allow supply chain professionals to analyze results and identify improvements that will lead to more reliable, faster, and less expensive delivery to customers throughout the supply chain.

Integrated Supply Chain Management

As the importance of managing the supply chain well has increased, companies have acknowledged that they must manage the supply chain as a complete system and treat it as an integrated function. When an organization takes an integrated approach, it is recognizing that it cannot manage each part of the supply chain as an independent function, but instead needs to understand and manage the connections and interdependencies.

Within the supply chain organization, this means that sourcing, demand planning, inventory planning, warehousing, logistics, and order-fulfillment functions must work together. The rise of supply chain software tools that bring this data and information together in one place is just one indicator of an increasingly integrated focus. Also, many organizations previously had these functions spread between different organizations with little opportunity to interact. Today, most large organizations have an integrated supply chain function with a common management team and common objectives.

Beyond the work occurring within the supply chain organization, there are important connections to marketing, finance, and manufacturing. Marketing plays a direct role in creating the demand forecast and defining the product and delivery expectations for customers. These must be reviewed with the supply chain team so that everyone knows what needs to be achieved, and when that isn’t possible, adjustments can be made and communicated to customers early. The integration with finance is necessary to ensure that investments are budgeted correctly and inventory is accounted for accurately. Manufacturing is often most heavily affected by decisions and requirements of the supply chain team, as they are counting on having an adequate supply and must meet delivery time lines to keep customer commitments.

As with many complex organizational challenges, this integration works best when there are clear objectives that are set across the organizations, a common view of the data (which identify opportunities for improved performance), and clear, frequent communication about potential issues and needs. This enables all of the organizations to focus on delivering value to customers and achieving the company mission.

Supply Chain and Channel Strategy

Let’s look at an example in which the supply chain is key to a successful channel strategy that delivers the right value to customers.

Elli.com is an online retailer that sells customized wedding materials to brides. Elli specializes in paper products that are unique and beautifully designed, and it coordinates a complete look for a bride from her first wedding announcement to her final thank-you note.

In crafting its channel strategy, Elli focused on what it does best: providing a beautiful product to brides with an exceptional service experience. Elli is also a small company that did not want to use its funding to build capability in areas that others could do better and less expensively.

The table below shows the components of the channel strategy and the supply chain decisions the company made to provide unique value to its customers.

	Channel Strategy	Supply Chain Decision
Channel Structure	Sell direct to consumer. Brides are nervous about making every detail perfect. If Elli manages all interactions with the brides, the team can provide meticulous, reassuring service, reducing risk to customer relationships.	Do not engage wholesale or retail partners.
Sourcing	Elli does not create designs. The company works with a network of designers who submit design concepts. The Elli creative team reviews the designs and offers to resell those they believe Elli brides will love.	Outsource design work. The network of designers must be large enough to ensure a continual stream of designs that match Elli’s quality standards. Designers provide designs to Elli for marketing and fulfillment.
Order Fulfillment	Every Elli order is a custom product that is printed or created for an individual bride. When a bride places an order, an Elli staff member personally confirms that order and creates a digital proof of the print item for the bride’s approval.	Elli does not outsource any communication with brides.
Manufacturing	Once the proof is approved, the staff member sends the order to an external print service that prints, packages, and ships the order to the bride. The Elli staff member monitors the time line for printing and shipping, and addresses questions from the printer.	Elli has contracted with a local printer. The print partner was carefully selected to ensure that the printing time, quality, and attention to detail matches Elli’s expectations for its customers. By using a local provider, the company can regularly check the quality of orders.
Shipping	Elli determined that a national shipping partner could get the orders to brides most quickly and efficiently.	Elli uses a single national shipper. The shipping information is integrated into Elli’s customer database to provide the staff with real-time tracking information on each order.
Issue Resolution	Because Elli owns the relationships with brides, designers, printers, and shippers, the company can resolve all issues from a single point of contact.	Elli team members own different supply chain relationships. The team regularly reviews the supply chain performance and shares perspectives on how the partnerships and performance can be improved.

The Elli approach seems to be using a range of internal capabilities and external channel partners to create a customer experience that leaves brides happy. As you look at Elli’s approach, where is there risk in the distribution strategy? In which areas might issues arise as Elli grows?

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What you’ll learn to do: explain how channels affect the marketing of products and services

By March 2014, most Americans had noticed the Geico gecko; some had fallen in love with him. Regardless of buyers’ feelings about the little lizard, by 2014 enough had purchased auto insurance from Geico through its online sales portal to change the landscape of the insurance industry. Fortune magazine reported on the company’s success:

It’s official. After decades as the second-largest auto insurer in the U.S., Allstate Corp. now is No. 3.

Geico, the online auto insurer owned by Warren Buffett’s Berkshire Hathaway Inc., surpassed Allstate in 2013 in auto premiums collected. Berkshire Hathaway released its 2013 results today, finally laying out in black and white the the long-anticipated symbolic passing of that torch.

State Farm Insurance Cos. remains the largest auto insurer in the U.S. by a large margin. But it’s telling that the No. 2 player now is a company that sells mainly over the Internet rather than through an army of agents. Both State Farm and Allstate still largely depend on thousands of agents around the country to sell their product, but the online channel has grown much faster over the past decade and is expected to continue that trajectory.^[1]

Geico chose to use a channel strategy that eliminates agents as intermediaries and provides a direct channel to consumers. What benefits does this offer consumers? In order to take full advantage of the channel, Geico had to clearly identify and communicate the benefits to its target customers. It did this largely by means of a clever advertising slogan: “Give us 15 minutes and we’ll save you 15 percent on your car insurance.” (Some credit for Geico’s success is probably due to the lizard, too, which helped the company improve its brand visibility.)

While the message doesn’t say anything overt about Geico’s channel strategy, the message to customers is clear: Geico delivers good value (“save 15 percent”) fast (it only takes 15 minutes). The company’s ability to offer that value (savings and speed) really does come from its choice of channel strategy: direct to consumers (eliminating the intermediary) equals savings of time and money.

As you’ll learn in this next section, much of marketing’s role in the distribution process is identifying the right channels, creating and managing effective channel partnerships, and ensuring that the channel performance provides value to customers.

Optimizing Channels

Introduction

Geico didn’t simply find itself owning the online, direct channel. It analyzed its customer needs and competitors’ positions and chose a strategy to accelerate sales growth: Geico defined and managed its channel strategy.

The Channel Management Process

The channel management process contains five steps.

1. Analyze the Consumer

We begin the process of channel management by answering two questions. First, to whom shall we sell this merchandise immediately? Second, who are our ultimate users and buyers? The immediate and ultimate customers may be identical or they may be quite separate. In both cases, certain basic questions apply: There is a need to know what the customer needs, where they buy, when they buy, why they buy from certain outlets, and how they buy.

It is best that we first identify the traits of the ultimate user, since the results of that evaluation might determine the other channel institutions we would use to meet those needs. For example, the buying characteristics of the purchaser of a high-quality curved TV might be the following:

• purchased only from a well-established, reputable dealer
• purchased only after considerable research to compare prices and merchandise characteristics
• purchase may be postponed
• purchased only from a dealer equipped to provide prompt and reasonable product service

These buying specifications illustrate the kinds of requirements that the manufacturer must discover. In most cases, purchase specifications are fairly obvious and can be determined without great difficulty. In others, though, they can be difficult to determine. For example, some consumers will only dine at restaurants that serve menu items that meet particular dietary needs; others will only patronize supermarkets that demonstrate social responsibility in their sourcing and packaging. Still, through careful and imaginative research, most of the critical factors related to consumer buying specifications can be figured out.

Once the consumer’s buying specifications are known, the channel planner can decide on the type or types of wholesaler or retailer through which a product should be sold. This means that a manufacturer contemplating distribution through particular types of retailers must become intimately familiar with the precise location and performance characteristics of those he is considering.

In much the same way that buying specifications of ultimate users are determined, the manufacturers must also discover buying specifications for resellers. Of particular importance is the question “From whom do my retail outlets prefer to buy?” The answer to this question determines the types of wholesalers (if any) that the manufacturer should use. Although many retailers prefer to buy directly from the manufacturers, this is not always the case. Often, the exchange requirements of manufacturers (e.g., infrequent visit, large order requirements, and stringent credit terms) are the opposite of those desired by retailers. Such retailers would rather buy from local distributors who have lenient credit terms and offer a wide assortment of merchandise.

2. Establish the Channel Objectives

Once customer needs are specified, the marketer can decide what the channel must achieve, which can be captured in the channel objectives. Channel objectives are based on customer requirements, the marketing strategy, and the company strategy and objectives. However, in cases where a company is just getting started, or an older company is trying to carve out a new market niche, the channel objectives may be the dominant objectives. For example, a small manufacturer wants to expand outside the local market. An immediate obstacle is the limited shelf space available to this manufacturer. The addition of a new product to the shelves generally means that space previously assigned to competitive products must be obtained. Without this exposure, the product is doomed.

As one would expect, there is wide diversity of channel objectives. The following areas encompass the major categories:

• Growth in sales by reaching new markets and/or increasing sales in existing markets.
• Maintenance or improvement of market share
• Achieve a pattern of distribution by a certain time, place, and form
• Reduce costs or increase profits by creating an efficient channel

3. Specify Distribution Tasks

After the distribution objectives are set, it is appropriate to determine the specific distribution tasks (functions) to be performed in that channel system. The channel manager must be very specific in describing the tasks and also detail how these tasks will change depending upon the situation. For example, a manufacturer might delineate the following tasks as necessary to profitably reach the target market:

• Provide delivery within 48 hours after order placement
• Offer adequate storage space
• Provide credit to other intermediaries
• Facilitate a product return network
• Provide readily available inventory (quantity and type)

4. Evaluate and Select Among Channel Alternatives

Determining the specific channel tasks is a prerequisite of the evaluation and selection process. There are four considerations for channel alternatives: number of levels, intensity at the various levels, types of intermediaries at each level, and application of selection criteria to channel alternatives. In addition, it is important to decide who will be in charge of the selected channels.

Number of Levels

Channels can range in levels from two to several (five is typical). The two-level channel (producer to consumer) is a direct channel. The number of levels in a particular industry might be the same for all the companies simply because of tradition. In other industries, this dimension is more flexible and subject to rapid change.

Intensity at Each Level

Once the number of levels has been decided, the channel manager needs to determine the actual number of channel components involved at each level. How many retailers in a particular market should be included in the distribution network? How many wholesalers?

The intensity decision is extremely critical, because it is an important part of the firm’s overall marketing strategy. Companies such as Starbucks and Hershey’s have achieved high levels of success through their intensive distribution strategy.

Types of Intermediaries and Application of Selection Criteria

As we discussed, there are several types of intermediaries that operate in a particular channel system. The objective is to identify several possible alternative channel structures, and evaluate these alternatives with respect to some set of criteria such as company factors, environmental trends, reputation of the reseller, and experience of the reseller.

Who Should Lead?

Regardless of the channel framework selected, channels usually perform better if someone is in charge, providing some level of leadership. Essentially, the purpose of this leadership is to coordinate the goals and efforts of channel institutions. The level of leadership can range from very passive to quite active—verging on dictatorial. The style may range from very negative, based on fear and punishment, to very positive, based on encouragement and reward. In a given situation, any of these leadership styles may prove effective.

Under which conditions should the manufacturers lead? The wholesaler? The retailer? While the answer is contingent upon many factors, in general, the manufacturer should lead if control of the product (merchandising, repair) is critical and if the design and redesign of the channel is best done by the manufacturer. The wholesaler should lead where the manufacturers and retailers have remained small in size, large in number, relatively scattered geographically, are financially weak, and lack marketing expertise. The retailer should lead when product development and demand stimulation are relatively unimportant and when personal attention to the customer is important.

5. Evaluating Channel Member Performance

The need to evaluate the performance level of the channel members is just as important as the evaluation of the other marketing functions. Clearly, the marketing mix is quite interdependent, and the failure of one component can cause the failure of the whole. There is one important difference, though: the channel member is dealing with independent business firms, rather than employees and activities under its control, these firms may be reluctant to change their practices.

Sales is the most popular performance criterion used in channel evaluation. Other possible performance criteria are maintenance of adequate inventory, selling capabilities, attitudes of channel intermediaries toward the product, competition from other intermediaries and from other product lines carried by the manufacturer’s own channel members.

Correcting or Modifying the Channel

As a result of the evaluation process, or because of other factors such as new competition, technology, or market potential, changes may need to be made in the channel structure. Because channel relationships tend to be long-term, and the channel decision has such a pervasive impact on the business, any change should be carefully evaluated. Later in this module we will discuss service outputs and their role in measuring and modifying channel performance.

The Human Aspect of Distribution

By its very nature, a channel of distribution is made up of people. Ideally, a channel member should coordinate his or her efforts with other members in such a way that the performance of the total distribution system to which he or she belongs is enhanced. This is rarely the case, though. Part of this lack of cooperation is due to the organizational structure of many channels, which encourages a channel member to be concerned only with channel members immediately adjacent to them, from whom they buy and to whom they sell. A second reason is the tendency of channel members to exhibit their independence as separate business operations. It is difficult to gain cooperation under this arrangement. Four human dimensions have been incorporated into the study of channel behavior: roles, communication, conflict, and power. It is assumed that an understanding of these behavioral characteristics will increase the effectiveness of the channel.

Role

Most channel members participate in several channels. Establishing the role of a channel member means defining what the behavior of the channel member should be. For example, a basic role prescription of the manufacturer may be to maximize the sales of his or her particular brand of product. This suggests that the manufacturer is to actively compete for market share and aggressively promote his or her brand. The role prescriptions of independent wholesalers, however, are likely to be quite different. Since wholesalers may represent several competing manufacturers, their role would be to build sales with whatever brands are most heavily demanded by retailers. Therefore, a major issue in channel management is defining the role prescriptions of the various participants in order to achieve desired results. This is accomplished through a careful appraisal of the tasks to be performed by each channel member and clear communication of these roles to the members.

Communication

Channel communication is sending and receiving information that is relevant to the operation of the channel. It is critical for the the channel member to foster an effective flow of information within the channel. Communication will take place only if the channel member is aware of the pitfalls that await. The channel manager should therefore try to detect any behavioral problems that inhibit the effective flow of information through the channel and try to solve these problems before the communication process in the channel becomes seriously distorted.

Conflict

Any time individuals or organizations must work together and rely on one another for personal success, conflict is inevitable. In a distribution channel, conflict usually arises in one of two forms: structural or behavioral.

Structural conflict occurs when the channel partners are expected to cooperate and compete. For example, imagine that you want to buy a new pair of Nike shoes and you have two choices. You can go to a local Foot Locker retailer and buy the shoes for $89, or you can go online to Nike.com and buy the shoes for $69. In effect, Nike is undercutting its retail channel while selling through a direct channel. It is likely that Foot Locker is unhappy about this. While a retailer expects to compete with other retailers who carry the same brands, it doesn’t expect that the manufacturer will sell through the direct channel at deep discounts. This type of structural conflict is often the cause of behavioral conflict.

All organizations expect to manage some level of behavioral conflict in the channel. They do this by:

• Establishing a mechanism for detecting conflict
• Evaluating the effects of the conflict
• Resolving the conflict

Given the distributed nature of the channel, it is often difficult to resolve conflict. Strategies such as the formation of a channel committee, joint goal setting, and bringing in arbitrators have all been used. In some cases, conflict becomes part of the ongoing channel dynamic—it’s difficult but manageable. Eric Schmidt, chairman and CEO of Google Inc., notes: “From my experience the most successful companies are the ones where there is enormous conflict. Conflict does not mean killing one another, but instead means there is a process by which there is a disagreement. It is okay to have different points of view and disagree, because tolerance of multiple opinions and people often leads to the right decision through some kind of process.”

Power

Power is the capacity to use force in a relationship. It is often the means by which one party is able to control or influence the behavior of another party. In the channel mechanism, power refers to the capacity of a particular channel member to control or influence the behavior of another channel member. For instance, a large retailer may want the manufacturer to modify the design of the product or perhaps be required to carry less inventory. Both parties may attempt to exert their power in an attempt to influence the other’s behavior. The ability of either of the parties to achieve this outcome will depend on the amount of power that each can bring to bear.

Third-Party Sales

Throughout the channel structure there are a number of points where sales may occur.

The most straightforward of these is the direct channel, in which the producer sells directly to the consumer. In every other structure, multiple sales occur—from producer to wholesaler, from wholesaler to retailer, from retailer to buyer. In cases involving an intermediary, there is a third-party sale. Third-party sales are sales conducted by anyone other than the producer. Even when there are four or five parties involved, we refer to all of them as third parties.

Third-party sales are often vexing for marketers. When a company uses a direct sales approach, the marketer can devise a sales compensation structure that creates the right incentives for the sales team to sell the right products to the right customers at the right price. In a third-party sales situation, it is much more difficult to understand and influence the sales process. Let’s look at a direct sales situation and a third-party sales situation to understand the differences.

Direct Sales Incentives

Nanette Lepore is a high-end clothing designer who has created a personal brand. Nanette sells direct to consumers both online and through her boutique stores across the U.S. Through the direct channel, Nanette’s marketing team owns every aspect of the sales experience. When customers enter a store or land on her Web page, they see a complete outfit that is designed to sell the look that Nanette most wants them to buy. This includes clothing, shoes, and accessories all designed and sold by Nanette Lepore.

Nanette Lepore’s blog and social media presence drive interest in the products that are available in stores and online, with an emphasis on those that are targeted for immediate sale.

When she completes drawings for next season’s looks, Nanette provides digital copies of her drawings to her sales associates, who have been cultivating a list of their most fashion-forward customers. These customers can review drawings and preorder clothing before it is available to the public. These customers pay top dollar for Nanette Lepore’s most current creations.

In the store, sales associates are not equally compensated for all sales. Once a line of clothing goes on sale, the price is reduced. From the perspective of a sales associate, instead of earning a 5 percent commission ($40) on an $800 dress, the associate will earn a 5 percent commission ($10) on a discounted $200 dress. The associate may earn no commission or a reduced commission on clearance items.

The sales staff is preparing customers in advance and in the moment to pay top dollar for Nanette Lepore’s hottest fashions. They do this because there is an entire sales system and compensation structure that centers on Nanette Lepore. They also do this because they have become part of the Nanette Lepore brand and feel a commitment to Nanette Lepore and to the women for whom she is designing.

Third-Party Sales Incentives

Many retailers sell the Nanette Lepore line, including Neiman Marcus, Saks Fifth Avenue, Nordstrom, Zappos, Gilt, Shopbop, and 6pm.com.

The Neiman Marcus sales associate in the dress department is paid a flat commission regardless of the brand she sells. A strong sales associate will identify shoppers with an affinity for Nanette’s designs and present them in the changing room or call to let them know that new Nanette Lepore designs have arrived. If a dress from Diane von Furstenberg or Kate Spade is more likely to make the sale, the dress by Nanette Lepore will not be suggested. The sales associate has incentives to make the largest possible sale—regardless of brand.

If the customer buys a Nanette Lepore dress and heads to the shoe department or accessory department to complete her outfit, she won’t have Nanette Lepore brands as an option. Each department carries the most popular brands, and Nanette Lepore bags and shoes are a new, unproven brand.

In a more extreme example, 6pm.com is the online bargain outlet for Zappos. There is no sales associate, and little effort is made to feature or present any particular brand or clothing. Customers come searching for rock-bottom pricing. Nanette Lepore’s fashions sell at a discount of 60 percent to 70 percent off the manufacturers’ suggested retail price.

If this example doesn’t seem like something that you have experienced, walk into BestBuy and look for a phone, camera, or computer. Ask a sales associate to help you. You will quickly find that the store’s sales compensation structure is driving what is available to you—and what is recommended.

What about something as simple as breakfast cereal in a grocery store? Which products are at eye level? Which are difficult to find? Which are not available? Sales incentives are determining the answers to each of these questions.

Approaches to Support Third-Party Sales Success

If the marketer works for the producer—in our example, Nanette Lepore—he will lose significant control and influence in the third-party sale, while the Neiman Marcus marketing team will gain control or power. How can a marketer approach third-party sales most effectively? The following approaches can be used:

1. Understand and align incentives. A good marketer must understand why each channel partner buys and sells, how they are compensated, and what objectives they are hoping to achieve. In third-party sales, the marketer must optimize an existing structure rather than creating the structure.
2. Provide exceptional sales support. While the Nanette Lepore sales associates only needs to learn about her line, the Neiman Marcus sales associates must learn thirty or more. Make it very easy for the third-party sales team to become expert in your product.
3. Create demand for your product. Often marketers blame channel partners for a marketing mix that doesn’t deliver value to the customer. While it is trite to say that a good product sells itself, it is true that the right product is easier to sell. When the distribution channel—”place,” in the marketing mix—creates a lot of complexity, it is even more important to get the other three elements of the marketing mix just right.

Service Outputs

As with each element of the marketing mix, different segments of customers have different needs with regard to place, or distribution. Service outputs offer a way to focus on the unique needs of a target buyer and plan for those in the distribution strategy. Service outputs are the productive outputs of the marketing channel that consumers value and desire.

By identifying the service outputs for each segment of target buyers, the marketer can optimize the distribution strategy for each major segment. It is important to note that there are always trade-offs in the distribution strategy. A channel that provides a high level of customized service, such as a boutique store, will also usually add additional cost. A channel that provides goods in very large quantities with a lower level of service, such as Costco, will generally offer them at a lower cost. Either might be the “right” solution depending on the customer segment.

Common Service Outputs

When considering the goals of channel management in meeting customer needs, there are a few broad service outputs that channels can address. The service outputs are explained from the perspective of the target customer, by identifying needs or preferences that a target customer might have:

1. Spacial convenience: Can I get the product at or near the location where I want it?
2. Timing of availability: Do I need the product immediately or am I willing to wait?
3. Quantity: Am I willing to buy in bulk or buy multiple items?
4. Assortment and variety: Do I have a very particular need or a flexible need? Am I looking for one or many options?
5. Service: Do I require assistance or support through the purchase process?
6. Information: Do I need information to make a purchase, or do I enter the buying process having already made a decision?

Again, service outputs generally involve trade-offs. For example, few customers would ever say, “Timing of availability has no impact on my purchase decision,” but the timing of availability may be less important than the quantity or service needs. Customers generally have strong preferences in some areas and are more flexible in others.

Service Outputs in Practice

Imagine that a farmer is selling eggs and wants to meet the needs of her final consumers. Eggs are a fairly uniform product, a commodity, so most consumers are going to make decisions about which eggs they purchase based more on the distribution strategy than on a product or promotional strategy. Price is likely to be a factor, too.

Let’s consider how two different customers might weight the service outputs in two very different but simple egg-buying decisions.

Service Output	Experience: I’m looking for a nice restaurant for brunch.	Service Output Level	Experience: I need eggs that I can cook for my family’s breakfast.	Service Output Level
Spatial Convenience	I’m willing to drive a little bit, especially to an interesting location with strong reviews.	Low	I want the most convenient location on my route where I can get in and out quickly.	High
Timing of Availability	I’m seeking an experience and am willing to spend some time to get it.	Low	I want the quickest purchase possible.	High
Quantity	I would like a nicely sized portion that seems like good value for the money.	Medium	I don’t use eggs in bulk but need enough to feed my family.	Medium
Assortment and Variety	I would like to have a nice selection of preparations, and I prefer organic farm-fresh eggs.	High	I just need a dozen eggs of any brand.	Low
Service	I want a full-service experience from the wait staff and chef.	High	I want a quick, efficient check-out, but I don’t require help selecting.	Low
Information	I would like to have information about my options, and to understand the opinions of others who have eaten at this restaurant.	High	I already know everything I need to make a purchase.	Low

For the farmer, these different scenarios can inform the distribution strategy. If she is looking to command a higher price, then she may want to focus on a strategy of selling through restaurant suppliers or directly to restaurants as a retail channel. If she is looking to sell a larger quantity of eggs, then she likely needs to sell to a wholesaler who can get as many of her eggs as possible into the right supermarkets that are located in neighborhoods of many, many consumers seeking spatial convenience in the purchase process. Or, she might want to pursue both strategies but do this with an awareness that she is serving two different target buyers with very different needs.

By understanding the service outputs of buyer segments, marketers can better match distribution options to buyer needs and provide the right trade-offs to each buyer.

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Why evaluate how to use distribution channels to market an organization’s products and services effectively?

More Than Just Another P

Of the elements in the marketing mix, product and price are perhaps the easiest to understand. We see products all around us, and we understand that we need to pay a specific price to buy them. Promotion is sometimes a little more difficult to grasp, but if we begin with the concept of advertising and then develop a more complete view of promotion from that, promotion is also fairly easy to understand.

“Place,” on the other hand, is not so straightforward. In fact, using the word “place” can be misleading. If I were to say, “We are going to talk about place related to groceries,” you would likely think about where you buy your groceries—as in, which store and which location. In this module, though, we want to discuss the process of determining where you want to find particular groceries and how to get those groceries to that place in the way that best aligns with your preferences.

While it inconveniently begins with the letter D rather than P, distribution is a more accurate description of this function. Distribution brings the products that you want to the place where you want to buy them, at a cost that supports the customer and company price requirements.

How do your groceries get to the right place at the right cost? To explore this question, let’s look at two high-end grocery stores that use very different methods to manage this process: Whole Foods and Trader Joe’s.

Whole Foods’ Approach to Distribution

Whole Foods’ motto—Whole Foods, Whole People, Whole Planet—emphasizes a vision that reaches beyond food retailing. The company has chosen a strategy of sourcing locally wherever possible. This, in turn, has driven the strategy of how Whole Foods fills its shelves—the distribution strategy. The video below explains how the company sources products.

In order to support local sourcing, store managers are empowered to make purchasing decisions for each store, independently of the regional offices. As a result, it is possible for Whole Foods to buy potatoes from a local farmer who would never dream of selling his produce to a large grocery chain. Essentially, Whole Foods is differentiated because all products are sourced locally. The stores operate under minimal governance and are given maximum freedom to source a product mix that is appropriate for their location. Whole Foods stores operate according to the premise that they need these freedoms to meet the unique buying needs of their local customers. The only governing rule put in place by the corporate office is that stores must not stock products with artificial flavors, preservatives, colors, sweeteners, or hydrogenated oils. A downside to this local purchasing policy is that consistency is compromised across the chain. Every retail location carries a variety of products that distinguishes it from other stores in the same chain.

Not surprisingly, it is difficult to achieve economies of scale with this model. Higher distribution costs lead to higher prices, which makes it important for Whole Foods to target customers with high incomes. To ensure ample access to their target consumer segments, Whole Foods opens stores in communities with a large number of college-educated residents with no fewer than two hundred thousand people within a twenty-minute drive.

Trader Joe’s Approach to Distribution

The mission of Trader Joe’s is to give customers the best food and beverage values they can find anywhere and to provide them with the information required to make informed buying decisions. The company strives to provide these with a dedication to the highest quality of customer satisfaction delivered with a sense of warmth, friendliness, fun, individual pride, and company spirit.

At the core of the Trader Joe’s “way” is a focus on cost control, simplicity, and fun. These company objectives are woven throughout each aspect of the business. Trader Joe’s aims to create a truly unique customer experience, offering high-quality gourmet foods at a low cost in a fun environment that keeps customers coming back for more.

Trader Joe’s manages its distribution networks by minimizing the number of hands that touch the product, thereby reducing costs and making products quickly available to their customers. The company orders directly from the manufacturer. The manufacturer, in turn, is responsible for bringing the product to a Trader Joe’s distribution center. At the distribution center, trucks leave on daily resupply trips to local stores. Because the stores are relatively small, there is little room for excess inventory, and orders from distribution centers need to be incredibly precise.

This quick and efficient distribution process is directly responsible for helping the company identify where to locate new retail stores. Trader Joe’s will only enter markets where the region has a distribution infrastructure that allows it to efficiently resupply products to stores. They have not opened stores in Florida or Texas—both large, lucrative markets—because the distribution networks are not yet strong enough to support their strategy.^[1] [2]

Trader Joe’s strategy of implementing a low-cost and efficient distribution network has contributed to the democratization of gourmet foods by making them more readily available to customers at all income levels.

You can see that the distribution strategy for each company has an effect on where they open stores, how they price their products, which customers will buy, and who will have access to gourmet foods.

In this module, you’ll learn more about distribution strategies and their role in the marketing mix.

Learning Outcomes

• Explain what channels of distribution are and why organizations use them
• Explain how channels affect the marketing of products and services
• Describe types of retailers and explain how they are used as a channel of distribution
• Explain how integrated supply chain management supports an effective distribution strategy

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