15

Chapter 15

Distribution Channels
and Supply Chain
Management

© 2019 Cengage. All rights reserved.

 LEARNING OBJECTIVES

15.1 Describe the four types of distribution channels.

15.2 Describe the three functions of marketing intermediaries.
15.3 Outline the five factors that influence selection of
distribution channels.
15.4 List the key priorities for each function of the
manufacturing supply chain.
15.5 Summarize methods for managing the warehousing and
storage function of the supply chain.
15.6 Compare the five major modes of transportation.
15.7 Given an example of a supply chain, identify methods for
accomplishing the priorities of that supply chain.

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 What Are the Four Distribution
Channels? opening example
• P&G produces hundreds of products across many
product categories.
• P&G’s marketers have millions of dollars available to
market the company’s products across different
channels.
• As a marketing manager for P&G’s hair care category,
you and your team must allocate $20 million to
different distribution channels.
• Which distribution channels are available, and which
would prove to be most effective?
© 2019 Cengage. All rights reserved.
What Are the Four Distribution Channels?

• distribution channels: the individuals and

organizations who manage the flow of product from
producers to consumers
– Also are called marketing channels
• A firm must analyze channels with regard to
consumer needs to determine the most appropriate
channel(s) for its goods and services.

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 Types of Distribution Channels

• The first step in choosing a distribution channel is to

determine which type of channel will best meet:
– Seller’s objectives
– Distribution needs of customers
• Four distribution channels:
– Direct channel
– Channels using marketing intermediaries
– Dual distribution
– Reverse channels

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 Direct Channel
(slide 1 of 2)

• direct channel: carries goods directly from a

producer to the ultimate user
– Simplest and shortest distribution channel
• direct selling: a marketing tactic in which a producer
establishes direct sales contact with its product’s
final users
– Important option for goods requiring demonstrations
to persuade customers to buy
• A company can use more than one direct channel.

© 2019 Cengage. All rights reserved.

Direct Channel
(slide 2 of 2)

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Channels Using Marketing Intermediaries
(slide 1 of 3)

• marketing intermediary: an organization that operates between

producers and consumers to help bring the product to market
– More efficient, less expensive, and less time-consuming than
direct channels
• wholesalers: marketing intermediary who takes title to the
goods, stores them in warehouses, and distributes them to
retailers, other distributors, and sometimes end consumers
• sales agent: a third-party person or company who represents
the producer to wholesalers and retailers
– A contracted sales force with expertise in a particular market or
geography
– Particularly important for smaller firms

© 2019 Cengage. All rights reserved.

Channels Using Marketing Intermediaries
(slide 2 of 3)

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Channels Using Marketing Intermediaries
(slide 3 of 3)

• vertical integration: is when a producer assumes

control over functions that were previously handled
by an intermediary
– Apple decided to open its own retail stores in addition
to distributing its products through other retailers.

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 Dual Distribution
• dual distribution: the movement of products through two or
more channels to reach the firm’s target market

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 Reverse Channels

• reverse channels: channels designed to return goods

to their producers
– Example: incurring a recycling charge for disposing of
old tires when you buy new ones
• Have gained importance due to:
– Rising prices of raw materials
– Increased availability of recycling facilities
– Increased environmental sustainability
• Reverse channels also handle product recalls and
repairs.
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 What Are the Four Distribution
Channels? closing example
• Traditionally, hair care products have reached
consumers through brick-and-mortar stores, but
online sales are increasing.
• You and your team decide to utilize a dual
distribution strategy:
– Sponsoring sales promotions with your retail
distributors
– Funding a YouTube ad campaign to drive customers to
the product website where they can buy products
directly from P&G
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 Functions of Intermediaries

• Intermediaries often can perform the distribution

functions more effectively and less expensively than
the producer can.
• Intermediaries perform three functions:
– Facilitating the exchange process
– Lowering the cost of logistics
– Increasing a company’s sales and marketing
infrastructure

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 Facilitate the Exchange Process

• A producer can cut the

costs of buying and
selling to multiple
customers by using an
intermediary.

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 Lower Cost of Logistics

• By using intermediaries, a manufacturer doesn’t have

the cost of:
– Buying or leasing its own warehouses to inventory
product
– Operating its own fleet of vehicles to deliver product
• Instead, it can partner with:
– A logistics company to ship product
– A wholesaler who can inventory and deliver product
to retailers or end-users

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 Increase Sales and
Marketing Infrastructure
• Intermediaries provide cost effective sales and
marketing services to manufacturers.
• Instead of hiring thousands of sales reps to reach
retailers and consumers across the U.S., a firm can:
– Work with large sales and marketing companies that
have existing sales forces
– Partner with large retailers who have thousands of
locations and service millions of existing customers on
a daily basis

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 Short and Long Distribution Channels

• A short distribution channel involves few

intermediaries.
– Examples: business market products, service firms
• A long distribution channel involves several
intermediaries working in succession to move goods
from producers to consumers.

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 Selecting Distribution Channels

• A variety of factors affect the selection of a

distribution channel:
– Market
– Product
– Organizational
– Competitive
– Intensity

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 Market Factors
• Products are intended for consumer or business
market end-users.
– Business market purchasers usually prefer to deal
directly with manufacturers.
– Consumers mainly make their purchases from
retailers.
• Other market factors affect channel choice:
– Market’s needs
– Geographic location
– Average order size
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 Product Factors

• Products characteristics guide the selection of the

optimal distribution channel strategy.
– Perishable goods move through short distribution
channels to reduce storage time.
• Examples: fresh fruit and vegetables, milk
– Products with low unit costs usually travel through
long channels to gain the widest distribution possible.
• Examples: canned dog food, bars of soap, gum

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 Organizational Factors

• Companies with strong financial, management, and

marketing resources need less help from intermediaries.
– A large, financially strong manufacturer can hire its own
sales force, warehouse its own goods, and extend credit
to retailers or consumers.
– A firm with a broad product line can usually market
directly to retailers or business users.
• A small firm with fewer resources may need
intermediaries.
– Direct selling is often unaffordable for single-product
firms.
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 Competitive Factors
• Marketers sometimes choose distribution channels to either:
– Avoid competitors
– Compete with competitors head-to-head
• Two types of conflict can hinder the functioning of a
distribution channel:
– horizontal conflict: disagreements among channel members at
the same level, such as two or more wholesalers or retailers
– vertical conflict: disagreements among channel members at
different levels
• The answer to channel conflict is effective cooperation among
channel members.
– Best achieved when all channel members regard themselves as
equal components of the same organization
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 Intensity Factors
(slide 1 of 3)

• distribution intensity: the number or percentage of

intermediaries (usually retailers) through which a
manufacturer distributes its goods in a particular
market
• Three general categories of distribution intensity:
– intensive distribution: seeks to distribute a product
through all available retailers in a trade area
• Suits items with wide appeal across broad groups of
consumers

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 Intensity Factors
(slide 2 of 3)

• Three general categories of distribution intensity

(cont’d):
– selective distribution: when a firm chooses only a
limited number of retailers in a market area to handle
its line
• Reduces marketing costs while establishing strong
working relationships within the channel
• Selected retailers often comply with the firm’s rules for
advertising, pricing, and displaying its products.

© 2019 Cengage. All rights reserved.

 Intensity Factors
(slide 3 of 3)

• Three general categories of distribution intensity

(cont’d):
– exclusive distribution: when a producer sells to only a
small number of retailers or grants exclusive rights to
a wholesaler or retailer to sell its products in a specific
geographic region
• May sacrifice some market coverage
• Often develop and maintain an image of product quality
and prestige
• Limits marketing costs

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 Components of the Supply
Chain: opening example
• Pier 1 Imports buys its mix of items from vendors in
more than 50 countries.
– Most representing small companies
• High-demand items or seasonal products must:
– Arrive in a timely manner to its distribution centers
– Be shipped in sufficient quantities
• An efficient supply chain is critical to Pier 1’s success.
• What components does Pier 1 need to consider
along its supply chain?

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 Components of the Supply Chain
(slide 1 of 3)

• supply chain: the complete sequence of suppliers and

activities that contribute to the creation and delivery of
goods and services
– Also is known as the value chain
• The supply chain:
– Begins with raw material inputs for manufacturing a product
– Proceeds to actual production activities
– Ends with the movement of finished products through the
distribution channel to customers
• Logistics: activities related to the physical movement and
management of raw materials or products
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Components of the Supply Chain
(slide 2 of 3)

© 2019 Cengage. All rights reserved.

 Components of the Supply Chain
(slide 3 of 3)

• Supply chain management takes place in two

directions:
– upstream management: the management of raw
materials, inbound logistics, and warehouse and
storage facilities
– downstream management: the management of
finished product storage, outbound logistics,
marketing and sales, and customer service

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 Managing the Supply Chain

• Common methods for managing the supply chain:

– radio frequency identification (RFID): a tiny chip with
identification information is placed on an item; that chip
can then be read by a radio frequency scanner from a
distance, making tracking easier
– enterprise resource planning (ERP) system: an integrated
software package that consolidates data from among the
firm’s units
– logistical cost control: businesses reexamine each link in
their supply chains to identify activities that don’t add
value for customers

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 Components of the Supply
Chain: closing example
• Pier 1 organizes its supply chain to lower costs and
save time.
• The key to Pier 1’s continuing success is careful
coordination of its supplier network, logistics
processes, and inventory control.
• Its growing online presence has resulted in upgrades
to its warehousing strategy and shipping
partnerships.

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Key Priorities of Warehousing and Storage

• A firm’s warehousing and storage function contains

the following elements:
– Inventory control
• Quantity of inventory the firm maintains at each
location
– Protective packaging and materials handling
• How the firm packages and efficiently handles goods in
the factory, warehouse, and transport terminals
– Warehousing
• The distribution system’s location of stock and the
number of warehouses the firm maintains
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 Inventory Control

• Companies must maintain enough inventory to meet

customer demand without incurring costs for
carrying excess inventory.
– With just-in-time (JIT) production, companies keep
low inventory, relying on suppliers to deliver parts
quickly when they are needed.
– RFID technology tracks the quantity and whereabouts
of inventory more precisely.

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 Protective Packaging and
Materials Handling
• Two concepts influence materials handling choices:
– unitizing: or palletizing, combining as many packages
as possible into each load that moves within or
outside a facility
• Promotes efficient materials handling because each
package requires minimal labor to move
• Minimizes damage and pilferage
– containerization: the process of combining several
unitized loads into a single, well-protected load
• Reduces loading/unloading time
• Limits in-transit damage to freight
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 Warehousing
(slide 1 of 2)

• Products flow through two types of warehouses:

– Storage
• Holds goods for moderate to long periods to balance
supply and demand for producers and purchasers
– Distribution
• Assembles and redistributes goods, keeping them
moving
• Logistics managers can cut costs by:
– Developing central distribution centers
– Automating warehouse systems
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 Warehousing
(slide 2 of 2)

• When determining the number and location of

storage facilities, a company must consider:
– Warehousing and materials handling costs
– Delivery costs from warehouses to customers
• Large facilities offer economies of scale in facilities
and materials handling systems.
• Delivery costs rise as the distance from warehouse to
customer increases.

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 Modes of Transportation:
opening example
• Susan M. Brownell, the VP of supply management at the
U.S. Postal Service, manages supplier relationships with
over $12 billion in expenditures and $6 billion of
inventory.
• To save taxpayer dollars, Ms. Brownell must optimize
transportation costs for mail/package deliveries.
• She also is expected to maintain, if not increase, the
quality of USPS delivery services.
• What transportation options are available to her?
• How should she evaluate which ones to use?

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 Modes of Transportation

• Logistic managers choose from five major modes of

transportation:
– Railroads
– Motor carriers
– Water carries
– Pipelines
– Air freight

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 Railroads

• Railroads control the largest share of the freight business

as measured by ton-miles.
– Ton-mile: shipping activity required to move 1 ton of
freight 1 mile
• Rail provides the most efficient way to move bulky
commodities over long distances.
• Goods most often handled by railroads: lumber, iron,
steel, coal, automobiles, grain, chemicals

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 Motor Carriers

• Trucks haul more than 10.5 billion tons of freight

each year.
– Deliver to areas railroads can’t reach
– Provide fast and consistent service for both large and
small shipments
• Technology has improved the efficiency of trucking.
– Example: in-truck computers that allow last-minute
changes in scheduling and delivery
• Goods most often handled by motor carriers: clothing,
furniture, fixtures, lumber, plastics, food, machinery
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 Water Carriers
• Two types of transport methods move products over
water:
– Inland or barge lines
• Transport bulky, low-unit-value commodities
– Oceangoing deepwater ships
• Costs are low compared with the rates for other modes
of transportation.
• Transit time is often longer than other options.
• Goods most often handled by water carriers: fuel, oil,
chemicals; automobiles, electronics, clothing, toys
from foreign manufacturers
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 Pipelines
• More than 2.5 million miles of pipeline crisscross the
United States transporting energy products.
• Offer low maintenance and dependable methods of
transportation, but have limitations:
– Have fewer locations than water carriers
– Able to accommodate shipments of only a small
number of products
– Offer a relatively slow method of transportation
• Goods most often handled by pipelines: oil, diesel
fuel, jet fuel, kerosene, natural gas
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 Air Freight
• Air freight is the shipment and transfer of goods through an
air carrier.
• Provides a number of benefits to shippers:
– Products can be delivered to remote or hard-to-reach locations.
– Time sensitive material can more easily be shipped “express” via
air.
– Smaller and mid-sized companies can participate more easily in
international trade.
– Airport controls provide a higher level of security.
• Goods most often handled by air freight: flowers, medical
testing kits, and gourmet food products sent directly to
consumers
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 Comparing the Five Modes of Transport

Dependability Frequency Availability Flexibility

in Meeting of in Different in
Mode Speed Schedules Shipments Locations Handling Cost
Rail Average Average Low Low High Average
Water Very Average Very low Limited Very high Very low
slow
Truck Fast High High Very Average High
extensive
Pipeline Slow High High Very Very low Low
limited
Air Very High Average Average Low Very
fast high

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 Intermodal Operations

• intermodal operations: utilizing a combination of

transport modes to improve customer service and
achieve cost advantages
– Piggyback: rail and highway carriers
– Birdyback: air and highway carriers
– Fishyback: water and air carriers

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 Modes of Transportation:
closing example
• Because the USPS already uses a sophisticated
combination of intermodal transportation, Brownell
has several options:
– Use motor carriers to transport the bulk of domestic
first-class mail until fuel prices increase to a certain
level, then use an automated system to route more
mail via rail.
– Use air to ship packages above a certain price point or
with a certain value.

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