Companies and Marketing Channels - Essay Example

Running Head Marketing Channels & Supply Chain Management Marketing Channels & Supply Chain Management Companies use marketing channels in order to improve their supply chain and reduce time and costs usually spend on delivery. Every manufacturer is confronted with making a choice from amongst a variety of alternative channels. Although generalized solutions to all distribution channel decisions cannot be formulated. Heterogeneous sources of supply are sorted out, and then can be accumulated for sale to interested customers, as is done by industrial-supply firms or retail stores (Stroh, 2006). Through dispersion, the products are allocated and customers can achieve the assortment of heterogeneous products that they require to satisfy them (Kotler and Armstrong 2008). The channel functions, concentration and dispersion, are related to the homogeneity and heterogeneity of supply, and the appropriate sorting process must be provided. Successive channel stages should be attempted to overcome any discrepancy between product assortment and market requirements (Christopher, 2005). Customer requirements of one or two units are at variance with supplier requirements of mass production. From a micro point of view, a firm's distribution decisions are designed to combine, supplement, or modify those of other firms, in order to form channels of distribution that the most effective. Since markets are dynamic, the opportunity for new combinations is continuously available. Channels are thus used by companies to overcome barriers. These barriers include the separation of time and space between producers and markets, the costs of moving goods, the communications barriers between producers and users of products, and the separation of demand (Christopher, 2005). From a macro point of view, channels change slowly. New distribution outlets tend to complement, rather than replace, existing ones. Supermarket chains, for example, do not eliminate the independent merchants; discount houses do not eliminate department stores; and integrated manufacturers do not eliminate wholesalers (Stroh, 2006). Rather, they enrich the alternative channels available, are modified in turn, and settled into a niche in the distribution structure. Since markets represent diverse wants and needs, the channels necessary to serve them will continue to be diverse. Customers and products are separated in time, space, and ownership. The conduct of human activities presupposes the availability of an appropriate assortment of goods and services. Channels of distribution bridge the separations and support our life style. In a broad sense, channels are composed of middlemen and facilitating agencies, wholesalers, retailers, financial institutions, and transportation agencies (Kotler and Armstrong 2008). Channels allow companies to add value to their products (Stroh, 2006). For instance, channels allow such companies as Ford and Toyota, McDonald's and Wendy restaurants to change their pricing decisions and promotion campaigns (Kotler and Armstrong 2008). A product can have various combinations of packages, brands, labels, tastes, and appearances; it can come in various shapes, colors, sizes, and materials, and be offered with numerous services and privileges. Channels help these companies promote products through various channels, to be sold at varying prices, discounts, and markups. These decisions integrate physical handling, transportation storing, sorting, and distribution of goods in a systematic and effective manner. The overall function of distribution channels is the concentration and dispersion of products in relation to market needs (Kotler and Armstrong 2008). Distribution channels concern the kinds and number of middlemen required to get products and services to the market. The challenge to management is to construct systematic links amongst institutions in order to achieve a coherent pipeline capable of moving goods and their title to markets. 2. Basically, the choice is one of direct or indirect distribution. In the latter case, manufacturers' channels are composed of one or more varieties of independent middlemen. Following Kotler and Armstrong (2008): "a marketing channel consists of firms that have partnered for their common good. Each channel member depends on the other" (p. 339). Dealers evaluate product lines on the basis of congruency with current and competitive lines, sales policies, resources, facilities, service to customers, reputation, and profitability. However, effective dealer performance demands not only an acceptance of the product, but also a willingness to handle and promote it as a manufacturer's programs require (Christopher, 2005). The most important is that 'each channel members plays a specialized role' (Kotler and Armstrong 2008, p. 339). Generally, manufacturers like Ford or BMW seem to assume more of these responsibilities partly because of size, know-how, and capability, and partly because they can stabilize production and iron out distribution fluctuations. They take the lead in developing services, marketing information, products, packages, brands, advertising, and sales-promotion activities, they achieve greater degrees of channel control. In some instances, however, retailers perform most of these functions and control the channels of distribution. This occurs most often in industries with small manufacturers who lack marketing know-how and financial resources, and may be highly specialized. The clothing industry is a case in point (Cohen and Roussel 2004). Kotler and Armstrong (2008) identify the following types of channels: conventional distribution channels and vertical marketing systems. The main difference is that in the former "no channel members have much control over the other members". In vertical marketing systems, "one channel member owns the other" (p. 340). Multi-channel systems serve a pivotal and conflicting role. They are both selling and purchasing institutions, they have common and conflicting interests with other channel members, they are both independent and dependent, and they want to sell a particular manufacturer's product line and yet offer adequate assortments to customers. Channel conflicts are evidenced by the reactions of independent retailers to chains, more traditional retailers to discount houses, and wholesalers with their own private brands to manufacturers. This should not be misconstrued to mean that cooperation does not exist in channels (Cohen and Roussel 2004). Indeed, a set of mutual expectations exists in channels amongst manufacturers and middlemen. Manufacturers expect middlemen to furnish sales and promotional efforts, adequate product inventory and exposure, and required services and information. Middlemen expect product lines that are competitive, salable, and profitable, as well as territorial protection, merchandising assistance, and fair treatment (Cohen and Roussel 2004). A major problem, therefore, is that of balance (Cohen and Roussel 2004). Channel balance, which is difficult to achieve, must be realized at various levels. For example, manufacturers like Toyota and BMW desire an adequate number of distributors to blanket markets and would prefer even greater numbers. This desire must be balanced with distributors' preference for limited numbers of distributing units with protected territories. In the end, the number of channels must reflect a compromise; there must be enough of them to ensure fairly adequate coverage, but not too many to prohibit segments profitable enough to protect the interests of each. To get channels to function as integrated systems means that the programs and actions of each unit in the complex must be acceptable and coordinated with those of other units. This is not easy to achieve, but the benefits can be considerable. Substantial savings can be realized through such devices as contractual arrangements, which specify obligations between manufacturers and distributors, and permit each to plan, program, and benefit accordingly. Continuing channel contacts and formal contracts help stabilize markets, encourage automation, and result in lower costs. Adequate incentives are necessary at each stage of the data-and-product flow in order to develop a coordinated distribution program. 3. Demand characteristics are directly related to physical-distribution systems, and it is required that companies choose alternative solutions. The main alternatives are: company sales force, manufacturer's agency and industrial distributors (Kotler and Armstrong 2008, p. 348). Where demand is widely variable, then distribution facilities are usually concentrated in alternative channels. Where demand is continuous and rather consistent, as is the case for some food products, distribution facilities can be decentralized. A highly variable demand makes it difficult to design effective physical-distribution systems and control costs, while a stable demand permits it. In between these extremes, where demand patterns can be discerned through analysis, as with seasonal products, reasonable distributions systems may be approximated (Christopher, 2005). Product characteristics help to determine the optimal design and type of channels structure and number of intermediaries. Following Kotler and Armstrong (2008), a company can use intensive distribution, extensive distribution and selective distribution. The ability of products such as luxury items to absorb costs is particularly important. High-value items, if heavily stocked, mean a heavy inventory investment and hence increased costs (Christopher, 2005). Their storage is often minimized. For them transportation is a modest amount of the total price. A heavy stock of low-value items, on the other hand, does not have a significant effect on total inventory costs, but costs of these items are greatly affected by transportation costs (Christopher, 2005). Following Cohen and Roussel (2004) seasonality has a certain impact on alternative methods and number of intermediaries. Seasonality of production or sales and the physical or style perishability of the product can also affect the distribution process. Perishability dictates immediate shipping, handling, or storing. Seasonality has implications for inventory storage. Product analysis often reveals that a small proportion of products account for a large proportion of sales or profits. The efficiency of the intermediaries is measured in terms of cost of inputs as they relate to outputs. If the costs cannot be reduced further without reducing the level of service, then obviously the system is highly efficient (Christopher, 2005). It should be noted that various functional centers, such as inventory, traffic, and warehousing can be efficient, they can keep their individual costs low, while the total costs and total service are inefficient. Different functions have different and sometimes competing and objectives. Thus, inventory managers might like to reduce inventory costs even if this increases transportation costs, while the traffic manager prefers the reverse. Ideally, a systems approach should be adopted that balances costs and benefits from the perspective of the whole organization (Christopher, 2005). Intermediaries are diverse, and one ideal form of organization does not exist. Decisions concerning the level of executive responsibility of the physical-distribution officers, the activities to be grouped within the department, and the functional area to which the physical-distribution department is attached, vary for similar businesses. The main problem is that "using intermediaries usually means giving them some control over the marketing of the product" (Kotler and Armstrong 2008, p. 349). Logistical decisions and the design of a company's movement-and-storage system result from cost-market requirement analysis of alternatives. Thus, physical distribution is dynamic, responding to market shifts and competition forces. Its policies must be flexible and reviewed frequently to achieve a balance between the goals of servicing the markets and reducing distribution costs (Christopher, 2005). 4. Channel selection rests basically on cost-revenue considerations. The choice of a channel should be based on profitability, in both the short and the long run. Yet in channel analysis, undue attention is often given to comparisons of sales volume without heed to corresponding costs. Difficult problems arise when channels are out of phase with mass production techniques and mass-market needs (Stroh, 2006). Consider the distribution of today's automobiles with their extensive service demands, complex equipment, and vast information requirements through small independent dealers. Small distributors cannot effectively stand between mass-production manufacturers and mass-volume markets. Problems of this kind require channel adjustments (Stroh, 2006). Channels also need change as a product matures. In the product's early stage, heavy promotion and selling may be required, which could lead to high margins and selective distribution. Later, with acceptance, broader distribution and lower margins may result through supermarket and discount distribution. In choosing channels, a company is, faced with determining what marketing activities it can and is willing to perform for itself, the degree of control it wishes, the amount of manufacturing specialization or integration desired, the availability of various kinds of middlemen, and the alternative use of its funds and resources (Kotler and Armstrong 2008). Distribution channels are the vehicles for matching companies with customers. They establish the arrangements and paths for the flow of product and title to ultimate users. They move products and information to markets and provide the funnel for the feedback of information to the producer. As networks of marketing agencies, they constitute a system; a loose but formal coalition of independent entities linked together to distribute products and services. The total channel pattern constitutes one element of the distribution mix, the other being physical distribution (Kotler and Armstrong 2008). Distribution channels are critical components of the marketing mix. As the links between companies and markets, they can impede or foster the effectiveness of the rest of the marketing mix. Distribution channels cover a wide range of situations (Stroh, 2006). At one end is the complicated linkage of manufacturers and their branches, agents and brokers, other wholesalers, and retailers for the movement of certain consumer goods. At the other is the direct distribution of heavy machinery. In between, lie a variety of channel assortments. Which one works best depends on the company and its products and markets at a certain time (Kotler and Armstrong 2008). Channels are always selected or devised on a rational basis. Many channels just grow and become habitual and institutionalized. In the future they must be planned more effectively because marketing tasks (which are shaped by technological changes, sociological and psychological factors, new product development, automation, and dynamic global markets) are becoming more complex (Stroh, 2006). The channel of distribution is a model for studying the links that facilitate the movement of products, services, and their title. In reality, total integration is not achieved, as competition, conflict, and lack of coordination appear. Businessmen do not tend to think of the total network, the total system. Rather, they think of and deal with the adjacent stage in the channel (Stroh, 2006). Equilibrium in a channel depends on the development of mutually satisfying marketing relationships and roles among manufacturers, wholesalers, and retailers. The tie that binds and coordinates channel activity is the community of interest and independence that these groups share. Often the relationship is one in which the manufacturer is the primary organization and other channel members are secondary. Sometimes, however, this is reversed. For instance, if Toyota or Ford tries to choose channels of distribution on a rational basis to meet company, product, and market requirements, it selects amongst different combinations of wholesalers and retailers, either independent or wholly owned (Cohen and Roussel 2004). Channels may be long or short, direct or indirect, wholly owned or networks of independents, broad or narrow. In some instances adequate distribution possibilities may not exist for products. This may be especially true in international markets and in relation to fundamental innovations. Specialized channels may then have to be developed to incorporate the new facilities, knowledge, and services required (Cohen and Roussel 2004). 5. Marketing logistics and integrated supply chains are the two basic components of the distribution mix. Both deal with physical flows and title flows. Channels refer to a number of marketing institutions linked so that title and products can flow to consumers. The selection of integrated supply chains, or routes for reaching consumers, is usually based on sales and communications. It is concerned with the physical flow of goods to markets. It views the institutions comprising channels as points of assembly and dispersion of goods. It is concerned with achieving economies in the logistical transfer of goods from one point in the channel to another (Cohen and Roussel 2004). Marketing logistics and integrated supply chains deal with the transportation, movement, loading, stocking, handling and warehousing activities of the channel as a whole. In addition, integrated supply chains include packaging and order-processing activities that do not alter the physical appearance of products per se, but that can damage or downgrade them. They have a great impact on utility by affecting service and availability and converting items into economic values. Improvements in the performance of the physical-distribution functions have led to increased marketing effectiveness and reduced costs for some industries (Cohen and Roussel 2004). Supply chain management is important because it involves coordination of "suppliers, purchasing agents, marketers channel members and customers" (Kotler and Armstrong 2008, p. 352). The activities encompassed are concerned with the movement and storage of products and supplies to implement marketing strategies and tactics and satisfy customer needs. They focus on coordinating supply and demand and creating place, time, and possession utilities. The emergence of physical distribution is now receiving increasing attention because of the rising costs of distribution and the growing emphasis on consumer demand for services (Cohen and Roussel 2004), and physical distribution provides a new orientation for marketing. It gives distribution factors the importance they deserve in marketing and business policies, plans, and decisions. Containerization, which permits the interchange of standardized containers among various modes of transportation, can reduce handling, packing, and insurance costs; air freight and new jets can reduce inventory and warehousing costs; combinations of transportation methods resulting in piggyback and "trailership" (integrating truck-trailers with railroad cars and ships) and special cars result in further savings; and the use of "palletization", where the pallet becomes an integral part of packaging and handling (Cohen and Roussel 2004). Such savings can be a vital element in company profits. Theoretically, distribution systems are designed to give customers the maximum service; yet they are also supposed to minimize distribution costs. The former goals suggest many distribution centers, large inventories, and rapid transportation; the latter suggests the opposite (Cohen and Roussel 2004). Manufacturing, however, generally lacks such coordination. Physical distribution as a concept sees the physical movement of goods as a set of related activities carried on by a number of firms at various levels, linked together to form a total distribution system. To develop better flows of goods to customers and consumers, marketing managers must achieve a balance of physical-distribution components Christopher, 2005). Uncoordinated decisions in manufacturing lead to high costs. Thus, modern analytical tools, new technology (especially data processing), handling and moving of equipment help companies to increase services and lower costs. The integration of two systems resulting in the design of two-level and three-level railroad cars to transport autos, the development of containerization and special loading and unloading terminals, the use of highway transport for local pick up and delivery, and air transportation to eliminate warehouses, are examples (Christopher, 2005). References 1. Christopher, M. (2005). Logistics & Supply Chain Management: creating value-adding networks. FT Press; 3 edition. 2. Cohen, Sh., Roussel, J. (2004). Strategic Supply Chain Management. McGraw-Hill;. 3. Kotler, Ph., Armstrong. G. (2008). Principles of Marketing, 12ed, Pearson Prentice-Hall. 4. Stroh, M. (2006). A Practical Guide to Transportation and Logistics. Logistics Network Inc. Read More