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MGT301 - Principles of Marketing - Lecture Handout 29

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Lesson overview and learning objectives:

In today’s global marketplace, selling a product is sometimes easier than getting it to customers. Therefore, physical distribution and logistics management are receiving increased attention from strategic planners. The task of physical distribution systems is to minimize the total cost of providing a desired level of customer services while bringing those services to the customer with the maximum amount of speed. Major logistics functions of order processing, warehousing,
inventory management, and transportation are discussed and explored in today’s Lesson.


A. Push Versus Pull Strategy:

Push Versus Pull Strategy

A promotion strategy that calls for using the sales force and trade promotion to push the product through the channel is called push strategy. The producer promotes the product to wholesalers, the wholesalers promote to retailers and the retailers promote to consumers. While the pull strategy is the promotional strategy that calls for spending a lot on
advertising and consumer promotion to build up consumer demand; if successful, consumer will ask their retailers for the product, the retailer will ask the wholesalers and wholesalers will ask the producers. So these are two strategies through which availability of products can be created in the market for final consumers.

B. Physical Distribution and Logistics Management

Companies must decide on the best way to store, handle, and move their products and services so that they are available to customers in the right assortments, at the right time, and in the right place. Logistics effectiveness has a major impact on both customer satisfaction and company costs.
Here we consider the nature and importance of marketing logistics, goals of the logistics system, major logistics functions, and the need for integrated logistics management.

a. Nature and Importance of Physical Distribution and Marketing Logistics

To some managers, physical distribution means only trucks and warehouses. But modern logistics is much more than this. Physical distribution—or marketing logistics—involves planning, implementing, and controlling the physical flow of materials, final goods, and related information from points of origin to points of consumption to meet customer requirements at a profit. In short, it involves getting the right product to the right customer in the right place at the right time. Traditional physical distribution typically started with products at the plant and then tried to find low-cost solutions to get them to customers. However, today's marketers prefer market logistics thinking, which starts with the marketplace and works backward to the factory. Logistics addresses not only the problem of outbound distribution (moving products from the factory to customers) but also the problem of inbound distribution (moving products and materials from suppliers to the factory).

Supply Chain Management

It involves the management of entire supply chains, value-added flows from suppliers to final users, as shown in Figure . Thus, the logistics manager's task is to coordinate activities of suppliers, purchasing agents, marketers, channel members, and customers. These activities include forecasting, information systems, purchasing, production planning, order processing, inventory, warehousing, and transportation planning.
Companies today are placing greater emphasis on logistics for several reasons. First, customer service and satisfaction have become the cornerstones of marketing strategy, and distribution is an important customer service element. More and more, companies are finding that they can attract and keep customers by giving better service or lower prices through better physical distribution. Second, logistics is a major cost element for most companies. According to one study, in a recent year American companies "spent $670 billion—a gaping 10.5 percent of gross domestic product—
to wrap, bundle, load, unload, sort, reload, and transport goods." About 15 percent of an average product's price is
accounted for by shipping and transport alone. Poor physical distribution decisions result in high costs. Improvements in
physical distribution efficiency can yield tremendous cost savings for both the company and its customers. Third, the
explosion in product variety has created a need for improved logistics management. Finally, improvements in information technology have created opportunities for major gains in distribution efficiency. The increased use of computers, point-of-sale scanners, uniform product codes, satellite tracking, electronic data interchange (EDI), and electronic funds
transfer (EFT) has allowed companies to create advanced systems for order processing, inventory control and handling, and transportation routing and scheduling.

b. Goals of the Logistics System

Some companies state their logistics objective as providing maximum customer service at the least cost. Unfortunately, no logistics system can both maximize customer service and minimize distribution costs. Maximum customer service implies rapid delivery, large inventories, flexible assortments, liberal returns policies, and other services—all of which raise distribution costs. In contrast, minimum distribution costs imply slower delivery, smaller inventories, and larger shipping lots—which represent a lower level of overall customer service.
The goal of the marketing logistics system should be to provide a targeted level of customer service at the least cost. A company must first research the importance of various distribution services to its customers and then set desired service levels for each segment. The company normally will want to offer at least the same level of service as its competitors do. But the objective is to maximize profits, not sales. Therefore, the company must weigh the benefits of providing higher levels of service against the costs. Some companies offer less service than their competitors and charge a lower price. Other companies offer more service and charge higher prices to cover higher costs.

c. Major Logistics Functions

Given a set of logistics objectives, the company is ready to design a logistics system that will minimize the cost of attaining these objectives. The major logistics functions include order processing, warehousing, inventory management, and transportation.

i. Order Processing

Orders can be submitted in many ways—by mail or telephone, through salespeople, or via computer and EDI. In some cases, the suppliers might actually generate orders for their customers: Once received, orders must be processed quickly and accurately. Both the company and its customers benefit when order processing is carried out efficiently. Most companies now use computerized order-processing systems that speed up the order–shipping–billing cycle. For example, General Electric operates a computer-based system that, on receipt of a customer's order, checks the customer's credit standing as well as whether and where the items are in stock. The computer then issues an order to ship, bills the customer, updates the inventory records, sends a production order for new stock, and relays the message back to the salesperson that the customer's order is on its way—all in less than 15 seconds.

ii. Warehousing

Every company must store its goods while they wait to be sold. A storage function is needed because production and consumption cycles rarely match. A company must decide on how many and what types of warehouses it needs and where they will be located. The company might use either storage warehouses or distribution centers. Storage warehouses store goods for moderate to long periods. Distribution centers are designed to move goods rather than just store them. They are large and highly automated warehouses designed to receive goods from various plants and suppliers, take orders, fill them efficiently, and deliver goods to customers as quickly as possible.
Warehousing facilities and equipment technology have improved greatly in recent years. Older, multistoried warehouses with outdated materials-handling methods are facing competition from newer, single-storied automated warehouses with advanced materials-handling systems under the control of a central computer. In these warehouses, only a few employees are necessary. Computers read orders and direct lift trucks, electric hoists, or robots to gather goods, move them to loading docks, and issue invoices. These warehouses have reduced worker injuries, labor costs, theft, and breakage and have improved inventory control.

iii. Inventory

Inventory levels also affect customer satisfaction. The major problem is to maintain the delicate balance between carrying too much inventory and carrying too little. Carrying too much inventory results in higher-than-necessary inventory-carrying costs and stock obsolescence. Carrying too little may result in stock outs, costly emergency shipments or production, and customer dissatisfaction. In making inventory decisions, management must balance the costs of carrying larger inventories against resulting sales and profits.
During the past decade, many companies have greatly reduced their inventories and related costs through just-in-time logistics systems. Through such systems, producers and retailers carry only small inventories of parts or merchandise, often only enough for a few days of operations. New stock arrives exactly when needed, rather than being stored in inventory until being used. Just-intime systems require accurate forecasting along with fast, frequent, and flexible delivery so that new supplies will be available when needed. However, these systems result in substantial savings in inventory-carrying and handling costs.

iv. Transportation

Marketers need to take an interest in their company's transportation decisions. The choice of transportation carriers affects the pricing of products, delivery performance, and condition of the goods when they arrive—all of which will affect customer satisfaction. In shipping goods to its warehouses, dealers, and customers, the company can choose among five transportation modes: rail, truck, water, pipeline, and air.
Railroads are the nation's largest carrier, accounting for 26 percent of total cargo ton-miles moved. They are one of the most cost-effective modes for shipping large amounts of bulk products—coal, sand, minerals, farm and forest products—over long distances. In recent years, railroads have increased their customer services by designing new equipment to handle special categories of goods, providing flatcars for carrying truck trailers by rail (piggyback), and providing in-transit services such as the diversion of shipped goods to other destinations en route and the processing of goods en route. Thus, after decades of losing out to truckers, railroads appear ready for a comeback.
Trucks have increased their share of transportation steadily and now account for 24 percent of total cargo ton-miles (over 52 percent of actual tonnage). They account for the largest portion of transportation within cities as opposed to between cities. Trucks are highly flexible in their routing and time schedules, and they can usually offer faster service than railroads. They are efficient for short hauls of high-value merchandise. Trucking firms have added many services in recent years. Pipelines are a specialized means of shipping petroleum, natural gas, and chemicals from sources to markets. Most pipelines are used by their owners to ship their own products.
Although air carriers transport less than 1 percent of the nation's goods, they are becoming more important as a transportation mode. Air freight rates are much higher than rail or truck rates, but air freight is ideal when speed is needed or distant markets have to be reached. Among the most frequently air-freighted products are perishables (fresh fish, cut flowers) and high-value, low-bulk items (technical instruments, jewelry). Companies find that air freight also reduces inventory levels, packaging costs, and the number of warehouses needed.
Shippers increasingly are using intermodal transportation—combining two or more modes of transportation. Piggyback describes the use of rail and trucks; fishyback, water and trucks; trainship, water and rail; and airtruck, air and trucks. Combining modes provides advantages that no single mode can deliver. Each combination offers advantages to the shipper. For example, not only is piggyback cheaper than trucking alone but it also provides flexibility and convenience.
In choosing a transportation mode for a product, shippers must balance many considerations:
speed, dependability, availability, cost, and others. Thus, if a shipper needs speed, air and truck are the prime choices. If the goal is low cost, then water or pipeline might be best. Shipping costs are often a significant portion of the marketing costs of a product. It is often difficult for businesses to pass on these higher costs to customers when there are active competitors. One option is to reduce dependence on the unreliable transportation. However, that may not be possible for some businesses. As the case you just read suggests, a company's physical distribution and transportation flexibility is an important part of its marketing decisions, a factor that could make or break its ability to serve its customers.

d. Integrated Logistics Management

Today, more and more companies are adopting the concept of integrated logistics management. This concept recognizes that providing better customer service and trimming distribution costs requires teamwork, both inside the company and among all the marketing channel organizations. Inside, the company's various functional departments must work closely together to maximize the company's own logistics performance. Outside, the company must integrate its logistics system
with those of its suppliers and customers to maximize the performance of the entire distribution system.

Cross-Functional Teamwork Inside the Company

In most companies, responsibility for various logistics activities is assigned to many different functional units—marketing, sales, finance, manufacturing, purchasing. Too often, each function tries to optimize its own logistics performance without regard for the activities of the other functions. However, transportation, inventory, warehousing, and order-processing activities interact, often in an inverse way. For example, lower inventory levels reduce inventory-carrying costs. But they may also reduce customer service and increase costs from stock outs, back orders, special production runs, and costly fast-freight shipments. Because distribution activities involve strong trade-offs, decisions by different functions must be coordinated to achieve superior overall logistics performance.
The goal of integrated logistics management is to harmonize all of the company's distribution decisions. Close working relationships among functions can be achieved in several ways. Some companies have created permanent logistics committees made up of managers responsible for different physical distribution activities. Companies can also create management positions that link the logistics activities of functional areas. Many companies have a vice president of logistics with cross-functional authority. The important thing is that the company coordinate its logistics and marketing activities to create high market satisfaction at a reasonable cost.

e. Building Channel Partnerships

The members of a distribution channel are linked closely in delivering customer satisfaction and value. One company's distribution system is another company's supply system. The success of each channel member depends on the performance of the entire supply chain. Companies must do more than improve their own logistics. They must also work with other channel members to improve whole-channel distribution. Today, smart companies are coordinating their logistics strategies and building strong partnerships with suppliers and customers to improve customer service and reduce channel costs.
These channel partnerships can take many forms. Many companies have created cross-functional, cross-company teams.
Other companies partner through shared projects. For example, many larger retailers are working closely with suppliers on in-store programs. Channel partnerships may also take the form of information sharing and continuous inventory replenishment systems. Companies manage their supply chains through information. Suppliers link up with customers to share information and coordinate their logistics decisions. Here are just two examples:
Today, as a result of such partnerships, many companies have switched from anticipatory-based distribution systems to response-based distribution systems. In anticipatory distribution, the company produces the amount of goods called for by a sales forecast. It builds and holds stock at various supply points, such as the plant, distribution centers, and retail outlets. A response-based distribution system, in contrast, is customer triggered. The producer continuously builds and replaces stock as orders arrive. It produces what is currently selling.

f. Third-Party Logistics

Companies may use third-party logistics providers for several reasons. First, because getting the product to market is their main focus, these providers can often do it more efficiently and at lower cost than clients whose strengths lie elsewhere. According to one study, outsourcing warehousing alone typically results in 10 percent to 15 percent cost savings. Another expert estimates that companies can save 15 percent to 25 percent in their total logistics costs by outsourcing. Second, outsourcing logistics frees a company to focus more intensely on its core business. Finally, integrated logistics companies understand increasingly complex logistics environments. This can be especially helpful to companies attempting to expand their global market coverage.

KEY TERMS (Lesson # 28-29)

distribution channel

A set of interdependent organizations involved in the process of making a product or service available for use or consumption by the consumer or business user.

Channel level

A layer of intermediaries that performs some work in bringing the product and its ownership closer to the final buyer.

Direct marketing channel

A marketing channel that has no intermediary levels

Indirect marketing channel

Channel containing one or more intermediary levels.

Channel conflict

Disagreement among marketing channel members on goals and roles—who should do what and for what rewards.

Conventional distribution channel

A channel consisting of one or more independent producers, wholesalers, and retailers, each a separate business seeking to maximize its own profits even at the expense of profits for the system as a whole.

Vertical Marketing System (VMS)

A distribution channel structure in which producers, wholesales, and retailers act as a unified system. One channel member owns the others, has contracts with them, or has so much power that they all cooperate

Corporate VMS

A vertical marketing system that combines successive stages of production and distribution under single ownership—channel leadership is established through common ownership.

Contractual VMS

A vertical marketing system in which independent firms at different levels of production and distribution join together through contracts to obtain more economies or sales impact than they could achieve alone.

Franchise organization

A contractual vertical marketing system in which a channel member, called a franchiser, links several stages in the production-distribution process.

Administered VMS

A vertical marketing system that coordinates successive stages of production and distribution, not through common ownership or contractual ties but through the size and power of one of the parties.

Horizontal marketing system

A channel arrangement in which two or more companies at one level join together to follow a new marketing opportunity.

Hybrid marketing channel

Multi channel distribution system in which a single firm sets up two or more marketing channels to reach one or more customer segments.

Intensive distribution

Stocking the product in as many outlets as possible.

Exclusive distribution

Giving a limited number of dealers the exclusive right to distribute the company's products in their territories.

Selective distribution

The use of more than one, but fewer than all, of the intermediaries who are willing to carry the company's products.

Physical distribution (or marketing logistics)

The tasks involved in planning, implementing, and controlling the physical flow of materials, final goods, and related information from points of origin to points of consumption to meet customer requirements at a profit.

Distribution center

A large, highly automated warehouse designed to receive goods from various plants and suppliers, take orders, fill them efficiently, and deliver goods to customers as quickly as possible.

Integrated logistics management

The logistics concept that emphasizes teamwork, both inside the company and among all the marketing channel organizations, to maximize the performance of the entire distribution system.

Third-party logistics provider

An independent logistics provider that performs any or all of the functions required to get their clients' product to market.

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