Value Chain Management

and Logistics
Evans & Berman
Chapter 14

Chapter Objectives
To discuss the role of the value chain and the value
delivery chain in the distribution process
To explore distribution planning and review its
importance, distribution functions, the factors used in
selecting a distribution channel, and the different types
of distribution channels
To consider the nature of distribution contracts,
cooperation and conflict in a channel of distribution,
the special aspects of a distribution channel for
industrial products, and international distribution
To examine logistics and demonstrate its importance
To discuss transportation alternatives and inventory
management issues
Copyright Atomic Dog Publishing, 2002

The Distribution Process

Supplier/
Manufacturer
Goals
Value Chain
Distribution
Intermediary
Goals

Total Delivered
Product

Level of
Satisfaction

Value Delivery
Chain
Customer
Goals
Copyright Atomic Dog Publishing, 2002

Key Points of the Distribution Process

Goals

The goals of various channel members are considered as

inputs to the value chain and value delivery chain.
The value chain and value delivery chain are parallel
processes.
The total delivered product is the actual result of the
value chain and value delivery chain.
Satisfaction is based on the perceived value received
from the value chain and value delivery chain.
Feedback regarding service gaps and breakdowns must
be handled systematically in the process.
Satisfaction
Copyright Atomic Dog Publishing, 2002

Channel Functions
Distribution

Marketing
Research

Buying

Promotion

Pricing
Functions
Performed in
a Channel
of Distribution

Product
Planning

Customer
Services
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Distribution and the Web

The Internet affects marketing
functions and logistics by:

Speedily conveying information.

Improving communication with
channel members.
Allowing firms to reach distant parts of
the world.
Providing customers with the option of
worldwide vendors.
Offering Web-enhanced services for
each distribution function.
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Factors to Consider in Selecting a

Distribution Channel

The Consumer
The Company
The Product
The Competition
Distribution Channels
Legalities

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A Direct Distribution Channel

Manufacturer

200,000
Customers

In this direct channel, an

umbrella manufacturer sells
directly to final consumers. It
makes 200,000 separate
transactions, one for each
customer.

Copyright Atomic Dog Publishing, 2002

An Indirect Distribution Channel

Manufacturer

Wholesaler
(East U.S.)

Wholesaler
(South U.S.)

Wholesaler
(North U.S.)

Wholesaler
(West U.S.)

50 Retailers

50 Retailers

50 Retailers

50 Retailers

1,000
Customers per
Retailer

1,000
Customers
per Retailer

1,000
Customers
per Retailer

1,000
Customers
per
Retailer

In this indirect
channel, an
umbrella
manufacturer
makes only 4
transactions. It sells
to regional
wholesalers, which
resell to 50 retailers
each. The retailers
each sell to 1,000
final consumers.
Copyright Atomic Dog Publishing, 2002

Typical Indirect Channels of Distribution

1

Manufacturer/
Manufacturer/
Service Provider Service Provider

Retailer

Wholesaler

Final
Consumer

Retailer

Final
Consumer

Manufacturer/
Service Provider

Manufacturer/
Service Provider

Merchant
Wholesaler or
Sales Agent

Merchant
Wholesaler or
Sales Agent

Organizational
Consumer

Distributor
Organizational
Consumer
Copyright Atomic Dog Publishing, 2002

Pushing Versus Pulling Strategies

Pushing

Manufacturer/
Service Provider

Distribution
Intermediaries

Consumers

Distribution
Intermediaries

Consumers

Pulling

Manufacturer/
Service Provider

Copyright Atomic Dog Publishing, 2002

Intensity of Channel Coverage

Exclusive
Distribution

A firm severely limits the number of resellers in

an area. It seeks a prestige image, channel
control, and high profit margins and
accepts lower total sales.

Selective
Distribution

A firm employs a moderate number of resellers in

an area. It tries to combine some channel control
and a solid image with good sales volume
and profits.

Intensive
Distribution

A firm uses a large number of resellers in an area.

Its goals are to have wide market coverage,
channel acceptance, and high total sales and
profits. Per-unit profits are low.
Copyright Atomic Dog Publishing, 2002

International Distribution Planning

International distribution requires
additional considerations and planning:
The channel length may depend on a
nations stage of economic
development.
Less-developed and developing
nations tend to use shorter, more direct
channels than industrialized ones.
Limited transportation and
communication networks foster local
shopping.
Cultural norms always affect channel
member interactions.
Copyright Atomic Dog Publishing, 2002

Logistics

Logistics,
Logistics also known as physical
distribution,
distribution encompasses the broad range
of activities concerned with efficiently
delivering raw materials, parts, semi-finished
items, and finished products to designated
places.
Logistics includes customer service,
shipping, warehousing, inventory control,
trucking operations, packaging, receiving,
materials handling, and plant, warehouse,
and store location planning.
Logistics affects costs, the value of customer
service, and its relationship with other
functional areas.
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Logistics and Other

Functional Areas
There is a critical interaction between logistics
and each of the firms marketing functions
and this requires careful coordination.
Product variations (color, size, features,
styles) may impose a burden on distribution
facilities.
Logistics planning is related to overall
channel strategy.
Promotion campaigns must realistically
coordinate with potential logistics delivery.
Pricing may be the firms differential
advantage based on superior logistical
service.

Copyright Atomic Dog Publishing, 2002

Selected Physical Distribution Activities

Involved in a Typical Order Cycle

Insufficient goods in
stock
Customer places
an order

Orders shipped
to individual
customers

Supplier receives
Inventory on
and enters
hand checked
order
Sufficient goods
in stock
Goods stored
until enough
orders are
placed

Production
scheduled

Goods
packaged,
sorted, tagged,
and sent to local
warehouse
Copyright Atomic Dog Publishing, 2002

An Illustration of the Total-Cost

Approach in Distribution
Carrier

$100,000

Air

$1.5 mil.

Rail

$300,000

Truck

$500,00

$1.6 mil.

$800,000

$300,000

$500,000
$200,000

$1.4 mil.

$1.2 mil.

Costs

Annual
freight
costs
Annual
warehousing
costs
Annual costs
of lost sales
due to being
out of stock

Copyright Atomic Dog Publishing, 2002

What Happens When a Firm

Has Stock Shortages

When a firm runs

out of stock,
customers can

Wait until
merchandise is
available

Most Desirable Action

Purchase a
substitute
product from
the same seller

Switch to a new
seller while
merchandise is
not available

Permanently
switch to a new
seller for all
purchases
Least Desirable Action
Copyright Atomic Dog Publishing, 2002

5 Transportation Forms
for Shipping
Railroads carry heavy, bulky items over long distances but have high fixed
costs due to facility investments.

Motor Carriers usually transport small shipments over short distances and
handle 80% of U.S. shipments weighing less than 500 or 1,000 pounds.

Waterways in the U.S. include barges on inland rivers, and tankers and
freighters on Great Lakes, and intercoastal shipping.

Airways are fast and expensive but move high-value perishable and
emergency goods. Speed may provide a differential advantage.

Pipelines move gas and petroleum products with minimum handling and
labor costs.

Wal Mart
Copyright Atomic Dog Publishing, 2002

Inventory Management

Good inventory management provides a continuous flow of goods and

matches the quantity of goods kept in inventory as closely as possible with
customer demand.
To improve their inventory management, many firms are applying a just-in-time
inventory system and electronic data interchange.
interchange
Four specific aspects of inventory management are stock turnover,
turnover when to
reorder,
reorder how much to reorder,
reorder and warehousing.
warehousing
Stock turnover refers to the number of times during a stated period (usually
one year) that average inventory on hand is sold. It shows the relationship
between a firms sales and the inventory level it maintains.
A reorder point depends on order lead time, the usage rate, and safety stock
The economic order quantity (EOQ) is the order volume corresponding to the
lowest sum of order-processing and inventory-holding costs.

Copyright Atomic Dog Publishing, 2002

Chapter Summary

This chapter discusses the role of the value chain and the
value delivery chain in the distribution process.
It explores distribution planning and examines its
importance, distribution functions, the factors used in
selecting a distribution channel, and the different types of
distribution channels.
It considers the nature of distribution intermediary
contracts, cooperation and conflict in a channel of
distribution, the special aspects of a distribution channel for
industrial products, and international distribution.
It examines logistics and demonstrates its importance.
It discusses transportation alternatives and inventory
management issues.
Copyright Atomic Dog Publishing, 2002