Chapter Outline
· Supply Chains and the Value Delivery Network.
· Channel Behavior and Organization.
· Channel Design Decisions.
· Channel Management Decisions.
· Marketing Logistics & Supply Chain Management.
Producing a product or service and make it available to customers in the market requires building strong relationships not only with customers but also with suppliers and resellers in the company’ supply chain. Supply chain includes relationships with upstream and downstream partners.
Upstream partners are company’ suppliers, who supply raw materials, parts, components, finances, information, and expertise required to create a product or service.
Downstream partners are wholesalers and retailers. Marketers focus on the downstream side of supply chain.
Supply chain vs Demand Chain vs Value Delivery Network
· Supply Chain: is “make and sell” view, that means, all the raw materials, productive inputs and factory capacity should serve as starting point for marker planning.
· Demand Chain: is better term than supply chain, as it suggests “sense and respond” view. In this view, planning starts by identifying the needs of target customers, to which company responds by organizing a chain of resources and activities with the goal of creating customer value.
· Value Delivery Network: supply chain and demand chain both have limitations, companies now a days are engaged in building and managing a complex, continuously evolving value delivery network. It includes company, its suppliers, distributors and the ultimate customer. All these partners with each other to improve the performance of entire system.
The Nature and Importance of Marketing Channels:
There are very few producers who sell their products directly to consumers. Most of the companies use intermediaries to bring their products to market.
Marketing Channel: These are interdependent companies who help producers to make products or services available in the market for final users.
A company’ channel decisions directly affect company’s marketing decision. Product pricing depends upon whether company has decided to work with national discount chains, or will use high quality specialty stores or company will sell its products directly to consumers online.
Company’ sales force and communications depends upon, how much training, persuasion, support and motivation its channel partners need. Company will acquire or develop a new product often depends upon how well a new product fit the capabilities of its channel members. Companies often don’t pay much attention to its distribution channels, while others use these channels well to gain competitive edge.
Example: Amazon.com has changed the face to retailing and become the Walmart of internet by selling everything and anything without using physical stores.
How Channel Members Add Value:
Why companies use intermediaries or channel partners, as it can affect the company’ control over how and to whom they sell their products. The answer is, companies use intermediaries to make products available in target markets more efficiently through their experience, specialization and scale of operations.
If we look at the picture above, in “A” case, every manufacturer using direct marketing to reach three customers, so three manufacturers and three customer means this system needs nine different contacts in total. Where, in case of scenario “B” three manufacturers contact one distributor, which further contacts three customers. So, in this system total number of contacts reduced to six.
So, we can conclude, intermediaries reduce the amount of work that must be done by both producers and consumers.
From economic system’ perspective, marketing intermediaries play an important role in transforming assortment of products produced by producers into assortments demanded by consumers. Producers make narrow assortment of products in larger quantities but consumers want broad assortment of products in smaller quantities. So, here marketing intermediaries play their role, they buy large quantities of products from different producers and then break them down into smaller quantities and wider assortments demanded by consumers.
Marketing intermediaries perform following key functions to help complete the transactions:
· Information: It is to gather and disperse the information about producers, consumers and other actors and forces in the marketing environment needed for planning and helping exchange.
· Promotion: Developing and disperse persuasive communications about an offer.
· Contact: Searching and engaging buyers and prospect customers.
· Matching: Designing offers to meet buyer’ needs, it includes activities, such as, manufacturing, grading, assembling and packaging.
· Negotiation: Reaching an agreement on price and other terms, so that ownership or possession can be transferred.
Following functions are performed to fulfill the completed transactions.
· Physical Distribution: Transporting and storing goods.
· Financing: Acquiring and using funds to cover the costs of channel work.
· Risk Taking: Assuming the risks of carrying out the channel work.
Now the question is who will perform these functions, if manufacturer perform these functions, its costs may rise. And if these functions are shifted to intermediaries, then intermediaries will charge extra to cover this cost.
Number of Channel Levels:
Companies can design distribution channels to make products and services available to customers in different ways. Each layer of marketing intermediaries that plays its part to bring the product and its ownership to final buyer is called as channel level. As producer and final consumer perform some tasks, they are part to every level.
The number of intermediary levels indicate channel’s length.
· Direct Marketing Channel: it is to directly to consumers, and have no intermediary levels.
· Indirect Marketing channels: it contains one or more intermediaries.
Below mentioned 2nd picture showing some common business distribution channels. Business producers can opt to sell directly to business customers or they can use sales force or using sales force along with business distributors. More the number of levels less the control and greater the complexity.
All the institutions in channel are connected with several types of flows, which are physical flow of products, flow on ownership, payment flow, promotion flow and information flow.
Distribution channels are not as simple as they are perceived. These are complex behavioral systems, in which people and companies interact to achieve individual, company and channel goals. Some channel systems consist of informal interaction while others consist of formal interactions guided by strong organizational structures. Channel systems don’t stand still, new types of intermediaries emerge time to time and whole new systems evolve.
Channel Behavior:
A marketing channel consists of different firms, partnered together for their common good. All channel firms should work smoothly as, every channel member’ success depends upon each other.
Example, Ford dealers depend on ford to make car that meet customer needs, in return, ford depends upon dealers to engage and persuade customers to buy Ford. One dealer depends upon other fellow dealer to provide superior services to uphold brand’ reputation, and in-fact every dealer depends upon ford’ marketing channel how well they compete in market with other brands like Toyota, Honda, GM etc.
Every channel member must understand the role of each other, must coordinate with each other to attain overall channel goals. Channel Conflict is when channel members disagree on who should do what and for what rewards. This type of disagreements over goals, roles and rewards generates channel conflicts.
· Horizontal Conflicts: it’s a conflict that rises among same level of channel members. Example, Ford dealer can complain about other dealer regarding poor customer services, or charging extra money, or stealing their sales by offering discounts etc.
· Vertical Conflicts: it is when conflict rises between different levels of same channel.
Some conflicts take form of healthy competition, such competition can be good for the channel, otherwise the channel could become passive and noninnovative. On the other hand, severe and prolonged conflict can disrupt channel effectiveness and cause lasting harm to channel relationships.
Vertical Marketing Systems:
Specific roles must be assigned to each channel member and channel conflicts must be managed to get the best performance of channel as whole. Channel performs well when it includes a firm or agency or a proper mechanism, which plays the leadership role and have the power to assign roles and managing conflicts.
Conventional Distribution Channel Vs Vertical Marketing System:
Conventional Marketing Channel | Vertical Marketing System |
It includes one or more independent producers, wholesalers and retailers. | It is a unified system, including producers, wholesalers and retailers. |
Each member tries to maximize its own profit even at the expense of system as whole. | Channel members own each-others, are bound in a contract with each other, with having so much powers they all cooperate. |
No channel has control on each other, no one have power of assigning roles and managing channel conflicts. | It can be dominated by producer or wholesaler or retailer. |
Following are three types of VMS, i.e., Corporate VMS, Contractual VMS and Administered VMS, let’s discuss each briefly;
Corporate VMS:
In this type of VMS, companies integrate sequential stages of production and distribution under one ownership. Coordination and conflicts are managed through regular organizational channels.
Example: Grocery giant Kroger owns and operates 37 manufacturing plants, 6 bakery plants, 5 grocery plants, 17 dairies, 2 beverages plants, 2 meat plants, 2 cheese plants, 2 frozen dough plants and 1 deli plant. All these are manufactured, delivered and available for sale in Kroger store shelves.
Contractual VMS:
These are independent firms at different levels of production and distribution, these are contractually bound to achieve more economies or sales impact than each could achieve alone. These members coordinate in their activities and manage conflicts through contracts.
Franchise Organization: franchises are the most common example or contractual relationships. It is now a big business and play vital role in country’ economy. According to an estimate, a new franchise opens somewhere in USA in every eight minutes, and around one out of every 12 retail business outlet is franchised business. Following are three types of franchises;
· Manufacturer-Sponsored Retailer Franchise System: Example, Ford and its network of independent franchised dealers.
· Manufacturer-Sponsored Wholesaler Franchise System: Example, Coca-Cola licensed bottlers (wholesalers), buy Coca-Cola syrup, fill the bottles and then supply the finished products to retailers.
· System-Firm Sponsored Retailer Franchise: Example is Burger King and its more than 12,000 franchisee-operated restaurants around the world.
Administered VMS:
In this type of VMS, power is determined by the size of channel member. Manufacturer of top brands can manipulate its power and obtain extra cooperation and support from retailers.
Example: P&G or Apple can command unusual cooperation from many resellers regarding displays, shelf-space, promotions or price-policies. Big stores like Kroger or Walmart can put extra pressure on manufacturers that supply products they sell.
Horizontal Marketing System:
In Horizontal Marketing System, two or more same level of firms join and work together to follow a new marketing opportunity. In this way, these companies can combine financial, production or marketing resources to accomplish more than any one company could alone. Companies can join forces with competitors or noncompetitors:
· Joining forces with competitors: Different airlines join their resources together in different global alliances, Example, Star Alliance consist of 27 airlines, “working in Harmony” offers more than 18,500 combined daily departures to more than 190 destinations.
· Joining forces with non-competitors: Walmart make partnership with McDonald’ to place “Express” version of McDonald’ restaurants in Walmart stores. Both get benefit from each other’ sales.
Multichannel Distribution Systems:
In the past, companies use one distribution channel to reach single market or market segment. But now, companies use mix of channels or Multichannel Channel Distribution System to reach one or more customer segments and involves multichannel marketing.
Following picture shows a producer using multiple distribution channels to reach customers.
I. Catalogs, online or mobile channels.
II. Directly through retailers.
III. Through distributors and dealers.
IV. Using own sales force to reach customers.
This multichannel distribution system offers many advantages to companies operating in different segments and facing large and complex markets. Companies can expand its sales and market coverage and gains opportunities to customize its products or services according to specific needs of diverse customer segments.
But this multichannel distribution channel system often becomes harder to control, as multiple channels are selling same products to same customers, so, compete with each other for sales and customers.
Changing Channel Organization:
With the rapid advancements in market, especially the explosive growth of direct and online marketing has changed the nature and design of marketing channels.
Disintermediation; Occurs when product or services producers cut out intermediaries and go directly to final buyers. Or new types of intermediaries have displaced the traditional ones. Example: iTunes and Amazon MP3 have thrown traditional music store retailers out of business.
So, to avoid displacement channels need to innovate their ways of doing business. And grab the opportunities available in the market.
To go online or dealing directly with customers bring some problems, as it comes in competition with companies own other channels, but still, companies use this online and direct selling as they take is as a plus for entire channel.
Example:
Volvo car group (now owned by a Chinese car maker Geeley) has started selling Volvo vehicles online directly to customers. Around 80% of Volvo buyers already use online channel to buy other Volvo products.
Which taking channel design decisions manufacturers or producers struggle between what is ideal and what is practical. A new firm with limited resources may start by selling products in a small market, in this case deciding about best channel might not be a problem, maximum problem can be to convince one or two intermediaries.
After succeeding in one small market, company may start targeting two or more markets. It can also be done by selling directly to retailers, in larger markets companies may involve distributors. In other parts on countries companies may adopt the franchising model, and later company may develop online portal for selling the products directly to customers. In this way channel evolve to meet market opportunities and conditions.
Marketing channel design involves analyzing consumer needs, setting channel objectives, identifying major channel alternatives and evaluating the alternatives. Let’s discuss each briefly,
Analyzing Consumer Needs:
As we know that, marketing channels are integral part of overall customer value delivery network. Every member adds value for customers. While designing marketing channel, first step is to find out, what consumers want and expect from channels.
· Do consumers prefer to buy products from nearby or they are willing to travel distance for your product.
· Do consumers would like to buy online or by phone or in person on the store.
· Do consumers want add on services, which may include, delivery, installation or after sale services, or they will avail these services from some other company.
· Do consumer value specialization or breadth of assortment.
The quicker the delivery, greater the assortment, more add-on-services supplied greater the channel’ service level. Companies and its channel members often lack resources and skill to provide all the services demanded. And if companies will provide premium services, in return its cost will rise as well.
It is observed that, consumers accept lower service levels in exchange for lower prices. So, companies must balance consumer needs not only against the costs and feasibility but also against customer price preferences.
Setting Channel Objectives:
Companies should elaborate their marketing channel objectives in terms of targeted levels of customer service. Most of the companies try to target several segments demanding different services. Then companies decide on which segment to serve and best channel to utilize in each segment. But, along with providing better services to maximum number of consumer segments, companies want to minimize the total channel costs.
The company’ channel objectives are largely influenced by nature of company, the product, its marketing intermediaries, its competitors and environment.
Examples:
· Every company will evaluate its size and resources and then will decide which marketing functions to perform itself and which to outsource.
· If company is selling perishable products, then it will try to deal directly with consumer to avoid delays and too much handling.
Finally, the environmental factors i.e., economical and legal constraints may affect channel objectives and design.
Example:
If economy of country is depressed, then, manufacturers will try to distribute their products in economical ways, using shorter channels and dropping unnecessary services that finally add-up in good’s price.
Identifying Major Alternatives:
Once the company has defined its channel objectives, now its time to identify its major channel alternatives in terms of; Types of Intermediaries, Number of Marketing Intermediaries and Responsibilities of channel members. Let’s discuss each;
Types of Intermediaries:
A company should identify all available channel members which can perform channel work. Most of the companies identify many channel member choices. Using more than one reseller in a channel have its benefits and drawbacks as well.
Benefit is, company can reach different kind of buyers.
Drawback is, it is difficult to control, as both the resellers and company’ own direct sales force complains about undercutting each other business, as both compete with each other for the same customer. Companies in this case find themselves “Stuck in the Middle”.
Example: Dell is an example, as initially dell use to sell its product directly to consumers or through own sales force to sell the products in different institutions or corporates etc. but later on, to compete with competitors like Samsung or Apple, dell started selling its products through retailers (Walmart, Staples, Best Buy, etc.), value added resellers, independent distributors and dealers, who alter or develop the product to serve the special demands of customers.
Number of Marketing Intermediaries:
Companies must determine, how many number of channel members to use at each level. Following three are often exercised by companies, which are;
· Intensive Distribution: it is use when the product of common use. Example, toothpaste or candies or shampoo etc., companies use to sell their products through millions of outlets to provide maximum brand exposure.
· Extensive distribution: it is used when the product is premium or luxury Brand. Example, “Breitling watches” it is positioned as “Instruments for professional” priced from $5000 to more than $100,000 is sold through just one jeweler in Chicago, and six jewelers in entire state of Illinois. This distinctive position earns greater dealer spot and customer service.
· Selective Distribution: between the intensive and extensive distribution lies the selective distribution, it is distributed by more than one but consumers don’t find these products on every point. Example, Furniture, consumer electronics etc.
Responsibilities of Channel Members:
The producer and intermediary should agree upon different terms and responsibilities, to avoid the problems in future. Pricing policies, territory rights, conditions of sale and specific services performed by each party and producer must set special discount for intermediaries. Along with this agreement, company should companies should carefully spell out mutual services and duties.
Example: McDonald’s provide franchises with a record keeping system, training at hamburger University, general management support and Promotional support. In return franchisee must follow company standards of cleanliness or physical facilities on the store, maintain food quality, provide requested information, cooperate with new promotion programs and buy specified food products
Evaluating the Major Alternatives:
After identifying several channel alternatives, now company wants to select the one, that will best satisfy its long-run objectives. Every alternative should be evaluated against economic, control and adaptability criteria, let’s discuss each;
· Economic Criteria: economic criteria include comparing sales, costs and profitability or different channel alternatives. What investment is required and what will be its returns.
· Control Issues: using intermediaries means giving them some control for the promotion of products. Some intermediaries take more control than others. But company prefer and should keep as much control as possible.
· Adaptability Criteria: channels often involve long-term commitments, but companies want to keep the channel flexible so that it can adapt to environmental changes.
Designing International Distribution Channels:
International marketers face different type of complexities while designing their channels. Every country has its own unique distribution system, which has evolved over time and changes very slow.
In some international markets, distribution system is very complex. For example, many western countries find difficulties in distributing products in India and Pakistan. As in India and Pakistan departmental stores and super markets account for only a small portion of country’ huge market. Here people use to buy products from nearby shops, called as “Kirana” which are run by owners. These shops are feasible for buyers because of personalized services and credit.
Same is the case with China, China’ rural markets are very much decentralized, consists of distinct submarkets, each with its own subculture. After years of efforts even Walmart executives admit that, they have been unable to assemble an efficient supply chain in China.
In Brazil, Nestle use self-employed salespeople who sell Nestle products from refrigerator carts to door.
Once the company have carefully reviewed its channel alternatives and determined the best channel design, now its time to implement and manage the chosen channel. This step involves following steps, which are selecting, managing and motivating channel members and last step is evaluating channel performance over time.
Selecting Channel Members:
Every producer varies in its ability to attract qualified marketing intermediaries. Some producers find no difficulty in finding qualified channel members. Example: When Toyota first introduced Lexus line in US, Toyota didn’t face any difficulty, in-fact it had to refuse many would-be resellers.
Some producers have to work hard to find the most suitable channel member. Example: Timex first tried to sell its inexpensive watch through regular jewelry stores, Timex find very difficulty as many jewelers refuse to sell its inexpensive product. So, Timex started to sell watches through mass-merchandise outlets.
The third case is, there are many established brands, who face difficulties in finding the qualified channel member, specially when the reseller is powerful. Example: consumer now don’t find Marlboro, Camel or any other cigarette brand on CVS Pharmacy and on many other pharmacies. Now pressure is building on Walmart to refuse selling cigarettes.
Characteristics to be observed:
While selecting intermediaries, companies need to carefully evaluate each channel member’ years in business, growth, location, cooperativeness, profit record and reputation.
Managing and Motivating Channel Members:
Once the company has finalized channel members, now company need to continuously manage and motivate these channel members to get best out of them. Companies now need to change the thinking style, try to sell not only through the intermediaries but also to and with them.
Most companies have started treating channel members as their first-line customers and partners. They use to practice “Partner relationship management” to forge long-term partnerships with channel members. This creates a strong value delivery system that fulfil the need of both the company and its channel members.
Example: Caterpillar works hand-in-hand with its dealer’s network. By working together, they dominate the world’ construction, mining and logging equipment business. It has 189 superb dealers in more than 180 countries.
Many big companies, according to their resources, have started installing integrated high-tech Partnership Relationship Management (PRM) and Supply Chain Management (SCM) software to coordinate their whole-channel marketing efforts. Just like as companies use customer relationship management (CRM) software to manage healthy relationship with important customers.
Evaluating Channel Members:
The company must regularly check the performance of each channel member against the set standards, which may be, sales quotas, service or product delivery time, average inventory levels, treatment of damaged and lost goods, services to customers and cooperation in company promotion and training programs.
Companies must take care of basic working needs of channel members. The companies who treat their partners poorly risk not only their support but also some legal problems as well.
Companies should reward channel members who are performing well and giving good results and companies should support poorly performing channel member or as a last resort, replace them.
Public Policy and Distribution Decisions:
In most of cases, companies are free to settle whatever arrangements suit them with distributors. Most channel law deals with mutual rights and duties of channel members once they have formed a working relationship.
· Exclusive Distribution: It is when sellers allow certain outlets to carry its products.
· Exclusive Dealing: it is the arrangement, in which seller requires from dealers not to handle competitor’ products.
Most of wholesalers and producers like to develop exclusive channels for their products. Both parties get benefit from each other. Sellers get the more reliable and dependable outlet, on the other hand, dealers get stronger seller support and steady source of supply. These exclusive arrangements prevent other producer from selling to these dealers. It is legal as long as they tend to create a monopoly, don’t lessen the competition and as long as both parties voluntarily enter into the agreement.
Exclusive Territorial Agreement: It can be a two-way contract; Producer may agree not to sale to any other dealer in specified territory and dealer may also agree not to sale the product outside the territory. In this case, keeping a dealer from selling outside the territory is a legal issue.
Full Line Forcing: strong brand producers sometimes use to sell to a dealer in just a case if the dealer will buy all rest of its line. It is not necessarily illegal. It becomes a legal issue, when it tries to lessen the competition as it can prevent consumers from buying competitor’ products.
In the end, it is producer’ right to freely select the dealer, but to terminate dealer is somewhat restricted. For this companies need a strong cause. a company cannot replace or drop a dealer in a case, if for example, a dealer refuses to cooperate in doubtful legal arrangement (i.e., tying agreement or exclusive dealing).
In today’s world which has become a global village, selling a product is easier than getting it to customers. Companies need to decide best way to store, handle and move their products and services to customers in right assortments, at right time and in right place.
Nature and Importance of Marketing Logistics:
To some managers marketing logistics is just about trucks and warehouses, in-fact;
· Marketing Logistics/Physical Distribution: It revolved around planning, implementing, controlling and physical flow of goods, services and related information from points of production to points of consumption to meet customer requirements at some profit.
· In simple terms, it involves getting right products to right customers in right place at right time to some profit.
Marketing logistics involves the entirety
of Supply Chain Management, i.e., managing upstream and downstream value-added
flows of materials, final goods and related information among suppliers, the
company, resellers, and final consumers.
· Outbound
logistics: It includes
moving products from factory to resellers and ultimately to customers or
consumers.
· Inbound
logistics: It is to move
products and materials from suppliers to factory.
· Reverse
logistics: it is to reuse,
recycle, refurbishing or disposing of broken, excess or unwanted products
returned by resellers or consumers.
The logistics manager’ duty is to coordinate the activities of suppliers, purchasing agents, marketers channel members and customers. All these activities require, forecasting, information systems, purchasing, production planning, order processing, inventory, warehousing and transportation planning.
In today’ world of calculations, companies
are putting great emphasis on logistics because of following four reasons,
which are;
· Competitive
Edge: by using improved
logistics to provide customers better service and on lower rates than
competitors.
· Cost
Saving: by improving
logistics can provide cost savings for both companies and customers. Around 20%
of an average product account for its shipping or transportation.
· Logistics
Management: in the past,
there was not so much choice in products for customers but now there is vast
variety in almost every product. It is important to handle huge variety of
different products. Companies use sophisticated supply chain management
software, RFID tags, point-of-sale scanners, satellite tracking or electronic
transfer of order to efficiently serve this purpose.
· Environmental
Sustainability Efforts: logistics
effects environment and firm’ environment sustainability efforts. So, to take
care of environment, companies are now developing green supply chains (includes
the process of reducing, recycling, reusing or degradable products).
Sustainable Supply Chains:
Companies have many reasons to reduce the
impact of supply chain on environment. Following are the reasons;
· 1st
is, if companies don’t go green themselves then the responsible authorities
will force companies to adopt green supply chains.
·
Consumer’
demand: different surveys suggest that, around 50% of millennials are willing
to pay more for sustainable products and 39% do research about sustainability
practices or efforts of companies before making a purchase.
By taking green steps companies can save
the world for future generations and it is also good for company’ bottom line.
Companies can green-up their logistics (transportation, warehousing &
Packaging) through greater efficiency and greater efficiency means lower costs.
Example: Nike reduced the carbon emission by 6%, despite it
has increased production to 20%. It also shifted cargo to ocean freight, this
reduced emission by 4% per product and it also makes accountants smile by
saving around $8 million a year in shipping costs.
Goals of Logistics Systems:
Some companies state their logistics
objectives as providing maximum customer services at lower costs.
Unfortunately, it sounds good, but there is no possible solution available
which can both maximize customer service and minimize lower costs.
Higher customer service means, rapid
delivery, larger inventories, liberal return policies, flexible assortments and
other related services, all these services increase distribution costs. In
contrast, lower distribution costs include, slower delivery, smaller
inventories and large shipping lots, this represents the lower customer
services level as well.
The goal of marketing logistics should be
to provide targeted level of customer services at lower possible costs. Companies
need to first research about the importance of different distribution services
to customers and then set the desired service level for each segment.
Some companies offer less service level
than competitors and charge lower price, while others provide superior services
to customers and charge higher price to cover higher costs.
Major Logistics Functions:
After developing logistics objectives,
companies design logistics system that will minimize the cost of attaining
those objectives. Following are major logistics functions; warehousing,
inventory management, transportation and logistics information management.
Let’s discuss each briefly;
Warehousing:
Production and consumption cycles rarely
match, so, most companies need to store their products while they wait to be
sold. The storage function overcomes the differences in needed quantities and
timings, to make sure that, products are available when consumers need it.
Example: Sugar mills produce sugar in the crushing season of
sugarcane (November-March) in Pakistan, but sugar is consumed whole year,
non-stop. So, companies or dealers use warehouses to store sugar for later use
throughout the year.
Warehouses vary in its types, now companies
need to decide how many and what type of warehouse or distribution centers they
need.
Warehouse: used to store goods for moderate to longer periods.
Distribution centers: these are used to move goods rather than
just storing them. Nowadays, warehouses are large and highly automated
warehouses designed to receive goods from various plants and suppliers, take
orders, fulfil them efficiently and deliver goods to consumers as quickly as
possible. Outdated methods of handling products are replaced by newer,
computer-controlled systems requiring fewer employees, scanners read orders,
lift trucks, electric hoists or robots to gather goods and efficiently handle
orders.
Inventory Management:
Inventory management effects customer
satisfaction. Managers need to maintain balance between carrying too much
inventory and carrying it too little. Carrying too little inventory risks not
having product when customer demands it, for this company may order costly
emergency shipments or production. On the other hand, buying too much stock
results in higher inventory, carrying and storage cost.
·
Just
in time: it is a type of
logistics system, in which producers and sellers carry only small inventories.
This stock is sufficient for few days of operations. New stock arrives when
needed rather than building big inventories. For this manager need to critically
forecast the demand along with fast, frequent and flexible delivery. This
technique saves money from carrying bigger inventories and holding costs.
Example: RFID software has enabled managers to track a
product, remaining quantity, when to order and forecasting. Many big companies
like Walmart and P&G use RFID software to make supply chain more efficient.
Transportation:
The choice of transportation carrier
effects the product pricing, delivery performance and the condition of goods
when they arrive at facility. All of these collectively affect customer
satisfaction. Major transportation modes are; Trucks, rail, water, pipeline,
air and internet. Let’s discuss each briefly;
· Trucks: trucks have increased their share of
ton-miles transported in recent times. Trucks are flexible in routine and time
schedule and offer faster service than railroads. These are efficient for short
hauls of high-value merchandise. Companies offer satellite tracking,
internet-based shipment management and logistics planning software to
cross-border shipping operations.
· Rail: Railroads account for 26 percent of
ton-miles moved. It is one of the cheaper ways of transporting bulk-products
over long distances, i.e., coal, sand, minerals and farm and forest products. Railroads
have also improved their services by designing new equipment to handle special
categories of goods, providing in-transit services such as diversion of shipped
goods to other destinations en-route and processing of goods en-route.
· Water
carriers: it accounts for
7 percent of ton-miles moved. Cost of transporting products in bulk through
water carriers is too low in comparison with other modes transportation. Transported
products include low-value, nonperishable products which are sand, coal, grain,
oil and metallic ores. It is also the slowest mode of transporting goods which
may also be affected by weather.
· Pipeline: it accounts for 17 percent of ton-miles
transported. Products include petroleum, natural gas, and chemicals from sources to markets. These pipelines are owned and used by product owners.
· Air: it carries less than 1 percent of
ton-miles moved. It is highly costly; it is used to transport products faster.
Products include fresh fish, cut flowers, technical instrument, jewelry or
important documents. FedEx is a famous company who provides this air
transportation of goods, FedEx owns more than 650 aircrafts. It is also
observed that air carriers have reduced inventory levels, packaging costs and
number of ware houses needed.
· Internet: through internet producers send products
to customer through satellite, cable, phone wire or wireless signals. Its
distribution cost is very low. Products include music, videos, digital
documents, assignments etc.
Multimodal Transportation: it is to combine two or more modes for
transporting goods. 8 percent of ton-miles are moved through multiple modes.
·
Piggyback:
use of rail and trucks.
·
Fishyback:
water and trucks.
·
Trainship:
water and rail.
·
Airtruck:
air and truck.
Logistics Information Management:
Companies manage supply chain through
information. Channel partners often joins to share information. Flow of
information regarding customer transactions, billing, inventory level and
shipping and customer data effects channel performance. Companies need simple,
fast and accurate processing for capturing processing sharing channel
information.
Information can be shared in many ways, in recent times, most of information is shared through;
EDI (electronic data interchange). it is digital exchange
of data among organizations, it is transmitted through internet. Example:
Walmart cannot run smooth operations (thousands of products and suppliers and
customers) without efficient EDI. If any supplier doesn’t have the required
EDI, Walmart works with it to find and implement the needed tools.
VMI (vendor managed inventory): customer (can be
retailers) shares real time data on sales and current inventory with suppliers.
Then it is the responsibility of supplier to manage inventory and delivery of
product.
Integrated Logistics Management:
It is a concept, which says, better
customer service and trimming distribution cost requires teamwork, both inside
the company and working closely with all marketing channel organizations.
Inside, the company’ different departments
work together to maximize own logistics performance. Outside, must integrate
its logistics system with its suppliers and customers to maximize the
performance of whole distribution network.
Cross-Functional Teamwork Inside the
Company:
Most companies assign logistics
responsibilities to different departments, i.e., sales, marketing, finance and
purchasing. Each department tries to maximize its own logistics performance
ignoring the performance of other relevant departments. Distribution activities
involve strong trade-off, decisions by different functions must be coordinated
to achieve better overall logistics performance.
Departments like inventory, transportation,
warehousing and information management activities interact with each other in
inverse way. Lower inventory levels reduce inventory carrying costs, but along
with this benefit, it risks customer service, increase stockouts, special
production runs, backorders and fast-freight shipments.
Building Logistics Partnerships:
Companies need to do more than just
improving logistics, they need to coordinate with other channel partners to
improve whole channel distribution. One company’ distribution system is
supply-system of other company. And so, success of each channel member depends
upon the performance of entire supply chain.
Cross-functional or Cross-company teams: two companies develop teams to coordinate
with each other to improve the distribution system, squeeze costs and bringing
value to final consumers. Example, Nestle’ Purina (Pet food unit) and
Walmart work together to improve customer value, distribution system and
squeeze costs, which finally benefits both the customer and the company.
Shared Projects: companies can partner with each other through shared
projects. Example, Mega marts offer their key suppliers to display their
new products on their shelves. This let the suppliers to take customer feedback
and improve quality and distribution. It also benefits the whole system, the
retailer, supplier and the final consumer.
Third-Party Logistics:
Many companies are use 3PL (third party
logistics) providers for the tasks like bundling, offloading, sorting,
transporting, storing, reloading, tracking or custom clearing etc. most of
companies hate these logistics tasks and want to focus on their core business. 3PL
providers include DHL Logistics, FedEx Logistics, UPS (United Parcel Services)
and BAX Global etc.
UPS says “We love Logistics”, UPS knows
handling logistics is a competitive edge and it’s a whole new way of thinking.
Its not just handling shipment services but on deeper note, it helps companies
to sharpen their own logistics, cut costs (up to 10 to 25 percent savings) and
serve customer better.
According to a report, around 86 percent of Fortune 500 companies use 3PL services. Companies include, General Motors, P&G and Walmart, each of these uses more than 50 3PL providers.