Ebook Marketing an introduction (13th edition): Part 2

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Part 1: Defining Marketing anD the Marketing Process (chaPters 1–2)
Part 2: UnDerstanDing the MarketPlace anD cUstoMer ValUe (chaPters 3–5)
Part 3: Designing a cUstoMer ValUe-DriVen strategy anD Mix (chaPters 6–14)
Part 4: extenDing Marketing (chaPters 15–16)

10

Marketing channels

chaPter roaD MaP

Delivering customer Value
objective outline

objectiVe 10-1 explain why companies use marketing
channels and discuss the functions these channels perform.
Supply Chains and the Value Delivery Network (328–329); The
Nature and Importance of Marketing Channels (329–331)

objectiVe 10-4 explain how companies select,
motivate, and evaluate channel members. Channel
Management Decisions (343–346); Public Policy and Distribution
Decisions (347)

objectiVe 10-2 Discuss how channel members interact
and how they organize to perform the work of the channel.
Channel Behavior and Organization (332–339)

objectiVe 10-5 Discuss the nature and importance of
marketing logistics and integrated supply chain management. Marketing Logistics and Supply Chain Management

(347–354)

objectiVe 10-3 identify the major channel alternatives
open to a company. Channel Design Decisions (339–343)

Previewing the concepts
We now look at the third marketing mix tool—distribution. companies rarely work alone in
creating value for customers and building profitable customer relationships. instead, most
are only a single link in a larger supply chain and marketing channel. as such, a firm’s
success depends not only on how well it performs but also on how well its entire marketing channel competes with competitors’ channels. the first part of this chapter explores the
nature of marketing channels and the marketer’s channel design and management decisions.
We then examine physical distribution—or logistics—an area that has grown dramatically
in importance and sophistication. in the next chapter, we’ll look more closely at two major
channel intermediaries: retailers and wholesalers.
We start by looking at Uber, the fast-growing, app-based car-hailing service that has
recently sprouted up in cities around the world. Uber has radically reinvented urban transportation channels, posing a serious threat to conventional taxi cab and car service companies.
as Uber grows, traditional competitors must innovate or risk being pushed aside.


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first stop
Uber: Radically Reshaping Urban
Transportation Channels
It’s rare. But every now and then a company comes along
that completely disrupts the traditional ways of distributing a
product or service. FedEx revolutionized small package delivery channels; Amazon.com radically transformed online selling; and Apple’s iTunes and iPod turned music distribution on
its ear. Now comes Uber, the app-based ride service that is
revolutionizing urban transportation. Fast-growing Uber is giving conventional taxi cab and car services a real ride for their
money. In just five short years, Uber has revved up operations

in 270 major cities in 55 countries, already booking more than
Uber lets passengers hail the nearest cab from any location using its
$1 billion in rides annually.
smartphone app, then track the vehicle on a map as it approaches.
Why are so many customers around the world bypassing
PAUL J. RICHARDS/AFP/Getty Images
good old taxi cabs in favor of newcomer Uber? It’s all about
convenience, ease of use, and peace of mind. No more stepping out into busy city streets to wave down a passing cab. Instead,
their best behavior. Poorly rated drivers risk being rejected by future
Uber’s smartphone app lets passengers hail the nearest cab or limo
passengers; poorly rated passengers risk rejection by drivers, who
from any location with the touch of a button, then track the vehicle
can choose which fares they accept.
on a map as it approaches. The Uber app gives riders an accurate
Uber’s disruptive innovation has brought a breath of fresh air to
estimate in advance of the fare to their destinations (usually less
an industry begging for change. Urban transportation channels have
than that charged by a regular cab), eliminating guesswork and unlong been characterized by cartel-like relationships between cab
certainty. After the ride, passengers simply exit and walk away. Uber
companies and local governments, high fixed fares, poor service,
automatically pays the driver (including tip) from the passenger’s preand little accountability. As one economics professor points out, the
paid Uber account, eliminating the often inconvenient and awkward
taxi cab industry “was ripe for entry [by startups] because everybody
moment of payment. And it’s the same process all over the world,
hates it.” The business reporter puts it more plainly: “If service at
from San Francisco, London, Paris, or Abu Dhabi to Ashville, North
Starbucks was as routinely disappointing as service from taxis, StarCarolina, or Athens, Georgia.
bucks would have gone out of business long ago.”
Compare the Uber experience to the uncertain and often unsetLike any innovator, upstart Uber faces
tling experience of using a standard taxi cab. One business reporter

some significant challenges. For examdescribes waiting in line at a taxi stand while a driver tried to convince
ple, Uber has been criticized for
another would-be passenger—a total stranger—to share the cab,
exercising too little control over
thereby increasing his fare. The cab itself was ancient and filthy, with
driver quality and security. So
Uber—the fast-growing
ripped and worn seats. During the entire ride, the cabbie carried on
far, the company has ridapp-based ride service—is
a phone conversation in a foreign language via his headset, causing
den beneath the radar of
revolutionizing urban transportation
safety concerns while distractedly navigating busy city streets. The
industry regulators by not
channels in cities around the globe.
driver spoke only poor, hard-to-understand English. “That turned out
directly employing drivers
as Uber grows, traditional taxi
to be a good thing,” says the reporter, “because I couldn’t understand
(all Uber drivers are indecab services must innovate or
what he was trying to say when he insulted me for not tipping him
pendent contractors) and
risk extinction.
enough.” The reporter’s conclusion: “I stepped out of the taxi in front
not owning any vehicles (all
of my house and realized I just don’t have to put up with this garvehicles are driver-owned).
bage anymore. Uber has changed my life, and as God is my witness,
However, although some muni[wherever Uber is available] I will never take a taxi again.”
cipalities have passed ordinances
Uber actually began as a ride-sharing service. Current Uber

favorable to Uber’s operations, others
drivers range from professional drivers who’ve switched over from
are imposing new regulatory restrictions
conventional cab and transportation companies to regular people
and licensing requirements.
looking for a little adventure and some extra income in their spare
Uber has also been criticized for its “surge pricing” practices—a
time. All Uber drivers go through an orientation that requires profidynamic pricing mechanism that kicks in to raise prices when demand
ciency in a market area’s dominant language, ensuring that they can
exceeds supply, sometimes resulting in shockingly high fares and
communicate effectively with customers. Uber vehicles must be at
accusations of price gouging. Uber justifies surge pricing by pointing to
least 2007-year models or newer, and customers can often choose
the very foundation of its business model—allowing the forces of supthe type of car they want, from an entry-level Prius to a stretch
ply and demand to work. Surge pricing provides an incentive for more
Mercedes S-Class. A two-way rating system—by which riders rate
drivers to be available during periods when passengers need them
drivers and drivers rate riders in return—helps keep both sides on
most. According to Uber, if a passenger faces a higher-than-normal

327


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fare because of surge pricing, the alternative without Uber would more
than likely be no taxi at all. Moreover, Uber informs passengers in advance what the fares will be. If they don’t like the fare, they can find
another cab, take public transportation, or walk.
As Uber expands within a given market, Uber founder and CEO
Travis Kalanick envisions the increased likelihood of what he calls

“a perfect day”—a day when there is a ride available for everyone
who needs one and no surge pricing results. Such a scenario is no
pipe dream. In New York City recently, Uber riders experienced seven
such “perfect days” in a row.
Uber’s huge success has attracted a garage full of competitors,
such as Lyft, Sidecar, Gett, Carma, and Curb. Even Google (itself a
major Uber investor) is rumored to be readying the launch of its own
ride-sharing service, one that would eventually utilize the driverless
vehicles Google is developing. Uber still has a huge first-to-market
advantage. It has an estimated seven times the riders and 12 times
the revenues of nearest competitor Lyft, and it’s adding new customers at an estimated five times faster.

Beyond the numbers, however, for now, Uber has little to fear from
like-minded competitors. In fact, the more competitors adopt the new
model, the more the revolutionary channel will grow and thrive versus traditional channels, creating opportunities for all new entrants.
Instead, the new distribution model poses the biggest threat to traditional taxi cab and car-for-hire companies, who are now losing both
customers and drivers to Uber and its competitors.
Uber-mania is even catching on in other industries. It seems like
there’s an app-based on-demand “Uber” for almost anything these
days—laundry and dry cleaning (Washio), in-home massage (Zeel),
24/7 delivery services (Postmates), and even booze (Minibar). In
fact, CEO Kalanick sees no end of future applications for Uber’s
services, well beyond just delivering people to their destinations.
Once Uber has established a dense network of cars in every city, he
predicts using the network to deliver everything from packages from
retailers to takeout food. As Kalanick puts it, “Once you’re delivering
cars in five minutes, there are a lot of other things you can deliver in
five minutes.”1

s the Uber story shows, good distribution strategies can contribute strongly to

customer value and create competitive advantage for a firm. But firms cannot bring
value to customers by themselves. Instead, they must work closely with other firms
in a larger value delivery network.

a

author comment
These are pretty hefty terms for a really
simple concept: A company can’t go it alone
in creating customer value. It must work
within a broader network of partners to
accomplish this task. Individual companies
and brands don’t compete; their entire
value delivery networks do.

supply chains and the Value Delivery network

Producing a product or service and making it available to buyers requires building relationships not only with customers but also with key suppliers and resellers in the company’s
supply chain. This supply chain consists of upstream and downstream partners. Upstream
from the company is the set of firms that supply the raw materials, components, parts,
information, finances, and expertise needed to create a product or service. Marketers,
however, have traditionally focused on the downstream side of the supply chain—the
marketing channels (or distribution channels) that look toward the customer. Downstream
marketing channel partners, such as wholesalers and retailers,
form a vital link between the firm and its customers.
The term supply chain may be too limited, as it takes a
make-and-sell view of the business. It suggests that raw materials, productive inputs, and factory capacity should serve as
the starting point for market planning. A better term would be
demand chain because it suggests a sense-and-respond view
of the market. Under this view, planning starts by identifying the needs of target customers, to which the company responds by organizing a chain of resources and activities with

the goal of creating customer value.
Yet, even a demand chain view of a business may be too
limited because it takes a step-by-step, linear view of purchase-production-consumption activities. Instead, most large
companies today are engaged in building and managing a
complex, continuously evolving value delivery network. As
defined in Chapter 2, a value delivery network is made up of
Value delivery network: in making and marketing even just its classic
the company, suppliers, distributors, and, ultimately, customcolas, Pepsi manages a huge network of people within the company plus
ers who “partner” with each other to improve the performance
thousands of outside suppliers, bottlers, retailers, and marketing service
of the entire system. For example, Pepsi makes great beverfirms that must work together to create customer value and establish the
ages. But to make and market just one of its many lines—say,
brand’s “Pepsi: live for now” positioning.
its classic colas—Pepsi manages a huge network of people
Vasiliy Baziuk/AP Images

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chapter 10: Marketing channels: Delivering customer Value

Value delivery network

A network composed of the company,
suppliers, distributors, and, ultimately,
customers who partner with each other
to improve the performance of the entire
system in delivering customer value.

author comment
In this section, we look at the
downstream side of the value delivery
network—the marketing channel
organizations that connect the company
and its customers. To understand their
value, imagine life without retailers—
say, without grocery stores
or department stores.

Marketing channel (distribution
channel)

A set of interdependent organizations
that help make a product or service
available for use or consumption by the
consumer or business user.

329

within the company, from marketing and sales people to folks in finance and operations.
It also coordinates the efforts of thousands of suppliers, bottlers, retailers ranging from
Kroger and Walmart to Papa John’s Pizza, and advertising agencies and other marketing
service firms. The entire network must function together to create customer value and establish the brand’s “Pepsi: Live for Now” positioning.
This chapter focuses on marketing channels—on the downstream side of the value
delivery network. We examine four major questions concerning marketing channels: What
is the nature of marketing channels, and why are they important? How do channel firms
interact and organize to do the work of the channel? What problems do companies face
in designing and managing their channels? What role do physical distribution and supply
chain management play in attracting and satisfying customers? In the next chapter, we will

look at marketing channel issues from the viewpoints of retailers and wholesalers.

the nature and importance
of Marketing channels
Few producers sell their goods directly to final users. Instead, most use intermediaries to
bring their products to market. They try to forge a marketing channel (or distribution
channel)—a set of interdependent organizations that help make a product or service available for use or consumption by the consumer or business user.
A company’s channel decisions directly affect every other marketing decision.
Pricing depends on whether the company works with national discount chains, uses
high-quality specialty stores, or sells directly to consumers online. The firm’s sales force
and communications decisions depend on how much persuasion, training, motivation,
and support its channel partners need. Whether a company develops or acquires certain
new products may depend on how well those products fit the capabilities of its channel
members.
Companies often pay too little attention to their distribution channels—sometimes
with damaging results. In contrast, many companies have used imaginative distribution systems to gain a competitive advantage. Enterprise Rent-A-Car revolutionized the
car-rental business by setting up off-airport rental offices. Apple turned the retail music
business on its head by selling music for the iPod via the Internet on iTunes. FedEx’s creative and imposing distribution system made it a leader in express package delivery. And
Amazon.com forever changed the face of retailing and became the Walmart of the Internet
by selling anything and everything without using physical stores.
Distribution channel decisions often involve long-term commitments to other firms.
For example, companies such as Ford, McDonald’s, or Nike can easily change their
advertising, pricing, or promotion programs. They can scrap old products and introduce
new ones as market tastes demand. But when they set up distribution channels through
contracts with franchisees, independent dealers, or large retailers, they cannot readily replace these channels with company-owned stores or Internet sites if the conditions change.
Therefore, management must design its channels carefully, with an eye on both today’s
likely selling environment and tomorrow’s as well.

how channel Members add Value
Why do producers give some of the selling job to channel partners? After all,

doing so means giving up some control over how and to whom they sell their products. Producers use intermediaries because they create greater efficiency in making
goods available to target markets. Through their contacts, experience, specialization,
and scale of operation, intermediaries usually offer the firm more than it can achieve
on its own.
figure 10.1 shows how using intermediaries can provide economies. Figure 10.1A
shows three manufacturers, each using direct marketing to reach three customers. This
system requires nine different contacts. Figure 10.1B shows the three manufacturers working through one distributor, which contacts the three customers. This system requires only


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Part 3: Designing a customer Value-Driven strategy and Mix

Manufacturer

1
2

Customer

Manufacturer

Customer

1

4

3
Marketing channel
intermediaries make
buying a lot easier for
consumers. Again,
think about life without
grocery retailers. How
would you go about
buying that 12-pack of
Coke or any of the
hundreds of other items
that you now routinely
drop into your shopping
cart?

4
Manufacturer

5

Customer

2

Manufacturer

Distributor

5
Customer

6
7
Manufacturer

3
8
9

Customer

A. Number of contacts without a distributor

Manufacturer

6
Customer

B. Number of contacts with a distributor

figure 10.1 how a Distributor reduces the number of channel transactions

six contacts. In this way, intermediaries reduce the amount of work that must be done by
both producers and consumers.
From the economic system’s point of view, the role of marketing intermediaries is
to transform the assortments of products made by producers into the assortments wanted
by consumers. Producers make narrow assortments of products in large quantities, but
consumers want broad assortments of products in small quantities. Marketing channel
members buy large quantities from many producers and break them down into the smaller
quantities and broader assortments desired by consumers.

For example, Unilever makes millions of bars of Lever 2000 hand soap each week.
However, you most likely only want to buy a few bars at a time. Therefore, big food, drug, and
discount retailers, such as Safeway, Walgreens, and Target, buy Lever 2000 by the truckload
and stock it on their stores’ shelves. In turn, you can buy a single bar of Lever 2000 along with
a shopping cart full of small quantities of toothpaste, shampoo, and other related products as
you need them. Thus, intermediaries play an important role in matching supply and demand.
In making products and services available to consumers, channel members add value
by bridging the major time, place, and possession gaps that separate goods and services
from those who use them. Members of the marketing channel perform many key functions. Some help to complete transactions:
●●

●●
●●
●●
●●

Information. Gathering and distributing information about consumers, producers,
and other actors and forces in the marketing environment needed for planning and
aiding exchange.
Promotion. Developing and spreading persuasive communications about an offer.
Contact. Finding and engaging customers and prospective buyers.
Matching. Shaping offers to meet the buyer’s needs, including 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.

Others help to fulfill the completed transactions:
●●
●●
●●

Physical distribution. Transporting and storing goods.
Financing. Acquiring and using funds to cover the costs of the channel work.
Risk taking. Assuming the risks of carrying out the channel work.

The question is not whether these functions need to be performed—they must be—
but rather who will perform them. To the extent that the manufacturer performs these
functions, its costs go up; therefore, its prices must be higher. When some of these functions are shifted to intermediaries, the producer’s costs and prices may be lower, but the


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chapter 10: Marketing channels: Delivering customer Value

331

intermediaries must charge more to cover the costs of their work. In dividing the work of
the channel, the various functions should be assigned to the channel members that can add
the most value for the cost.

number of channel levels
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

A marketing channel containing one or
more intermediary levels.

figure 10.2 consumer and
business Marketing channels

Producer

Producer

Companies can design their distribution channels to make products and services available
to customers in different ways. Each layer of marketing intermediaries that performs some
work in bringing the product and its ownership closer to the final buyer is a channel level.
Because both the producer and the final consumer perform some work, they are part of
every channel.
The number of intermediary levels indicates the length of a channel.
figure 10.2
shows both consumer and business channels of different lengths. Figure 10.2A shows
several common consumer distribution channels. Channel 1, called a direct marketing channel, has no intermediary levels—the company sells directly to consumers. For
example, Mary Kay Cosmetics and Amway sell their products through home and office
sales parties and online Web sites and social media; companies ranging from GEICO insurance to Omaha Steaks sell directly to customers via the Internet, mobile, and telephone.
The remaining channels in Figure 10.2A are indirect marketing channels, containing
one or more intermediaries.
Figure 10.2B shows some common business distribution channels. The business
marketer can use its own sales force to sell directly to business customers. Or it can
sell to various types of intermediaries, which in turn sell to these customers. Although
consumer and business marketing channels with even more levels can sometimes be

found, these are less common. From the producer’s point of view, a greater number
of levels means less control and greater channel complexity. Moreover, all the institutions in the channel are connected by several types of flows. These include the physical
flow of products, the flow of ownership, the payment flow, the information flow, and
the promotion flow. These flows can make even channels with only one or a few levels
very complex.

Using direct channels, a
company sells directly to
consumers (no surprise there!).
Examples: GEICO and Amway.

Producer

Using indirect channels, the company uses one or
more levels of intermediaries to help bring its products
to final buyers. Examples: most of the things you
buy—everything from toothpaste to cameras to cars.

Producer

Producer

Manufacturer’s
representatives
or sales branch

Wholesaler

Retailer

Retailer

Consumer

Consumer

Consumer

Channel 1

Channel 2

Channel 3

A. Consumer marketing channels

Producer

Business
distributor

Business
distributor

Business
customer

Business
customer

Business
customer

Channel 1

Channel 2

Channel 3

B. Business marketing channels


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author comment
Channels are made up of more than
just boxes and arrows on paper. They
are behavioral systems consisting of real
companies and people who interact
to accomplish their individual and
collective goals. Like groups of people,
sometimes they work well together
and sometimes they don’t.

channel behavior and organization
Distribution channels are more than simple collections of firms tied together by various

flows. They are complex behavioral systems in which people and companies interact to
accomplish individual, company, and channel goals. Some channel systems consist of only
informal interactions among loosely organized firms. Others consist of formal interactions
guided by strong organizational structures. Moreover, channel systems do not stand still—
new types of intermediaries emerge and whole new channel systems evolve. Here we look
at channel behavior and how members organize to do the work of the channel.

channel behavior

channel conflict

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

A marketing channel consists of firms that have partnered for their common good. Each channel member depends on the others. For example, a Ford dealer depends on Ford to design cars
that meet customer needs. In turn, Ford depends on the dealer to engage customers, persuade
them to buy Ford cars, and service the cars after the sale. Each Ford dealer also depends on
other dealers to provide good sales and service that will uphold the brand’s reputation. In fact,
the success of individual Ford dealers depends on how well the entire Ford marketing channel
competes with the channels of Toyota, GM, and other auto manufacturers.
Each channel member plays a specialized role in the channel. For example, Samsung’s
role is to produce electronics products that consumers will covet and create demand
through national advertising. Best Buy’s role is to display these Samsung products in convenient locations, answer buyers’ questions, and complete sales. The channel will be most
effective when each member assumes the tasks it can do best.
Ideally, because the success of individual channel members depends on the overall
channel’s success, all channel firms should work together smoothly. They should understand and accept their roles, coordinate their activities, and cooperate to attain overall channel goals. However, individual channel members rarely take such a broad view. Cooperating
to achieve overall channel goals sometimes means giving up individual company goals.
Although channel members depend on one another, they often act alone in their own shortrun best interests. They often disagree on who should do what and for what rewards. Such

disagreements over goals, roles, and rewards generate channel conflict.
Horizontal conflict occurs among firms at the same
level of the channel. For instance, some Ford dealers in
Chicago might complain that other dealers in the city
steal sales from them by pricing too low or advertising
outside their assigned territories. Or Holiday Inn franchisees might complain about other Holiday Inn operators
overcharging guests or giving poor service, hurting the
overall Holiday Inn image.
Vertical conflict, conflict between different levels of
the same channel, is even more common. For example,
McDonald’s has recently faced growing conflict with its
corps of almost 3,000 independent franchisees:2

channel conflict: growing McDonald’s franchisee discontent may explain
the increasing lack of smiles on the faces of both McDonald’s cashiers and
customers. “there’s a huge connection” between franchisee satisfaction and
customer service.
Seth Perlman/AP Images

In a recent company Webcast, based on rising customer
complaints that service isn’t fast or friendly enough,
McDonald’s told its franchisees that their cashiers need
to smile more. At the same time, it seems, the franchisees
weren’t very happy with McDonald’s, either. A recent
survey of franchise owners reflected growing franchisee
discontent with the corporation. Much of the conflict
stems from a recent slowdown in systemwide sales that
has both sides on edge. The most basic conflicts are
financial. McDonald’s makes its money from franchisee royalties based on total system sales. In contrast,
franchisees make money on margins—what’s left over

after their costs.


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chapter 10: Marketing channels: Delivering customer Value

333

To reverse the sales slump, McDonald’s has increased emphasis on Dollar Menu items,
a strategy that increases corporate sales but squeezes franchisee margins. Franchisees are also
grumbling about adding popular but more complex menu items, such as Snack Wraps, that
increase the top line for McDonald’s but add preparation and staffing costs for franchisees
while slowing down service. McDonald’s is also asking franchisees to make costly restaurant
upgrades and overhauls. As one survey respondent summarized, there’s “too much reliance on
price-pointing and discounting to drive top-line sales, which is where the corporate cow feeds.”
In all, the survey rates McDonald’s current franchisee relations at a decade-low 1.93 out of a
possible 5, in the “fair” to “poor” range. That fact might explain both the lack of smiles and the
increasing customer complaints. According to one restaurant consultant, “there’s a huge connection” between franchisee satisfaction and customer service.

Some conflict in the channel takes the form of healthy competition. Such competition can be good for the channel; without it, the channel could become passive and noninnovative. For example, the McDonald’s conflict with its franchisees might represent
normal give-and-take over the respective rights of the channel partners. However, severe
or prolonged conflict can disrupt channel effectiveness and cause lasting harm to channel
relationships. McDonald’s should manage the channel conflict carefully to keep it from
getting out of hand.

Vertical Marketing systems
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,
perhaps even at the expense of profits
for the system as a whole.

Vertical marketing system (VMs)

A channel structure in which producers,
wholesalers, 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.

figure 10.3 comparison of
conventional Distribution channel
with Vertical Marketing system

For the channel as a whole to perform well, each channel member’s role must be specified,
and channel conflict must be managed. The channel will perform better if it includes a
firm, agency, or mechanism that provides leadership and has the power to assign roles and
manage conflict.
Historically, conventional distribution channels have lacked such leadership and
power, often resulting in damaging conflict and poor performance. One of the biggest channel developments over the years has been the emergence of vertical marketing systems that
provide channel leadership. figure 10.3 contrasts the two types of channel arrangements.
A conventional distribution channel consists of one or more independent producers,
wholesalers, and retailers. Each is a separate business seeking to maximize its own profits,
perhaps even at the expense of the system as a whole. No channel member has much control over the other members, and no formal means exists for assigning roles and resolving
channel conflict.
In contrast, a vertical marketing system (VMS) consists of producers, wholesalers, and retailers acting as a unified system. One channel member owns the others, has

Producer
Producer

Wholesaler

Wholesaler

Retailer

Vertical marketing system—here’s
another fancy term for a simple
concept. It’s simply a channel in
which members at different levels
(hence, vertical) work together in
a unified way (hence, system) to
accomplish the work of the channel.

Retailer

Consumer

Consumer

Conventional
marketing
channel

Vertical
marketing

system


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contracts with them, or wields so much power that they must all cooperate. The VMS can
be dominated by the producer, the wholesaler, or the retailer.
We look now at three major types of VMSs: corporate, contractual, and administered.
Each uses a different means for setting up leadership and power in the channel.
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.

corporate VMs

A corporate VMS integrates successive stages of production and distribution under single
ownership. Coordination and conflict management are attained through regular organizational channels. For example, Sherwin-Williams, the largest U.S. coatings manufacturer, sells
its Sherwin-Williams-branded products exclusively through more than 4,000 company-owned
retail paint stores. And grocery giant Kroger owns and operates 38 manufacturing plants—17
dairies, 6 bakery plants, 5 grocery plants, 2 frozen dough plants, 2 beverage plants, 2 cheese
plants, 2 ice cream plants, and 2 meat plants—that give it factory-to-store channel control
over 40 percent of the more than 11,000 private-label items found on its shelves.3
Integrating the entire distribution chain—from its own design and manufacturing
operations to distribution through its own managed stores—has turned Spanish clothing
chain Zara into the world’s fastest-growing fast-fashion retailer:4

franchise organization

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

In recent years, fashion retailer Zara has attracted an army of loyal shoppers swarming to buy
its “cheap chic”—stylish designs that resemble those of big-name fashion houses but at moderate prices. However, Zara’s amazing success comes not just from what it sells but from how fast
its cutting-edge distribution system delivers what it sells. Zara delivers fast fashion—really fast
fashion. Thanks to vertical integration, Zara can take a new fashion concept through design,
manufacturing, and store-shelf placement in as little as three weeks, whereas competitors such
as H&M, Gap, or Benetton often take six months or more. And the resulting low costs let Zara
offer the very latest midmarket chic at downmarket prices.
Speedy design and distribution allow Zara to introduce a copious supply of new
fashions—at three times the rate of competitor introductions. Then Zara’s distribution
system supplies its stores with small shipments of new merchandise twice a week,
compared with competing chains’ outlets, which get large shipments seasonally, usually just four to six times per year. The combination of a large number of timely new

fashions delivered in frequent small batches gives Zara stores a continually updated
merchandise mix that brings customers back more often. Fast turnover also results
in less outdated and discounted merchandise. Rather than guessing about tomorrow’s
fashions, Zara can wait to see what customers are actually buying and then make that.

contractual VMs

franchising systems: through franchising,
two Men and a truck—“Movers Who care”—grew
quickly from two high school students with a
pickup truck to an international network of
330 franchise locations that’s experienced record
growth over the past six years.
Two Men and a Truck International

A contractual VMS consists of independent firms at different levels of production and distribution that join together through contracts to obtain more economies
or sales impact than each could achieve alone. Channel members coordinate their
activities and manage conflict through contractual agreements.
The franchise organization is the most common type of contractual relationship. In this system, a channel member called a franchisor links several stages
in the production-distribution process. In the United States alone, some 780,000
franchise outlets account for more than $889 billion of economic output. Industry
analysts estimate that a new franchise outlet opens somewhere in the United States
every eight minutes and that about one out of every 12 retail business outlets is a
franchised business.5
Almost every kind of business has been franchised—from motels and fastfood restaurants to dental centers and dating services, from wedding consultants
and handyman services to funeral homes, fitness centers, and moving services.
For example, through franchising, Two Men and a Truck moving services—
“Movers Who Care”—grew quickly from two high school students looking to
make extra money with a pickup truck to an international network of 330 franchise
locations that’s experienced record growth over the past six years and completed

more than 5.5 million moves.6
There are three types of franchises. The first type is the manufacturersponsored retailer franchise system—for example, Ford and its network of


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chapter 10: Marketing channels: Delivering customer Value

administered VMs

A vertical marketing system that
coordinates successive stages of
production and distribution 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.

335

independent franchised dealers. The second type is the manufacturer-sponsored wholesaler franchise system—Coca-Cola licenses bottlers (wholesalers) in various world markets that buy Coca-Cola syrup concentrate and then bottle and sell the finished product to
retailers locally. The third type is the service-firm-sponsored retailer franchise system—
for example, Burger King and its nearly 12,100 franchisee-operated restaurants around the
world. Other examples can be found in everything from auto rentals (Hertz, Avis), apparel
retailers (The Athlete’s Foot, Plato’s Closet), and motels (Holiday Inn, Hampton Inn) to
supplemental education (Huntington Learning Center, Mathnasium) and personal services
(Great Clips, Mr. Handyman, Anytime Fitness).

The fact that most consumers cannot tell the difference between contractual and corporate VMSs shows how successfully the contractual organizations compete with corporate chains. The next chapter presents a fuller discussion of the various contractual VMSs.

administered VMs

In an administered VMS, leadership is assumed not through common ownership or contractual ties but through the size and power of one or a few dominant channel members.
Manufacturers of a top brand can obtain strong trade cooperation and support from resellers. For example, GE, P&G, and Apple can command unusual cooperation from many
resellers regarding displays, shelf space, promotions, and price policies. In turn, large
retailers such as Walmart, Home Depot, Kroger, and Walgreens can exert strong influence
on the many manufacturers that supply the products they sell.
For example, in the normal push and pull between Walmart and its consumer goods
suppliers, giant Walmart—the biggest grocer in the United States with nearly 30 percent
share of all U.S. grocery sales—usually gets its way. Take supplier Clorox, for instance.
Although The Clorox Company’s strong consumer brand preference gives
it significant negotiating power, Walmart simply holds more cards. Sales
to Walmart make up 26 percent of Clorox’s sales, whereas Clorox products account for only one-third of 1 percent of Walmart’s purchases, making Walmart by far the dominant partner. Things get even worse for CalMaine Foods and its Eggland’s Best brand, which relies on Walmart for
nearly one-third of its sales but tallies only about one-tenth of 1 percent
of Walmart’s volume. For such brands, maintaining a strong relationship
with the giant retailer is crucial.7

horizontal Marketing systems

horizontal marketing systems: general Mills and nestlé
operate a joint venture—cereal Partners Worldwide—that
markets general Mills big g cereal brands outside north
america.
Sonny Meddle/Rex Features/Presselect/Alamy

Another channel development is the horizontal marketing system, in
which two or more companies at one level join together to follow a new
marketing opportunity. By working together, companies can combine

their financial, production, or marketing resources to accomplish more
than any one company could alone.
Companies might join forces with competitors or noncompetitors.
They might work with each other on a temporary or permanent basis,
or they may create a separate company. For example, competing big
media companies Fox Broadcasting, Disney-ABC, and NBCUniversal
(Comcast) jointly own and market Hulu, the successful online subscription service that provides on-demand streaming of TV shows, movies,
and other video content. Together, they compete more effectively against
digital streaming competitors such as Netflix. Walmart partners with
noncompetitor McDonald’s to place “express” versions of McDonald’s
restaurants in Walmart stores. McDonald’s benefits from Walmart’s heavy
store traffic, and Walmart keeps hungry shoppers from needing to go elsewhere to eat.
Such channel arrangements also work well globally. For example,
competitors General Mills and Nestlé operate a joint venture—Cereal
Partners Worldwide—to market General Mills Big G cereal brands in
130 countries outside North America. General Mills supplies a kitchen


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336

Part 3: Designing a customer Value-Driven strategy and Mix

cabinet full of quality cereal brands, whereas Nestlé contributes its extensive international
distribution channels and local market knowledge. The 25-year-old alliance produces $1.1
billion in revenues for General Mills.8

Multichannel Distribution systems
Multichannel distribution system

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

Disintermediation

The cutting out of marketing channel
intermediaries by product or service
producers or the displacement of
traditional resellers by radical new
types of intermediaries.

In the past, many companies used a single channel to sell to a single market or market segment. Today, with the proliferation of customer segments and channel possibilities, more
and more companies have adopted multichannel distribution systems. Such multichannel marketing occurs when a single firm sets up two or more marketing channels to reach
one or more customer segments.
figure 10.4 shows a multichannel marketing system. In the figure, the producer
sells directly to consumer segment 1 using catalogs, online, and mobile channels and
reaches consumer segment 2 through retailers. It sells indirectly to business segment 1
through distributors and dealers and to business segment 2 through its own sales force.
These days, almost every large company and many small ones distribute through
multiple channels. For example, John Deere sells its familiar green-and-yellow lawn and
garden tractors, mowers, and outdoor power products to consumers and commercial users through several channels, including John Deere retailers, Lowe’s home improvement
stores, and online. It sells and services its tractors, combines, planters, and other agricultural equipment through its premium John Deere dealer network. And it sells large construction and forestry equipment through selected large, full-service John Deere dealers
and their sales forces.
Multichannel distribution systems offer many advantages to companies facing large
and complex markets. With each new channel, the company expands its sales and market
coverage and gains opportunities to tailor its products and services to the specific needs of
diverse customer segments. But such multichannel systems are harder to control, and they

can generate conflict as more channels compete for customers and sales. For example,
when John Deere first began selling selected consumer products through Lowe’s home
improvement stores, many of its independent dealers complained loudly. To avoid such
conflicts in its online marketing channels, the company routes all of its online sales to
John Deere dealers.

changing channel organization
Changes in technology and the explosive growth of direct and online marketing are having a profound impact on the nature and design of marketing channels. One major trend is
toward disintermediation—a big term with a clear message and important consequences.

figure 10.4 Multichannel
Distribution system

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chapter 10: Marketing channels: Delivering customer Value

337

Disintermediation occurs when product or service producers cut out intermediaries and
go directly to final buyers or when radically new types of channel intermediaries displace
traditional ones.
Thus, in many industries, traditional intermediaries are dropping by the wayside, as is

the case with online marketers taking business from traditional brick-and-mortar retailers.
For example, online music download services such as iTunes
and Amazon MP3 have pretty much put traditional musicstore retailers out of business. In turn, streaming music
services such as Spotify and Vevo are now disintermediating
digital download services—digital downloads peaked last
year while music streaming increased 32 percent.
Disintermediation presents both opportunities and problems for producers and resellers. Channel innovators who
find new ways to add value in the channel can displace
traditional resellers and reap the rewards. In turn, traditional
intermediaries must continue to innovate to avoid being swept
aside. For example, when Netflix pioneered online DVD-bymail video rentals, it sent traditional brick-and-mortar video
stores such as Blockbuster into ruin. Then Netflix itself faced
disintermediation threats from an even hotter channel—video
streaming. But instead of simply watching developments,
Disintermediation: streaming music services such as spotify are
Netflix has led them.
rapidly disintermediating both traditional music-store retailers and even
music download services such as itunes.
Similarly, superstore booksellers Borders and Barnes &
Dado Ruvic/Reuters/Corbis
Noble pioneered huge book selections and low prices, shutting down most small independent bookstores. Then along came Amazon.com, which
threatened even the largest brick-and-mortar bookstores. Amazon.com almost singlehandedly bankrupted Borders in less than 10 years. Now, both offline and online sellers of
physical books are being threatened by digital book downloads and e-readers. Rather than
yielding to digital developments, however, Amazon.com is leading them with its highly
successful Kindle e-readers and tablets. By contrast, Barnes & Noble—the giant that put
so many independent bookstores out of business—was a latecomer with its struggling
Nook e-reader and now finds itself locked in a battle for survival.9
Like resellers, to remain competitive, product and service producers must develop
new channel opportunities, such as the Internet and other direct channels. However, developing these new channels often brings them into direct competition with their established
channels, resulting in conflict. To ease this problem, companies often look for ways to

make going direct a plus for the entire channel (see Marketing at Work 10.1).
For example, Volvo Car Group (now owned by Chinese car maker Geeley) recently
announced plans to start selling Volvo vehicles online in all of its markets. Some 80 percent of Volvo buyers already shop online for other goods, so cars seem like a natural extension. Few auto makers have tried selling directly, with the exception of Tesla, which sells
its all-electric cars online, bypassing dealers altogether. Other car companies worry that
selling directly would alienate their independent dealer networks. “If you say e-commerce,
initially dealers get nervous,” says Volvo’s head of marketing. So, to avoid channel conflicts, Volvo will pass all online sales through established dealers for delivery. In that way,
boosting sales through direct marketing will benefit both Volvo and its channel partners.10

linking the concePts
Stop here for a moment and apply the distribution channel concepts we’ve discussed so far.
●●
●●

Compare the Zara and Ford channels. Draw a diagram that shows the types of intermediaries in
each channel. What kind of channel system does each company use?
What are the roles and responsibilities of the members in each channel? How well do these channel members work together toward overall channel success?


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Marketing at Work

10.1

Zara: though Disintermediation to the top of World fashion
Unlike their competitors Gap, Beneton, and H&M, Spanish

because of its lack of originality, as shoppers around the world
clothing and accessories retailer Zara controls most of the steps
are thrilled to buy Zara’s catwalk copycat designs at affordable
in the supply-chain, designing, manufacturing, and distributing
prices.
its products. So while some competitors outsource all producZara stores are located in city center streets, are owned
tion to developing countries, particularly in Asia, Zara makes
by the company, and thereby have total control of its image
its most fashionable items—half of all its merchandise—at a
and sales data. Zara uses its stores to find out what consumdozen company-owned factories in Spain and Portugal. Zara,
ers want, what styles are selling best, what colors are in
which was founded in 1975 and is the flagship brand of the
demand, and which items are hot sellers. The data are fed
Inditex group, has over 2,000 stores strategically located in
back to Zara headquarters in Spain through a sophisticated
leading cities, such as New York, Paris, Tokyo, and Buenos
marketing information system. At the end of each day, Zara
Aires, and operates in 88 countries in Europe, South America,
sales assistants report inventory levels to the respective store
Oceania, and Africa. In the fiscal year 2014, Inditex had sales
manager, who immediately informs Zara’s central design and
of $19.7 billion, which is an 8 percent increase, far stronger
distribution departments about what consumers are buying,
than its competitors, making Zara the world’s largest apparel
asking for, and avoiding, all of which have to be recorded
retailer—not despite but because of its production and manuaccordingly. Top-selling items are requested by the store
facturing strategy.
managers and reach the store within one to two days. At the
The secret to its success stems from Zara’s vertically intesame time, the commercial team liaises with the designers
grated marketing system (VMS), which combines successive

and sales trends are identified, either from evidence in stores
stages of production and distribution under single ownership.
or the catwalk, to develop new products to follow them. New
Controlling the entire distribution chain from design and profashions are produced in relatively small batches so failures
duction to its own worldwide distribution network has turned
can be disregarded after their first appearance and hits can be
Zara into the world’s fastest growing retailer. Zara resisted
followed quickly. By producing smaller batches of clothing,
the temptation of locating its production in Asian countries
Zara adds an air of exclusivity that encourages customers to
like China, where labor cost is low. By going against the
shop more often. As garments are made in small production
trend, Zara was able to hold control over its supply chain.
runs and no item stays in the shops for more than four weeks,
As a vertically integrated retailer, Zara pursues a disinterZara shoppers are encouraged to make repeat visits. Whereas
mediation strategy, which as the name suggests involves the
the average high-street store in Spain expects shoppers to
removal of intermediaries in a supply chain. Instead of going
visit three times a year on average, Zara shoppers visit up to
through traditional distribution channels (which has distribu17 times.
tors, wholesalers, brokers, or agents), Zara deals with every
customer directly. The company designs, produces, and distributes the products itself.
Disintermediation means that Zara has to monitor
all its processes clearly in order to be efficient and fast.
Effective disintermediation and vertical integration makes
Zara faster, more flexible, and more efficient than international competitors such as Gap and H&M. Zara can make
a new line from start to finish in less than 15 days and a
look seen on MTV can be in Zara stores within a month,
versus an industry average of 6 months. This is a staggering pace, helped by the fact that between 51 to 55 percent
of its clothing is manufactured in what the company describes as “proximity” markets—Spain, Portugal, Turkey

and Morocco—instead of Asia. Zara’s key competitive
advantage lies in its ability to match fashion trends that
change quickly. It is no wonder that versions of latest
designs by fashion designers in Paris, London, New York,
or Tokyo are in Zara stores within a very short time of apZara’s key competitive advantage lies in its ability to match fashion trends that
pearing on the runway. One of the most fascinating things change quickly.
about Zara is that it became popular not in spite of but VannPhotography/Shutterstock


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chapter 10: Marketing channels: Delivering customer Value

As fresh inventory is key to Zara’s sales strategy, its stores
are stocked with new designs twice a week faster than most of
its competitors. The result of this structure is that the product
range in Zara stores evolves quickly. Rather than relying on
one product range per season, Zara promotes four or five waves
of new products after the initial seasonal launch. In the stores,
around 60 percent of Zara’s products are lasting and the remaining 40 percent vary continually. Thus, the retailer can offer considerably more products than its rivals. It launches about
30,000 model items annually compared with 10,000 items for
its main competitors. Consequently, the chain does not have to
slash prices, as rivals often do, to move mass quantities of outof-season stock.
Zara has grown with little to no advertising, and it has
been observed that it hardly even has a marketing department.
Instead of spending money on TV spots or print ads, the company invests heavily in the design, appeal, and location of its
shops, which are the best display and advertisement for Zara
and its brand image. Zara’s flexibility and speed has helped
the fashion retailer to expand and grow steadily. In the last few
years, like-for-like sales have grown by 17 percent and Zara
wants to expand its shop space by 8 to 10 percent every year

for the next three to five years.
Zara continues to enhance its amazing channel management system and disintermediation strategy, which has left
thousands of fashion retailers worldwide pop-eyed. It is the
prototype of a “fast-fashion” retailer. Daniel Piette, the chairman of LVMH Investment Funds and the former fashion
director for the luxury house that owns brands like Louis
Vuitton, Givenchy, Marc Jacobs, and Hublot has hailed Zara

author comment
Like everything else in marketing, good
channel design begins with analyzing
customer needs. Remember, marketing
channels are really customer value
delivery networks.

Marketing channel design

Designing effective marketing channels
by analyzing customer needs, setting
channel objectives, identifying major
channel alternatives, and evaluating
those alternatives.

339

as possibly the most innovative and devastating retailer.
Stacey Cartwright, former CFO of Burberry Group plc, stated
that Zara is a fantastic case study of how to get products to
the stores at amazing speeds; indeed, Burberry has an eye
on their techniques. The so-called Spanish success story has
reset the boundaries for what shoppers expect from a highstreet clothing store and promises to continue to thrive as one

of the world’s biggest fashion retailers.
Sources: “Zara,” Intidex, Rupal Parekh,
“How Zara Ballooned into a Multi-Billion Dollar Brand without Advertising,”
Advertising Age, August 19, 2013, />zara-grew-a-multi-billion-dollar-brand-sans-ads/243730/; “ZARA and Its
Awesome Supply Chain Management,” Internationalas, August 17, 2014,
“Zara on the World’s Most Valuable Brands,”
Forbes, May 2015, Walter Loeb,
“Zara Leads in Fast Fashion,” Forbes, March 30, 2015, />sites/walterloeb/2015/03/30/zara-leads-in-fast-fashion/; Svend Hollensen and
Marc Opresnik, Marketing: A Relationship Perspective, 2nd ed. (Vahlen 2015);
“The Best 100 Brands,” Interbrand, />zara/; Graham Ruddick, “How Zara Became the World’s Biggest Fashion
Retailer,” The Telegraph, October 20, 2014, />finance/newsbysector/retailandconsumer/11172562/How-Inditex-became-theworlds-biggest-fashion-retailer.html; “Zara: Managing Chain of Value and
Driving CSR with Consumers,” JL Nueno, />index.php/2011/07/29/gestionando-la-cadena-de-valor-y-accionando-la-rsccon-los-consumidores/?lang=en; The Economist, Chain Reaction, February
2, 2002, pp. 1–3; C. Roux, “The Reign of Spain,” The Guardian, October 28,
2002, pp. 6–7; “Store Wars: Fast Fashion, The Monet”, The Money Programme,
BBC, February19, 2003, television; A. Mitthell, “When Push Comes to Shove,
It’s All About Pull,” Marketing Week, January 9, 2003, pp. 26–27; K. Capell,
“Zara Thrives By Breaking All the Rules,” Business Week, October 20, 2008,
p. 66; M. Johnson and A. Falstead, “Inditex Breaks New Ground for Season in
the South,” Financial Times, May 2011, p. 17.

channel Design Decisions
We now look at several channel design decisions manufacturers face. In designing marketing channels, manufacturers struggle between what is ideal and what is practical. A new
firm with limited capital usually starts by selling in a limited market area. In this case,
deciding on the best channels might not be a problem: The problem might simply be how
to convince one or a few good intermediaries to handle the line.
If successful, the new firm can branch out to new markets through existing intermediaries. In smaller markets, the firm might sell directly to retailers; in larger markets, it
might sell through distributors. In one part of the country, it might grant exclusive franchises; in another, it might sell through all available outlets. Then it might add an online
store that sells directly to hard-to-reach customers. In this way, channel systems often
evolve to meet market opportunities and conditions.
For maximum effectiveness, however, channel analysis and decision making should be

more purposeful. Marketing channel design calls for analyzing consumer needs, setting
channel objectives, identifying major channel alternatives, and evaluating those alternatives.

analyzing consumer needs
As noted previously, marketing channels are part of the overall customer value delivery
network. Each channel member and level adds value for the customer. Thus, designing the


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340

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marketing channel starts with finding out what target consumers want from the channel.
Do consumers want to buy nearby, or are they willing to travel to more centralized locations? Would customers rather buy in person, by phone, or online? Do they value breadth
of assortment, or do they prefer specialization? Do consumers want many add-on services
(delivery, installation, repairs), or will they obtain these services elsewhere? The faster the
delivery, the greater the assortment provided, and the more add-on services supplied, the
greater the channel’s service level.
Providing the fastest delivery, the greatest assortment, and the most services, however,
may not be possible, practical, or desired. The company and its channel members may not
have the resources or skills needed to provide all the desired services. Also, higher levels
of service result in higher costs for the channel and higher prices for consumers. The success of modern discount retailing shows that consumers often accept lower service levels
in exchange for lower prices.
Many companies, however, position themselves on
higher service levels, and customers willingly pay the
higher prices. For example, your local independently
owned Ace Hardware store probably provides more
personalized service, a more convenient location, and

less shopping hassle than the nearest huge Home Depot
or Lowe’s store. As a result, it also charges somewhat
higher prices. To loyal Ace customers, the convenience
and higher service levels are well worth the price. Ace
positions itself as “The helpful place.” Says the company: “While others have become large and impersonal,
at Ace, we’ve remained small and very personal. That’s
why we say a visit to Ace is like a visit to your neighbor.”
In his review on Yelp, one loyal Ace customer agrees:11
I have become a convert from Lowe’s/Home Depot to Ace
for two reasons. For one, it’s much easier to get in and out
of and it’s closer to my house. Second, and most imporMeeting customers’ channel service needs: ace hardware positions itself as
tantly, upon entering the store a knowledgeable employee
“the helpful place.” to loyal ace customers, the convenience of smaller stores and
will greet me and ask how they may help. Then they will
the personal service they receive are well worth ace’s somewhat higher prices.
lead me to where I need to go and boom, I’m done. At
ZUMA Press, Inc/Alamy
Lowe’s I end up wandering around the caverns of that
building—back and forth, is it here? down there? did I pass it?—until I’m exhausted. At Ace, the
time and energy saved more than makes up for an increase in cost. Plus, they’re very friendly.

Thus, companies must balance consumer needs not only against the feasibility and
costs of meeting these needs but also against customer price preferences.

setting channel objectives
Companies should state their marketing channel objectives in terms of targeted levels of
customer service. Usually, a company can identify several segments wanting different levels of service. The company should decide which segments to serve and the best channels
to use in each case. In each segment, the company wants to minimize the total channel cost
of meeting customer service requirements.
The company’s channel objectives are also influenced by the nature of the company, its products, its marketing intermediaries, its competitors, and the environment.

For example, the company’s size and financial situation determine which marketing
functions it can handle itself and which it must give to intermediaries. Companies selling perishable products, for example, may require more direct marketing to avoid delays
and too much handling.
In some cases, a company may want to compete in or near the same outlets that carry
competitors’ products. For example, Maytag and other appliance makers want their products displayed alongside competing brands to facilitate comparison shopping. In other


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341

cases, companies may avoid the channels used by competitors. The Pampered Chef, for
instance, sells high-quality kitchen tools directly to consumers through its corps of more
than 60,000 consultants worldwide rather than going head-to-head with other kitchen tool
makers for scarce positions in retail stores. And Stella & Dot sells quality jewelry through
more than 30,000 independent reps—called stylists—who hold Tupperware-like in-home
“trunk shows.”12 GEICO and USAA primarily market insurance and banking products to
consumers via phone and Internet channels rather than through agents.
Finally, environmental factors such as economic conditions and legal constraints may
affect channel objectives and design. For example, in a depressed economy, producers
will want to distribute their goods in the most economical way, using shorter channels and
dropping unneeded services that add to the final price of the goods.

identifying Major alternatives
When the company has defined its channel objectives, it should next identify its major
channel alternatives in terms of the types of intermediaries, the number of intermediaries,
and the responsibilities of each channel member.

types of intermediaries

A firm should identify the types of channel members available to carry out its channel
work. Most companies face many channel member choices. For example, until recently,
Dell sold directly to final consumers and business buyers only through its sophisticated
phone and online marketing channel. It also sold directly to large corporate, institutional,
and government buyers using its direct sales force. However, to reach more consumers and
match competitors such as Samsung and Apple, Dell now sells indirectly through retailers such as Best Buy, Staples, and Walmart. It also sells indirectly through value-added
resellers, independent distributors and dealers that develop computer systems and applications tailored to the special needs of small and medium-sized business customers.
Using many types of resellers in a channel provides both benefits and drawbacks. For
example, by selling through retailers and value-added resellers in addition to its own direct
channels, Dell can reach more and different kinds of buyers. However, these are more difficult to manage and control. In addition, the direct and indirect channels compete with
each other for many of the same customers, causing potential conflict. In fact, Dell often
finds itself “stuck in the middle,” with its direct sales reps complaining about competition
from retail stores, whereas its value-added resellers complain that the direct sales reps are
undercutting their business.

number of Marketing intermediaries

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 that
are willing to carry the company’s
products.

Companies must also determine the number of channel members to use at each level.
Three strategies are available: intensive distribution, exclusive distribution, and selective
distribution. Producers of convenience products and common raw materials typically seek
intensive distribution—a strategy in which they stock their products in as many outlets as
possible. These products must be available where and when consumers want them. For example, toothpaste, candy, and other similar items are sold in millions of outlets to provide
maximum brand exposure and consumer convenience. Kraft, Coca-Cola, Kimberly-Clark,
and other consumer goods companies distribute their products in this way.
By contrast, some producers purposely limit the number of intermediaries handling
their products. The extreme form of this practice is exclusive distribution, in which the
producer gives only a limited number of dealers the exclusive right to distribute its products in their territories. Exclusive distribution is often found in the distribution of luxury
brands. Breitling watches—positioned as “Instruments for Professionals” and selling at
prices from $5,000 to more than $100,000—are sold by only a few authorized dealers in
any given market area. For example, the brand sells through only one jeweler in Chicago
and only six jewelers in the entire state of Illinois. Exclusive distribution enhances
Breitling’s distinctive positioning and earns greater dealer support and customer service.
Between intensive and exclusive distribution lies selective distribution—the use
of more than one but fewer than all of the intermediaries who are willing to carry a


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company’s products. Most consumer electronics, furniture, and home appliance
brands are distributed in this manner. For example, outdoor power equipment
maker STIHL doesn’t sell its chain saws, blowers, hedge trimmers, and other
products through mass merchandisers such as Lowe’s, Home Depot, or Sears.
Instead, it sells through a select corps of independent hardware and lawn and
garden dealers. By using selective distribution, STIHL can develop good working relationships with dealers and expect a better-than-average selling effort.
Exclusive distribution also enhances the STIHL brand’s image and allows for
higher markups resulting from greater value-added dealer service. “We count on
our select dealers every day and so can you,” says one STIHL ad.

responsibilities of channel Members

selective distribution: stihl sells its chain
saws, blowers, hedge trimmers, and other products
through a select corps of independent hardware
and lawn and garden retailers. “We count on
them every day and so can you.”
STIHL Incorporated

The producer and intermediaries need to agree on the terms and responsibilities of each channel member. They should agree on price policies, conditions
of sale, territory rights, and the specific services to be performed by each party.
The producer should establish a list price and a fair set of discounts for the intermediaries. It must define each channel member’s territory, and it should be
careful about where it places new resellers.
Mutual services and duties need to be spelled out carefully, especially in
franchise and exclusive distribution channels. For example, McDonald’s provides franchisees with promotional support, a record-keeping system, training at
Hamburger University, and general management assistance. In turn, franchisees
must meet company standards for physical facilities and food quality, cooperate
with new promotion programs, provide requested information, and buy specified food products.

evaluating the Major alternatives
Suppose a company has identified several channel alternatives and wants to select the one
that will best satisfy its long-run objectives. Each alternative should be evaluated against
economic, control, and adaptability criteria.
Using economic criteria, a company compares the likely sales, costs, and profitability
of different channel alternatives. What will be the investment required by each channel
alternative, and what returns will result? The company must also consider control issues.
Using intermediaries usually means giving them some control over the marketing of the
product, and some intermediaries take more control than others. Other things being equal,
the company prefers to keep as much control as possible. Finally, the company must apply
adaptability criteria. Channels often involve long-term commitments, yet the company
wants to keep the channel flexible so that it can adapt to environmental changes. Thus, to
be considered, a channel involving long-term commitments should be greatly superior on
economic and control grounds.

Designing international Distribution channels
International marketers face many additional complexities in designing their channels.
Each country has its own unique distribution system that has evolved over time and
changes very slowly. These channel systems can vary widely from country to country.
Thus, global marketers must usually adapt their channel strategies to the existing structures within each country.
In some markets, the distribution system is complex, competitive, and hard to
penetrate. For example, many Western companies find India’s distribution system
difficult to navigate. Large discount, department store, and supermarket retailers still
account for only a small portion of the huge Indian market. Instead, most shopping is done in small neighborhood stores called kirana shops, run by their owners
and popular because they offer personal service and credit. In addition, large Western
retailers have difficulty dealing with India’s complex government regulations and poor
infrastructure.


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343

Distribution systems in developing countries may be
scattered, inefficient, or altogether lacking. For example,
China’s rural markets are highly decentralized, made of
many distinct submarkets, each with its own subculture. And,
because of inadequate distribution systems, most companies
can profitably access only the small portion of China’s massive population located in affluent cities. China’s distribution
system is so fragmented that logistics costs to wrap, bundle,
load, unload, sort, reload, and transport goods amount to 18
percent of the nation’s GDP, far higher than in most other
countries. (In comparison, U.S. logistics costs account for
about 8.5 percent of the nation’s GDP.) After years of effort,
even Walmart executives admit that they have been unable to
assemble an efficient supply chain in China.13
Sometimes local conditions can greatly influence
how a  company distributes products in global markets. For
international distribution: in the huge indian market, most shopping is
example, in low-income neighborhoods in Brazil where
done in small neighborhood stores call kirana shops, run by their owners
consumers have limited access to supermarkets, Nestlé supand popular because they offer personal service and credit.
plements its distribution with thousands of self-employed
Frank Bienewald/imageBROKER/Alamy
salespeople who sell Nestlé products from refrigerated carts
door to door. And in big cities in Asia and Africa, where crowded streets and high real
estate costs make drive-thrus impractical, fast-food restaurants such as McDonald’s and
KFC offer delivery. Legions of motorbike delivery drivers in colorful uniforms dispense
Big Macs and buckets of chicken to customers who call in. More than 30 percent of

McDonald’s total sales in Egypt and 12 percent of its Singapore sales come from delivery. Similarly, for KFC, delivery accounts for nearly half of all sales in Kuwait and a third
of sales in Egypt.14
Thus, international marketers face a wide range of channel alternatives. Designing
efficient and effective channel systems between and within various country markets
poses a difficult challenge. We discuss international distribution decisions further in
Chapter 15.

author comment
Now it’s time to implement the chosen
channel design and work with selected
channel members to manage and
motivate them.

Marketing channel management

Selecting, managing, and motivating
individual channel members and
evaluating their performance over time.

channel Management Decisions
Once the company has reviewed its channel alternatives and determined the best channel
design, it must implement and manage the chosen channel. Marketing channel management calls for selecting, managing, and motivating individual channel members and
evaluating their performance over time.

selecting channel Members
Producers vary in their ability to attract qualified marketing intermediaries. Some producers have no trouble signing up channel members. For example, when Toyota first introduced its Lexus line in the United States, it had no trouble attracting new dealers. In fact, it
had to turn down many would-be resellers.
At the other extreme are producers that have to work hard to line up enough qualified
intermediaries. For example, when Timex first tried to sell its inexpensive watches through
regular jewelry stores, most jewelry stores refused to carry them. The company then managed to get its watches into mass-merchandise outlets. This turned out to be a wise decision because of the rapid growth of mass merchandising.

Even established brands may have difficulty gaining and keeping their desired distribution, especially when dealing with powerful resellers. For example, you won’t find
Marlboro, Winston, Camel, or any other cigarette brand at your local CVS pharmacy store.
CVS Caremark recently announced that it will no longer sell cigarettes in its stores,
despite the resulting loss of more than $2 billion in annual sales. “This is the right thing to
do,” says the company. “We came to the decision that cigarettes and providing healthcare


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just don’t go together in the same setting.” Target dropped cigarettes nearly 20 years ago, and public advocates are pressuring
Walmart to do the same. If the major discount stores and other
drugstore chains such as Walgreens and Rite Aid follow suit,
Philip Morris, R.J. Reynolds, and other tobacco companies will
have to seek new channels for selling their brands.15
When selecting intermediaries, the company should determine what characteristics distinguish the better ones. It will
want to evaluate each channel member’s years in business, other
lines carried, location, growth and profit record, cooperativeness, and reputation.

Managing and Motivating channel Members
Once selected, channel members must be continuously managed and motivated to do their best. The company must sell not
only through the intermediaries but also to and with them. Most
companies see their intermediaries as first-line customers and
partners. They practice strong partner relationship management
to forge long-term partnerships with channel members. This
creates a value delivery system that meets the needs of both the
company and its marketing partners.

In managing its channels, a company must convince suppliers
and distributors that they can succeed better by working together
selecting channels: even established brands may have difficulty
as a part of a cohesive value delivery system. Companies must
keeping desired channels. cVs caremark’s decision to stop selling
work in close harmony with others in the channel to find better
cigarettes leaves tobacco companies seeking new sales channels.
ways to bring value to customers. Thus, Amazon and P&G work
CVS Caremark Corporation
closely to accomplish their joint goal of selling consumer package
goods profitably online. Through its Vendor Flex program, Amazon operates within P&G
warehouses to reduce distribution costs and speed up delivery, benefiting both the partnering
companies and the customers they jointly serve (see Marketing at Work 10.2).
Similarly, heavy-equipment manufacturer Caterpillar works hand-in-hand with its
superb dealer network—together they dominate the world’s construction, mining, and logging equipment business:

This is the right thing to do.

Heavy-equipment manufacturer Caterpillar produces innovative, high-quality industrial
equipment products. But ask anyone at Caterpillar, and they’ll tell you that the most important reason for Caterpillar’s dominance is its outstanding distribution network of 189
independent dealers in more than 180 countries. Dealers are the ones on the front line.
Once the product leaves the factory, the dealers take over. They’re the ones that customers see. So rather than selling to or through its dealers, Caterpillar treats dealers as inside
partners. When a big piece of Caterpillar equipment breaks down, customers know that they
can count on both Caterpillar and its dealer network for support. A strong dealer network
makes for a strong Caterpillar, and the other way around. On a deeper level, dealers play a
vital role in almost every aspect of Caterpillar’s operations, from product design and delivery to service and support. As a result of its close partnership with dealers, the big Cat
is purring. Caterpillar dominates the world’s markets for heavy construction, mining, and
logging equipment. Its familiar yellow tractors, crawlers, loaders, bulldozers, and trucks
capture well over a third of the worldwide heavy-equipment business, more than twice that
of number-two Komatsu.

Many companies are now installing integrated high-tech partnership relationship
management (PRM) systems to coordinate their whole-channel marketing efforts. Just
as they use customer relationship management (CRM) software systems to help manage
relationships with important customers, companies can now use PRM and supply chain
management (SCM) software to help recruit, train, organize, manage, motivate, and evaluate relationships with channel partners.


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Marketing at Work

345

10.2

amazon and P&g: taking channel Partnering to a new level
Until recently, if you ordered Bounty paper towels, Pampers
reduces the costs of storing bulky items, such as diapers and
diapers, Charmin toilet paper, or any of the dozens of other
toilet paper, in its own distribution centers, and it frees up
P&G consumer products from Amazon.com, they probably
space in Amazon’s centers for more higher-margin goods.
came to your doorstep by a circuitous distribution route. The
The sharing arrangement lets Amazon extend its consumer
paper towels, for example, might well have been produced in
package goods selection without building more distribution
P&G’s large northeastern Pennsylvania factory and shipped
center space. For example, the P&G warehouse also stocks

by the trailer-truck load to its nearby Tunkhannock wareother popular P&G household brands, from Gillette razors
house, where they were unloaded and repacked with other
to Pantene shampoo to Tide laundry detergent. Finally,
P&G goods and shipped to Amazon’s Dinwiddie, Virginia,
locating at the source guarantees Amazon immediate availfulfillment center. At the fulfillment center, they were
ability and facilitates quick delivery of P&G products to
unloaded and shelved and then finally picked and packed by
customers.
Amazon employees for shipment to you via UPS, FedEx, or
P&G also benefits from the Vendor Flex partnership. It
the USPS.
saves money by cutting out the costs of transporting goods
But these days, in a move that could turn consumer packto Amazon’s fulfillment centers, which in turn lets it charge
age goods distribution upside down, Amazon and P&G
more competitive prices to the e-commerce giant. And alare quietly blazing a new, simpler, lower-cost distribution
though P&G is a superb in-store brand marketer, it is still a
trail for such goods. Now, for example, at the Pennsylvania
relative newcomer to online selling, one of the company’s top
warehouse, rather than reloading truckloads of P&G prodpriorities. By partnering more closely with Amazon, P&G gets
ucts and shipping them to Amazon fulfillment centers, P&G
Amazon’s expert help in moving its brands online.
employees simply cart the goods to a fenced-off area inside
Amazon considers household staples to be one of its
their own warehouse. The fenced-in area is run by Amazon.
next big frontiers for Internet sales. Its presence inside the
From there, Amazon employees pack, label, and ship items
P&G Pennsylvania warehouse is just the tip of the iceberg
directly to customers who’ve ordered them online. Amazon
for Vendor Flex. Amazon and P&G quietly began sharing
calls this venture Vendor Flex—and it’s revolutionizing how

warehouse space three years ago, and the online merchant
people buy low-priced, low-margin everyday household
has set up shop inside at least seven other P&G distribuproducts.
tion centers worldwide, including facilities in Japan and
Amazon’s Vendor Flex program offers big potential for
Germany. Amazon is also inside or talking with other maboth Amazon and supplier–partners like P&G. Americans
jor consumer  goods suppliers—from Kimberly Clark to
currently buy only about 2 percent of their nonfood consumer
Georgia Pacific to Seventh Generation—about co-locating
package goods online. Boosting online sales of these staples
distribution facilities. Moreover, Amazon has invested heavto 6 percent—the percentage that the Internet now captures of
ily to build an infrastructure for profitably selling all kinds
overall retail sales—would give Amazon
an additional $10 billion a year in revenues, up from the current $2 billion.
But there’s a reason why household
staples have lagged behind other kinds of
products in online sales. Such goods have
long been deemed too bulky or too cheap
to justify the high shipping costs involved
with Internet selling. To sell household
staples profitably online, companies like
Amazon and P&G must work together
to streamline the distribution process and
reduce costs. That’s where Vendor Flex
comes in.
Vendor Flex takes channel partnering
Partnering in the distribution channel: Under amazon’s Vendor flex program, P&g and
to an entirely new level. Co-locating “in amazon share warehouse facilities, creating distribution cost and delivery advantages for both
the same tent” creates advantages for partners.
both partners. For Amazon, Vendor Flex Raywoo/Fotolia; Grzegorz Knec/Alamy; Grzegorz Knec/Alamy

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of everyday household items to consumers online. For example, in late 2010, Amazon acquired Quidsi, the owner of
Diapers.com and Soap.com, online retailers of baby products and household essentials. Since the Amazon acquisition, Quidsi has added a half-dozen new sites selling, among
other things, toys (YoYo.com), pet supplies (Wag.com), premium beauty products (BeautyBar.com), and home products
(Casa.com).
Vendor Flex looks like a win-win for everyone involved—
Amazon, P&G, and final consumers. However, the close
Amazon–P&G partnership has caused some grumbling
among other important channel participants. For example,
what about Walmart, P&G’s largest customer by far? The
giant store retailer is locked in a fierce online battle with
Amazon, yet one of its largest suppliers appears to be
giving Amazon preferential treatment. At the same time,
Amazon’s courtship of P&G may upset other important
suppliers that compete with P&G on Amazon’s site. Both
P&G and Amazon must be careful that their close Vendor
Flex relationship doesn’t damage other important channel
partnerships.
More broadly, some analysts assert that even with Vendor
Flex, Amazon won’t be able to sell products such as paper
towels, detergent, or shaving cream profitably online. They
reason that the margins on such items are simply too low to
cover shipping costs. Amazon is already losing an estimated

$1 billion to $2 billion annually on its Amazon Prime shipping
program. And, they suggest, if there is money to be made by
shipping a heavy jug of Tide or a bulky three-pack of Bounty

paper towels from P&G’s warehouse to your front door, P&G
would have been doing that long ago.
However, such doom-and-gloom predictions seem to overlook recent rapid changes in the distribution landscape, especially in online retailing. Mega-shippers like UPS and FedEx
are continuing to drive down small-package delivery times and
costs. And Amazon is moving aggressively toward same-day
delivery in major market areas, including grocery and related
items. The Vendor Flex program seems to align well with such
distribution trends.
As for the Amazon–P&G Vendor Flex partnership, it looks
like an ideal match for both companies. If P&G wants to be
more effective in selling its brands online, what better partner
could it have than Amazon, the undisputed master of online
retailing? If Amazon wants to be more effective in selling
household staples, what better partner could it have than P&G,
the acknowledged master of consumer package goods marketing? Together, under Amazon’s Vendor Flex, these respective
industry leaders can flex their distribution muscles to their own
benefit—and to the benefit of the consumers they jointly serve.
Sources: Serena Ng, “Soap Opera: Amazon Moves In with P&G,” Wall
Street Journal, October 15, 2013, p. A1; Andre Mouton, “Amazon Considers
‘Co-Creation’ with Procter & Gamble,” USA Today, October 21, 2013,
www.usatoday.com/story/tech/2013/10/21/amazon-proctor-gambleproducts/3143773/; David Streitfeld, “Amazon to Raise Fees as Revenue
Disappoints,” New York Times, January 31, 2014, p. B1; and Bridget
Bergin, “Amazon’s Involvement with Manufacturing: When Is It Too
Much?” Manufacturing.net, September 25, 2014, www.manufacturing.net/
blogs/2014/09/amazon%E2%80%99s-involvement-with-manufacturingwhen-is-it-too-much.

evaluating channel Members
The company must regularly check channel member performance against standards such
as sales quotas, average inventory levels, customer delivery time, treatment of damaged
and lost goods, cooperation in company promotion and training programs, and services to
the customer. The company should recognize and reward intermediaries that are performing well and adding good value for consumers. Those that are performing poorly should
be assisted or, as a last resort, replaced.
Finally, companies need to be sensitive to the needs of their channel partners. Those
that treat their partners poorly risk not only losing their support but also causing some legal problems. The next section describes various rights and duties pertaining to companies
and other channel members.

linking the concePts
Time for another pause. This time, compare the Caterpillar and KFC channel systems.
●●

●●

Diagram the Caterpillar and KFC channel systems. How do they compare in terms of channel
levels, types of intermediaries, channel member roles and responsibilities, and other characteristics? How well is each system designed?
Assess how well Caterpillar and KFC have managed and supported their channels. With what
results?


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347

Public Policy and Distribution Decisions
For the most part, companies are legally free to develop whatever channel arrangements
suit them. In fact, the laws affecting channels seek to prevent the exclusionary tactics of

some companies that might keep another company from using a desired channel. Most
channel law deals with the mutual rights and duties of channel members once they have
formed a relationship.
Many producers and wholesalers like to develop exclusive channels for their products.
When the seller allows only certain outlets to carry its products, this strategy is called
exclusive distribution. When the seller requires that these dealers not handle competitors’
products, its strategy is called exclusive dealing. Both parties can benefit from exclusive
arrangements: The seller obtains more loyal and dependable outlets, and the dealers obtain
a steady source of supply and stronger seller support. But exclusive arrangements also exclude other producers from selling to these dealers. This situation brings exclusive dealing
contracts under the scope of the Clayton Act of 1914. They are legal as long as they do not
substantially lessen competition or tend to create a monopoly and as long as both parties
enter into the agreement voluntarily.
Exclusive dealing often includes exclusive territorial agreements. The producer may
agree not to sell to other dealers in a given area, or the buyer may agree to sell only in its
own territory. The first practice is normal under franchise systems as a way to increase
dealer enthusiasm and commitment. It is also perfectly legal—a seller has no legal obligation to sell through more outlets than it wishes. The second practice, whereby the producer
tries to keep a dealer from selling outside its territory, has become a major legal issue.
Producers of a strong brand sometimes sell it to dealers only if the dealers will take
some or all of the rest of its line. This is called full-line forcing. Such tying agreements are
not necessarily illegal, but they violate the Clayton Act if they tend to lessen competition
substantially. The practice may prevent consumers from freely choosing among competing
suppliers of these other brands.
Finally, producers are free to select their dealers, but their right to terminate dealers is
somewhat restricted. In general, sellers can drop dealers “for cause.” However, they cannot
drop dealers if, for example, the dealers refuse to cooperate in a doubtful legal arrangement, such as exclusive dealing or tying agreements.

author comment
Marketers used to call this plain-old
“physical distribution.” But as these titles
suggest, the topic has grown in importance,

complexity, and sophistication.

Marketing logistics and supply
chain Management
In today’s global marketplace, selling a product is sometimes easier than getting it to customers. 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 logistics
management in the supply chain, the goals of the logistics system, major logistics functions, and the need for integrated supply chain management.

nature and importance of Marketing logistics
Marketing logistics (physical
distribution)

Planning, implementing, and
controlling the physical flow of goods,
services, and related information
from points of origin to points of
consumption to meet customer
requirements at a profit.

To some managers, marketing logistics means only trucks and warehouses. But modern logistics is much more than this. Marketing logistics—also called physical
distribution—involves planning, implementing, and controlling the physical flow of
goods, services, 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 profitably.
In the past, physical distribution planners typically started with products at the plant
and then tried to find low-cost solutions to get them to customers. However, today’s
customer-centered logistics starts with the marketplace and works backward to the factory

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figure 10.5 supply chain
Management

Inbound
logistics
Suppliers

Outbound
logistics
Company

Resellers

Customers

Reverse logistics
Managing the supply chain calls for
or even to sources of supply. Marketing logistics
customer-centered thinking. Remember, it’s
involves not only outbound logistics (moving prodalso called the customer value delivery network.
ucts from the factory to resellers and ultimately
to customers) but also inbound logistics (moving products and materials from suppliers to the factory) and reverse logistics (reusing,
recycling, refurbishing, or disposing of broken, unwanted, or excess products returned by

supply chain management
consumers or resellers). That is, it involves the entirety of supply chain management—
Managing upstream and downstream
managing upstream and downstream value-added flows of materials, final goods, and
value-added flows of materials, final
related information among suppliers, the company, resellers, and final consumers, as
goods, and related information among
shown in figure 10.5.
suppliers, the company, resellers, and
The logistics manager’s task is to coordinate the activities of suppliers, purchasing
final consumers.
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,
companies can gain a powerful competitive advantage by using improved logistics to give
customers better service or lower prices. Second, improved logistics can yield tremendous
cost savings to both a company and its customers. As much as 20 percent of an average
product’s price is accounted for by shipping and transport alone. This far exceeds the cost
of advertising and many other marketing costs. American companies spend $1.39 trillion each year—about 8.2 percent of GDP—to wrap, bundle,
load, unload, sort, reload, and transport goods. That’s more than
the total national GDPs of all but 12 countries worldwide.16
Shaving off even a small fraction of logistics costs can
mean substantial savings. For example, Walmart is currently
implementing a program of logistics improvements through
more efficient sourcing, greater supply chain productivity,
and better management of its more than $51 billion worth of
owned inventory, and that will reduce supply chain costs by 5
to 15 percent over five years—that’s a whopping $4 billion to
$12 billion.17
Third, the explosion in product variety has created a need

for improved logistics management. For example, in 1916 the
typical Piggly Wiggly grocery store carried only 605 items.
Today, a Piggly Wiggly carries a bewildering stock of between
20,000 and 35,000 items, depending on store size. A Walmart
Supercenter store carries more than 140,000 products, 30,000 of
which are grocery products.18 Ordering, shipping, stocking, and
controlling such a variety of products presents a sizable logistics
challenge.
Improvements in information technology have also created
opportunities for major gains in distribution efficiency. Today’s
companies are using sophisticated supply chain management
software, Internet-based logistics systems, point-of-sale scanners, RFID tags, satellite tracking, and electronic transfer of
logistics: as this huge container ship suggests, american
order and payment data. Such technology lets them quickly and
companies spent $1.39 trillion last year—8.2 percent of U.s. gDP—to
wrap, bundle, load, unload, sort, reload, and transport goods.
efficiently manage the flow of goods, information, and finances
E.G.Pors/Shutterstock
through the supply chain.


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349

Finally, more than almost any other marketing function, logistics affects the environment and a firm’s environmental sustainability efforts. Transportation, warehousing,
packaging, and other logistics functions are typically the biggest supply chain contributors
to the company’s environmental footprint. So many companies are now developing green
supply chains.

sustainable supply chains
Companies have many reasons for reducing the environmental impact of their supply
chains. For one thing, if they don’t green up voluntarily, a host of sustainability regulations
enacted around the world will soon require them to. For another, many large customers—
from Walmart and Nike to the federal government—are demanding it. Environmental
sustainability has become an important factor in supplier selection and performance evaluation. But perhaps even more important than having to do it, designing sustainable supply
chains is simply the right thing to do. It’s one more way that companies can contribute to
saving our world for future generations.
But that’s all pretty heady stuff. As it turns out, companies have a more immediate and
practical reason for turning their supply chains green. Not only are sustainable channels
good for the world, they’re also good for a company’s bottom line. The very logistics activities that create the biggest environmental footprint—such as transportation, warehousing, and packaging—also account for a lion’s share of logistics costs. Companies green
up their supply chains through greater efficiency, and greater efficiency means lower costs
and higher profits. In other words, developing a sustainable supply chain is not only environmentally responsible, it can also be profitable. Consider Nike:19

The Higg Index
Sustainable Apparel Coalition

green supply chains: nike has developed a sweeping strategy for greening
its supply chain. the higg index lets nike work with suppliers and distributors to
reduce the supply chain’s environmental footprint while at the same time reducing
its logistics costs.

Nike, the iconic sports shoe and apparel company, has
developed a sweeping strategy for greening every phase
of its supply chain. For example, Nike recently
teamed with Levi’s, REI, Target, and other members of
the Sustainable Apparel Coalition to develop the Higg
Index—a tool that measures how a single apparel product
affects the environment across the entire supply chain.

Nike uses the Higg Index to work with suppliers and
distributors to reduce its supply chain’s environmental
footprint. For instance, during just the past three years,
the more than 900 contract factories that make Nike
footwear worldwide have reduced their carbon emissions
by 6 percent, despite production increases of 20 percent.
That’s equivalent to an emissions savings equal to more
than 1 billion car-miles.
Nike has found that even seemingly simple supply
chain adjustments can produce big benefits. For example,
the company sources its shoes in Asia, but most are sold in
North America. Until about a decade ago, the shoes were
shipped from factory to store by air freight. After analyzing
distribution costs more carefully, Nike shifted a sizable portion of its cargo to ocean freight. That simple shoes-to-ships
shift reduced emissions per product by 4 percent, making
environmentalists smile. But it also put a smile on the faces
of Nike’s accountants by saving the company some $8 million a year in shipping costs.

Sergio Azenha/Alamy

goals of the logistics system
Some companies state their logistics objective as providing maximum customer service at
the least cost. Unfortunately, as nice as this sounds, 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


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imply slower delivery, smaller inventories, and larger shipping lots—which represent a
lower level of overall customer service.
The goal of marketing logistics 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 customers and then set desired service levels for each segment. 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.

Major logistics functions
Given a set of logistics objectives, the company designs a logistics system that will minimize the cost of attaining these objectives. The major logistics functions are warehousing,
inventory management, transportation, and logistics information management.

Warehousing

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.

Production and consumption cycles rarely match, so most companies must store their
goods while they wait to be sold. For example, Snapper, Toro, and other lawn mower manufacturers run their factories all year long and store up products for the heavy spring and
summer buying seasons. The storage function overcomes differences in needed quantities
and timing, ensuring that products are available when customers are ready to buy them.

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. In contrast, 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.
For example, Amazon operates more than 50 giant distribution centers, called fulfillment centers, which fill online orders and handle returns. These centers are huge and
highly automated. For example, the Amazon fulfillment center in Tracy, California, covers
1.2 million square feet (equivalent to 27 football fields). At the center, 4,000 employees
control an inventory of 21 million items and ship out up to 700,000 packages a day to
Amazon customers in Northern California and parts of the Pacific Northwest. During last
year’s Cyber Monday, Amazon’s fulfillment center network filled customer orders at a rate
of 426 items per second globally.20
Like almost everything else these days, warehousing
has seen dramatic changes in technology in recent years.
Outdated materials-handling methods are steadily being
replaced by newer, computer-controlled systems requiring
fewer employees. Computers and scanners read orders and
direct lift trucks, electric hoists, or robots to gather goods,
move them to loading docks, and issue invoices. For example,
to improve efficiency in its massive fulfillment centers,
Amazon recently purchased robot maker Kiva Systems:21

high-tech distribution centers: amazon employs teams of
super-retrievers—day-glo orange kiva robots—to keep its fulfillment
centers humming.
David Paul Morris/Bloomberg/Getty Images

When you buy from Amazon, the chances are still good that
your order will be plucked and packed by human hands.
However, the humans in Amazon’s fulfillment centers are

increasingly being assisted by an army of squat, ottoman-size,
day-glo orange robots. The Tracy, California, fulfillment center
has 3,000 of them, “let out of their cage to scurry hither and
yon bearing 6-foot-high . . . movable shelves.” The robots bring
racks of merchandise to workers, who in turn fill boxes. Dubbed
the “magic shelf,” racks of items simply materialize in front of
workers, with red lasers pointing to items to be picked. The
robots then drive off and new shelves appear. The super-efficient
robots work tirelessly 16 hours a day, seven days a week. They