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Chapter 5
Managing the Supply Chain
Learning Objectives
• Discuss the retailer’s role as one of the institutions involved in the supply chain
• Describe the types of supply chains by length, width, and control
• Explain the terms dependency, power, and conflict and their impact on supply-chain relations
• Understand the importance of a collaborative supply-chain relationship
The Supply Chain
• Set of institutions that move goods from the point of production to that of consumption
• Channel: Term used for supply chain• Broadened view incorporates:• The materials that go into manufacturing the good• The process consumers use to dispose of or
recycle the product
LO 1
Zara
• Corporate owned vertical marketing channel• Run each step below full capacity• Limited runs of each style• Zday the days the new stuff comes (feeding
frenzy)
The Supply Chain
• Is affected by five external forces:• Consumer behavior• Competitor behavior (big retailers going straight to
manufacturers)• Socioeconomic environment (dirt to dirt)• Technological environment• Legal and ethical environment
LO 1
The Supply Chain
• Must perform eight marketing functions:
• Buying• Selling• Storing• Transporting
• Sorting• Financing (car
dealerships)• Information gathering• Risk taking
LO 1
The Supply Chain
• Sorting - Breaking down heterogeneous products into homogenous groups
• Logistics network• The entities that are involved in moving physical
inventory from the source to the retail store
• Logistics inventory• Total business cost: All direct and indirect
costs of manufacturing, distributing, and marketing a product
LO 1
The Supply Chain
• Institutions involved in performing the eight marketing functions• Primary marketing institutions • Channel members that take title to the goods as they
move through the marketing channel (drop shippers)
• Facilitating marketing institutions: Channel members that: • Do not actually take title • Assist in the marketing process by specializing in the
performance of certain marketing functions
LO 1
Exhibit 5.2- Institutions Participatingin the Supply Chain
LO 1
Facilitating Marketing Institutions• Public warehouse: Stores goods for
safekeeping for any owner in return for a fee• Third-party logistics provider• Provides service to retailers of outsourced logistics
services for their:• Storage, transporting, sorting, information and risk
management functions
• Other facilitating institutions• Provide information through out the supply chain• Aid in financing
LO 1
Types of Supply Chains
• Strategic decisions for efficient and competitive supply chain require deciding:• Supply-chain length• Supply-chain width• Control of the supply chain
LO 2
Exhibit 5.3 - Strategic Decisions in Supply-Chain Design
LO 2
Exhibit 5.4 - Direct and Indirect Supply Chains
LO 2
Supply-Chain Length
• Direct supply chain: Manufacturer sells its goods directly to the final consumer
• Desired length is determined by:• The size of the customer base• Geographical dispersion• Behavior patterns like purchase frequency
LO 2
Supply-Chain Length• Average purchase size • The particular needs of customers• The nature of the product • Size of the manufacturer, its financial capacity, and
its desire for control
LO 2
Supply-Chain Width
• Intensive distribution: All possible retailers are used in a trade area
• Selective distribution: Moderate number of retailers are used in a trade area
• Exclusive distribution: Only one retailer is used to cover a trading area
LO 2
Exhibit 5.5 - Width of Supply-ChainStructure
LO 2
Exhibit 5.6 - Marketing Channel Patterns
LO 2
Control of the Supply Chain• Conventional marketing channel: Each
channel member is: • Loosely aligned with the others and takes a short
term orientation• Vertical marketing channels• Capital-intensive networks of several levels• Professionally managed and centrally programmed
to:• Realize the technological, managerial, and promotional
economies of long-term relationships
LO 2
Control of the Supply Chain
• Quick response (QR) systems/ efficient consumer response (ECR) systems• Integrated information, production, and logistical
systems that:• Obtain real-time information on consumer actions by
capturing sales data at point-of-purchase terminals • Transmit customer information back through the entire
channel• Enable efficient production and distribution scheduling
LO 2
Control of the Supply Chain
• Corporate vertical marketing channels • One channel institution owns multiple levels of
distribution • Consists of either a manufacturer that has
integrated vertically forward to reach the consumer or: • A retailer who has integrated vertically backward to
create a self supply network
LO 2
Control of the Supply Chain
• Contractual vertical marketing channels• A contract governs the working relationship
between channel members and includes:•Wholesaler-sponsored voluntary groups •Wholesaler brings together a group of
independently owned retailers and offers them a coordinated merchandising and buying
LO 2
Control of the Supply Chain
Retailer-owned cooperatives• Wholesale institutions, organized and owned by
member retailers• Offer scale economies and services to member retailers• Retailers make greater transaction-specific investments
or investments in assetsFranchise• Form of licensing • The owner of a product, service, or business methods
obtains distribution through affiliated dealersLO 2
Exhibit 5.6 - Advantages and Disadvantages of Franchising
LO 2
Control of the Supply Chain
• Administered vertical marketing channels –
• Channel members takes the initiative to lead the channel by: •Applying the principles of effective interorganizational management
LO 2
Managing Retailer-Supplier Relations
• Dependency• In channel arrangement:• Each member firm, whether primary or facilitating,
depends on the others to perform a job• Interdependency is:
• At the root of the collaboration found in today’s supply • The major cause of conflict found in supply
• Power: Ability of one channel member to influence the decisions of the other channel members
LO 3
Managing Retailer-Supplier Relations
Types of power
Reward power Based on B’s perception that A has the ability to provide rewards for B
Expertise power Based on B’s perception that A has some special knowledge
Referent power Based on the identification of B with A
Coercive power Based on B’s belief that A has the capability to punish or harm B if B doesn’t do what A wants
Legitimate power Based on A’s right to influence B, or B’s belief that B should accept A’s influence
LO 3
Managing Retailer-Supplier Relations
• Types of power• Reward, expertise, referent, and informational
power foster a healthy working relationship• Use of coercive and legitimate power tends to
elicit conflict and harm cooperation
Managing Retailer-Supplier Relations
• Conflict• Major sources of conflict between retailers and
their suppliers: • Perceptual incongruity regarding the:
• Quality of the supplier’s merchandise• Potential demand for the supplier’s merchandise• Consumer appeal of the supplier’s advertising• Best shelf position for the supplier’s merchandise
LO 3
Managing Retailer-Supplier Relations
•Goal incompatibility•Dual distribution
•Domain disagreements•Diverter•Gray marketing• Free riding
Managing Retailer-Supplier RelationsPerceptual incongruity
The retailer and supplier have different perceptions of reality.
Goal incompatibility
Achieving the goals of either the supplier or the retailer would hamper the performance of the other.
Dual distribution Manufacturer sells to independent retailers and also through its own retail outlets.
Domain disagreements
Disagreement about which member of the marketing channel should make decisions.
Diverter Unauthorized member of a channel who buys and sells excess merchandise to and from authorized channel members.
LO 3
Managing Retailer-Supplier Relations
Gray marketing Branded merchandise flows through unauthorized channels.
Free-riding Consumer seeks product information, usage instructions, and sometimes even warranty work from a full-service store but then, armed with the brand’s model number, purchases the product from a limited service discounter or over the Internet.
LO 3
Exhibit 5.8 - Supply Chain Management Best Practices
LO 4
Facilitating Channel Collaboration
Mutual trust Both the retailer and its supplier have faith that each will be truthful and fair in their dealings with the other; allows the channel to grow and prosper
Two-waycommunication
Both retailer and supplier communicate openly their ideas, concerns, and plans
Solidarity High value is placed on the relationship between a supplier and retailer; results in flexible dealings where adaptations are made as circumstances change
LO 4
Category Management
• Category management (CM) • Process of managing all the SKUs within a product
category• Involves the simultaneous management of: • Price, shelf space, merchandising strategy, promotional
efforts, and other elements of the retail
• Based on the firm’s goals, changing environment, and consumer behavior
LO 4
Category Management• Advantages• Increase in sales for both parties• Decrease in markdowns• Better in-stock percentages on key items for the retailer• Increase in turnover rates • Decrease in average inventory for both retailers and
wholesalers• Increase in both members’ ROI and profit
LO 4
Category Management• Category manager • Creates various store displays based on local
market conditions and knowledge of:• Consumer trends• Point-of-sale information• Analysis provided by each supplier
• Ensures that the retailer has the best assortment for each store
• A supplier may serve as the retailer’s category advisor
LO 4