Mma6e chapter-16 final

Marketing Management:An Asian Perspective, 6th Edition

Instructor Supplements Created by Geoffrey da Silva

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Managing Retailing, Wholesaling, and Logistics

16© Pearson Education South Asia Pte Ltd 2013. All rights reserved

Learning Issues for Chapter Sixteen

1. What major types of marketing intermediaries occupy this sector?

2. What marketing decisions do these marketing intermediaries make?

3. What are the major trends with marketing intermediaries?

4. What does the future hold for private label brands?

4 © Pearson Education South Asia Pte Ltd 2013. All rights reserved

Chapter Outline

• In the previous chapter, we examined marketing intermediaries from the viewpoint of manufacturers who wanted to build and manage marketing channels.

• In this chapter, we view these intermediaries—retailers, wholesalers, and logistical organizations—as requiring and forging their own marketing strategies.

• Intermediaries also strive for marketing excellence and can reap the benefits like any other company.


Chapter Outline

• The more successful intermediaries use strategic planning, advance information systems, and sophisticated marketing tools.

• They segment their markets, improve their market targeting and positioning, and aggressively pursue market expansion and diversification strategies.


Retailing

• Retailing includes all the activities involved in selling goods or services directly to final consumers for personal, non-business use.

• A retailer or retail store is any business enterprise whose sales volume comes primarily from retailing.

• Any organization selling to the final consumer—no matter how or where they are sold is doing retailing.


Types of Retailers

• Consumers today can shop for goods and services at store retailers, non-store retailers, and retail organizations.

• Store Retailers

– Perhaps the best known type of store retailers is the department store.


Department Stores

Department stores are the best-known type of retailers. Japan’s Takashimaya attracts millions each year with special offerings such as art galleries, playgrounds, and restaurants.


Table 16.1: Major Retailer Types


Service Levels and Positioning of the Retailer

Retailers can position themselves as offering one of four levels of service:

1.Self-service—Self-service is the cornerstone of all discount operations. Many customers are willing to carry out their own locate-compare-select process to save money.

2.Self-selection—Customers find their own goods, although they can ask for assistance.


Service Levels and Positioning of the Retailer

3. Limited service—These retailers carry more shopping goods, and customers need more information and assistance. The stores also offer services (such as credit and merchandise-return privileges).

4. Full service—Salespeople are ready to assist in every phase of the locate-compare-select process. Customers who like to be waited on prefer this type of store. The high staffing cost, along with the higher proportion of specialty goods and slower-moving items and the many services, results in high-cost retailing.


Non-store Retailing

• Although the overwhelming bulk of goods and services is sold through stores, non-store retailing has been growing much faster than store retailing.

• Non-store retailing falls into four major categories:i. Direct sellingii. Direct Marketing (which includes telemarketing and Internet

selling)iii. Automatic vendingiv. Buying service


Direct Selling

• Direct selling (also called multilevel selling and network marketing) involves companies selling door-to-door or at home sales parties. Avon, Tupperware, and Mary Kay Cosmetics are sold one-to-many: a salesperson goes to the home of a host who has invited friends; the salesperson demonstrates the products and takes orders.

• Pioneered by Amway, the multilevel (network) marketing sales system consists of recruiting independent businesspeople who act as distributors.

• The distributor’s compensation includes a percentage of sales of those the distributor recruits as well as earnings on direct sales to customers.


Direct Marketing

• Direct marketing has roots in direct-mail and catalog marketing; it includes telemarketing, television direct-response marketing, and electronic shopping.

• Sales through direct marketing are highest within Asia in Japan, although home shopping TV channels are gaining popularity in Korea and Taiwan.

• See “Marketing Insight: Enhancing Online Shopping in Asia”.


Marketing Insight: Enhancing Online Shopping in Asia

South Korea has one of the most avid Internet shoppers. Hence, companies such as LG is capitalizing on this online shopping fever.


Automatic Vending

• Automatic vending is used for a variety of merchandise, including impulse goods like cigarettes, soft drinks, coffee, candy, newspapers, and magazines, and other products like hosiery, cosmetics, hot food, condoms, and paperbacks.

• Vending machines are found in factories, offices, large retail stores, gasoline stations, hotels, restaurants, and many other places.

• They offer 24-hour selling, self-service, and merchandise that is always fresh.

• Japan has the most vending machines per person


Vending Machines—Japan

Vending machines are an effective distribution system in Japan. Products sold through vending machines range from the usual soft drinks, beers, and cigarettes to more exotic items such as hot instant noodles and eggs. Coca-Cola alone operates more than a million drink machines there.


Buying Service

Buying service is a store-less retailer serving a specific clientele—usually employees of large organizations—who are entitled to buy from a list of retailers that have agreed to give discounts in return for membership.


Corporate Retailing and Franchising

• Although many retail stores are independently owned, an increasing number are part of some form of corporate retailing.

• These organizations achieve economies of scale, greater purchasing power, wider brand recognition, and better-trained employees than independent stores can usually gain alone.


Corporate Retailing and Franchising

• The major types of corporate retailing:

a. corporate chain stores,

b. voluntary chains,

c. retailer and consumer cooperatives,

d. franchises, and

e. merchandising conglomerates


Table 16.2: Major Types of Corporate Retail Organizations


Franchising in Asia

• Franchising is described in “Marketing Insight: Franchising Fever in Asia.”

• China has the world’s largest number of franchise stores, with more than 2,000 brands and over 120,000 outlets.

• In Shanghai alone, there are 16,000 franchise chain stores.

• The franchise business model has been adopted in nearly 50 sectors, including convenience stores, education, and training.


The New Retail Environment

• In the past, retailers secured customer loyalty by offering convenient locations, special or unique assortments of goods, greater or better services than competitors, and store credit cards.

• All this has changed. Today, brands such as Timberland and Levi’s

are found in department stores, in their own shops, in merchandise outlets, and in off-price discount stores.

•

In their drive for volume, manufacturers have placed their branded goods everywhere.

• The result is that retail-store assortments have grown more alike.


The New Retail Environment

• Service differentiation also has eroded.

• Many department stores trimmed services, and many discounters increased services.

• Customers become smarter shoppers. They do not want to pay more for identical brands, especially when service differences have diminished.

• There are 9 retail developments that are changing the way consumers buy, and manufacturers and retailers sell.


The 8 Key Retail Developments:

1. New retail forms and combinations—To better satisfy customers’ need for convenience, a variety of new retail forms have emerged. Bookstores feature coffee shops. Gas stations include food stores. Some retailers are experimenting with limited time-only stores called “pop-ups” that let retailers promote brands, reach seasonal shoppers for a few weeks in busy areas, and create buzz.

2. Growth of intertype competition—Department stores do not just compete with other department stores. They also compete with different types of stores—discount stores, catalog showrooms, department stores—for the same consumers by carrying the same type of merchandise.


The 9 Key Retail Developments

3. Competition between store-based and non-store-based retailing—Consumers now receive sales offers through direct mail letters and catalogs, television, mobile phones, and the Internet. These non-store-based retailers are taking business away from store-based retailers.

4. Growth of giant retailers—Through their superior information systems, logistical systems, and buying power, giant retailers are able to deliver good service and immense volumes of products at appealing prices to masses of consumers.


Homeplus Retail Chain (Korea)

Tesco’s Homeplus introduced this integrated online and offline shopping concept in South Korea. On their way to work, shoppers scan barcodes of items they want to order from a virtual store at a subway station. These items are delivered by the time they return home from work.



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5. The traditional trade is alive and well — Despite the growth of modern retailing in Asia, traditional retail formats are still abundant in many parts of the region. India, the Philippines, Sri Lanka, and Indonesia have many grocery stores. Traditional stores continue to remain in demand because of their convenient locations, fresh food, and appeal to the small basket and low-income shoppers.

6. Growing investment in technology — Modern retailers use technology to produce better forecasts, control inventory costs, and order electronically from suppliers. Technology is also affecting what happens inside the store.

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Traditional Retailing in Asia

Floating markets in Thailand are typical of how mobile traditional retailers are in location. The floating market sells a wide range of products, including fruits, handbags, and cooked food.


Traditional Retailing in Asia

Wet markets such as this in Vietnam sell fresh vegetables and meat.



7. Global profile of major retailers—Retailers with unique formats and strong brand positioning are increasingly appearing in other countries.

– Retailers such as McDonald’s, Carrefour, IKEA, and Toys “R” Us have become globally prominent.

– Among Asian retailers, the Japanese have the longest and largest international presence.

– Foreign retailers are expanding their operations in China. While they had bought or leased properties that suited their specific needs in the past, market liberalization has allowed them to buy local shopping chains as prime property becomes scarcer.


Japanese Retailers

Japanese retailers have a large international presence compared with other Asian retailers.


The 9 Key Retail Developments:

9. Upgrading of Asian retailers—Some Asian retailers are reacting strongly to the entry of foreign players. Larger Asian department stores have established their own hypermarkets and discount outlets as a defensive strategy against foreign chains. Malaysia’s Metrojaya has Cosmart and Indonesia’s Matahari has Mega M.

10.Growth of factory outlets—Factory outlets are booming business in China and Malaysia. Although these outlets sell outdated models, they satisfy Asian consumers’ need for branded merchandise and do not have to worry that they are counterfeits.


Marketing Decisions

With the key changes in new retail environment, we can examine retailers’ marketing decisions in the areas of

i. Target marketii. Product assortmentiii. Procurementiv. Pricev. Services vi. Store atmospherevii. Store activities and experiencesviii. Communicationix. Location


Target Market

• Until the target market is defined and profiled, the retailer cannot make consistent decisions on product assortment, store décor, advertising messages and media, price, and service levels.

• Mistakes in choosing or switching target markets can be costly.

• To better hit their targets, retailers are slicing the market into finer and finer segments and introducing new lines of stores to provide a more relevant set of offerings to exploit niche markets.


Target Marketing in Retailing

Hong Kong’s Giordano targets at the value-for-money market looking for casual clothes that come in cheerful colors.


Channels

• Based on a target market analysis and other considerations that were covered in Chapter 15, retailers must decide which channels to employ to reach their customers.

• Increasingly, the answer is multiple channels.


Product Assortment

• The retailer’s product assortment must match the target market’s shopping expectations in breadth and depth.

• The real challenge begins after defining the store’s product assortment, and that is to develop a product-differentiation strategy.

• To better differentiate themselves and generate consumer interest, some luxury retailers are making their stores and merchandise more varied.


Using Technology to Determine Product Assortment

Tsutaya is one of the pioneers to use an electronic system to track consumer tastes, and use such data in its product assortment and store location decisions.


Product Assortment Options

1. Feature exclusive national brands that are not available at competing retailers. Robinsons in Singapore carries exclusive lines.

2. Feature mostly private branded merchandise. Benetton, Gap, and Giordano design most of the clothes carried in their stores. Many supermarket and convenience chains carry their own private branded merchandise.

3. Feature blockbuster distinctive merchandise events. Isetan may run month-long shows featuring the goods of another country, such as France, throughout the store.



4. Feature surprise or ever-changing merchandise. Off-price apparel retailer Reject Shop offers surprise assortments of overstocks and closeouts.

5. Feature the latest or newest merchandise first. Zara excels in and profits from being first-to-market with appealing new looks and designs.



6. Offer merchandise customizing services. The Imperial Tailors department of Shanghai Tang features a team of Shanghainese tailors who make exquisitely detailed clothing to customer specifications.

7. Offer a highly targeted assortment. Retail stores may carry goods just for taller men, expectant mothers, or larger women.


Procurement

• The retailer must establish merchandise sources, policies, and practices.

• In the corporate headquarters, specialist buyers (sometimes called merchandise managers) are responsible for developing brand assortments and listening to salespersons’ presentations.


Procurement

• Retailers are rapidly improving their skills in demand forecasting, merchandising selection, stock control, space allocation, and display.

• Some stores are experimenting with radio frequency identification systems and electronic readers and use them to monitor inventory and track goods in real time.


Procurement

• When retailers do study the economics of buying and selling individual products there are typically findings.


Procurement

• Stores are using direct product profitability (DPP) to measure a product’s handling costs (receiving, moving to storage, paperwork, selecting, checking, loading, and space cost) from the time it reaches the warehouse until a customer buys it in the retail store.


Prices

• Prices are a key positioning factor and must be decided in relation to the target market, the product-and-service assortment mix, and the competition.

• All retailers would like to achieve high volumes and high gross margins.

• They would like high Turns x Earns, but the two usually do not go together.

• Most retailers fall into the high-markup, lower-volume group (fine specialty stores) or the low-markup, higher-volume group (mass merchandisers and discount stores).


Prices

• Retailers must also pay attention to pricing tactics.

• Most retailers will put low prices on some items to serve as traffic builders or loss leaders. They will run storewide sales.

• They will plan markdowns on slower-moving merchandise.

• As discussed in Chapter 14, some retailers such as Wal-Mart are using Everyday Low Pricing (EDLP).

• EDLP could lead to lower advertising costs, greater pricing stability, a stronger image of fairness and reliability, and, under certain circumstances, higher retail profits than Hi-Lo pricing.


Services

• Retailers must decide on the services mix to offer customers: i. Prepurchase services include accepting telephone and mail

orders, advertising, window and interior display, fitting rooms, shopping hours, fashion shows, and trade-ins.

ii. Postpurchase services include shipping and delivery, gift-wrapping, adjustments and returns, alterations and tailoring, installations, and engraving.

iii. Ancillary services include general information, check cashing, parking, restaurants, repairs, interior decorating, credit, rest rooms, and baby-attendant service.


Store Atmosphere

• Atmosphere is another element in the store arsenal.

• Every store has a look, and a physical layout that makes it hard or easy to move around,

• See “Marketing Memo: Helping Stores to Sell”.

• Retailers must consider all the senses in shaping the customer’s experience.

• Example, by varying the tempo of music affects average time and dollars spent in the supermarket.


Store Activities and Experiences

• The growth of e-commerce has forced traditional brick-and-mortar retailers to respond.

• In addition to their natural advantages, such as products that shoppers can actually see, touch, and test, real-life customer service, they also provide a shopping experience as a strong differentiator.

• The store atmosphere should match shoppers’ basic motivations.


Creating In-Store Experiences

Bookstores such as Kinokuniya include cafés to provide customers experiences beyond book buying and reading.


Communications

• Retailers use a wide range of communication tools to generate traffic and purchases.

• They place ads, run special sales, issue money-saving coupons, and run frequent shopper-reward programs, in-store food sampling, and coupons on shelves or at checkout points.


Communications

• Each retailer must use communications that support and reinforce its image positioning.

• Retailers must carefully train salespeople to greet customers, interpret their needs, and handle complaints.

• Off-price retailers will arrange their merchandise to promote the idea of bargains and large savings, while conserving on service and sales assistance.


Location

• Retailers are accustomed to saying that the three keys to success are “location, location, and location.”

• Department store chains, oil companies, and fast-food franchisors exercise great care in selecting locations.

• This can be broken down into selecting regions of the country in which to open outlets, then particular cities, and then particular sites.


Retail Location Options

1. Central business districts—This is the oldest and most heavily trafficked city area, often known as “downtown.” As Asia becomes more saturated with shopping malls, some retailers are branching out from downtown areas to less competitive suburban locations to obtain lower rent and to reach out to new segments.

2. Regional shopping centers—These are large suburban malls containing 40–200 stores, typically featuring one or two anchor stores, such as Isetan or Parkson Grand, and numerous smaller stores, many under franchise operation.

3. Community shopping centers—These are smaller malls with one anchor store and 20–40 smaller stores.


Retail Location Options

4. Shopping strips—These contain a cluster of stores, usually housed in one long building, serving a neighborhood’s needs for groceries, hardware, laundry, shoe repair, and dry cleaning.

5. A location within a larger store—Certain well-known retailers—McDonald’s, Starbucks, Dunkin’ Donuts—locate new, smaller units as concession space within larger stores or operations, such as airports, schools, or department.

6. Stand-alone stores—Some retailers may avoid shopping centers to locate new stores in free-standing sites on streets so that they are not connected directly to other retail stores.


Considerations in Determining Retail Locations

Given the relationship between high traffic and high rents, retailers must decide on the most advantageous locations for their outlets, using:

– traffic count

– surveys of consumer shopping habits, and

– analysis of competitive locations


Impact of Feng Shui on Location and Other Marketing Activities

• Aside from these practical considerations, many retailers in Asia also employ feng shui (literally meaning “wind and water”) in locating their retail outlets as well as in conducting other marketing activities.

• This refers to the use of geomancy and is discussed in more detail in “Marketing Insight: Feng Shui and Its Application to Retailing and Marketing in the Far East.”


Impact of Geomancy on Architecture

The Marina Bay Sands Integrated Resort features a three-block structure which some superstitious Singaporeans ascribed to as resembling traditional Chinese altar pieces.


Private Labels

• A private label (also called reseller, store, house, or distributor brands) is one retailers and wholesalers develop.

• In the United States, one out of every four items sold is a private labeled item.

• Some experts believe that 50 percent is the natural limit for carrying private brands because:–Consumers prefer certain national brands;–Many product categories are not feasible or attractive on a

private-brand basis.


Private Labels in Asia

• Private label penetration remains low across all Asian countries, even in countries where shopper awareness of house brands is high (85–95 percent).

• In Hong Kong, Korea, Singapore, and Thailand, the percentage of shoppers who actually buy any private label is typically only 30–50 percent.

• The only two countries where more than half of urban shoppers claim to buy private labels are Singapore (56 percent) and Korea (53 percent).

• Taiwan is the least developed market with only 27 percent of shoppers claiming to purchase private label products.


Role of Private Labels

• Why do intermediaries sponsor their own brands?

• First, they are more profitable. Intermediaries search for manufacturers with excess capacity who will produce the private label at a low cost. Other costs, such as R&D, advertising, sales promotion, and physical distribution are also much lower. This means that the private brander can charge a lower price and yet make a higher profit margin.

• Second, retailers develop exclusive store brands to differentiate themselves from competitors. – For example, some domestic retailers in China have launched private

labels as part of their strategy of fighting back against foreign competitors.


Branding Strategy of Muji

Mujirushi Ryohin’s full name translates into “no-brand quality products.” The Japanese retailer, known simply as “Muji,” has become a huge success, with 387 outlets in 15 countries, including 34 in Europe. This store has ironically turned its no-brand into a brand name.


Private Labels versus Generics

• Private label or store brands should be distinguished from generics.

• Generics are unbranded, plainly packaged, less expensive versions of common products such as soy sauce, paper towels, and canned fruits.

• They offer standard or lower quality at a price that may be as much as 20–40 percent lower than nationally advertised brands and 10–20 percent lower than retailer private label brands.

• The lower price of generics is made possible by lower-quality ingredients, lower-cost labeling and packaging, and minimal advertising.


The Private-Label Success Factors

• In the confrontation between manufacturers’ and private labels, retailers have many advantages and increasing market power.

• Because shelf space is scarce, many supermarkets now charge a slotting fee for accepting a new brand, to cover the cost of listing and stocking it.

• Retailers also charge for special display space and in-store advertising space. They typically give more prominent display to their own brands and make sure they are well-stocked.



• Private label brands now come in attractive packaging, and even offer premium items such as organic products.

• Retailers are now building better quality into their store brands. Supermarket retailers are adding premium store-brand items like organic products. They are also emphasizing attractive, innovative packaging. Some are even advertising aggressively.



• The growing power of store brands has also benefited from the weakening of brands.

• Many consumers have become more price sensitive, a trend reinforced by the continuous price specials that have trained a generation to buy on price.

• Competing manufacturers and retailers copy and duplicate the quality and features of the best brands in a category, reducing physical product differentiation.



• Also by cutting marketing communications budgets, some firms have made it harder to create any intangible differences in brand image.

• A steady stream of brand extensions and line extensions has blurred brand identity at times and led to a confusing amount of product proliferation.


Success of Private Label Brands

Private label brands now come in attractive packaging, and even offer premium items such as organic products.


Marketing Insight: Manufacturer’s Response to the Private Label Threat

• Fight selectively where manufacturers can win against private labels and add value for consumers, retailers, and shareholders. This is typically where the brand is one or two in the category or occupies a premium niche position.

• Partner effectively by seeking win-win relationships with retailers through strategies that complement the retailer’s private labels.


Marketing Insight: Manufacturer’s Response to the Private Label Threat

• Innovate brilliantly with new products to help beat private labels. Continuously launching incremental new products keeps the manufacturer brands looking fresh, but this must be punctuated by periodically launching radical new products.

• Create winning value propositions by imbuing brands with symbolic imagery as well as functional quality that beats private labels. Too many manufacturer brands have let private labels equal and sometimes better them on functional quality. In addition, to have a winning value proposition, the pricing needs to be monitored closely to ensure that perceived benefits are equal to the price premium.


Wholesaling

• Wholesaling includes all the activities involved in selling goods and services to those who buy for resale or business use.

• Wholesaling excludes farmers, manufacturers, and retailers.

• Major Wholesaler Typesi. Merchant wholesalersii. Full-service wholesalersiii. Limited-service wholesalersiv. Brokers and agentsv. Manufacturers’ and retailers’ branches and officesvi. Specialized wholesalers


Wholesalers Differ From Retailers

• Wholesalers pay less attention to promotion, atmosphere, and location because they are dealing with business customers.

• Wholesale transactions are usually larger than retail transactions.

• Wholesalers cover a larger trade area than retailers.

• The government deals with wholesalers and retailers differently in terms of legal regulations and taxes.


Wholesaling Functions

1. Selling and promoting—Wholesalers’ sales forces help manufacturers reach many small business customers at a relatively low cost. Wholesalers have more contacts, and often buyers trust wholesalers more than they trust a distant manufacturer.

2. Buying and assortment building—Wholesalers are able to select items and build the assortments their customers need, saving the customers considerable work.



3. Bulk breaking—Wholesalers achieve savings for their customers by buying in large carload lots and breaking the bulk into smaller units.

4. Warehousing—Wholesalers hold inventories, thereby reducing inventory costs and risks to suppliers and customers.

5. Transportation—Wholesalers can often provide quicker delivery to buyers because they are closer to the buyers.



6. Financing—Wholesalers finance customers by granting credit, and finance suppliers by ordering early and paying bills on time.

7. Risk bearing—Wholesalers absorb some risk by taking title and bearing the cost of theft, damage, spoilage, and obsolescence.



8. Market information—Wholesalers supply information to suppliers and customers regarding competitors’ activities, new products, price developments, and so on.

9. Management services and counseling—Wholesalers often help retailers improve their operations by training sales clerks, helping with store layouts and displays, and setting up accounting and inventory-control systems. They may help industrial customers by offering training and technical services.


Trends in Wholesaling

• Wholesaler-distributors have faced mounting pressures in recent years from new sources of competition.

• One major response has been to increase asset productivity by managing inventories and receivables better.

• Each have had to improve their strategic decisions on target markets, product assortment, and services, price, promotion, and place.

• The trend toward vertical integration, in which manufacturers try to control or own their intermediaries, is still strong.


Market Logistics

• Physical distribution starts at the factory.

• Managers choose a set of warehouses (stocking points) and transportation carriers that will deliver the goods to final destinations in the desired time or at the lowest total cost.

• Physical distribution has now been expanded into the broader concept of supply chain management (SCM).


Supply Chain Management

• Supply chain management starts before the physical distribution:

a. Procuring the right productsb. Converting them efficiently into finished productsc. Dispatching them to their final destinations

• The supply chain perspective can help a company identify superior suppliers and distributors and help them improve productivity.


Market Logistics

• Market logistics involves planning the infrastructure to meet demand, then implementing and controlling the physical flows of materials and final goods from points of origin to points of use, to meet customer requirements at a profit.

• Market logistics represent a major challenge for distributors in Asia. Geographic distances, population density, and supporting infrastructure impact market access and logistics efficiency.


Four Steps in Market Logistics

1. Deciding on the company’s value proposition to its customers. (What on-time delivery standard should be offered? What levels should be attained in ordering and billing accuracy?)

2. Deciding on the best channel design and network strategy for reaching the customers. (Should the company serve customers directly or through intermediaries? What products to source from which manufacturing facilities? How many warehouses to maintain and where should they be located?)


Four Steps in Market Logistics

3. Developing operational excellence in sales forecasting, warehouse management, transportation management, and materials management.

4. Implementing the solution with the best information systems, equipment, policies, and procedures.


Integrated Logistics Systems

The market logistics task calls for integrated logistics systems (ILS), involving:

a. Materials managementb. Material flow systemsc. Physical distribution abetted by information technologyd. Information systems play a critical role in managing market

logistics especially computers, point-of-sale terminals, uniform product bar codes, satellite tracking, Electronic Data Interchange (EDI), and Electronic Funds Transfer (EFT).


Integrated Logistics System—Li & Fung

Li & Fung offers an integrated logistics system that its clients, including Avon, find beneficial


Market Logistics Encompass Several Activities

• Sales forecasting

• The company schedules distribution, production, and inventory levels

• Production plans

• Materials to order

• Finished goods inventory


Key Concerns and Trends

• The total cost of market logistics can amount to 30 to 40 percent of the product’s cost.

• Lower market-logistics cost will permit lower prices.

• Many firms are embracing lean manufacturing, to produce goods with minimal waste of time, materials, and money.


Market Logistics Objectives

• Many companies state their market-logistics objective as “getting the right goods to the right places at the right time for the least cost.” Given that market logistics involve strong tradeoffs, decisions must be made on a total system basis.

• Given that market-logistics activities require strong tradeoffs, managers must make decisions on a total-system basis. The company must research the relative importance of each of their service outputs.

• The company must then research the relative importance of these service outputs. For example, service-repair time is very important to buyers of copying equipment. Company must consider competitors’ service standards.


Market Logistics Objectives

• The company must also consider competitors’ service standards. It will normally want to match or exceed the competitors’ service level, but the objective is to maximize profits, not sales. Company ultimately has to establish some promise to the market.

• The company ultimately must establish some promise it makes to the market.

• Given the market-logistic objectives, the company must design a system that will minimize the cost of achieving these objectives.


Market Logistics Costs

Each possible market-logistics system will lead to the following costs:

M = T + FW + VW + S

Where M = total market-logistic cost of proposed system.Where T = total freight cost of proposed system.Where FW = total fixed warehouse cost of proposed system.Where VW = total variable warehouse costs (including inventory).Where S = total cost of lost sales due to average delivery delay under proposed system.


Market Logistics Decisions

Four major decisions must be made with regard to market logistics:

i. How should orders be handled (order processing)?

ii. Where should stocks be located (warehousing)?

iii. How much stock should be held (inventory)?

iv. How should goods be shipped (transportation)?


Order Processing

• Most companies today are trying to shorten the order-to-payment cycle.

• That is the elapsed time between an order’s receipt, delivery, and payment.

• The longer this cycle takes the lower the customer’s satisfaction and the lower the company’s profits.


Warehousing

• Every company has to store finished goods until they are sold, because production and consumption cycles rarely match.

• The storage function helps smooth discrepancies between production and quantities desired by the market.

• The company must decide on the number of inventory stocking locations: –More locations means that goods can be delivered to customers

more quickly.–More locations also means higher warehousing and inventory

costs.95 © Pearson Education South Asia Pte Ltd 2013. All rights reserved

Warehousing

• Storage warehouses store goods for moderate-to-long periods of time.

• Distribution warehouses receive goods from various company plants and suppliers and move them out as soon as possible.

• Automated warehouses employ advanced materials-handling systems under the control of a central computer.

• Some warehouses are now taking on activities formerly done in the plant.


Inventory

• Salespeople would like their companies to carry enough stock to fill all customer orders immediately.

• However, this is not cost-effective.

• Inventory cost increases at an accelerating rate as the customer-service level approaches 100%.

• Management needs to know how much sales and profits would increase as a result of carrying larger inventories and promising faster order fulfillment times, and then make a decision.

• Inventory decision making involves knowing when to order and how much to order.


Inventory

• As inventory draws down, management must know at what stock level to place a new order.

• This stock level is called the order (reorder) point.

• The order point should balance the risks of stockout against the costs of overstock.

• The company needs to balance order-processing costs and inventory-carrying costs.

• Order-processing costs for a manufacturer consist of setup costs and running costs (operating costs when production is running).


Order Processing versus Carrying Costs

• Order-processing costs must be compared with inventory-carrying costs.

• The larger the average stock carried, the higher the inventory-carrying costs.

• These carrying costs include storage charges, cost of capital, taxes and insurance, and depreciation and obsolescence.

• Carrying costs might run as high as 30 percent of inventory value.

• This means that marketing managers who want their companies to carry larger inventories need to show that the larger inventories would produce incremental gross profit to exceed incremental carrying costs.


Optimal Order Quantity

• The optimal order quantity can be determined by observing how order-processing costs and inventory-carrying costs sum up at different order levels.

• Figure 16.1 shows that the order-processing cost per unit decreases with the number of units ordered because the order costs are spread over more units.


Optimal Order Quantity

• Inventory-carrying charges per unit increase with the number of units ordered because each unit remains longer in inventory.

• The two cost curves are summed vertically into a total-cost curve.

• The lowest point on the total-cost curve is projected down on the horizontal axis to find the optimal order quantity Q*.


Figure 16.1: Determining Optimal Order Quantity


Controlling Inventory Costs

• Companies are reducing their inventory costs by treating inventory items differently.

• They are positioning inventory items according to risk and opportunity.

• They are also keeping slow-moving items in a central location while keeping faster moving items closer to customers.

• The ultimate answer to carrying near-zero inventory is to build for order.


Transportation

• Transportation choices will affect product pricing, on-time delivery performance, and the condition of the goods when they arrive, all of which affect customer satisfaction.

• In shipping goods to its warehouses, dealers, and customers, the company can choose among five transportation modes: rail, air, truck, waterway, and pipeline.


Transportation

• Shippers consider such criteria as speed, frequency, dependability, capability, availability, traceability, and cost.

• For speed, air, rail, and truck are the prime contenders. If the goal is low cost, then it is water and pipeline.


Combining Transportation Modes

• Shippers are increasingly combining two or more transportation modes, thanks to containerization.

• Containerization consists of putting the goods in boxes or trailers that are easy to transfer between two transportation modes.

• Piggyback describes the use of rail and trucks; fishyback, water and trucks; trainship, water and rail; and airtruck, air and trucks.

• Each coordinated mode offers specific advantages. For example, piggyback is cheaper than trucking alone, yet provides flexibility and convenience.


Private, Contract, and Common Carriers

• Shippers can choose from private, contract, and common carriers.

• If the shipper owns its own truck or air fleet, the shipper becomes a private carrier.

• A contract carrier is an independent organization selling transportation services to others on a contract basis.

• A common carrier provides services between predetermined points on a scheduled basis and is available to all shippers at standard rates.


Organizational Lessons

• Market-logistics strategies must be derived from business strategies, rather than solely from cost considerations.

• The company should set its logistics goals to match or exceed competitors’ service standards and should involve members of all relevant teams in the planning process.


Asahi Breweries

Asahi Breweries overhauled its delivery system to ensure that fresh beer is delivered within five days of production.


Customer Demands

• Today’s stronger demands for logistical support from large customers will increase suppliers’ costs.

• Customers want more frequent deliveries so that they do not have to carry as much inventory.

• They want a shorter order-cycle time, which means that suppliers will have to carry high in-stock availability.

• Customers often want direct store delivery rather than shipments to distribution centers.


Customer Demands

• They want mixed pallets rather than separate pallets.

• They want tighter promised delivery times.

• They may want custom packaging, price tagging, and display building.


Responding to Customer Demands

• Suppliers cannot reject many of these requests, but at least they can set up different logistical programs with different service levels and customer charges.

• Smart companies will adjust their offerings to each major customer’s requirements.

• The company’s trade group will set up differentiated distribution by offering different bundled service programs for different customers.


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Thank you

Date post:	07-Jul-2015
Category:	Business
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Mma6e chapter-16 final

Business