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