Developing a Supply Chain and Distribution Channel
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Published: Mon, 22 May 2017
Most producers use intermediaries to bring their products to market. They try to develop a distribution channel marketing channel to do this. A distribution channel is a set of interdependent organizations that help make a product available for use or consumption by the consumer or business user. Channel intermediaries are firms or individuals such as wholesalers, agents, brokers, or retailers who help move a product from the producer to the consumer or business user.
A company’s channel decisions directly affect every other marketing decision. Place decisions, for example, affect pricing. Marketers that distribute products through mass merchandisers such as Wal-Mart will have different pricing objectives and strategies than will those that sell to specialty stores. Distribution decisions can sometimes give a product a distinct position in the market. The choice of retailers and other intermediaries is strongly tied to the product itself. Manufacturers select mass merchandisers to sell mid-price-range products while they distribute top-of-the-line products through high-end department and specialty stores. 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.
Some companies pay too little attention to their distribution channels. Others, such as FedEx, Dell Computer, and Charles Schwab have used imaginative distribution systems to gain a competitive advantage.
Functions of Distribution Channels
Distribution channels perform a number of functions that make possible the flow of goods from the producer to the customer. These functions must be handled by someone in the channel. Though the type of organization that performs the different functions can vary from channel to channel, the functions themselves cannot be eliminated. Channels provide time, place, and ownership utility. They make products available when, where, and in the sizes and quantities that customers want. Distribution channels provide a number of logistics or physical distribution functions that increase the efficiency of the flow of goods from producer to customer. Distribution channels create efficiencies by reducing the number of transactions necessary for goods to flow from many different manufacturers to large numbers of customers. This occurs in two ways. The first is called breaking bulk. Wholesalers and retailers purchase large quantities of goods from manufacturers but sell only one or a few at a time to many different customers. Second, channel intermediaries reduce the number of transactions by creating assortments-providing a variety of products in one location-so that customers can conveniently buy many different items from one seller at one time. Channels are efficient. The transportation and storage of goods is another type of physical distribution function. Retailers and other channel members move the goods from the production site to other locations where they are held until they are wanted by customers. Channel intermediaries also perform a number of facilitating functions, functions that make the purchase process easier for customers and manufacturers. Intermediaries often provide customer servicessuch as offering credit to buyers and accepting customer returns. Customer services are oftentimes more important in B2B markets in which customers purchase larger quantities of higher-priced products.
Some wholesalers and retailers assist the manufacturer by providing repair and maintenance service for products they handle. Channel members also perform a risk-taking function. If a retailer buys a product from a manufacturer and it doesn’t sell, it is “stuck” with the item and will lose money. Last, channel members perform a variety of communication and transaction functions. Wholesalers buy products to make them available for retailers and sell products to other channel members. Retailers handle transactions with final consumers. Channel members can provide two-way communication for manufacturers. They may supply the sales force, advertising, and other marketing communications necessary to inform consumers and persuade them to buy. And the channel members can be invaluable sources of information on consumer complaints, changing tastes, and new competitors in the market.
The Internet in the Distribution Channel
By using the Internet, even small firms with limited resources can enjoy some of the same competitive advantages as their largest competitors in making their products available to customers internationally at low cost. E-commerce can result in radical changes in distribution strategies. Today most goods are mass-produced, and in most cases end users do not obtain products directly from manufacturers. With the Internet, however, the need for intermediaries and much of what has been assumed about the need and benefits of channels will change. In the future, channel intermediaries that physically handle the product may become largely obsolete. Many traditional intermediaries are already being eliminated as companies question the value added by layers in the distribution channel. This removal of intermediaries is termed disintermediation, the elimination of some layers of the distribution channel in order to cut costs and improve the efficiency of the channel.
Distribution intensity refers to the number of intermediaries through which a manufacturer distributes its goods. The decision about distribution intensity should ensure adequate market coverage for a product. In general, distribution intensity varies along a continuum with three general categories: intensive distribution, selective distribution, and exclusive distribution.
An intensive distribution strategy seeks to distribute a product through all available channels in an area. Usually, an intensive distribution strategy suits items with wide appeal across broad groups of consumers, such as convenience goods
Selective distribution is distribution of a product through only a limited number of channels. This arrangement helps to control price cutting. By limiting the number of retailers, marketers can reduce total marketing costs while establishing strong working relationships within the channel. Moreover, selected retailers often agree to comply with the company’s rules for advertising, pricing, and displaying its products. Where service is important, the manufacturer usually provides training and assistance to dealers it chooses. Cooperative advertising can also be utilized for mutual benefit. Selective distribution strategies are suitable for shopping products such as clothing, furniture, household appliances, computers, and electronic equipment for which consumers are willing to spend time visiting different retail outlets to compare product alternatives. Producers can choose only those wholesalers and retailers that have a good credit rating, provide good market coverage, serve customers well, and cooperate effectively. Wholesalers and retailers like selective distribution because it results in higher sales and profits than are possible with intensive distribution where sellers have to compete on price.
Exclusive distribution is distribution of a product through one wholesaler or retailer in a specific geographical area. The automobile industry provides a good example of exclusive distribution. Though marketers may sacrifice some market coverage with exclusive distribution, they often develop and maintain an image of quality and prestige for the product. In addition, exclusive distribution limits marketing costs since the firm deals with a smaller number of accounts. In exclusive distribution, producers and retailers cooperate closely in decisions concerning advertising and promotion, inventory carried by the retailers, and prices. Exclusive distribution is typically used with products that are high priced, that have considerable service requirements, and when there are a limited number of buyers in any single geographic area. Exclusive distribution allows wholesalers and retailers to recoup the costs associated with long selling processes for each customer and, in some cases, extensive after-sale service. Specialty goods are usually good candidates for this kind of distribution intensity.
Types of supply chain flexibility
In defining ‘types’ of supply chain flexibility the author list no less than 71 different types, linking each type with the appropriate reference. I believe that some of these could and should be aggregated into other types, thus reducing the overall number, but it only goes to show that flexibility in one industry is different from flexibility in another industry.
Dimensions of supply chain flexibility
After describing the various types of supply chain flexibility, More & Babu propose three domains of dimensions for supply chain flexibility:
â€¢ Core flexibility
â€¢ Global flexibility
â€¢ Supplemental flexibility
Core flexibility, obviously being the most important dimension, is described more in detail, the others more cursory. This is not a glitch, but only natural, since the other dimensions essentially are a result of core flexibility, which relates to:
â€¢ Sourcing / Procurement / Purchasing
â€¢ Logistics Distribution
â€¢ Information and communication (ICT)
â€¢ Human resources
Global flexibility is essential for achieving spatial and temporal flexibility and is seen as a response to environmental uncertainty. Although not clearly defined in the article, global flexibility encompasses all elements needed for stretching a supply chain around the globe, from supplier to end customer, particularly related to a network that can change time and space.
Supplemental flexibility appears as a rather foggy concept and I am not sure what the authors mean, but I guess it is anything else related to flexibility and not covered above. Or it could be flexibility that is not intended or designed or built in, but just happens to be there when needed?
Supply chain flexibility for business excellence
This section of the article deals with supply chain principles and how they relate to or are different from supply chain flexibility. I should add that while some of them are well described and well discussed, others are only given a more cursory review.
Supply chain flexibility – lean
While lean may work well in a predictable and non-volatile environment, flexible works better when faced with disruptive events.
Supply chain flexibility – agile
Agility is an extended concept of flexibility, and is achieved when the system is inherently flexible and able to respond to unpredictable events. A flexible system can be, but isn’t always agile; an agile system is always flexible.
Supply chain flexibility – responsive
Responsiveness is the ability to react to customer demands or market changes. An inherently flexible system is able to respond; however, it is possible to be flexible, but not responsive, while responsiveness will always imply that there is an underlying flexible system. A flexible supply chain with time (to meet and satisfy the changes) as the primary constraint is a responsive supply chain.
Supply chain flexibility – resilient
Here the authors follow Sheffi in that more flexibility equals more resilience, thus enabling continuous reconstruction and the ability to bounce back after any disturbance.
Supply chain flexibility – robust
Interestingly, my own article on robustness and flexibility, which they reference, makes it into the ‘robust’ category. I’m not sure that’s where I would put it, but maybe yes. At that time (2004) my ideas on flexibility were still in the molding. However, as More & Babu see it, flexibility is an external concept, robustness is an internal concept, being flexible is to adapt and adjust, being robust is to accommodate and absorb. Faced with a disruption or external event, a robust supply chain will continue unchanged, while a flexible supply chain will continue changed. Robust is being risk averse and seeking certainty. Flexible is accepting uncertainty and and the risk that comes with it. I am not sure that is how I saw it in 2004, but looking back at my definitions of robust and flexible, yes, that interpretation is justified.
Forces and dynamics of supply chain flexibility
This is one of the more interesting parts of the paper, where they look at three (four) new terms: (domains and) stimuli, enablers and inhibitors, all contributing to how, or how not, supply chain flexibility can be achieved. The individual items pertaining to these terms make up an impressive list, which is very thorough, drawn from the reviewed literature.
Stimuli are the elements that compel the supply chain partners to take actions in response to a changing environment. Listing 16 domains (eg customer, competitor, technology, market, product, and 13 more …), the authors look at which stimuli that would bring forth supply chain flexibility. In technology, for instance, it could be rapid advances in technology, in product it could be shorter and shorter life cycle of products, and so on. Some 70 or so stimuli are listed.
Enablers are tools and techniques that support the implementation or realization of supply chain flexibility. The authors divide the enablers according to six ‘segments’ in the supply chain, starting with supply and procurement, and divided into sub-segments, and list some 150-200 enablers (I gave up counting).
Inhibitors are internal and external forces that impede the supply chain. Here we have another ‘everything that comes to mind’ list, including no less than 62 inhibitors, ranging from market constraints to the more mundane ‘low morale’.
The dynamics of three forces
This is where the paper really lets me down, slightly. While the discussion itself is excellent, the figure that is supposed to illustrate the three concepts and the discussion leading up to it, is more or less completely void of any of the aforementioned, at least in the way it was presented. It is almost as if this is a completely different model, a good model, but not what I expected.
The basic message I am reading out of this paper is that ‘It is all supply chain flexibility’, whatever we name it, whatever other concepts we bring in, it all comes down to one thing: being flexible. I am also impressed with the breadth of the paper. That is the upside.
If there is a downside to this paper it has to be the length and the attempt at being exhaustive to the point of including way too much detail. This leads to an overly lengthy listing of items, ie the discussion of stimuli, enablers and inhibitors, which would have fared much better had it been focused on a few aggregated items. While the stimuli, enablers and inhibitors are said to be drawn form the literature, no particular references are made to which is drawn from which literature.
Importance of Efficient distribution
FMCG sector lives and dies on the effectiveness of its supply chain. In a market where goods have a limited shelf life and perishables last only a matter of days, its essential that stock movements are timely and accurately tracked. Naturally, suppliers are turning to IT to make their supply chains more responsive to retailer’s demands, whilst working out ways to squeeze more costs out of the supply chain. High volumes and rapid turnovers are key characteristics of the FMCG supply chain and keeping track of stock is no easy task. Receiving goods, checking them in, storing them in the correct way and then checking them out again takes time and costs money.
Applying the right strategy
One strategy that the FMCG Company and its logistics partners can adopt is to avoid goods ever entering the warehouse where possible and this is where network management, cross docking, dynamic sourcing and routing is becoming increasingly attractive in the FMCG supply chain. By receiving goods and shipping them out the same day, warehouses can dramatically reduce costs. The key, of course, is software that gives visibility of the opportunities to cross dock and can then set up and manage all of the required activities, within the transport schedules. In a cut-throat market like retail, this impact on the bottom line shouldn’t be under-estimated.
The FMCG supply chain is also particularly suited to RF data capture technology in the warehouse and the yard, given the high turnover of stock. By keeping tabs on goods both inside the warehouse and en-route to retailers, RF technology can help suppliers have a real-time and accurate picture of their inventory. This can help avoid write-offs, especially of perishable stock.
Be flexible and responsive
In addition, some retailers are raising the bar on how responsive an FMCG supply chain needs to be. As goods quickly move off store shelves, retailers are demanding fast replenishment by the FMCG supplier. By identifying daily or seasonal fast movers and getting the right stock in the right location within the warehouse, the picking process is speeded up and the warehouse optimised through dynamic pick faces. By using historical data and forecasting for peak times, suppliers are much more likely to be able to fulfil orders and avoid stock-outs at busy times.
Stock-outs simply aren’t an option for suppliers. Neither are write-offs where stock has been lost or expired within the four walls of the warehouse. To combat this, many suppliers are moving beyond the traditional principle of first-in, first-out to think about first-expiration first-out. Again, this is an area where RF can play an important role in locating stock correctly and ensuring that companies can keep an accurate track of inventory.
Retailers may drive the FMCG supply chain, but, they are themselves responding to customer centric strategies to win and retain high spending customers and IT is helping them to better serve their customers. A new trend is how the FMCG supply chain is being extended direct to customers with the rapid growth of Internet retail for FMCG goods like food and cosmetics. Online retail is associated with low prices and competitive delivery rates but fulfilling customer orders requires a slick supply chain and maintained stock levels.
Whether it’s for an online audience or a traditional retail outlet, responsiveness and flexibility remain the hallmarks of a successful FMCG supply chain. To make sure the right product is in the right place at the right time, there needs to be cooperation across the whole of the supply chain. The only way to achieve this is to deploy truly integrated supply chain management systems that don’t regard the distribution center or warehouse as a link in the chain but an essential hub in improving customer service and delivery.
ESTABLISHED APPROACHES FOR SUPPLY CHAIN DESIGN
As a first approach, Fisher (FISHER 1997, p.106ff) contrasts different types of goods and their associated demand predictabilities with their respective supply chains. On the basis of two generic product types – functional products with high demand predictability and long life-cycles (e.g. diapers) and innovative products with low demand predictability and short life-cycles (e.g. cellular phones) respectively – he defines two corresponding supply chain types to meet the distinct requirements of these product types. For functional products, the primary goal of supply chain design is cost reduction with respect to predictability and reliability. In contrast, innovative products require supply chains that are designed to minimize the lead time between order and delivery. According to Fisher, these requirements result in two distinct types of supply chains, which he names “Efficient Supply Chain” and “Responsive Supply Chain” .Christopher, Twill and Mason-Jones, based on Fisher’s suggestion, propose the “Lean Supply Chain”, “Agile Supply Chain” and “Leagile Supply Chain”.
Whilethe Lean Supply Chain ocuses on cost reduction for standardized mass-products, the Agile Supply Chain aims for high availability of goods and short lead times. Both supply chain types are similar to the ones described by Fisher, while the Leagile Supply Chain is an extension of the two former types (MASON-JONES et al. 2000, p. 4061ff). It is defined as a combination of Lean and Agile Supply Chains by different authors, introducing a point-of- decoupling (OLHAGER 2003, p. 319ff) to separate Lean (upstream) from Agile (downstream) processes. Extended by Christopher and Towill to what they call “hybrid strategies”, this approach is able to model parallel processes (Lean and Agile) in a single supply chain.
All approaches that were introduced to this point are focused on the demand-side of the supply chain. They become extended to the supply-side by Lee (LEE 2002, p. 93ff), who considers a distinction between stable and evolving supply processes. Stable processes are characterized by fully developed technologies and manufacturing techniques, as well as by a reliable procurement market. On the contrary, an evolving process is not fully developed and becomes subject to permanent change, its procurement market is limited relating to volume and experience. Considering the supply-side, Lee yields a “Risk-Hedging” and an “Agile” supply chain in addition to Fisher’s Efficient and Responsive supply chains. The former is capable of pooling and sharing capacities and resources, e.g. different companies save storage cost by pooling their stocks of certain critical goods. The Agile Supply Chain is defined according to Christopher’s Twill’s and Mason-Jones’ Leagile Supply Chain, namely as a combination of the Responsive and the Risk-Hedging type. Corsten and Gabriel (CORSTEN/GABRIEL 2004, p. 245) propose another attempt to extend Fisher’s approach, without taking Lee’s approach into account. They define four supply chain strategies – a lean supply chain, a flexible supply chain, a fast supply chain and an aligned supply chain. The first three types match the Lean, Leagile and Agile supply chains of Christopher, Twill and Mason-Jones, but the aligned supply chain represents a true extension of the concept. Designed for efficiency, the aligned supply chain is focusing on the optimization of internal processes, unlike the lean supply chain, which tries to further integrate suppliers into the supply chain process
HYBRID SUPPLY CHAINS
Supply chain segmentation allows companies to classify their customers and allocate them to the four segments described above. The corresponding supply chain phenotypes constitute the initial point to adjust all supply chain activities. To supply customers according to their respective requirements, it is recommendable for companies to establish four supply chains, if their portfolio of customers is heterogeneous, or less if a more uniform type of portfolio is present. By this approach, all customers can be satisfied, while supply chain agility and efficiency are respected. Simultaneous operating of different supply chains, in which customers are being allocated accordantly, is therefore the next consequential step in supply chain management. The mentioned antagonism of a “one size fits all” approach and its divergent goals can be resolved by introducing the described approach which is called “hybrid supply chain”.
To satisfy heterogeneous customer needs, “one size fits all” supply chains turn out to be neither effective nor efficient. The pictured antagonism between demand- and supply-side yields significant availability problems which in turn cause eminent sales losses. This conflict can be solved by an end-to-end orientation to the customer, while diversified requirements and characteristics can best be met by a segmented supply chain.
Any attempt to utilize such “hybrid” supply chains for industry will first have to further develop the approach of supply chain segmentation to substantiate the supply chain phenotypes. According to the SCOR-model (SUPPLY CHAIN COUNCIL 2006, p. 2;
BOLSTORFF/ROSENBAUM 2003, p. 2) one has to allocate supply chain management concepts according to the requirements of the high level processes source, make and deliver in order to attain a detailed reference configuration for each supply chain phenotype,.
It is the aim of current research, to develop the supply chain segmentation approach further and to build a framework for hybrid supply chains, in order to support executives in industry in answering the question of number and configuration of supply chains and to assist them to overcome the conflict between the market- and production-oriented sides of the supply chain.
Hybrid supply chains offer an efficient and likewise powerful way to face growing requirements and increasing dynamics of markets, as well as the individualization of customer needs. The final goal is therefore the extension of supply chain management by including hybrid supply chains.
BUILDING THE RESILIENT SUPPLY CHAIN
In today’s uncertain and turbulent markets, supply chain vulnerability has become an issue of significance for many companies. As supply chains become more complex as a result of global sourcing and the continued trend to ‘leaning-down’, supply chain risk increases. The challenge to business today is to manage and mitigate that risk through creating more resilient supply chains.
Supply chain managers strive to achieve the ideals of fully integrated efficient and effective supply chains, capable of creating and sustaining competitive advantage. To this end they must balance downward cost pressures and the need for efficiency, with effective means to manage the demands of market-driven service requirements and the known risks of routine supply chain failures. Better management and control of internal processes together with more open information flows within and between organizations can do much to help.
However, in an age of lengthening supply chains serving globe-spanning operations, recent events around the world have provided frequent reminders that we live in an unpredictable and changing world. Natural disasters, industrial disputes, terrorism, not to mention the spectra of war in the Middle East, have all resulted in serious disruptions to supply chain activities. In these situations ‘business as usual’ is often not an option.
Modern commercial supply chains are in fact dynamic networks of interconnected firms and industries. No organization is an island and even the most carefully controlled processes are still only as good as the links and nodes that support them.All are dependent on efficient and reliable transportation and communication systems, an obvious point, but one that is often overlooked.
These issues are the subject of the Centre for Logistics and Supply Chain
The work presented in this paper forms part of the wider body of research, funded by the UK’s Department for Transport, which aimed to increase the resilience of economic activity to all manner of potential threats.
This paper reports on some of the findings and recommendations of the second stage of that program. The work is empirically based and draws on insights from a number of important industries including food retailing, oil and petrochemicals, pharmaceutical, packaging, electronics, transport services and the distribution of automotive spares. It also includes input from private and public sector organizations involved in the provision of health care and in defense. In particular it focuses on the development of a managerial agenda for the identification and management of supply chain risk, with recommendations to improve the resilience of supply chains.
Supply Chain Resilience
When working effectively and efficiently modern supply chains allow goods to be produced and delivered in the right quantities, to the right places, at the right time in a cost effective manner. Until recently the term ‘supply chain’ was not widely used beyond the confines of academia, specialist sectors of industry and the professional management community. Now, in the wake of a number of far- reaching supply chain disruptions to economic activity it has crossed over into the everyday vocabulary of politicians, general managers and the wider public.
The term ‘supply chain’ is itself a relatively new addition to the lexicon of management, first used in the early 1980s when writers coined the phrase to describe an emerging management discipline. This new discipline was a response to changes in prevailing trends in business strategy, which in turn demanded that internal functional self-interests be put aside to achieve a greater good – a more efficient organ isation, creating and delivering better value to customers and shareholders. It amounted to a redefinition and amalgamation of established business activities, notably ‘logistics’ (integrated transport, warehousing, and distribution) and manufacturing-based ‘operations management’.
The latter drew together elements of purchasing, order and inventory management, production planning and control, plus customer service.
In the 1990s – the efficiency driven age of ‘business process reengineering’ – supply chain management sought to speed the flow of goods and services by extending the integration of elements of logistics, operations management and marketing into cross-functional inter organisational processes. Its avowed aim was to improve the efficiency of product flows from the production of raw materials all the way through to the marketplace where finished goods were delivered to the final consumer. The task was increasingly enabled by rapid developments in information technology, which in turn opened the way for further improvements in efficiency and greater awareness of a changing marketplace and emerging customer requirements.
In practice legacies of functional biases within organisations, together with varying
perspectives of specialist firms mean that the term ‘supply chain’ continues to imply
different things to different people. It is still frequently used to describe either the
management of integrated manufacturing and/or logistics activities within a single
firm’s manufacturing, transport, distribution or retail network. It is also regularly
applied (particularly in the context of purchasing) to describe the management and
performance monitoring of an organisation’s supplier base, through quality
improvement initiatives, involvement in new product introductions, promotions and
overall cost reduction.
For the purpose of this paper we adopt an end-to-end perspective of the flows of
product and accompanying information from the source of raw materials to delivery
to the end customer and sometimes beyond (i.e. after-sales support and where
necessary return). We therefore define a supply chain as:
“the network of
organizations that are involved, through upstream and downstream linkages, in the
different processes and activities that produce value in the form of products and
services in the hands of the ultimate consumer”
. The notion of networks is
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