CHAPTER 13: DISTRIBUTION AND PRICING

Right Product, Right Person, Right Place, Right Price

DISTRIBUTION: GETTING YOUR PRODUCT TO YOUR CUSTOMER

Producer Wholesaler Consumer

Channel of Distribution – the network of organizations and processes

that links producers to consumers

Distribution is a key element of the marketing mix Where should the product be sold? How will it get to the location(s) from the factory?

DISTRIBUTING DIRECTLY TO THE CONSUMER

Producer Consumer

Direct Channel – Distribution process that links the producer and the customer with

no intermediaries.

For example, Dell

CHANNEL INTERMEDIARIES

Channel Intermediaries – informally called middlemen. They facilitate the movement of products from the producer to the consumer.

Producer Wholesaler Consumer

THE ROLE OF DISTRIBUTORS: ADDING VALUE (Utility)

Form Utility: Turning inputs into finished goods

Time Utility: Providing products at the right time

Place Utility: Offering products at the right place

Ownership Utility:

Providing credit, cashing checking, delivering products

Information Utility:

Offering helpful information

Service Utility: Providing fast, friendly, personalized service

Jamba Juice

Vending Machines

ATM’s, Gas Stations

Pay Pal

Home Depot Service

Makeover stations

DISTRIBUTORS: STREAMLINING CONSUMER TRANSACTIONS

THE MEMBERS OF THE CHANNEL

Retailers – the distributors that sell products directly to the ultimate users

Wholesalers – distributors that buy

products from producers and sell them to other

businesses or non-final users.

WHOLESALERS: SORTING OUT THE OPTIONS

Merchant Wholesalers Take legal possession/title Full-service Limited Service

Drop Shippers Cash and Carry Truck Jobbers

Agents/Brokers Don’t take title of the goods

Amazon

Sam’s Club

Coke Distributor

RETAILERS: THE CONSUMER CONNECTION

Store Retailers Non-Store

Retailers Online Direct Response Direct Selling Vending

eBay, AmazonCatalogs,

telemarketingDoor-to-door

Best Buy at airports

DISTRIBUTION STRATEGY

INTENSIVE DISTRIBUTION

SELECTIVE DISTRIBUTION

EXCLUSIVE DISTRIBUTION

Placing your product in as many stores as possible

Placing your products with “preferred retailers”

Placing your products with only one retail outlet in a given area

Price / Product

Tiffany, Bentley automobiles

Paintball equipment

Starbucks, People magazine

MULTICHANNEL RETAILING

Retailers are encouraging

consumers to buy through multiple

channels

Store Online

PHYSICAL DISTRIBUTION: PLANES, TRAINS, AND MUCH, MUCH MORE

Determining the best distribution channels for your product is only half

the distribution strategy.

How will the product flow through the channel from producer to consumer?

Supply Chain Management – planning and coordinating the movement of products along

the supply chain

Logistics – focuses on the tactics involved in moving the products

ELEMENTS OF THE SUPPLY CHAIN

SUPPLY CHAIN MANAGEMENT DECISIONS

Warehousing Materials Handling Inventory Control Order Processing Customer Service Transportation Security

TRANSPORTATION DECISIONS

Mode

Percentage of U.S.

Volume

Cost SpeedOn-Time

Dependability

Flexibility in

Handling

Frequency of

Shipments

Availability

Rail 40.2% Medium Slow Medium Medium Low Extensive

Truck 40.0% High Fast High Medium High Most Extensive

Ship 9.0% Lowest Slowest Lowest Highest Lowest Limited

Plane 0.2% Highest Fastest Medium Low Medium Medium

Pipeline ** Low Slow Highest Lowest Highest Most Limited

MODES OF TRANSPORTATION:

PRICING : A HIGH STAKES GAME

Pricing plays a key role in the demand for products

Price is a tough variable Legal constraints Intermediary pricing (ie. wholesalers,

distributors) Stable pricing is not the norm

Prices must constantly be evaluated

PRICING OBJECTIVES AND STRATEGIES

Building Profitability Matching the

Competition Creating Prestige

Skimming Pricing

Boosting Volume Penetration Pricing Every-day-low

Pricing High/Low Pricing Loss Leader Pricing

Usually for newly introduced items, rock-bottom pricing to drive high

volumeWalMart, need I say more!

Special sales on limited items (to attract customers), higher prices on

the restPricing selected items below cost to attract customers

Prestige pricing – offering a new product at premium price – attract

price insensitive buyers

PRICING IN PRACTICE: A REAL WORLD APPROACH

Breakeven Point (BP) = Total fixed cost (FC)

Price/Unit (P) – Variable cost/unit (VC)

Breakeven analysis – the process of determining the number of units that must be sold to

cover costs.

USING BREAKEVEN ANALYSIS

Businesses make decisions to adjust the product price and/or costs.

Raise prices Decrease variable costs Decrease fixed costs

Outsource labor, use cheaper components?

Move your plant to Mexico, advertise less?

FIXED MARGIN PRICING

Cost-Based Pricing

Demand-Based Pricing

Profit Margin – the gap between cost and the priceper product.

CONSUMER PRICING PERCEPTIONS: THE STRATEGIC WILD CARD

Consumer price perceptions can defy logic!

The link between price and perceived quality can be powerful Consumers will use price as a quality

indicator Does odd pricing like $196 or $199

always mean a bargain?

PSYCHOLOGICAL PRICING

A recent survey of

1,200 prices, found

that 57% ended in .99

cents, and another

11% ended in .97

or .98 cents. Only

about 3% were whole

dollar amounts.

CHAPTER 17: OPERATIONS MANAGEMENT

Putting It All Together

OPERATIONS MANAGEMENT: IT ISN’T GLAMOROUS, BUT IT MATTERS….

Operations Management – planning, organizing, leading and controlling all the activities in creating value by producing goods and services and distributing them to customers

Good Operations Management:

Most efficient and effective processes

Produce the right goods and services

Produce the right quantities

Distribute products to the right customers at the right time

Operations Management – planning, organizing, leading and controlling all the activities in creating value by producing goods and services and distributing them to customers

Good Operations Management:

Most efficient and effective processes

Produce the right goods and services

Produce the right quantities

Distribute products to the right customers at the right time

EFFECTIVENESS VS. EFFICIENCY

Efficiency – producing output

or achieving a goal at the lowest cost.

Effectiveness – completing tasks

and producing products that

create the greatest value.

“There is nothing so useless as doing efficiently that which should not be done at all”

Peter Drucker, Management Expert

Doing things rightDoing the right

thing

GOODS VS. SERVICES

GOODS SERVICES

Tangible, physical form, can be touched, seen, handled

Intangible, they can be “experienced”, no physical form

Can be stored and inventoried

Must be consumed when they are produced

Can be shipped Must be consumed, where they are provided

Are produced independently of the consumer

Often require customer involvement

Can measure some aspects of quality

Quality is based on customer perceptions

WHAT DO OPERATIONS MANAGERS DO?

Facility Location

Process Selection and Facility Layout

Inventory Control

Scheduling

Quality

FACILITY LOCATION

General Location Factors

Examples of Specific Considerations

Adequacy of utilities

Is the supply of electricity reliable? Is clean water available?

Land Is adequate land available for a facility? How much does the land cost?

Labor market conditions

Are workers with the right skills available? How expensive is labor?

Transportation factors

Is the location near customers and suppliers? Is appropriate transportation nearby?

Quality of life What is the climate like? Are adequate health care facilities available?

Legal and political environment

Does the local government support new business? What are the local taxes, fees, and regulations?

GOING OVERSEAS

Low-wage labor is a key reason firms focus overseas but, low wages do not always translate into low cost

There are a variety of opportunities in rapidly growing foreign markets

Key to balance advantages with drawbacks: Different laws and customs Inadequate infrastructure Inexperienced workers Political instability

PROCESS SELECTION AND FACILITY LAYOUT

Flow Shops Produce Large Batches Standardized Products Specialized Machinery Standardized Tasks Assembly Line is a Flow Shop Process

Job Shops Produce Small Batches Variety of Products General-purpose Machinery Flexible Processes

TECHNOLOGY OF OPERATIONS

Automation – replacing human operations and control of machinery

and equipment with some form of programmed control.

Robot – a programmable machine that is capable of manipulating

materials in order to perform tasks.

AUTOMATION: LET THE MACHINES DO IT

ROBOTS

• Robots are well suited for dangerous, tedious, dirty and physically demanding tasks.

• Robots don’t get tired

• Robots are flexible

INVENTORY CONTROL: DON’T JUST SIT THERE

Why hold inventories… Smooth out production schedules Meet demand increases Reduce switching costs Compensate for forecast errors

Why not… Unsold inventory ties up funds Inventory must be warehoused and managed Risk of losses due to spoilage, obsolescence

and pilferage

REDUCING INVESTMENT IN INVENTORY: JUST-IN-TIME TO THE RESCUE

Produce goods and services to meet actual demand. Minimize inventoriesat all stages of the supply chain through coordination.

MANAGING SUPPLY CHAINS

Supply chains can be complex Wide range of functions Involve many firms Heavy use of

technology RFID Chips

Internet has provided great tools for supply chain management

TRADE-OFF BETWEEN VERTICAL INTEGRATION AND OUTSOURCING

Vertical Integration Gain control over

supply chain Begin producing

its own parts Buying suppliers

Outsourcing Use outside firm

for producing supplies

Focus on key production areas

Cost savingsThe trend has been to rely more on outsourcing

which has become a controversial issue.

ENTERPRISE RESOURCE PLANNING (ERP) : CREATING ONE BIG SYSTEM

The goal of ERP is to integrate the flow of information

ERP systems can be costly and challenging to implement

Most firms that complete implementation of ERP systems, report being satisfied with the results

FOCUS ON QUALITY

Quality improves effectiveness and efficiency

Quality helps achieve competitive advantage

Lower costs, increases value Poor quality costs

DEMING CHAIN REACTION

Costs decrease because of less rework, fewer mistakes, fewer delays and snags,

and better use of time and materials

Improve Quality

Productivity Improves

Capture the market with better quality and lower price

Stay in business

Provide jobs and more jobs

W. Edwards Deming, viewed as the father of

the quality movement, first

proposed the relationship

between quality and business in the early 1950s.

HOW AMERICAN FIRMS RESPONDED TO THE QUALITY CHALLENGE

A broad concept of quality: Total Quality Management: Customer Focus Build quality throughout the organization Empowerment of employees Focus on prevention of errors Long-run commitment to continuous

improvement

INTERNATIONAL ORGANIZATION FOR STANDARDIZATION

Founded in 1947 Network of national standards institutes

in 150 nations ISO 9000 Certification

Generic quality standards Updated and modified, latest version is ISO

9000:2005 Environmental management focused

standards: ISO 14000

THE BALDRIGE NATIONAL QUALITY PROGRAM

Created by Congress in 1987 to encourage global competition

Participating firms are extensively evaluated

Detailed reports of company strengths and weaknesses

The 2011 Baldrige Award recipients include: Concordia Publishing House, St. Louis, Mo. (nonprofit)Henry Ford Health System, Detroit, Mich. (health care)Schneck Medical Center, Seymour, Ind. (health care)Southcentral Foundation, Anchorage, Alaska (health care)

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