Marketing Channel Strategy
partners share inventory and stocking information to ensure that no products are
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partners share inventory and stocking information to ensure that no products are under- or overstocked on retail shelves. These systems typically increase the fre- quency of shipments but lower the size per shipment, producing lower inventories held in the system and higher turnaround, both of which are sources of increased channel profitability. Moreover, CRP systems reduce inventory carrying costs, mini- mize the need for purchase orders, and often create closer relationships between the parties involved, resulting ultimately in greater channel loyalty. 3 However, a CRP also demands a routinized, strong relationship between channel partners. Trust, or confidence in the reliability and integrity of a channel partner, is required to achieve the high degree of cooperation among channel partners that is necessary to manage the CRP over time. 4 Fewer Contacts Without channel intermediaries, every producer would have to interact with every potential buyer to create all possible market exchanges. As the impor- tance of exchange in a society increases, so does the difficulty of maintaining all of these interactions. Consider a simple example: in a small village of only CHANNEL BASICS 40 10 households trading among themselves, 45 transactions would be necessary to conduct decentralized exchanges at each production point (i.e., [10 × 9]/2). But if the village added a central market with one intermediary, it could reduce the complexity of this exchange system and facilitate transactions, such that only 20 transactions would be required to carry out the centralized exchange (10 + 10). Implicit in this example is the notion that a decentralized system of exchange is less efficient than a centralized network that uses intermediaries. The same rationale applies to direct selling from manufacturers to retailers, relative to selling through wholesalers. Consider Figure 2.1. Assuming four manufacturers and 10 retailers that buy goods from each manufacturer, the number of contact lines amounts to 40. If the manufacturers sold to these retailers through one wholesaler, the number of necessary contacts would fall to 14. The number of necessary contacts instead increases with more wholesalers. For example, if the four manufacturers in Figure 2.1 used two wholesalers instead of one, the number of contacts would rise from 14 to 28; with four wholesalers, the number of contacts grows to 56. Thus, employing more and more intermediaries creates diminishing returns, viewed solely from the point of view of the number and cost of contacts in the market. Of course, in this example we assume that each retailer contacts each of the wholesalers used by manufacturers. But if a retailer prefers a certain wholesaler, any effort by the manufacturer to restrict the number of wholesalers creates the risk of excluding the retailer’s preferred wholesaler from the channel, which could leave the manufacturer unable to reach the market served by that retailer. In this simplistic example, we also assume that the cost and effectiveness of each contact—manufacturer to wholesaler, wholesaler to retailer, manufacturer to retailer—are equivalent. Such an assumption clearly does not hold in the real world, where selling through one type of intermediary generally entails very dif- ferent costs from those accrued by selling through another intermediary. Not all intermediaries are equally skilled at selling or are motivated to sell a particular manufacturer’s product offering, which certainly affects the choice of which and how many intermediaries to use. Thus we assert that it is the judicious use of intermediaries that reduces the number of contacts necessary to cover a market. This principle guides many manufactur- ers that seek to enter new markets but want to avoid high-cost direct distribution through their own employed sales forces. The trend toward rationalizing supply chains by reducing the number of suppliers also appears consistent with reducing the number of contacts in the distribution channel. In summary, intermediaries necessarily participate in marketing channels because they both add value and help reduce costs. These roles raise another key question, then: what types of work do the channels themselves actually perform? Selling Di re ct ly 40 Contact Line s Selling Th ro ugh One Wholesale r 14 Contact Line s Selling Th ro ugh Tw o Wholesaler s Re tailer s Wholesaler Manufactur er s Re tailer s Wholesaler Manufactur er s Re tailer s Manufactur er s 28 Contact Line s FIGURE 2.1 Contact Costs to Reach the Market W ith and W ithout Intermediaries |