Transcript MBA 860 - Adv. Mkt. Strategy - Information Technology Services

Chapter 5
New Product Development,
Management, and Strategy
Chapter Outline
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Product Strategy in Business Marketing
Product Lines Defined
Business New Product Development
Organization of the New Product Effort
Product Life-Cycle Analysis
Determinants of the Product Mix
The Product Adoption–Diffusion Process
Product Portfolio Classification, Analysis, and Strategy
Product Deletion Strategy
Marketing of Business Services
Important Characteristics of Business Services
Business Service Marketing—Challenges and Opportunities
Product Lines Defined
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Proprietary or catalog: Standard products offered to many customers
and usually inventoried in anticipation of sales orders. For example,
the DoAll Company keeps a large inventory of model No. C916A Band
Saws to ensure quick delivery to customers.
Custom-built: Different variations of accessories and options to
complement proprietary or catalog products offered. For example, the
DoAll company fills a request from a major company for a custom,
made-to-order saw with a larger motor size, larger table size, and
automatic indexing.
Custom-designed: Products designed for (and usually only for) a
particular user. For example, DoAll designed a unique band saw with a
custom-fixtured table and remote-control operation for U.S. Army to
use to cut up live ammunition.
Industrial services: Intangibles, i.e., maintenance, machine repair,
consulting. For example, DoAll provides a saw and coolant specialist
who makes courtesy inspections at customers’ plants to assist in
using DoAll in product applications.
Custom Product Versus
Proprietary Standard Line Manufacturers
• Custom: BMW designs a windshield washer fluid container for
their new model and sends part prints to a custom plastics
component manufacturer. Manufacturer must build production
equipment but BMW owns molding dies and rights to product.
Supplier sales build relationship, work with customer on
design, finalize terms of sale.
• Standard line: BMW picks a standard wheel bearing for its new
model and orders it directly from manufacturer. Manufacturer
sells same wheel bearing to others. Supplier sales build
relationship, work with customer on application, finalize terms
of sale.
Selling Strategy Varies by
Type of Relationship
Customer
purchases from
many suppliers.
S5
S1
S3
S4
S6
S7
S2
Customer purchases
from bid list of a few
suppliers.
Customer purchases
from one supplier for
that product
category.
S25
Customer
S8
S9
S1
S2
S3
S4
Customer
S1
Customer
Typical Organization Chart Showing
Sales Reporting Relationships
President
VP
Marketing
VP Mfg.
Sales Mgr.
VP Acct.
VP Engineering
Marketing Mgr.
Product
Development Mgr.
Customer
Service Mgr.
Does R&D Believe in the
Marketing Concept?
• It may depend on how long ago researchers graduated from
college. Within past five years, some technical schools have
begun teaching importance of studying customer’s needs as
a first step in design process—following tenets of TQM.
• Still, most technical departments aren’t known for their
customer orientation.
Product Manager/
Marketing Manager Role
Old View:
Organize, coordinate, and control.
New View:
Calculated chaos and controlled
disorder
Communicate—Communicate—
Communicate: Make things happen.
Questions:
• What companies purchase products
from these producers?
• What would a Product Manager do to
facilitate these transactions and
relationships?
New Product Approaches
• Technology push: When perceived value of particular
technology is great; firm has only a vague notion of possible
applications, and usually not much more.
• Market pull: Primarily the result of marketing research
methodologies of interviewing potential users about their
needs, then developing solutions to those perceived market
needs.
Phases of New Product Development
Idea and concept generation
Screening and evaluation
Business analysis
Product development
Product testing
Product commercialization and introduction
Marketing Activities at Each Phase
1. Idea and concept generation: involves the search for product
ideas and concepts that meet company objectives
2. Screening and evaluation: involves analysis to determine which
ideas submitted are pertinent and merit a more detailed study of
potential feasibility and market acceptance
3. Business analysis: return-on-investment criteria are examined
along with competition and the potential for market entry
4. Product development: involves taking the product from an idea
generated during a brainstorming session to a state of readiness
for product and market testing
5. Product testing: involves conducting commercial experiments
necessary to verify earlier business judgements
6. Product commercialization and introduction: includes launching
the new product through full-scale production and sales and
committing the company's reputation and resources to the
product's success
Organization of the New Product Effort
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Product manager: Individuals responsible for four P’s marketing mix
decisions for specific product line as it travels through life cycle;
responsibility often extends to new product development.
New product committee: Part-time interdisciplinary management
group reviews new product proposals; advantages outweigh
disadvantages because committee is most common form of
organizational structure for managing new products.
New product department: Specific department generates and
evaluates new product ideas, directs and coordinates development
work, and implements field testing and precommercialization of new
product; allows for maximum effort in new product development, but
at expense of major overhead costs.
New product venture team: Task force representing various
departments responsible for new product development and
implementation; normally dissolved once new product is established
in market.
Product Life Cycle
Introduction Growth Maturity
Decline
As a strategy planning tool, a “PLC” diagram is a visual representation of
a tendency (many nonbusiness systems tend to same shape, such as to
show income and height). On one level, it is a reminder to planner of what
is coming—if an inflection point is reached, you should know what is
coming (even though you only have actual life cycle to that point). In
business, PLC is often driven by experience curve, economies of scale,
competitive attraction to market opportunities, rate of diffusion factors,
and eventual market saturation. Planners must adjust for actual impact of
these factors on a particular product.
(continued)
Product Life Cycle
Introduction Growth Maturity
Decline
On another level, marketers continuously monitor and adjust their strategy
and tactics as product’s cycle progresses. As a reference, they can refer to
standard mix strategies for each PLC stage (usually represented in a table
directly under PLC diagram on most texts). Marketer’s objective is to adjust
strategy to changing life cycle situation to maximize the results. As maturity
approaches, marketer often decides to attempt a PLC extension by (1)
finding ways to increase current market’s usage, (2) finding totally new uses,
(3) finding new target segments, (4) developing new distribution, or (5)
perhaps a major product improvement and repositioning.
(continued)
Product Life Cycle
Actual PLC curves can be any shape—from product that doesn’t sell
at all, to fad that grows fast but has short life, to seasonal product, etc.
Company depends on its marketers to understand what factors
determine success and to make appropriate strategic decisions. It is
often tempting for new students to want to learn PLC superficially, but in
real world many people depend on in-depth understanding.
Stages in Adoption Process
• Awareness: Buyer learns of new product or service, but lacks
information.
• Interest: Buyer seeks out or requests additional information.
• Evaluation: Buyer (or member of buying team)
considers/evaluates usefulness of product/service;
consideration might be given to value-analysis project or makebuy situation.
• Trial: Buyer adopts product or service on limited basis.
• Adoption: If trial purchase worked, then buyer decides to make
regular use of product/service.
Factors Influencing
Rate of Adoption-Diffusion
• Diffusion: Spread of new product, innovation, or service
throughout an industry over time.
• Diffusion speed varies among industries—fast in
electronics, slow in domestic steel.
• As the marketer you must know, evaluate impact of,
monitor, and where possible affect factors that influence
adoption/diffusion rate.
BCG SBU Portfolio Business Strategy
High
Business
strength,
Growth rate,
Cash use
Low
High
Low
Industry attractiveness,
Market share,
Cash generation
(continued)
BCG Business SBU Portfolio Strategy
High
Business
strength,
Growth rate,
Cash use
Low
Use cash
to make
into star
Defend
position
Nurture
to feed
cash to?
Fix or abandon
High
Low
Industry attractiveness,
Market share,
Cash generation
(continued)
BCG Business SBU Portfolio Strategy
(as might appear in your strategic planning documents)
High
Growth rate
Cash use
Low
Computers
Printers
Modems
Telephones
High
Low
Market share
Cash generation
Note: Size can indicate amount of sales.
(continued)
GE Strategic Planning Grid
High
Medium
Low
High
Business strength axis
Medium
Low
High
Medium
Low
Self-defined as a
function of: size,
growth, share,
profitability, image,
position, people, and
other factors of
business strength or
weakness
Industry attractiveness axis
Self-defined as a function of: size, market growth, strength of
competitors, industry profitability, technical strength, and
positive acting market environmental factors.
(continued)
Problem #1:
SBUs Can Be Repositioned by
Redefining Axes
High
Medium
Low
High
Medium
Business strength axis
Low
High
Medium
Low
Industry attractiveness axis
Coca-Cola* as a
part of the cola
market
*Coca-Cola does not sell
directly to consumers
(continued)
Problem #1:
SBUs Can Be Repositioned by
Redefining Axes
High
Medium
Low
High
Business strength
axis
Medium
Low
High
Medium
Low
Coca-Cola as a
part of the soft
drink market
Industry attractiveness axis
(continued)
Problem #1:
SBUs Can Be Repositioned by
Redefining Axes
High
Medium
Low
High
Medium
Business strength
axis
Low
High
Medium
Low
Coca-Cola as a
part of the all
types of drinks
market
Industry attractiveness axis
(continued)
Problem #1:
SBUs Can Be Repositioned by
Redefining Axes
Bottom line: SBU market share and market strength change as
market is redefined; also possible that industry attractiveness
changes.
Note: Coca-Cola slides are for the purpose of demonstrating the concept of SBU position
shifting as axes are redefined; they do not represent actual strategic position of Coca-Cola.
Problem #2:
Doing What the Grid Position Indicates
• When portfolio models were first introduced, marketers did
what the grid position indicated rather than using them as a
tool to help visualize company’s mix of SBUs,
interrelationships, relative strengths, etc.
• If a larger percentage of business is in products in which
company is not strong, margins are low, and market is not
attractive, they may still be providing important coverage of
fixed overhead. Don’t automatically get rid of “dog”-quadrant
products.
• Bottom line: Two-factor portfolio models are not decision
models; they are tools to help marketers with their thinking.
Even with multiple-factor computer decision support systems,
the decision is still the marketer’s.
Important Characteristics
of Business Services
• Intangibility: Freight forwarding, consulting, repair, etc. can
seldom be tried out/tested in advance of purchase; instead,
buyers must view advertising copy, listen to sales
presentation, or consult current users to gain insight into
expected performance.
• Heterogeneity: A service is an experience and thus cannot be
duplicated; difficult to standardize and thus output quality may
vary.
• Perishability and fluctuating demand: Services cannot be
stored and markets fluctuate by day, week, or season; idle
service capacity is business that is lost forever—no inventory
buffer.
• Simultaneity: Production and consumption of services are
inseparable; this typically puts marketer in very close contact
with customer, requiring them to be highly professional.
Chapter 6
Price, Planning, and Strategy
Chapter Outline
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Business Pricing: An Overview
Major Factors Influencing Price Strategy
Pricing Methods
Demand Assessment and Strategy
Life-Cycle Costing
Price-Leadership Strategy
Competitive Bidding in the Business Market
Leasing in the Business Market
Pricing Discount Strategies
Different Companies,
Different Pricing Objectives
Company
Objective
Alcoa
20% ROI
American Can
Maintain market share
General Foods
33% gross margin
National Steel
Match the market
U.S. Steel
8% ROI after taxes
DuPont
Target ROI, cost-plus
(continued)
Different Companies,
Different Pricing Objectives
• Take three different products and produce them by exactly
the same process in three different companies.
• Because companies use different pricing calculations (1)
product prices will most likely vary by company and (2) price
difference usually will not be consistent.
• Obviously, this is true if marketers use different strategic
markups, but it also true of estimated cost (or even cost in
production).
• For example: One cost element would be fixed cost. How
does each company determine how much fixed cost should
be allocated to each product?
• Moral: Competitors’ prices may be very different from yours.
Study their historical patterns of bidding.
Major Factors
Influencing Price Decision
• Internal factors
– Company
objectives
– Marketing mix
value
– Costs
– Impact on other
products
– Product
differentiation
• External factors
– Buyers
– Demand
– Economic
considerations
– Ethical
considerations
– Competition
– Suppliers
– Government/legal
Pricing Methods
• Marginal pricing (contribution pricing): Attempts to maximize
profits by producing number of units at which marginal cost is
just less than or equal to marginal revenue.
• Economic value to the customer: A higher price will be paid by
buyers who perceive a greater value or benefit to them than
what they would receive from buying a competitive product.
• Break-even analysis: The point at which a firm’s revenue will
equal its total fixed and variable costs at a given price.
• Target return on investment pricing: An annual ROI target (i.e.,
ROI of 20% over cost). Typically done by a mix of individual
product markups over cost that average the target ROI.
• Cost-plus pricing: A version of target ROI pricing in which all
products are marked up by the same percentage.
Zero-Based Pricing
• Zero-based pricing (ZBP): Actually not a pricing method as
much as it is the accounting of the method to the customer,
and the resulting requirement to maintain consistency.
• With ZBP, buyers do not accept that an increase in price of one
cost element will necessarily justify a price increase. Supplier
is required to show actual cost of every element (from base
zero)—perhaps other elements have gone down in cost;
perhaps supplier has allowed some controllable costs to
increase and should not pass those along to customer;
perhaps supplier’s profit margin is already too high.
Pricing Across Product Life Cycle
(Life-Cycle Costing)
• Introduction phase:
– Price skimming: Introductory price set relatively high,
thereby attracting buyers at top of product’s demand
curve.
– Market penetration pricing: Low price is used as an
entering wedge.
• Growth phase
• Maturity phase
• Decline stage
Price-Leadership Strategy
• Price-leadership strategy: One or a very few firms initiate
price changes, with most or all the other firms in the
industry following suit.
• When price leadership prevails, price competition does not
exist. The burden of making critical pricing decisions is
placed on leading firm(s) and other simply follow the leader.
Competitive Bidding
• Competitive bidding: Buyer sends inquiries (requests for
quotations or RFQs) to firms able to produce in conformity
with requested requirements.
• Requests for proposals (RFPs) involve the same process,
but here buyer is signaling that everything is preliminary
and that a future RFQ will be sent once specifics are
determined from the best proposals.
Pricing Decision A
To:
Fr:
Re:
Marketing Manager (you)
Field Sales
New price for XYZ Company
Part #45367 Rev. C
As you know, Therese Garcia, our buyer,
is under a lot of pressure to reduce
purchasing costs by 10%. The current
price of the above referenced product is
$10.00. The projected quantity is 1,000,000
units/year. What price can we offer her for
next year?
(continued)
Pricing Decision A
Assignment A:
You call up the part number on your computer and note that the
price and quantity are correct. The cost system states that the
direct cost is $5.00/unit, and the overhead is $2.00/unit. The
marketing information system suggests weak competitive
activity with no other internal or external factors to be
considered. Make a price decision and formally respond to the
field salesperson.
Pricing Decision B
To:
Fr:
Re:
Marketing Manager (you)
Manufacturing Manager
New cost for XYZ Company
Part #45367 Rev. C
Because of strict cost controls and
production improvements, the cost will
be reduced from $5.00/unit to $4.95/unit.
(continued)
Pricing Decision B
Assignment B:
Calculate the annual cost savings and send manufacturing a
note of congratulations and appreciation. Also, decide how
much of this savings (if any) to pass on to the customer.
Pricing Decision C
To:
Fr:
Re:
Marketing Manager (you)
Field Sales
Customer need—
XYZ Company Part #45367 Rev. C
XYZ is still plating each of our parts
received to protect them from rust. It is a
messy job and it costs them $1.00/unit.
XYZ is requesting that we put this issue
at the head of our value analysis projects.
(continued)
Pricing Decision C
Assignment C:
Compose an e-mail to R&D requesting assistance and
provide priority and spending guidelines.
Pricing Decision D
To:
Fr:
Re:
Marketing Manager (you)
R&D Manager
Rust resistance, XYZ Company
Part #45367 Rev. C
Good news! We have just invented a rust
preventative material additive that will
meet XYZ’s requirements. We can add it
when we produce the part, and it will
increase our cost by only $.01/unit;
therefore, the cost will now be $4.96/unit.
(continued)
Pricing Decision D
Assignment D:
Calculate the savings based on alternative prices such as
$11.00/unit, $10.51/unit, and $10.01/unit. Develop and justify a
final price and proposal for XYZ.
Leasing in the Business Market
• Advantages to buyer
– No down payment
– No risk of ownership
• Advantages to seller
– Increased sales
– Ongoing business relationship with lessee
– Residual value retained
Ten Don’ts of Successful Selling
1. Don’t discuss with customers the price your company charges
others.
2. Don’t attend meetings with competitors at which pricing is
discussed (not even professional association meetings).
3. Don’t give lower prices to your company’s own subsidiaries.
4. Don’t enter into gentlepersons’ understandings with competitors
on prices, terms of sale, discounts, market share, intent to bid, or
customer terminations.
5. Don’t use one product as bait for selling another.
6. Don’t require a customer to buy a product only from you.
7. Don’t forget that individual states and other countries
have antitrust laws.
8. Don’t disparage a competitor’s product without proof.
9. Don’t require reciprocal purchases.
10. Don’t hesitate to consult your company’s lawyer if you are
unsure.
Chapter 7
Business Marketing
Channel Participants
Chapter Outline
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Functions of the Channel Intermediary
The Nature of Channel Decisions
Direct Channels
Indirect Channels
Combining Direct and Indirect Channels
Channel Cooperation
Channel Conflict
Channel Width
Business Marketing Channel Members
• Channel members: A set of independent companies that
form cooperative buyer-seller relationships involving
transactions (such as raw material, components, process
materials, and finished goods for resale), all leading to
getting a particular product line to the final user.
• It is important that each channel member see its
competition not as the other companies that make its
particular materials, but as the alternative channels that can
supply equivalent finished products to the final user.
• Cooperation, coordination, and strategically acting in the
best interests of the channel are key. If the channel loses
business to a competitive source of supply, then all channel
members lose.
Business Marketing Distribution
Channel Members
• Where a producer has alternative channels of distribution
available, the marketer’s challenge is to:
– Select the channel (or combination of channels) that
provides best coverage, provides best service to target
segments, and meets revenue objectives of the
organization.
– Remember that title-taking intermediaries (i.e.,
distributors) are customers of the producer, not just
providers of a distribution service.
(continued)
Business Marketing Distribution
Channel Members
• A distribution channel’s differential advantages can be
difficult for competitors to copy and, done correctly, can
form a sustainable differential advantage.
• The study of distribution channels involves relationships
between channel member companies. Don’t confuse this
with physical distribution, which involves the actual flow
of materials.
Functions of the Channel Intermediary
• Buying: An intermediary buys products for resale to other
intermediaries or to final business users.
• Selling: An intermediary with a capable sales force supported
by established warehouse distribution centers, which is already
serving other product needs of a wide user customer base,
would be a valuable channel addition.
• Storing: An inventory commitment is composed of products to
satisfy customer purchase requirements in a timely manner.
• Transporting: A vast array of transportation alternatives are
available for intermediaries to use to manage the physical
flow of the product to the business user.
(continued)
Functions of the Channel Intermediary
• Sorting: Most intermediaries buy in large quantities and then
sort (breaking of bulk) shipments into smaller lots (often in
combinations) for resale to business users.
• Financing: Intermediaries may invest in inventory, sell and
deliver merchandise to business user, and provide credit terms,
then finance the exchange process.
• Risk taking: Because of obsolescence and deterioration, risk is
inherent in the ownership of inventory; additional risk comes
from uncollectable customer accounts.
• Providing market information: Importance of continuous and
accurate flow of market information concerning final user
needs, pricing conditions, competitive conditions, and user
satisfaction is critical to the success of the channel.
Direct Distribution Channel
• Example: As a first-tier component supplier to automotive
OEMs, Rockwell Automation Inc. may contract to supply
BMW USA’s annual usage of wheel bearings. The
requirement may include several sizes, each in 50,000 to
100,000 quantities. This Rockwell would sell direct. A
Rockwell salesperson would call on BMW to review its
requirements, coordinate purchase transactions, and
maintain the relationship.
Images courtesy of Rockwell Automation
Indirect Distribution Channels
• Example: Rockwell also produces similar wheel bearings
that are used in automotive repair shops and to repair
industrial material handling equipment. Individually these
quantities are too small to be attractive but in total the
quantities are quite high. In this case, Rockwell sells through
a distributor, such as W.R. Grainger.
BMW
Indirect distribution
Direct
distribution
Rockwell Automation Inc.
(car image courtesy of BMW USA)
(continued)
BMW
Both BMW and Grainger would be
important customers of Rockwell,
probably purchasing millions of
dollars worth of bearings each
year.
Rockwell Automation Inc.
Internet Direct Distribution Channel
Grainger uses the Internet for direct transactions with thousands
of repair and maintenance users. Browse its on-line catalog at
www.grainger.com
(Website image courtesy of www.grainger.com)
(continued)
Internet Direct Distribution Channel
• At some point, Rockwell may decide that software
technology exists to allow it to sell to small users directly
over the Internet. Rockwell may then stop using the
distributor, or alternatively use it for additional intensive
distribution.
• It is not unusual for industrial Internet buyers to be required
to use company credit cards (such as American Express).
That removes the necessity for a company like Rockwell to
assess credit and set up an account for a small dollar
purchase. Still, a company like Grainger has an advantage in
direct Internet sales that Rockwell does not. What is it?
Grainger’s advantage is one-stop
shopping, which means convenience
for the customer.
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Grainger is the nation's leading business-to-business
distributor of maintenance, repair, and operating (MRO)
supplies and related information. Its customers have
access to over 560,000 products available to them through
on-line ordering, phone ordering, and stopping by branch
locations.
Rockwell Automation Inc. may agree that Grainger will be
its exclusive distributor in the state of South Carolina.
That is, of course, except for BMW’s South Carolina
assembly plant, which Rockwell will supply directly.
Manufacturer’s Representatives
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In the previous example of Rockwell Automation selling bearings
through an exclusive distributor in South Carolina, it may have been
because research indicated hundreds of small users.
If research had suggested several additional medium-sized users,
Rockwell may have gone with a manufacturer’s representative, who
would sell its bearings plus complementary products from other
manufacturers in return for a commission on sales. The hundreds of
very small users may have been covered by several nonexclusive
distributors.
At some point, sales from the medium-sized users may grow to the point
that manufacturer’s representative’s commissions exceed cost of
supporting a direct Rockwell field salesperson.
If a direct Rockwell field salesperson does take over the territory, at
some point their commissions from their largest account may grow to
the point that the company finds it logical to make the account into a
house account to be handled by headquarters.
As you might guess, distributors, manufacturer’s representatives, and
direct field salespersons are not very happy about house accounts.
Channel Transaction Facilitators
• Do not take title or carry inventory, but rather provide
services such as storage, transportation, or arranging of
sales.
• Independent warehouses, carriers, and manufacturer’s
representatives fall into this category.
• Can be very important to the success of the channel.
Channel Conflict
Channel conflict may result when channel members have mutually
exclusive values, interests, or goals. Manufacturers may want
control of distribution channels for better execution of their
marketing strategies, whereas intermediaries may not see the
manufacturer-determined strategies as in their best interest.
Problem Areas in ManufacturerIntermediary Relationship
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Service and technical assistance
House accounts
Inventory levels
Marketing information and feedback
Training and support services
Other product lines carried
Other manufacturer-supplied channels competing with
intermediary
• Prices and discounts
Channel Conflict Revisited
• Whether between channel members or between channel
members and channel transaction facilitators, potential
conflict is reduced by:
– Relationship building and team management
– Team-building efforts
– Clear and complete contracts
Conflict Resolution (A)
• As the senior (manufacturer’s) marketer involved, resolve
the following:
– The manufacturer’s rep who sells your products to IBM
has been so successful that her commissions (7.5% of
gross sales) now exceed your company president’s
compensation.
– It is not clear in the contract whether commissions would
end if the relationship ends.
Conflict Resolution (B)
• As the senior (manufacturer’s) marketer involved, resolve the
following:
– Your company is a $200 million (annual) manufacturer of
electric motors.
– You have an exclusive distribution agreement with a
multibillion dollar distributor with many distribution centers
and sales branches throughout the U.S. and Canada.
– Your distributor is in the process of dictating to you the
prices it will pay, the inventory it will carry, and the service it
will provide to customers.
Types of Channel Width
• Intensive distribution: Gain access to as many resellers as
possible within a particular geographic area.
• Selective distribution: Distribute product to limited number
of resellers in a particular geographic region; highly
chosen based on distinctive capabilities and high-quality
service.
• Exclusive distribution: Only one channel member can sell
a manufacturer’s products in a given geographic area.
Chapter 8
Physical Distribution
Management and Strategy
Chapter Outline
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The Nature of Physical Distribution
Supply Chain Management
Traffic Management
Functions of Traffic Management
Deregulation
Customer Service in Physical Distribution
Warehousing
Inventory Control
Physical Distribution
• Physical distribution: The process of planning, implementing,
and controlling efficient, effective flow and storage of goods,
services, and related information from point of origin to point
of consumption for the purpose of conforming to customer's
requirements.
• Why is it important to learn about physical distribution?
• Physical distribution cost can represent 20% or more of the
selling price of a product.
• It is an integrated part of the entire company system—
problems in other areas impact distribution and vice versa.
• From customer’s perspective, supplier’s physical distribution
function gets the right products to them, at the right place, at
the right time. These are basic customer rights (along with
right price and right condition).
Logistics Management
• Logistics involves more than physical distribution. In the
science of logistics, the flow of materials is efficiently
managed inbound-through and outbound of an organization.
• Two primary product flows:
– Physical supply (materials management): Flows that
provide raw materials, components, and supplies to the
production process.
– Physical distribution management: Flows that deliver the
completed product to customers and channel
intermediaries.
Materials
management
Supplier
Physical distribution
management
Manufacturer
Customer
Logistics Management
Supply Chain Management
Supply chain management: An integrated
philosophy to manage the multidirectional flow
of materials and information through an entire
channel, from the first raw material supplier to
the ultimate user of the finished product.
Study Area Map
Supply chain management
(a series of connected logistics flows)
Logistics management
Materials management
Incoming transportation
Receiving
Purchasing
Incoming warehousing
Inventory control
Physical distribution
Traffic management
Shipping
Customer service
Finished goods
Functions of Traffic Management
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Mode and carrier selection
Routing
Claims processing
Operation of private transportation
Many of the imported goods you purchase
were shipped in 20-foot or 40-foot
steel containers
Large cranes loaded the containers on a ship.
(Image courtesy of the Port of Charleston)
Larger container ships can hold
4,000 to 6,000 containers.
(Image courtesy of Maersk Sealand)
After unloading from the ship, the containers can
be loaded onto a flatbed rail car for additional
intermodal shipping.
(Image courtesy of CSX Corp.)
Alternatively, a container can be attached to
a set of wheels for motor transport
(as an 18-wheeler trailer).
Intermodal container motor carrier
(Image courtesy of Maersk Sealand)
Rail freight carrier
(Image courtesy of CSX Corp.)
Barge/river freight carrier
Air freight carrier
Pipeline
Container stack train
Jumbo jet air freight
Major Advantages by Transportation Mode
•
Motor
•
– Speed of
delivery
– Diversity of
equipment
– Flexibility
– Frequency of
movement
– Transfer of
goods to other
carriers
– Convenient to
both shipper
and receiver
Rail
•
– Mass movement of
goods
– Low unit cost of
movement
– Dependability
– Long-haul moving
– Wide coverage to major
markets and suppliers
– Many auxillary services
(i.e., switching)
– Transfer of goods to
other carriers
– Specialized equipment
Water
– Very low unit
cost of
movement
– Movement of
low-unit-value
commodities
– Long-haul
movement
– Mass movement
of bulk
commodities
(continued)
Major Advantages by Transportation Mode
•
Pipeline
– Lowest unit
cost
of movement
– Mass
movement
of liquid or gas
products
– Long-haul
moving
– Large capacity
– Most
dependable
mode
•
Air
•
– Frequent service
to major markets
– Large capability
– Overnight service
– Most rapid speed
of any carrier
Intermodal
– Cost savings
– Lower loss and
damage claims
due to
containerization
– Service
extended to
more shippers
and receivers
– Reduced
handling and
storage costs
Controllable Elements in a Logistics System
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Customer service
Logistics communications
Warehousing
Packaging
Production planning
Order processing
Transportation
Inventory control
Materials Handling
Plant and warehouse location
Major Categories of Service Complaints
•
Traffic and transportation
– Damaged merchandise
– Carrier did not meet
standard transit time
– Merchandise delivered
prior to date promised
– Carrier failed to follow
customer routing
– Carrier did not comply
with specific
instructions
– Errors present on bill of
lading
– Condition or type of
transport equipment not
satisfactory
•
Warehousing and packaging
– Merchandise delivered late
– Problem with containers in
packaging plants
– Special promotion merchandise
not specified in delivery
– Errors in warehouse release forms
– Incorrect types and quantities of
merchandise shipped
– Papers not mailed promptly to
headquarters
– Field warehouse delivered
damaged merchandise
(continued)
Major Categories of Service Complaints
• Inventory control
– Stockouts
– Contaminated
products received
– Product
identification
errors
– Poor merchandise
shipped
• Sales order service
– Delayed shipments
– Invoice, sales coding,
or brokerage errors
– Special instructions
ignored
– No notification of
late shipments