Supply Chain Analytics and Technology

Supply Chain Analytics and Technology

In addition to outsourcing, globalization, PPPs, and 3D printing, other advancements in data and technology are beginning to exert an impact on the effectiveness and efficiency of the supply chain. First, a rapidly increasing prevalence of powerful computers and methods for capturing customer, supplier, and company information over the past two decades has resulted in the appearance of big data, a colloquial term for the explosive availability of data that has traditionally been hard to capture, store, manage, and analyze. The emergence of big data has presented both great opportunities and significant problems for supply chain managers. There is indeed more information available about supply chain operations than ever before, but the challenge of extracting usable date from this information is also very great. In order to harvest more useful information, many companies are using cloud computing to collaborate on big data projects and analyze findings in a quick and cost-effective manner.

As a result, many organizations are seeking to develop capabilities for supply chain analytics. Supply chain analytics programs that can interpret big data have great potential for improving supply chain operations. For example, the use of bigger and better data should allow supply chain forecasting to become more accurate; shipments to be rerouted in the event of traffic or bad weather; and warehouses to be stocked with exactly the products customers want (and none they don’t want). Each of these ambitions, if realized, would offer lower prices for customers and lead to greater customer satisfaction

Advanced technology enabled by big data is also improving supply chain operations. Fundamentally, the acquisition and analysis of big data allows a company to replace human reasoning with faster and more efficient decision making that is based on information rather than intuition. As a result, and combined with supply chain analytics, a company can automate many of its supply chain processes rather than using human labor. Many tasks that are done repetitively and require significant precision can be accomplished more cheaply and accurately by robots. For example, scientists at the University of California have developed robots—powered by cloud-based data about surgical patients—that are capable of performing basic hip and knee replacement surgery.35 Cloud-based robots are already being used for large-scale production tasks like automobile and airplane manufacturing.

A final consideration related to technological advancement: sensory equipment that connects physical objects to decision-making analytics via the Internet is beginning to emerge. Recall the Internet of Things (IoT), which allows physical objects to relay specific information over the Internet without overt human interaction. The potential impact of the Internet of Things is tantalizing, but the technology is currently in its infant stage. Connections between cargo vessels or trucks and transportation networks may eventually lead to the development of smart transportation modes that re-route in real time based on local traffic patterns, weather events, and accidents. Alternatively, the traffic grid could react to a need for emergency supplies by enabling a sequence of green stoplights along a critical emergency route. The possibilities are essentially endless for the IoT to positively impact the supply chain. Many companies have already launched projects related to the development of IoT-enabled supply chain management strategies.

13-6 Marketing Channels and Channel Intermediaries

A marketing channel can be viewed as a canal or pipeline through which products, their ownership, communication, financing and payment, and accompanying risk flow to the consumer. A marketing channel (also called a channel of distribution) is a business structure of interdependent organizations that reaches from the point of production to the consumer and facilitates the downstream physical movement of goods through the supply chain. Channels represent the “place” or “distribution” element of the marketing mix (product, price, promotion, and place), in that they provide a route for company products and services to flow to the customer. In essence, the marketing channel is the “downstream” portion of the supply chain that connects a producer with the customer. Whereas “upstream” supply chain members are charged with moving component parts or raw materials to the producer, members of the marketing channel propel finished goods toward the customer, and/or provide services that facilitate additional customer value.

Many different types of organizations participate in marketing channels. Channel members (also called intermediaries, resellers, and middlemen) negotiate with one another, buy and sell products, and facilitate the change of ownership between buyer and seller in the course of moving finished goods from the manufacturer into the hands of the final consumer. As products move toward the final consumer, channel members facilitate the distribution process by providing specialization and division of labor, overcoming discrepancies, and providing contact efficiency.

13-6a How Marketing Channels

Work According to the concepts of specialization and division of labor, breaking down a complex task into smaller, simpler ones and assigning these to specialists creates greater efficiency and lower average production costs via economies of scale. Marketing channels attain economies of scale through specialization and division of labor by aiding upstream producers (who often lack the motivation, financing, or expertise) in marketing to end users or consumers. In most cases, such as for consumer goods like soft drinks, the cost of marketing directly to millions of consumers— taking and shipping individual orders—is prohibitive. For this reason, producers engage other channel members such as wholesalers and retailers to do what the producers are not well suited to do. Some channel members can accomplish certain tasks more efficiently than others because they have built strategic relationships with key suppliers or customers or have unique capabilities. Their specialized expertise enhances the overall performance of the channel.

Because customers, like businesses, are specialized, they also rely on other entities for the fulfillment of most of their needs. Imagine what your life would be like if you had to grow your own food, make your own clothes, produce your own television shows, and assemble your own automobile! Luckily, members of marketing channels are available to undertake these tasks for us. However, not all goods and services produced by channel members exist in the form we’d most prefer, at least at first. Marketing channels are valuable because they aid producers in creating time, place, and exchange utility for customers, such that products become aligned with their needs. Producers, who sit at the top of the supply chain, provide form utility when they transform oats grown on a distant farm into the Cheerios that we like to eat for breakfast. Time and place utility are created by channel members, when, for example, a transport company hired by the producer physically moves boxes of cereal to a store near our homes in time for our next scheduled shopping trip. And the retailer, who is often the closest channel member to the customer, provides a desired product for some amount of money we are reasonably willing to give, creates exchange utility in doing so.

13-6b  Functions and Activities of Channel Intermediaries

Intermediaries in a channel negotiate with one another, facilitate transfer of ownership for finished goods between buyers and sellers, and physically move products from the producer toward the final consumer. The most prominent difference separating intermediaries is whether they take title to the product. Taking title means they actually own the merchandise and control the terms of the sale—for example, price and delivery date. Retailers and merchant wholesalers are examples of intermediaries that take title to products in the marketing channel and resell them. Merchant wholesalers are organizations that facilitate the movement of products and services from the manufacturer to producers, resellers, governments, institutions, and retailers. All merchant wholesalers take title to the goods they sell, and most of them operate one or more warehouses where they receive finished goods, store them, and later reship them to retailers, manufacturers, and institutional clients. Since wholesalers do not dramatically alter the form of a good nor sell it directly to the consumer, their value hinges on their providing time and place utility and contact efficiency to retailers.

Other intermediaries do not take title to goods and services they market but do facilitate exchanges of ownership between sellers and buyers. Agents and brokers facilitate the sales of products downstream by representing the interests of retailers, wholesalers, and manufacturers to potential customers. Unlike merchant wholesalers, agents or brokers only facilitate sales and generally have little input into the terms of the sale. They do, however, get a fee or commission based on sales volume. For example, grocery chains often employ the services of food brokers, who provide expertise for a range of products within a category. The broker facilitates the sale of many different manufacturers’ products to the grocery chain by marketing the producers’ stocks, but the broker never actually takes ownership of any food products. Many different variations in channel structures are possible, with choices made based in large part on the numbers and types of wholesaling intermediaries that are most desirable. Generally, product characteristics, buyer considerations, and market conditions determine the types and number of intermediaries the producer should use, as follows:

• Customized or highly complex products such as computers, specialty foods, or custom uniforms are usually sold through an agent or broker, who may represent one or multiple companies. In contrast, standardized product such as soda or toothpaste are often sold through a merchant wholesaler and retailer channel.
• Buyer considerations such as purchase frequency or customer wait time influence channel choice. When there is no time pressure, customers may save money on books by ordering online and taking direct distribution from a wholesaler. However, if a book is needed immediately, it will have to be purchased at retail—at the school bookstore—and will include a markup.
• Market characteristics such as how many buyers are in the market and whether they are concentrated in a general location also influence channel design. In a home sale, the buyer and seller are localized in one area, which facilitates the use of a simple agent/broker relationship, whereas mass-manufactured goods such as automobiles may require parts from all over the world and therefore many intermediaries.

Retailers are those firms in the channel that sell directly to consumers as their primary function. A critical role fulfilled by retailers within the marketing channel is that they provide contact efficiency for consumers. Suppose you had to buy your milk at a dairy, your meat at a stockyard, and so forth. You would spend a great deal of time, money, and energy just shopping for just a few groceries. Retailers simplify distribution by reducing the number of transactions required by consumers, and by making an assortment of goods available in one location. Consider the example illustrated in Exhibit 13.1. Four consumers each want to buy a tablet computer. Without a retail intermediary like Best Buy, tablet manufacturers Samsung, Asus, Microsoft, Apple, and Lenovo would each have to make four contacts to reach the four consumers who are in the target market, for a total of twenty transactions. But when Best Buy acts as an intermediary between the producer and consumers, each producer needs to make only one contact, reducing the number to nine transactions. This benefit to customers accrues whether the retailer operates in a physical store location or online format.

13-6c  Channel Functions Performed by Intermediaries

Intermediaries in marketing channels perform three essential functions that enable goods to flow between producer and consumer. Transactional functions involve contacting and communicating with prospective buyers to make them aware of existing products and to explain their features, advantages, and benefits. Intermediaries in the channel also provide logistical functions. Logistical functions typically include transportation and storage of assets, as well as their sorting, accumulation, consolidation, and/ or allocation for the purpose of conforming to customer requirements. The third basic channel function, facilitating, includes research and financing. Research provides information about channel members and consumers by getting answers to key questions: Who are the buyers? Where are they located? Why do they buy? Financing ensures that channel members have the money to keep products moving through the channel to the ultimate consumer. Although individual members can be added to or deleted from a channel, someone in the channel must perform these essential functions. Producers, wholesalers, retailers, or consumers can perform them, and sometimes nonmember channel participants such as service providers elect to perform them for a fee.

13-7 Channel Structures

A product can take any of several possible routes to reach the final consumer. Marketers and consumers each search for the most efficient channel from many available alternatives. Constructing channels for a consumer convenience good such as candy differs from doing the same for a specialty good like a Prada handbag. Exhibit 13.2 illustrates four ways manufacturers can route products to consumers. When possible, producers use a direct channel to sell directly to consumers in order to keep purchase prices low. Direct marketing activities— including telemarketing, mail order and catalog shopping, and forms of electronic retailing such as online shopping and shop-at-home television networks—are good examples of this type of channel structure. There are no intermediaries. Producer-owned stores and factory outlet stores—like Sherwin-Williams, Polo Ralph Lauren, Oneida, and WestPoint Home—are also examples of direct channels.

By contrast, when one or more channel members are small companies lacking in marketing power, an agent/ broker channel may be the best solution. Agents or brokers bring manufacturers and wholesalers together for negotiations, but they do not take title to merchandise. Ownership passes directly from the producer to one or more wholesalers and/or retailers, who sell to the ultimate consumer. Most consumer products are sold through distribution channels similar to the other two alternatives: the retailer channel and the wholesaler channel. A retailer channel is most common when the retailer is large and can buy in large quantities directly from the manufacturer. Walmart, Sears, and car dealers are examples of retailers that often bypass a wholesaler. A wholesaler channel is commonly used for low-cost items that are frequently purchased, such as candy, cigarettes, and magazines.

13-7a  Channels for Business and Industrial Products

As Exhibit 13.3 illustrates, five channel structures are common in business and industrial markets. First, direct channels are typical in business and industrial markets. For example, manufacturers buy large quantities of raw materials, major equipment, processed materials, and supplies directly from other producers. Manufacturers that require suppliers to meet detailed technical specifications often prefer direct channels. For instance, Apple uses a direct channel to purchase high-resolution retina displays for its innovative iPad tablet line. To ensure sufficient supply for iPad manufacturing, Apple takes direct shipments of screens from Sharp, LG, and Samsung.36

Alternatively, companies selling standardized items of moderate or low value often rely on industrial distributors. In many ways, an industrial distributor is like a supermarket for organizations. Industrial distributors are wholesalers and channel members that buy and take title to products. Moreover, they usually keep inventories of their products and sell and service them. Often small manufacturers cannot afford to employ their own sales force. Instead, they rely on manufacturers’ representatives or selling agents to sell to either industrial distributors or users. Additionally, the Internet has enabled virtual distributors to emerge and has forced traditional industrial distributors to expand their business models. Many manufacturers and consumers are bypassing distributors and going direct, often via the Internet.

13-7b  Alternative Channel Arrangements

Rarely does a producer use just one type of channel to move its product. It usually employs several different strategies, which include the use of multiple distribution, nontraditional channels, and strategic channel alliances. When a producer selects two or more channels to distribute the same product to target markets, this arrangement is called dual or multiple distribution. Dual or multiple distribution systems differ from single channel systems, and managers should recognize the differences. Multiple distribution channels must be organized and managed as a group, and managers must orchestrate their use in synchronization if whole system is to work well. As consumers increasingly embrace online shopping, more retailers are employing a multiple distribution strategy. This arrangement allows retailers to reach a wider customer base, but may also lead to competition between distribution channels through cannibalization (whereby one channel takes sales away from another). When multiple separate channels are used, they must all complement each other. Some customers use “showrooming” as a way of learning about products, but may then also shop as a way of making price comparisons. Regardless of which channel the customer chooses when making the final purchase, they should receive the same messages and “image” of the products.

The use of nontraditional channels may help differentiate a firm’s product from the competition by providing additional information about products. Nontraditional channels include approaches such as mailorder television or video channels, or infomercials. Although nontraditional channels may limit a brand’s coverage, they can give a producer serving a niche market a way to gain market access and customer attention without having to establish physical channel intermediaries and can also provide another sales avenue for larger firms.

Furthermore, companies often form strategic channel alliances that enable them to use another manufacturer’s alreadyestablished channel. Alliances are used most often when the creation of marketing channel relationships may be too expensive and time consuming. For example, U.S.-based Vera Bradley, Inc. signed a deal with Mitsubishi Corporation and its partner Look, Inc. to distribute the former’s handbags, luggage, and accessories in the Japanese department stores and boutiques in their respective networks. This alliance helps Vera Bradley reach new markets in foreign cities and diversifies its revenue base, while minimizing its risks of going abroad.37

In addition to using primary traditional and nontraditional channels to flow products toward customer markets, many businesses also employ secondary channels, using either an active or passive approach. For example, though most automobile manufacturers sell their finished products to end users through networks of owned or franchised dealers, they also sell cars to rental agencies such as Enterprise or Hertz, who then rent them to potential customers. Similarly, fashion apparel companies might distribute their premium products, such as silk ties or branded watches, through primary channels such as department stores or specialty stores, while using an off-brand or discount outlet for distribution of low-end products. In each case, the goal of the company is the same: to engage a segment of customers who might otherwise never experience the product by offering it at a more easily affordable price or under trial conditions.

Marketers must also be aware, however, that some unintended secondary channels also exist. In some countries, gray marketing channels may be used to sell stolen or counterfeited products, which could detract from the profitability of the primary and secondary channels controlled by the business. Counterfeit products such as North Face outerwear, Rolex watches, and Prada handbags can be very difficult to distinguish from the real thing, and their presence provides unintended competition for the producer when such products are distributed through unauthorized intermediaries.

Along with marketing channels that move products downstream to end customers, retailers and manufacturers also manage channels that move products upstream, in the direction of the producer. These reverse channels enable consumers to return products to the retailer or manufacturer in the event of a product defect, or at the end of the product’s useful life to the consumer. The retailers or manufacturers can then recycle the product and use components to manufacture new products, or refurbish and resell the same product in a secondary market. Several large companies, including Apple, Best Buy, and Walmart, offer opportunities to recycle items ranging from plastic bags and batteries to televisions and Christmas trees. Consumers and companies alike view reverse channels as not just a way to reduce the firm’s environmental impact, but also as a means to gain some financial benefits as well.38 For example, Apple will pay consumers for their old Apple products if they qualify for resale, or if their component parts are valuable for manufacturing new products.39 Drop and shop programs use convenience to get consumers to recycle products, like batteries or cell phones, during a regular trip to the store.

13-7c Digital Channels

With technology changing rapidly, many companies are turning to digital channels to facilitate product distribution. Digital channels are pathways for moving product and information toward customers such that they can be sent and/or received with electronic devices, such as computers, smartphones, tablets, or video game consoles. Digital channels allow for either push- or pull-based information and product flows to occur, and sometimes simultaneously. For example, a downloaded video game or music file purchased by a customer can also include a digital ad for more games or a new music player.

In response to the growth of digital channels, customers are turning in droves to M-commerce, whereby a mobile device is used to assess, compare, and/or buy products. For example, suppose you need a ride from one point in Chicago to another. Instead of having to hail a cab or walk to the nearest elevated train station, you can use Uber’s smartphone app to contact a local driver who will take you directly to your destination. A key advantage of Uber and similar apps is their frictionless payment interface. When you are done with your ride, you just get out of the car and walk away while the app charges your credit or debit card and pays the driver.40 M-commerce is currently experiencing the largest growth in both retail and channel decision-making, in part because of its more than $20 billion annual revenue.

M-commerce also enables consumers using wireless mobile devices to connect to the Internet and shop. Essentially, M-commerce goes beyond text message advertisements to allow consumers to purchase goods and services using wireless mobile devices. M-commerce users adopt the new technology because it saves time and offers more convenience in a greater number of locations. The use of M-commerce has become increasingly important as users grow in both number and purchasing power. Consumers have become more reliant on digital technologies, as shown in the world’s first fully digital generation, the Millennials, and firms that fail to react to this trend risk losing a rapidly growing group of M-commerce customers.41

Many major companies, ranging from Polo Ralph Lauren to Sears, already offer shopping on mobile phones, and the growth potential is huge. Along with smartphone use, consumers are shopping with tablets just as much, if not more, than with company websites. One study even found that tablets accounted for twice as much in web-based sales as smartphone purchases.42 M-commerce in the United States will exceed $41 billion by 2017 and sales made on mobile devices on a global scale will exceed $110 billion in the same time frame.43 In the United States, 87 percent of adults own a cellphone, 45 percent own a smartphone, 31 percent own a tablet, and 26 percent own an e-reader.44 Fifty-five percent of adults use the Internet on their mobile devices, and 31 percent report that they go online with their mobile device more than they do with a desktop or laptop computer.45 The gap between the number of smartphones owned and smartphones used for purchases is closing rapidly. During the holiday season, about 30 percent of smartphone owners check prices using some kind of price comparison app or read reviews online while inside a store, and almost 50 percent use their smartphones to call a friend or family member for purchase advice.46 Overall, more than two-thirds of Americans use their mobile devices to obtain shopping information.

Along with smartphone technology, companies are starting to look into other digital channels with which to connect with their customers. Social shopping allows multiple retailers to sell products to customers through social media sites. Aaramshop brings hundreds of neighborhood grocery stores to customers through Facebook. Customers makes their purchases online and their specific neighborhood stores take care of delivering the items directly to customers’ homes.48 Home delivery extends beyond groceries in many heavily populated areas. In China and India, McDonald’s has started delivering directly to its customers instead of making consumers come to them. Firms are also using social media website as digital channels—even in some cases without offering a purchasing opportunity. Companies create profiles on websites like Pinterest or Facebook and use them not only to give customers information about their products, but also to collect customer information. According to one recent study, 38 percent of all online customers follow at least one retailer on a social networking site. Many customers use these website to find product information or get information on special deals, and those who follow a company’s blog or profile on a social media site often end up clicking through to the firm’s website.

While some services group retailers together in order to bring products to customers, others allow consumers to combine and order larger amounts. Websites like Groupon and LivingSocial give customers the opportunity to fulfill their individual needs at group prices. Many of these sites are organized and managed by intermediaries between manufacturers and customers, but others may be customer initiated or even created by firms to better promote their own products and manage demand.