Selecting Channel Partners PDF

# DISTRIBUTION MANAGEMENT ## CHAPTER 7 ### SELECTING CHANNEL PARTNERS "Focus on the right message for the right people at the right time." - Russel Glass ### LEARNING OUTCOMES At the end of the chapter, readers are expected to have clear understandings and develop competencies to perform the follow...

# DISTRIBUTION MANAGEMENT ## CHAPTER 7 ### SELECTING CHANNEL PARTNERS "Focus on the right message for the right people at the right time." - Russel Glass ### LEARNING OUTCOMES At the end of the chapter, readers are expected to have clear understandings and develop competencies to perform the following: 1. Define and determine the target markets and channel design strategy as part of the distribution process. 2. Identify ways of motivating channel members. 3. Assess the product issues in channel management. 4. Evaluate channel management in pricing issues. 5. Describe the promotion in marketing channels. 6. Distinguish the logistic and supply chain management in marketing channels. ### TARGET MARKETS AND CHANNEL DESIGN STRATEGY #### Markets to be serviced Sales policy of any company whether selling FMCG, industrial products or services dictates that all markets with potential for doing business need to be serviced. Resource limitations prevent the same level of servicing for all markets. The sales manager "priorities" his markets and devotes maximum channel power in the most potential markets. For industrial products, customers are normally located in clusters and it is easier to decide the market coverage for dealers. In the case of consumer products and pharmaceutical products, markets are spread widely, including a vast rural market. For these kinds of products, the frequency of market coverage is decided based on the importance or potential of the market and the prevalent competition. In either case, what competition does, decides the kind of market coverage most of the time. The market coverage plan is reflected in the beat plan of the channel partner. Companies make sure that there is no overlap of markets between their contracted channel members like distributors, stockists, dealers or agents (as otherwise, this could be the primary reason for channel conflict). Independent wholesalers and retailers normally service the market in which they are located. Except for institutions in the market they service, their entire sales happen from their own outlets - their customers come to them for purchase. #### Customer Coverage This is the second part of the beat plan. After deciding the list of markets to be serviced, it is necessary to decide the customers (wholesalers, retailers, and institutions - those who buy the products for their own consumption and not for sale) who need to be called upon and the frequency of calls. The customers can be classified as A, B, and C categories with service levels accordingly. Basic rules on customer coverage include: 1. Every consumer has to be visited at least once a month. 2. Every call on a customer has to be made productive. 3. A customer cannot be visited by two distributors for the same products. 4. The owner of the distributor firm has to also visit the key customer personally apart from the visit by his salesmen. For independent wholesalers and retailers there is no limitation on their customers. Every person who walks into their outlet is a customer. #### Selection of Channel Members Companies have no choice in the use of channels already in the market like wholesalers, retailers, chemists, transporters, warehouse leasing companies, spare parts dealers for all equipment, hotels, restaurants. Companies based on years of experience in the market place, have already defined parameters for selection of their channel partners. They apply these yardsticks among the prospects the salespeople shortlist in the market. For a new company starting its operations afresh, it is quite difficult to get good channel partners. They need to select from the crop available and develop them. #### Termination of Channel Partners Termination of a contracted channel partner is the most painful part of doing business with other parties. It is resorted to only when the partner is unable to meet the objectives of the company or has been caught in dishonest business practices. The termination is normally handled orally by the salespeople. #### Targeting your market Selling your product or service to as many customers as possible is called mass market. For most small businesses, this approach is not the best strategy. Instead, many entrepreneurs focus on identifying a target market, a limited service of customers who are most likely to buy the product or services. #### Types of Customers - **Consumers**: A company who sells to individuals is referred to as a business-toconsumer (B2C) company. Consumers are somewhat difficult to profile because they are varied in terms of changing priorities when their major life takes place. - **Businesses**: A company who sells to other companies is sometimes called a business-to-business (B2B) company. In this case, the customer profile might include details such as company size, type of industry, and geographical location. #### Market Segments Grouping of consumers or businesses within a particular market that has one or more things in common. A target market often includes more than one market segment: - Demographics - Geographics - Psychographics ## CHANNEL DESIGN Channel managers need a comprehensive framework for analysis to guide them through both the initial design of the channel and its ongoing management over time. Without such a framework, they may ignore important elements of the design or management processes resulting in inappropriately constructed or managed channels. The marketing channel challenge involves two major processes: 1. Designing the right channel: This involves segmenting the market, choosing which segments to target, and producing channel service outputs for the target end users in the most efficient way possible. In short, the design process implies the need to match the demand and supply sides of the channel to meet target end-user demands at the minimum possible cost. It also allows for an examination of the gaps that may exist in the current channel operations and suggestions for their control and elimination. 2. Implementing that design. The implementation process requires understanding of each channel member's sources of power and dependence, and an understanding of the potential for channel conflict, and resulting plan for creating an environment where the optimal channel design can be effectively executed on an ongoing basis. Segmentation means the splitting of the market into groups of end-users who are (a) maximally similar within each group, and (b) maximally different between groups. For the channel manager, segments are best defined on the basis of demand for the outputs of the marketing channel. It is also a means of adding value to the free product marketed through it. In this sense, the marketing channel can be viewed as another production line engaged in producing not the actual product that is sold but the ancillary services that define how the product is sold. The value-added services by channel members and consumed by the end users along with the product purchased are called service outputs such as: bulk-breaking, spatial convenience, waiting and delivery time, assortment and variety, customer service and product/market/usage information provision. #### Bulk Breaking Manufacturers make huge batches of products; consumers want to consume just one unit. Therefore, retailers buy in large quantities and offer the consumer exactly the quantity they want. On the other end of this trend are the so-called dollar stores, which offer very small quantities of products at very low prices. #### Spatial Convenience This categorization depends on the extent of search or shopping activity the consumer is willing to undertake. #### Waiting and Delivery Time Consumers differ in their willingness to tolerate out-of-stock situations when they shop; even the consumer exhibits differential willingness across different purchase occasions. Intense demand translates into a demand that a product be in stock at all times by holding extra safety stocks in their stores. #### Product Variety It describes different classes of goods that constitute the product offering that is the breadth of the product lines. ## MOTIVATING CHANNEL PARTNERS Motivating channel members includes efforts in designing capacity building programs, training, promotions support, marketing research and of course working along with the company sales personnel. These persuasive powers explained in a little more detail below: 1. **Referent Power**: This power emanates out of the eminent position that the company holds in the industry. This power generates instant recognition and respect and any intermediary associated with this kind of organization will automatically get a favorable rub-off this image. Companies like Microsoft, Infosys, HUL, Telco, and Colgate have this referent power in the businesses in which they operate. 2. **Expert Power**: This implies that the company has some special knowledge that is value adding to the channel partner. This support could take the form of specialized knowledge on developing business in which the company may train the sales personnel of the distributors. The disadvantage of this kind of power is that it got limited utility unless the company keeps developing valuable knowledge, which can continue to add value to the intermediary. 3. **Legitimate Power**: This is enforcing any task expected of the intermediary as per the agreement or contract signs with the company. The company has the right to get this work out of the channel partner and the intermediary has the responsibility to deliver this expectation. 4. **Support Power**: The company using the channel partners for distribution of its goods and services has the ability to give additional support to the channel partners to help increase volumes. This support could be in the form of promotion on the product (both trade related and consumer related) and subsides (like bearing a part of the distribution cost, cost of auxiliary salesmen employed by the distributors to increase coverage etc.) 5. **Competition Power**: It is the method of generating "rivalry" among the channel partners so that they try to "compete" on performing better than their peers. Sometimes this may take openly organized sales contests with targets on volume and other parameters or could be the constant comparisons which sales managers do in their meetings with channel partners, when they rate the performance of all their partners and rank them in order of good performance. 6. **Reward Power**: As the name implies, companies provide incentives to the channel partners to perform additional tasks at specific points of time. This power is the most persuasive but cannot be used to an extent where it may become a habit or get taken for granted. 7. **Coercive Power**: This is the power of "threat" used by the company to put defaulting channel partner back on track. The threat could be taking away some support even discontinuing the channel partnership if the partner does not do something which the company wants him to do as part of the requirement to sell more of the product. According to Pelton (2002), a marketing channel can be defined as an array of exchange relationships that create customer value in the acquisition, consumption, and disposition of products and services. This definition implies that exchange relationships emerge from market needs as a way of serving market needs. Channel members must come to the marketplace well equipped to address changing market needs and wants. By definition, activities or behaviors that contribute to exchange cannot exist without first having markets. In market settings, it is understood that no individual or organization can operate for long in complete isolation from other individuals or organizations. The interaction between equipment producers, wholesale distributors, retailers, consumers demonstrates how exchange relationships emerge from market needs as a way of serving market needs. In each case, some interaction must exist for marketing to occur. As stated by Porter (2013), channel strategy is a more basic and comprehensive component of distribution strategy than in logistics management. Channel strategy is concerned with the entire process of setting up and operating the contractual organization that is responsible for meeting the firm's distribution objectives, whereas logistics management is more narrowly focused on providing product availability at the appropriate time and place in the marketing channel. Based on Boone (2011), marketing channel strategy, one of the major strategic areas of marketing management, fits under the distribution (place) variable in the marketing mix. Management must develop and operate its marketing channels in such a way as to support and enhance the other strategic variables of the marketing mix in order to meet the demands of the firm's target markets. As mentioned by Vaile (2012), when a marketing channel has been developed, a series of flows emerges. These flows provide the links that tie channel members and other agencies together in the distribution of goods and services. From the standpoints of channel strategy and management, the most important of these flows are: 1. Product flow 2. Negotiation flow 3. Ownership flow 4. Information flow 5. Promotion flow. The product flow refers to the actual physical movement of the product from the manufacturer through all of the parties who take physical possession of the product, from its point of production to final consumers. The negotiation flow represents the interplay of the buying and selling functions associated with the transfer of title (right of ownership) to products. The ownership flow shows the movement of the title to the product as it is passed along from the manufacturer to final consumers. Turning now to the information flow, all parties participate in the exchange of information, and the flow can be either up or down. Finally, the promotion flow refers to the flow of persuasive communication in the form of advertising, personal selling, sales promotion, and publicity. According to Lumpkin (2014), channel management strategy would somehow be out of alignment with corporate or sales strategy but it happens quite frequently. A large number of the partners were small consulting firms that would do little to provide true scale to the sales function. In some cases, a channel manager had 20 small channel partners assigned to them. After defining a clear partner selection and de-selection process, the client dissolved many of the relationships with small players and focused their efforts on signing up distributors and a few select alliance partners that had massive reach in their target market. As discussed by Strutton (2013), the Five Components of a Channel Management Strategy are: True alignment to corporate and sales strategy, Defined partner selection process, Adherence to a channel governance process, Partner focused recruitment package. Comprehensive channel enablement content. Moreover, Blunt (2011) commented that there are Five Types of Marketing Channels 1. Manufacturer to Consumer, In this channel there is no intermediary. Manufacturer makes the goods and directly distributes to consumers. 2. Manufacturer to Retailer to Consumer, Retailer is the intermediary between manufacturer and consumer. He purchases goods from manufacturer and sells to consumer. 3. Manufacturer to Wholesaler to Retailer to Consumer, In this channel, there are two options, one is wholesaler and other is retailer. Wholesaler buys large scale and sells to retailer and the retailer sells to consumer. 4. Manufacturer to Wholesaler to Consumer, Consumer can buy easily and directly from wholesaler. So, in this channel there is only one intermediary and he is wholesaler. 5. Manufacturer to agent to wholesaler to retailer to consumer. Channel selling that is selling products/services through a network of distributors or resellers is a very effective sales model, especially in the B2B space. Channel marketing is not easy because unlike direct marketing, channel marketing must be addressed to both channel partners and end user customers. ## MOTIVATION THEORY - **Abraham Maslow's "Hierarchy of Needs"**: Abraham H. Maslow proposed five levels of needs that every individual seeks to satisfy. Maslow argued that needs form a hierarchy. When no needs are fulfilled, an individual focus on his physiological needs, such as food, clothing, shelter and healthcare. When these needs are achieved, safety needs become important, such as safety, job security and income security. When these are satisfied, social needs (like friendship, belongingness and acceptance) become important and so on up the hierarchy. Until the more basic needs are satisfied, the higher order needs would not be aroused. - **Frederick Herzberg's "Two-Factor Theory"**: Frederick Herzberg approached the question in motivation in a different manner. By asking individuals what satisfies and dissatisfies them. Herzberg tagged factors causing dissatisfaction of workers as hygiene factors, because these factors were part of the context in which the job is performed, as opposed to the job itself. Hygiene factors included, company policies, supervision, working condition, salary, safety and security at work. In contrast, motivators are factors that inherent to the job, such as achievement, recognition, interesting work, increased responsibilities, advancement and growing opportunities. - **Victor Vroom's "Expectancy Theory"**: The theory assumes that a person's motivation to exert effort depends upon his expectations for success. Vroom based his theory on three concepts: expectance, instrumentality and valence. - **Expectancy**: a person's perception of the relationship between effort and performance. It points out to what extent a person expects that increased effort will lead to superior performance. - **Instrumentality**: a person's perception of the relationship between performance and reward It is the degree in which a salesperson believe that higher performance will lead to some kind of reward. - **Valence**: the value placed on a particular reward by a salesperson. - **David McClelland's "Acquired Needs Theory"**: Also known as the Three-Need Theory of the Learned Need Theory, proposed that an individual's specific needs are acquired over time and are shaped by one's life experiences. According to this theory we tend to have one of these needs that affect us more powerfully than the others and thus affect our behaviors. - **Achievement seekers**: thrive to excel and appreciate frequent recognition of how well they are doing. They will avoid low risk activities that have no chance to gain. - **Affiliation seekers**: look for harmonious relationship with other people. They seek approval rather than recognition. - **Power seekers**: want power either to control other people or to achieve higher goals. They seek neither recognition nor approval - only agreement and compliance. - **Douglas McGregor's "Theory X and Y"**: Douglas McGregor (Douglas McGregor, The Human Side of Enterprise (Higher Education, 1960)) developed the theory that there are two basic management behavior types, Theory X managers and Theory Y managers, each of which has a very different set of assumptions about others. 1. **Theory X Assumptions**: * People are passive and must be directed and extrinsically motivated to serve the organizational needs. * The average human dislikes work and will avoid it if possible. * Most people must be coerced, controlled, directed, or threatened with punishment to get them to put forth adequate effort to achieve organizational objectives. * The average human being prefers to be directed, wishes to avoid responsibility, has relatively little ambition, and wants security above all else. 2. **Theory Y Assumptions**: * People are already intrinsically motivated and need proper working conditions. * Physical and mental effort in work is natural. * The average human being learns to accept and seek responsibility. People will exercise self-direction and self-control to achieve objectives to which they are committed to and believe. Motivation can also be Intrinsic or Extrinsic. - **Intrinsic Motivation**: means that individuals are motivated internally by a desire to please themselves or merely by the satisfaction of performing jobs. - **Extrinsic Motivation**: means that someone else provides the motivation through methods such as pay, promotion or recognition. ## DIMENSIONS OF MOTIVATION 1. **Intensity**: It is the magnitude of mental and physical effort put in by the salesperson for his or her activity or goal. As this inner drive becomes more intense, more effort will be put in by him. 2. **Persistence**: It is the extension of effort over time. This works when first dimension "intensity" is high and so the person has high persistence to expend the needed effort for the time period. 3. **Direction**: Implies that the individual can choose how his or her efforts will be spent. Salespeople who are highly competitive and have high intensity and persistence will attempt to determine what activities are required to reach that goals and direct their behavior. ## PRICING ISSUES IN CHANNEL MANAGEMENT This is the most critical issue when dealing with channel partners, whether they are on contract or independent. Like any other businessmen, they want prices which are favorable to give them the highest margins. However, a limit to the margin affects the end price for the product to be paid by the consumer. The pricing mechanism for a consumer product works like this: 1. The end consumer price is decided based on the company costs, margins expected and what the competition is doing for similar products. 2. The permitted retail margins are known and hence, the price to the retailer can be worked out from the maximum retail price. The prices in the market with independent wholesalers and retailers also get affected by the trade promotions run by the companies. However, the prices are negotiated and can vary between customers or even channel partners. Even for the consumer durables, the discounts which companies operate can vary between dealers and so can the end consumer prices which may get influenced by competition. ## PROMOTION IN MARKETING CHANNELS ### Basic Push Promotional Strategies in Marketing Channels Promotional strategies emphasizing the push approach initiated by the manufacturer but requiring channel member support and follow-through can take many forms. Most can be placed in the following seven categories: 1. Cooperative advertising 2. Promotional allowances 3. Slotting fees 4. Displays and selling aids 5. In-store promotions 6. Contests and incentives 7. Special deals and merchandising campaigns #### 1. Cooperative Advertising One of the most pervasive forms of promotional assistance offered by the manufacturer to channel members is that of cooperative advertising. One of the most common is the sharing of costs on a 50-50 basis up to some percentage of the retailer's purchases from the manufacturer. For the manufacturer, the effectiveness of cooperative advertising as a promotional strategy depends heavily on the level of support offered by the channel members. Specifically, the channel members must: - Have sufficient inventory of the advertised product. - Offer adequate point-of-purchase display. - Provide personal selling support if required. Getting this kind of support requires careful administration of the cooperative program by the manufacturer. #### 2. Promotional Allowances The most typical strategy used for promotional allowances is to offer the channel member a direct cash payment or a certain percentage of the purchases on particular products. The allowances are offered to encourage retailers to buy more of the manufacturer's products, to give the products more prominent shelf space, to feature the products in special floor or end-of-aisle displays, or to engage in other similar promotional activity. The availability of scanner data has made it feasible for manufacturers to measure the effects of promotional programs more accurately. But, such measurements are taken after the fact. If a manufacturer wants to do something up front to enhance channel member support and follow-through, the most positive step to take is to make sure that the promotional allowance program is consistent with channel member needs. #### 3. Slotting Fees Slotting fees or slotting allowances: Payments (either in cash or merchandise by manufacturers to persuade channel members, especially retailers, to stock, display, and support new products. The controversy over slotting fees has grown so intense that it has attracted the attention of some members of Congress, the Federal Trade Commission, and the General Accounting Office. They are investigating whether or not this practice violates antitrust laws. From the viewpoint of the channel manager, slotting fees must be viewed as a reality. The channel manager should attempt to work with retailers to discover areas of commonality leading to slotting fee arrangements that create more win-win, rather than win-lose situations. #### 4. Displays and Selling Aids It is estimated that $25 billion is spent each year on displays and selling aids in all types of retail stores. Besides, point-of-purchase (POP) displays, other common types of displays and selling aids include dealer identification signs, promotional kits, special in-store displays, and mailing pieces. Displays and selling aids can be highly effective, but quite often manufacturers have difficulty getting retailers to use these materials. A wide disparity of perceived usefulness of such materials often exists between the manufacturer and channel members. Thus, the channel manager must make an effort to see whether the firm's selling aids and displays are serving any useful purpose or whether they are more of a bother than a help. #### 5. In-store Promotions Most in-store promotions are short-term events designed to create added interest and excitement for the manufacturer's products. Regardless of the form of the in-store promotion, the key issue for the channel manager is whether the retailers perceive benefits from it in the form of increased sales, profits or recognition for the store. #### 6. Contests and Incentives Contests and incentives sponsored by manufacturers to stimulate channel member sales efforts for their products are another popular form of promotion. Sometimes the impact of a contest or incentive promotion can be increased by tying it to some major event at the local, state, national, or even international level. - Product knowledge - Selling technique - Quota Specification #### 3. Missionary Selling This term was first used to describe the activities of manufacturer's salespeople who were sent specifically to convince distributors that they should handle the manufacturer's new products. In the consumer goods industries, missionary salespeople can perform any of the following activities: - Checking wholesale and retail inventory levels - Calling on retailers to inform them of new products - Helping to arrange window and in-store displays - Answering the wholesalers' and retailers' questions and providing advice and training - Trying to promote goodwill - Taking orders for merchandise In the business-to-business market, they are often involved in: - Training distributor salespeople - Accompanying distributor salespeople on sales calls to assist their selling efforts - Taking initial orders for new products from the final user - Providing technical assistance - Helping distributors' salespeople to close sales, especially those requiring technical expertise #### 4. Trade Shows Trade shows are usually annual events organized by associations in industries. The main objective of participating in a trade show (aside from making sales) is to attain the maximum impact and gain the widest recognition for the firm's products - especially new products - and thus, enhance the firm's recognition and respect among its relevant publics. From the standpoint of the manufacturer, using trade shows as a promotional strategy for motivating channel members can be worthwhile. - It provides an opportunity to sell to existing and new channel members. - It provides an opportunity to show channel members new products, strategies, and promotional programs on a face-to-face basis. - It offers a chance to socialize with channel members in ways that might not be possible in the course of regular business relationships. - Perhaps the most important from a long-run channel promotional strategy standpoint, is that a strong presence and impact made by the manufacturer - especially if it seems to shine above other competing manufacturers at the show - can create a sense of pride and belonging in the channel members that sell its products. ## SUPPLY CHAIN MANAGEMENT Supply chain management involves optimizing operations to maximize both speed and efficiency. Speed is important because customers value fast service. Increasing speed, however, can cause costs to skyrocket, so maximizing efficiency is equally important. The most effective supply chains deliver products as fast and as cheaply as possible without sacrificing quality. Top companies accomplish this by using complicated logistics tools, such as computer algorithms that choose optimal routes for product shipping and large company databases that allow distant employees to pool order information and coordinate their efforts in real time. #### Competitive Advantage Lowering prices is a standard way to out-compete other businesses, but that is not always feasible. For example, the cost of doing business limits how low prices can be dropped without going into the red. Supply-chain management provides a way to develop a competitive advantage without having to lower prices. For instance, by developing a more efficient supply chain, you can deliver orders faster to customers. All else being equal, customers will choose the company that meets their needs fastest, giving you a competitive advantage in your industry. #### The Importance of Supply Chain Management It is well known that supply chain management is an integral part of most businesses and is essential to company success and customer satisfaction. #### Boost Customer Service - Customers expect the correct product assortment and quantity to be delivered. - Customers expect products to be available at the right location (i.e., customer satisfaction diminishes if an auto repair shop does not have the necessary parts in stock and can't fix your car for an extra day or two). - Right Delivery Time - Customers expect products to be delivered on time (i.e., customer satisfaction diminishes if pizza delivery is two hours late or Christmas presents are delivered on December 26). - Right After Sale Support - Customers expect products to be serviced quickly. (i.e., customer satisfaction diminishes when a home furnace stops operating in the winter and repairs can't be made for days) #### Reduce Operating Costs. - **Decreases Purchasing Cost**: Retailers depend on supply chains to quickly deliver expensive products to avoid holding costly inventories in stores any longer than necessary. For example, electronics stores require fast delivery of 60" flat-panel plasma HDTV's to avoid high inventory costs. - **Decreases Production Cost**: Manufacturers depend on supply chains to reliably deliver materials to assembly plants to avoid material shortages that would shutdown production. For example, an unexpected parts shipment delay that causes an auto assembly plant shutdown can cost $20,000 per minute and millions of dollars per day in lost wages. - **Decreases Total Supply Chain Cost**: Manufacturers and retailers depend on supply chain managers to design networks that meet customer service goals at the least total cost. Efficient supply chains enable a firm to be more competitive in the market place. For example, Dell's revolutionary computer supply chain approach involved making each computer based on a specific customer order, then shipping the computer directly to the customer. As a result, Dell was able to avoid having large computer inventories sitting in warehouses and retail stores which saved millions of dollars. Also, Dell avoided carrying computer inventories that could become technologically obsolete as computer technology changed rapidly. #### Improve Financial Position - **Increases Profit Leverage**: Firms value supply chain managers because they help control and reduce supply chain costs. This can result in dramatic increases in firm profits. For instance, U.S. consumers eat 2.7 billion packages of cereal annually, so decreasing U.S. cereal supply chain costs just one cent per cereal box would result in $13 million dollars saved industry-wide as 13 billion boxes of cereal flowed through the improved supply chain over a five year period. - **Decreases Fixed Assets**: Firms value supply chain managers because they decrease the use of large fixed assets such as plants, warehouses and transportation vehicles in the supply chain. If supply chain experts can redesign the network to properly serve U.S. customers from six warehouses rather than ten, the firm will avoid building four very expensive buildings. - **Increases Cash Flow**: Firms value supply chain managers because they speed up product flows to customers. For example, if a firm can make and deliver a product to a customer in 10 days rather than 70 days, it can invoice the customer 60 days sooner. Lesser known, is how supply chain management also plays a critical role in society. SCM knowledge and capabilities can be used to support medical missions, conduct disaster relief operations, and handle other types of emergencies. Whether dealing with day-to-day product flows or dealing with an unexpected natural disaster, supply chain experts roll up their sleeves and get busy. They diagnose problems, creatively work around disruptions, and figure out how to move essential products to people in need as efficiently as possible. ## SOCIETAL ROLES of SCM - **Ensure Human Survival** - **SCM Helps Sustains Human Life**: Humans depend on supply chains to deliver basic necessities such as food and water. Any breakdown of these delivery pipelines quickly threatens human life. For example, in 2005, Hurricane Katrina flooded New Orleans, LA leaving the residents without a way to get food or clean water. As a result, a massive rescue of the inhabitants had to be made. During the first weekend of the rescue effort, 1.9 million meals and 6.7 million liters of water were delivered. - **SCM Improves Human Healthcare**: Humans depend on supply chains to deliver medicines and healthcare. During a medical emergency, supply chain performance can be the difference between life and death. For example, medical rescue helicopters can save lives by quickly transporting accident victims to hospitals for emergency medical treatment. In addition, the medicines and equipment necessary for treatment will be available at the hospital as a result of excellent supply chain execution - **SCM Protects Humans from Climate Extremes**: Humans depend on an energy supply chain to deliver electrical energy to homes and businesses for light, heat, refrigeration and air conditioning. Logistical failure (a power blackout) can quickly result in a threat to human life. For example, during a massive East Coast ice storm in January 1998, 80,000 miles of electrical power lines fell resulting in no electricity for 3,200,000 Montreal, Quebec residents. Due to extreme cold, 30 died and 25% of all Quebec residents left home to seek heated shelter. In addition, economic costs included $3 billion in lost business, $1 billion in home damage and $1 billion in government expenditures. - **Improve Quality of Life** - **Foundation for Economic Growth**: Societies with a highly developed supply chain infrastructure (modern interstate highway system, vast railroad network, numerous modern ports and airports) are able to exchange many goods between businesses and consumers quickly and at low cost. As a result, the economy grows. In fact, the one thing that most poor nations have in common is no or a very poorly developed supply chain infrastructure. - **Improves Standard of Living**: Societies with a highly developed supply chain infrastructure (modern interstate highway system, vast railroad network, numerous modern ports and airports) are able to exchange many goods between businesses and consumers quickly and at low cost. As a result, consumers can afford to buy more products with their income thereby raising the standard of living in the society. For instance, it is estimated that supply chain costs make up 20% of a product's cost in the U.S. but 40% of a product's cost in China. If transport damage is added in, these costs make up 60% of a product's cost in China. The high Chinese supply chain cost is a major impediment to improving the standard of living for Chinese citizens. Consequently, China has embarked on a massive effort to develop its infrastructure. - **Job Creation**: Supply chain professionals design and operate all of the supply chains in a society and manage transportation, warehousing, inventory management, packaging and logistics information. As a result, there are many jobs in the supply chain field. For example, in the U.S., logistics activities represent 9.9% of all dollars spent on goods and services in 2006. This translates into 10,000,000 U.S. logistics jobs. - **Opportunity to Decrease Pollution**: Supply chain activities require packaging and product transportation. As a by-product of these activities, some unwanted environmental pollutants such as cardboard waste and carbon dioxide fuel emissions are generated. For example, paper and paperboard accounted for 34% of U.S. landfill waste in 2005. Only 50% of the 84 million tons of paper and paperboard waste were recycled. Also, carbon dioxide emissions from transportation accounted for 33% of total U.S. CO2 emissions in 2005. As designers of the network, supply chain professionals are in a key position to develop more sustainable processes and methods. - **Opportunity to Decrease Energy Use**: Supply chain activities involve both human and product transportation. As a by-product of these activities, scarce energy is depleted. For example, currently transportation accounts for 30% of world energy use and 95% of global oil consumption. As designers of the network, supply chair professionals have the role of developing energy efficient supply chains that use fewer resources. SCM involves a series of key activities and processes that must be complete in an efficient (fuelconserving, cost-reducing, etc.) and timely manner. Otherwise product will not be available when needed by consumers like you. By doing so, the SCM team can flawlessly execute the following processes: 1. **Planning**: the plan process seeks to create effective long- and short-range supply chain strategies. From the design of the supply chain network to prediction of customer demand, supply chain leaders need to develop integrated supply chain strategies. 2. **Procurement**: the buy process focuses on the purchase of required raw materials, components, and goods. As a consumer, you're pretty familiar with buying stuff! 3. **Production**: the make process involves the manufacture, conversion, and assembly of materials into finished goods or parts for other products. Supply chain managers provide production support and ensure that key materials are available when needed. 4. **Distribution**: the move process manages the logistical flow of goods across the supply chain. Transportation companies, third party logistics firms, and others ensure that goods are flowing quickly and safely toward the point of demand. 5. **Customer Interface**: the demand process revolves around all the issues that are related to planning customer interactions, satisfying their needs, and fulfilling orders perfectly. ## Seven Principles of SCM More than ten years ago, a research study of 100+ manufacturers, distributors and retailers uncovered some widely used supply chain strategies and initiatives. These ideas and practices were distilled down to seven principles and presented in an article in Supply Chain Management Review, a magazine widely read by SCM professionals. 1. **Principle 1**: Segment customers based on the service needs of distinct groups and adapt the supply chain to serve these segments profitably. 2. **Principle 2**: Customize the logistics network to the service requirements and profitability of customer segments. 3. **Principle 3**: Listen to market signals and align demand planning accordingly across the supply chain, ensuring consistent forecasts and optimal resource allocation. 4. **Principle 4**: Differentiate product closer to the customer and speed conversation across the supply chain. 5. **Principle 5**: Manage sources of supply strategically to reduce the total cost of owning materials and services. 6. **Principle 6**: Develop a supply chain-wide technology strategy that supports multiple levels of decision making and gives clear view of the flow of products, services, and information. 7. **Principle 7**: Adopt channel-spanning performance measures to gauge collective success in reaching the end-user effectively and efficiently. ## Case: Tupperware's Retail Channels Cannibalize the Party Channel Tupperware is a maker of plastic storage goods of premium quality and price, available in a huge assortment of models. For decades, Tupperware has been famous in North America for its party channel. Independent dealers (Tupperware Ladies) organized social events in private homes, where they presented and sold the full line. This system worked extremely well, partly because the sellers were doing business within their social network and partly because they ably presented the line, persuading buyers that many sizes and types were useful and worth their price. Over time, sales fell as women entered the labor force and fewer women had the time, energy, or interest to host or attend Tupperware parties. In response, Tupperware added booths in malls and moved to the internet. Rather than cannibalizing the agents, this new formats revived interest in the party format. Encouraged by its revival, Tupperware