Multimedia Marketing/Marketing.iso/market/chapter6.2p

Text File | 1996-08-22 | 14KB | 301 lines

SECTION 6.2  Why Should a Producer Use Intermediaries?

INSTRUCTIONS Try to answer the question: "Why should producers use intermediaries?"
Then go through this section in search of answers.

EXAMPLE

The agricultural marketing division of a large chemical producer
decided that its 20 year old channel of distribution had served
the company well in the past, but had outlived its usefulness.
The company had been working with two completely different sales
forces that distributed three different product lines. Due to the
confusion, the situation had become unworkable, with excessive
costs and lost sales in over-the-counter feed additives and animal
health products.

A twelve-person task force led the company's six month study of
alternatives. The task force developed a list of performance
characteristics of the old distribution system and developed a list
of objectives for selecting channel systems. It compared the
objectives with a list of channel alternatives, and arrived at a
choice of a preferred channel. It was one where the company would
sell directly through veterinarians and through wholesalers who
cover other markets. This new system turned out to both produce
more sales and lower distribution costs.

DETAILS

Producers give up some control over their destinies by aligning
themselves with intermediaries, who naturally expect to be compensated
for their efforts. Since producers could market directly if they chose
to, why do many opt for affiliating themselves with intermediaries?

The answer lies in the fact that intermediaries can substantially
enhance a channel's overall performance. They might add to a channel's
efficiency (ability to do the work at lower cost), its effectiveness
(ability to do the work well) or both. Then too, many producers lack
the capital that it would require to go direct. One of the large
automobile producers, for example, uses about 8,000 independent
dealers worldwide. The total investment for the firm to accomplish
distribution directly would run more than ,100 billion--enough to
break its treasury despite its being one of the top ten manufacturers.
The firm has better alternatives for spending its money--just being
competitive with new cars demands enormous investment--than tying
it up in bricks and mortar for showrooms.

PROBLEM 1

A marketer of tools for do-it-yourself consumers sells through
wholesalers, rather than direct to retailers. An important reason
for this pattern is likely to be:

A. The marketer has more control over the way the products are promoted.
B. The marketer will be able to keep prices to the consumer at
   desired levels.
C. The marketer will be able to distribute its products efficiently.
D. The marketer will be able to more closely control inventories
   at the retail level.

WORKED

A marketer of tools for do-it-yourself consumers would probably be
able to distribute its products efficiently if it used wholesalers
rather than selling directly to retailers. Wholesalers are specialists
in carrying out many channel responsibilities, such as selling,
warehousing, and delivery. They have large and efficient sales forces,
warehouses, and fleets of trucks that can operate at low costs. Often
manufacturers cannot duplicate this low cost operation. Also, since
wholesalers serve multiple producers, they are often big enough to
enjoy economies of scale--further adding to efficiency. One of the
big costs of this efficiency, however, is less control over marketing
activities at the retail level.

ANSWER  C
INSTRUCTIONS Try to answer the question: "Why should producers use intermediaries?"
Then go through this section in search of answers.

EXAMPLE

The agricultural marketing division of a large chemical producer
decided that its 20 year old channel of distribution had served
the company well in the past, but had outlived its usefulness.
The company had been working with two completely different sales
forces that distributed three different product lines. Due to the
confusion, the situation had become unworkable, with excessive
costs and lost sales in over-the-counter feed additives and animal
health products.

A twelve-person task force led the company's six month study of
alternatives. The task force developed a list of performance
characteristics of the old distribution system and developed a list
of objectives for selecting channel systems. It compared the
objectives with a list of channel alternatives, and arrived at a
choice of a preferred channel. It was one where the company would
sell directly through veterinarians and through wholesalers who
cover other markets. This new system turned out to both produce
more sales and lower distribution costs.

DETAILS

Another reason to affiliate with intermediaries is that they
facilitate the buying process for many customers by building
assortments, or bundles of items in one location that customers
believe are related. Grocery shoppers, to illustrate, prefer
to buy soup, meat, canned goods, vegetables, and household items
in one location, rather than from the soup store, the lettuce store,
and so on.

Industrial buyers feel about the same way that consumers do. A
supermarket produce buyer, for instance, would rather buy from one
salesperson who represents one company, rather than having to work
with the cabbage salesperson, the carrot salesperson, the apples
salesperson, etc. The latter situation would be very time consuming,
costly, and frustrating.

One of the major points of differential advantage that an intermediary
can have is to stock a wide line. Retailers and industrial customers,
then, have the opportunity to choose from an assortment of items. If
one does not fit their needs, it is probable that the intermediary
has one that does. This facilitates the buying process for these
companies.

PROBLEM 2

A hardware wholesaler facilitates the buying function for retailers
by providing what benefit for them?

A. Convenience.
B. Favorable terms of sale.
C. Information about consumers.
D. High product quality

WORKED

A hardware wholesaler facilitates the buying function for retailers
by providing convenience for them. Hardware retailers are specialists
in handling the needs of the retailers that they serve. They have
developed expertise in handling the buying function for retailers in
ways that fit into the established routines of the retailers. The
retail buyers have dealt with wholesalers in the past and know that
the operating procedures of the two parties are compatible. Generally,
this facilitates the entire exchange process, necessitating few
adjustments by retailers to the selling policies of those who call
upon them.

ANSWER  A
INSTRUCTIONS Try to answer the question: "Why should producers use intermediaries?"
Then go through this section in search of answers.

EXAMPLE

The agricultural marketing division of a large chemical producer
decided that its 20 year old channel of distribution had served
the company well in the past, but had outlived its usefulness.
The company had been working with two completely different sales
forces that distributed three different product lines. Due to the
confusion, the situation had become unworkable, with excessive
costs and lost sales in over-the-counter feed additives and animal
health products.

A twelve-person task force led the company's six month study of
alternatives. The task force developed a list of performance
characteristics of the old distribution system and developed a list
of objectives for selecting channel systems. It compared the
objectives with a list of channel alternatives, and arrived at a
choice of a preferred channel. It was one where the company would
sell directly through veterinarians and through wholesalers who
cover other markets. This new system turned out to both produce
more sales and lower distribution costs.

DETAILS

One of the major costs of doing business is that of the transactional
contact. This takes place when members of the channels of distribution
make arrangements for exchanges with each other. The contacts can
take place through various media, including personal calls by
sales representatives, telephone calls, electronic communications
through computers, fax transmission, the mail, and the like. All
of these involve time and expense, on the part of both buyer and
seller. If the number of contacts can be reduced, marketing becomes
more efficient.

Transaction costs can be very substantial. Consider the cost of sales
representatives. These individuals must be recruited, selected,
trained, and supervised. All of these processes can be very expensive.
When the sales representative is calling on a customer, he or she must
be paid and all of the associated expenses, such as travel,
accomodations, and entertainment covered. Salespeople make telephone
calls and faxes, send letters, and use laptop computers and associated
equipment. All of this comes at a high cost.

Even less expensive transactional methods can be expensive. Letters
and faxes require the time of executives--using part of their salaries
for this task. Secretaries' salaries and postage and fax fees can
run high.

There are flows of paperwork that add to transactions costs. Bills
must be mailed, invoices sent, bills of lading forwarded, and
insurance arranged for. Arrangements must be made with transportation
carriers (or with the marketer's traffic department if it does its
own transportation). If the customer is in a foreign country there
are numerous paperwork requirements from both the home and the host
country.

PROBLEM 3

For a producer of telephone components, a transactional contact
takes place when:

A. A sales manager telephones one of his sales representatives.
B. The marketing manager holds conference with the advertising manager.
C. A sales representative calls on a customer.
D. A service manager sends an E-mail message to the distribution
   manager.

WORKED

For a producer of telephone components, a transactional contact
takes place when a sales representative calls on a customer. Here,
arrangements for exchange are made by the producer and the customer.
These contacts are costly (the salary and expenses of the sales
representative) and time consuming. The producer will be able to
cut costs if it is able to reduce the number and the duration of
these contacts.

ANSWER  C
INSTRUCTIONS Try to answer the question: "Why should producers use intermediaries?"
Then go through this section in search of answers.

EXAMPLE

The agricultural marketing division of a large chemical producer
decided that its 20 year old channel of distribution had served
the company well in the past, but had outlived its usefulness.
The company had been working with two completely different sales
forces that distributed three different product lines. Due to the
confusion, the situation had become unworkable, with excessive
costs and lost sales in over-the-counter feed additives and animal
health products.

A twelve-person task force led the company's six month study of
alternatives. The task force developed a list of performance
characteristics of the old distribution system and developed a list
of objectives for selecting channel systems. It compared the
objectives with a list of channel alternatives, and arrived at a
choice of a preferred channel. It was one where the company would
sell directly through veterinarians and through wholesalers who
cover other markets. This new system turned out to both produce
more sales and lower distribution costs.

DETAILS

Intermediaries can substantially reduce the total number of
transactional contacts and related costs between producers and
final customers. With direct distribution, five different
producers would have to establish separate contacts with five
customers. The total number of contacts would be 5 X 5 = 25.

If a retailer sells the products of the five producers to five
consumers, there would be only ten contacts (five from the
producers to the retailer and five from the retailer to consumers).
For an entire economy, such as in the U.S., with hundreds of
millions of consumers and hundreds of thousands of producers, the
contact efficiencies are astronomical when intermediaries are
brought into the picture.

Many critics of marketing point to the profits of intermediaries
as being exorbitant, but they fail to grasp the idea that intermediaries
can actually reduce costs and prices. By specializing, they can often
perform the same functions for different producers at a lower total
cost and they significantly cut the number of transactional contacts
required between producers and users. It is true that intermediaries
charge a markup for their services, but it is also true that they
can clearly cut costs.

PROBLEM 4

In a small island economy there are 9 producers and 9 consumers.
All producers sell directly. How many transactional contacts
will be eliminated by adding one retailer?

A. 9
B. 41
C. 63
D. 84

WORKED

In a small island economy there are 9 producers and 9 consumers and
all producers sell directly. In this case there are 9 X 9 = 81
contacts. If a retailer is added there will be 9 + 9 = 18 contacts.
Hence, 63 (81 minus 18)contacts will be eliminated by adding one
retailer. It is assumed, in this case, that every retailer serves
every consumer and every producer serves every consumer.

ANSWER  C