Chapter 13

LOGISTICS AND CHANNEL MANAGEMENT

Chapter Objectives
Logistics, the synonymous term of physical distribution, involves planning,
implementing, and controlling the physical flow of materials from the point of origin to
the point of the consumer at a profit. The role of logistics is to get the right amount of
product to the right places in the right time.

There are six components of the logistics system: (1) transportation, (2) materials
handling, (3) order processing, (4) inventory control, (5) warehousing, and (6) packaging.

Channel management interfaces with logistics management in four areas: (1) defining
channel member service standards, (2) making sure a proposed logistics program meets
these standards, (3) selling the program to the channel members, and (4) monitoring the
program to see if it continually meets the demands of the channel members.

No matter how well designed and/or well implemented, over time channel members’
changing needs are sure to create shortcomings. Careful monitoring of the system should
help spot such deficiencies before they become areas of channel conflict.

Learning objectives
1) Be familiar with the definition of logistics, or physical distribution.
2) Have an awareness of the recent supply chain management emphasis of logistics.
3) Be aware of the role of logistics in the firm.
4) Understand the systems concept and the total cost approach as they apply to
logistics.
5) Know the major components of any logistics system.
6) Recognize that the output of a logistics system is good customer service.
7) Be cognizant of the distinction between logistics management and channel
management.
8) Have an overview of the four key interfaces between channel management and
logistics management.
Chapter Topics
1) The Role of Logistics
2) Logistics Systems, Costs, and Components
3) The Output of the Logistics System: Customer Service
4) Four Key Areas of Interface between Logistics and Channel Management

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Chapter Outline
Key Terms and Definitions
 Logistics or physical distribution (PD): Planning, implementing, and controlling the
physical flows of materials and final goods from points of origin to points of use to
meet customers’ needs at a profit.
 Supply chain management: Emphasizes close cooperation and comprehensive
interorganizational management to integrate the logistical operations of the different
firms in the channel.

Whether one chooses to use the term physical distribution, logistics, or supply chain
management, the underlying principle emphasized throughout this text is the building of
strong cooperation among channel members through effective interorganizational
management.

The Role of Logistics

The movement of the right amount of the right products to the right place at the right time
is the essence of the role of logistics in the marketing channel.

Key Term and Definition

 Third-party logistics providers: These firms specialize in performing most or all of
the logistical tasks that manufacturers or other channel members would normally
perform themselves.

Third-party logistics providers are growing rapidly into a major industry.

Logistics Systems, Costs, and Components

Key Term and Definition

 Systems concept: The various factors involved in the logistical process and the
interrelationships among them.

Such factors include transportation, materials handling, inventory control, warehousing,

and packaging of goods.

In essence, those in charge of managing logistics seek to find the optimum combination
of basic logistics components (transportation, etc.) to meet customer service needs.

Key Term and Definition

 Total cost approach: Addresses all of the costs of logistics together and seeks to
minimize the total cost.

A company must examine the cost of each component and how it affects the other
components.

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1) Transportation

Transportation is the most fundamental and obviously necessary component of any

logistics system. Transportation is also often the component accounting for the highest
percentage of the total cost of logistics.

The overriding issue facing the firm is choosing the optimum mode of transportation to
meet customer service demands.

2) Materials Handling

This encompasses the range of activities and equipment involved in the placement and
movement of products in storage areas. Issues that must be addressed when designing
materials handling systems include how to minimize the distances products are moved,
what kinds of mechanical equipment to use to minimize costs, and how best to use labor.

Key Term and Definition

 Cross docking: Sometimes referred to as flow-through distribution, it is where
merchandise is immediately moved across the receiving dock to other trucks for
immediate delivery to the stores.

In short, products are moved straight from shipping to receiving.

3) Order Processing

Order processing is often a key component of logistics, and developing an efficient order
processing system can often be far from routine! The importance of order processing in
logistics lies in its relationship with order cycle time.

Key Term and Definition

 Order cycle time: The length of time between when an order is placed and when it is
finally received by the customer.

4) Inventory Control

Inventory control refers to the firm’s attempt to hold the lowest level of inventory that
will still enable it to meet customer demand.

Inventory carrying costs – including the costs of financing, insurance, storage, and lost,
damaged and stolen goods, can amount to approximately 25 percent of the value of the
inventory per year.

The two objectives of inventory control – lowest possible inventory levels and shipping
goods in as large amounts as possible, can cause conflicts.

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Average inventory carrying costs rise in direct proportion to the level of the inventory,
while average ordering costs decrease in rough proportion to the size of the orders.

A trade-off must be made between these two costs to find the optimum levels for both.

Key Term and Definition

 Economic order quantity (EOQ): Occurs at the point at which total costs (inventory
costs plus ordering costs) are lowest.

5) Warehousing

The warehousing component of a logistics system is concerned with the holding of

products until they are ready to be sold. Warehousing can be one of the more complex
components of a logistics system because it entails several key decisions like where to
locate warehouses, how many, size, design and ownership.

Warehousing can be an important component of a logistics system because it is so closely

linked to the ability of the firm to provide high levels of customer service.

6) Packaging

Packaging and the costs associated with the packaging of products (consumer package
and case design) can affect the other components of the system and vice versa.

The type of transport used can affect packaging and packing costs. Materials handling
and order processing procedures and costs can also be affected by packaging because a
well-designed package can help to increase efficiencies in these components.
Additionally, effective packaging can help reduce inventory-carrying costs by reducing
product damage.

Packaging has an important logistics dimension that can make a significant difference in
the effectiveness and efficiency of the logistics system.

The Output of the Logistics System: Customer Service

Key Term and Definition

 Service Standards: “The attempt to define and enumerate services and to measure
performance against these standards.”

Heskett, Galskowsky, and Ivie, for example, stressed the following nine categories of
logistics service standards:

1. Time from order receipt to order shipment

2. Order size and assortment constraints
3. Percentage of items out of stock

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4. Percentage of orders filled accurately

5. Percentage of orders filled within a given number of days from receipt of the
order
6. Percentage of orders filled
7. Percentage of customer orders that arrive in good condition
8. Order cycle time (time from order placement to order delivery)
9. Ease and flexibility of order placement

These logistics service standards are usually quantified (90%+ order filled; 2 day order
cycle time, etc.) in some fashion and then the manufacturer’s actual performance is
measured against these standards.

The third standard – percentage of items out of stock or “stockouts” – is almost always
set in terms of percent of items ordered that cannot be filled from inventory.

Regardless of the particular services provided, the key issue is whether the services
offered are targeted at real customer needs.

Four Key Areas of Interface between Logistics and Channel Management

Channel management and logistics management go together hand in hand to provide

effective and efficient distribution. The meshing of channel management and logistics
management requires good coordination.

This especially applies to four major areas of interface between channel management and
logistics management.

1) Defining the kinds of logistics service standards that channel members want
2) Making sure that the proposed logistics program designed by the manufacturer
meets the channel member service standards
3) Selling the channel members on the logistics program
4) Monitoring the results of the logistics program once it has been instituted

1) Defining Logistics Service Standards

In general, the higher the service standards the manufacturer offers the higher the costs.
It is usually not possible to completely escape the trade-off of higher costs for higher
service standards.

Thus, the key issue facing the channel manager with respect to defining logistics service
standards is to determine precisely the types and levels of logistics service desired by the
channel members.

To deal with this issue effectively, the channel manager needs to obtain the channel
members’ views about what kinds of service standards they want before developing a
logistics program.

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However, fewer than 20 percent of manufacturer’s make a systematic attempt to find out
the service standard needs of their customers.

Bienstock, Mentzer, and Bird found three key factors–the timeliness of deliveries, the
availability of products, and the condition of products–significantly influenced
purchasing managers’ perceptions of the quality of logistical service, with timeliness
being the most important of the three. These authors called this physical distribution
service quality (PDSQ).

The development of logistics service standards should not be based solely on what the
manufacturer wants; the views of the channel members should also be incorporated. If
this is done, the set of logistics standards is much more likely to reflect what the channel
members actually want.

2) Evaluating the Logistics Program

A logistics program may be offered to channel members as a separate entity or may be

included as a major component of the manufacturer’s overall approach for supporting
channel member needs. The logistics program may be a key feature of a channel
“partnership” or strategic alliance.

The channel manager should play a role to ensure that the program does indeed meet the
channel members’ service requirements. It does require the channel manager to have a
clear understanding of the objectives of the logistics program.

In short, it is the job of the channel manager to make sure that the program is really what
the channel members want.

3) Selling the Channel Members on the Logistics Program

Stewart suggests several types of appeals to help sell the logistics program to channel
members. Manufacturers should emphasize that a new logistics program can foster:

A) Fewer out-of-stock occurrences.

B) Reduced channel member inventories
C) Increased manufacturer support for channel members.

A) Minimizing Out-Of-Stock Occurrences

By minimizing out-of-stock occurrences through an improved logistics program, sales
lost by the channel members will be reduced.

Overselling the benefits of the new system to the channel members should be avoided
due to some systems failing to live up to expected promises.

Two systems that do seem to work are computer-to-computer ordering and EDI.

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B) Reducing Channel Member Inventory Requirements

A well-designed and responsive logistics program can mean shortened channel member
order cycles, which means that they can carry less inventory.

Key Term and Definition

 Kanban system or Just in Time Inventory (JIT): The principle of JIT is to have only
enough inventory on hand to meet the immediate production requirements with no
reserve stock.

JIT depends upon excellent cooperation between the manufacturer and its suppliers and
also on a superbly designed and executed logistics system. If done well, it can reduce
inventory costs by sometimes well over 50 percent!

C) Strengthening the Manufacturer–Channel Member Relationship

A carefully designed logistics program aimed at improving service to the channel
members can serve as one of the most tangible signs of the manufacturer’s concern and
commitment to the channel members’ success.

In presenting a proposed logistics program to the channel members, the manufacturer

should emphasize that the program was conceived to help them (channel members) be
more successful.

An improved logistics management system offers great potential as a strategic marketing

tool – as it will offer greater potential to those manufacturers who are able to, with their
superior logistics capabilities, help channel members improve their logistics and
marketing capabilities as well.

4) Monitoring the Logistics System

Logistics systems must be continuously monitored, both in terms of how successful they
are in performing for the manufacturer and, just as important, how well they are meeting
channel member needs.

The channel manager should continually monitor the channel members’ reactions to the
logistics program. The most effective way is to conduct a survey of a sample of channel
members. The survey should be part of the overall marketing channel audit.

If the survey or audit finds areas for improvement or deficiencies, the manufacturer must
actually follow through and make these improvements or correct these deficiencies.

Channel member satisfaction with the manufacturer’s logistics program tends to decrease
when channel members, who pointed out the deficiencies, do not see subsequent
improvements or attempts to improve.

A manufacturer is more likely to make these changes if it views the logistics program as
an integral part of its overall marketing program.

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