Marketing and the Customer Value Chain

Marketing and supply chain management have a symbiotic relationship within any
enterprise, and together they are vital for a company’s viability and success. This book
offers a systemic approach to the integration of marketing and supply chain
management. It examines the strategic connections and disconnections between
supply chain and operations management and marketing by focusing on the factors
that constitute the extended marketing mix, including product, price, promotion,
people, and processes.
Key aspects of supply chain management are discussed in detail, including material
handling, unit load, handling systems, and equipment, as well as warehousing and
transportation, design, and packaging. The book then goes on to explore the marketing
functions of intangible products (services), followed by a focus on B2B markets.
Throughout, there is a strong emphasis on the optimization and maximization of the
value chain through the development of a systems approach with a market-orientation.
Pedagogy that translates theory to practice is embedded throughout, including
theoretical mini-cases, chapter-by-chapter objectives, and summaries.
Marketing and the Customer Value Chain will help advanced undergraduate and
postgraduate students appreciate how front-end marketing can interface with the
back-end operations of supply chain management.

Thomas Fotiadis is Associate Professor of Marketing and Director of the Marketing

Laboratory, Department of Production and Management Engineering, Polytechnic
School, Democritus University of Thrace, Greece.

Dimitris Folinas is Professor in the Department of Logistics at the Technological

Educational Institute of Central Macedonia, Greece.

Konstantinos Vasileiou is Assistant Professor of Pharmaceutical Marketing in the

Department of Pharmacy at the University of Patras, Greece.

Aggeliki Konstantoglou has a PhD in Industrial Marketing from the Democritus

University of Thrace, Greece.
Marketing and the Customer
Value Chain
Integrating Marketing and Supply
Chain Management

Thomas Fotiadis, Dimitris Folinas,

Konstantinos Vasileiou, and
Aggeliki Konstantoglou
Cover image: © Getty Images
First published 2022
by Routledge
4 Park Square, Milton Park, Abingdon, Oxon OX14 4RN
and by Routledge
605 Third Avenue, New York, NY 10158
Routledge is an imprint of the Taylor & Francis Group, an informa business
© 2022 Thomas Fotiadis, Dimitris Folinas, Konstantinos Vasileiou, and Aggeliki
Konstantoglou
The right of Thomas Fotiadis, Dimitris Folinas, Konstantinos Vasileiou, and
Aggeliki Konstantoglou to be identified as authors of this work has been asserted
in accordance with sections 77 and 78 of the Copyright, Designs and Patents
Act 1988.
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British Library Cataloguing-in-Publication Data

A catalogue record for this book is available from the British Library
Library of Congress Cataloguing-in-Publication Data
Names: Fotiadis, Thomas, author. | Folinas, Dimitris, 1970- author. |
Vasileiou, Konstantinos (Author of Marketing and the customer value chain),
author. | Konstantoglou, Aggeliki, author.
Title: Marketing and the customer value chain : integrating marketing and supply
chain management / Thomas Fotiadis, Dimitris Folinas, Konstantinos Vasileiou,
Aggeliki Konstantoglou.
Description: Milton Park, Abingdon, Oxon; New York, NY : Routledge, 2022. |
Includes bibliographical references and index.
Identifiers: LCCN 2021040613 (print) | LCCN 2021040614 (ebook) | ISBN
9781138394476 (hardback) | ISBN 9781138394490 (paperback) | ISBN
9780429684883 (ebook) Subjects: LCSH: Business logistics. | Marketing.
Classification: LCC HD38.5 .F68 2022 (print) | LCC HD38.5 (ebook) | DDC
658.7--dc23
LC record available at https://lccn.loc.gov/2021040613
LC ebook record available at https://lccn.loc.gov/2021040614

ISBN: 978-1-138-39447-6 (hbk)

ISBN: 978-1-138-39449-0 (pbk)
ISBN: 978-0-429-68488-3 (ebk)

DOI: 10.4324/9780429684883

Typeset in Times New Roman

by MPS Limited, Dehradun
“To my (already rising) star, Hermie 11”
Thomas Fotiadis

“To my family”
Dimitris Folinas

“To Poly, Aggeliki, and Zois”

Konstantinos Vasileiou

“To Mia, Konstantinos, and Haris”

Aggeliki Konstantoglou

“The authors would like to express their appreciation to Efthymios

Kokmotos for his help”
Contents

Introduction 1

1 Marketing mix elements: (P)roduct: Delimitation and integrative

approach with SCM 2
1.1 Product design and operations planning within the supply chain
context 2
1.2 Definition and classification of products 4
1.3 Decisions concerning the product mix, brand, packaging, and
labeling of a product 9
1.4 The new product development process 11
1.5 Product life cycle 21
1.6 Inventory management 29
1.7 Demand forecasting 37

2 Elements of the marketing mix (price): Conceptual and integrated

approach to supply chain management 46
2.1 Pricing in the context of the supply chain 47
2.2 Introduction to pricing 47
2.3 Factors affecting pricing 49
2.4 Pricing methods 70
2.5 Pricing strategies for new products 77
2.6 Pricing strategies for product mix 79
2.7 Price- adjustment strategies 80
2.8 Price- change strategies 84
2.9 Pricing of logistics services 87

3 Marketing mix elements: (P)romotion: Delimitation and integrative

approach with SCM 93
3.1 Integrated marketing communications within the supply chain
context 94
viii Contents
3.2 Introduction to integrated marketing communications 94
3.3 Integrated marketing communications within a constantly
changing environment 96
3.4 The communication process 98
3.5 Development of effective plans for integrated marketing
communications 100
3.6 Setting out the overall integrated marketing communications
mix 110
3.7 Product packaging for promotion 134

4 Marketing mix elements: (P)eople: Delimitation and integrative

approach with SCM 143
4.1 Main features of services (the 4 “I”s) 144
4.2 Classification of services 146
4.3 The importance of human resources in the provision of
high-quality services 147
4.4 Challenges faced by frontline employees 152
4.5 Human resource management in the provision of high-value
services 157
4.6 Supplementary foundations for the effective provision of
high-value services 168
4.7 Human resource management within services supply chain
context 170

5 Extended marketing mix elements: (P)hysical Evidence: Delimitation

and integrative approach with SCM 173
5.1 Introduction to the physical evidence of services 174
5.2 Strategic roles of servicescape 178
5.3 Types of servicescape 181
5.4 Theoretical models of the impact of the service environment 183
5.5 Dimensions of the service delivery environment 188
5.6 Servicescape design strategy in the context of supply chain 195
5.7 Location problem 198
5.8 Layout approaches 202

6 Extended marketing mix elements: (P)rocesses: Delimitation and

integrative approach with SCM 206
6.1 Introduction to the service processes design 206
6.2 The interconnection between operations management and
marketing 207
6.3 Key components and blueprinting of service processes 209
6.4 Service processes design 218
 Contents ix
6.5 Design of processes in the context of service supply
chains – outsourcing 227

7 Transportation management 238

7.1 Transportation means 238
7.2 Combined transportation 241
7.3 Transportation of dangerous goods 243
7.4 International transportation 245

8 Crisis management and SCM 248

8.1 Challenges involved in modern supply chains 248
8.2 Case studies of supply chain risks 249
8.3 Conceptual approach of crisis management in supply chains 253
8.4 Crisis management in supply chain 257

9 Delimitation of industrial markets: Features, significance, and synergies 262

9.1 Introduction to industrial marketing in the context of supply
chain management 262
9.2 Classification of industrial products 264
9.3 Industrial buyers and distribution networks 267
9.4 Characteristics of industrial markets 272
9.5 Materials handling 279
9.6 Storage 283

10 Emerging trends 294

10.1 Auto-ID technologies 294
10.2 Modern logistics and supply chain technologies 302
10.3 Green marketing and green supply chain management 307

References 309
Index 330
Introduction

Marketing and supply chain management within any enterprise have a symbiotic re-
lationship. A company needs to understand both concepts as their successful –
common – approach determines the company’s viability and success.
This was examined and justified thoroughly in the textbook titled Marketing and
Supply Chain Management: A Systemic Approach, 1st Edition, Routledge.
The book at hand can be considered as complementary in the sense of examining
the strategic connections and disconnections between supply chain management op-
erations and marketing by focusing on the six (remaining) of the seven P’s that con-
stitute the (extended) marketing mix (“product”, “price”, “promotion”, as well as,
“people”, “processes” and “physical evidence”) since “placement” was examined in
the textbook cited above. Additionally, the following aspects, relating to both mar-
keting and supply chain management are examined in detail: transportation man-
agement, crisis management and SCM, industrial markets in the context of SCM and
emerging trends.
The main objective of this work, however, remains the same: To examine these
disciplines/business areas in a systemic approach and to establish an integrated fra-
mework for their evaluation and application.
Throughout the textbook, there is a strong emphasis on the optimization and
maximization of the value chain, through the development of a systems approach
with strong market-orientation and this constitutes a further area where this work
functions complementary to the first textbook, addressing the issues under a dif-
ferent light and aiming to complete the proposed holistic approach to the issues it
discusses.
The key drivers for the integration of supply chain management and marketing
derives from the very fact that customer needs and expectations grow exponentially
more complex and harder to forecast, principally on account of the fact that customers
are faced with a wide array of alternatives in terms of quality, innovation, prices,
services, etc. This textbook will help both academics and managers appreciate how
front-end marketing can interface with the back-end operations of supply chain
management.
Each chapter of the book contains the following elements:

• An introductory paragraph that lists the main topics of the chapter.

• The conceptual framework that acts as a roadmap for the topics of the book.
• The learning objectives/questions.

DOI: 10.4324/9780429684883-101
1 Marketing mix elements: (P)roduct:
Delimitation and integrative approach
with SCM

Introduction
This chapter presents how product-based decisions must be the result of creative
synthesis and good cooperation between the marketing and supply chain executives of
a business, as well as among work groups made up of staff from the main partners of a
supply chain. In practice, the decisions made and their execution in relation to the
product essentially have priority and decisively influence decisions in relation to
the 3Ps of the marketing mix; without making a particularly detailed definition of the
product, there is no need to make important decisions in terms of the pricing,
distribution and promotion/communication of the product.

Learning goals
After reading this chapter, you will be able to answer the following questions:

• Why is cooperation important between the strategic partners of the supply chain
in the efficient offer of product solutions to the final customers?
• What is the development process of the new product?
• What are the stages in the life cycle of a product, and the decisions that must be
taken by the business in collaboration with the others involved in the supply chain?

Structure
1.1 Product design and operations planning within the supply chain context
1.2 Definition and classification of products
1.3 Decisions concerning the product mix, brand, packaging and labeling of a product
1.4 The new product development process
1.5 Product life cycle
1.6 Inventory management
1.7 Demand forecasting

1.1 Product design and operations planning within the supply chain
context
The modern world is an extremely competitive environment. If there is a lack of
feasible coordination in the optimal improvement of the entire supply chain to make it

DOI: 10.4324/9780429684883-1
 (P)roduct 3
effective and efficient, the supply chain will not manage to create and maintain or
increase its competitive edge in relation to the “product” packet that it will offer to its
final customers.
As a result, even if one or some of the businesses that participate in a supply chain
regulate their internal activities in an exemplary fashion, they still won’t manage to
satisfy the multiple and often conflicting demands of the stakeholders; these may in-
clude customers (end and intermediate), investors, workers, partners in the supply
chain (suppliers and intermediates with the final customers), public and other in-
stitutions, as well as, of course, the wider public.
For example, a customer who visits a car sales outlet with the purpose of buying a
new car is not at all interested in which businesses comprise the specific supply chain,
or how they share and regulate their activities among themselves, or how they assign
profits and expenses among each other. The customer will evaluate whether it is really
worth paying the asking price for the whole product offer that she or he is presented
with, against the corresponding offers of the competition.
If she or he proceeds to make the purchase of a new car from the car manufacturer,
then the efforts of all the partner businesses in the supply chain will be rewarded,
based on the supply chain’s conditions within the cooperation agreement. Otherwise,
even for the partner businesses that are characterized by an integrative approach in
their effective and efficient internal operations, in this case at least, the expected
outcomes will not be achieved.
It is argued that the scheduling of business operations starts with the design of the
product and the supply chain, followed by the remaining planning levels. Thus, a
rather myopic, one-sided view is being emphasized, and the contribution of the
marketing executives (or whichever other part of the business) is being overpraised in
the decisions made and their execution in relation to the product (Figure 1.1).
Businesses that wish to create and maintain or increase some strategic competitive
advantage are duty-bound to take decisions in relation to product design; they must
manage their product portfolios in the spirit of good cooperation, making a thorough

Supply Production Demand

Product Design
Long-term
Supply Chain Design

Materials Planning Production Planning Distribution Planning

Mid-term
Forecasting
Inventory Management

Purchasing Sales
Short-tern Production Control
Receivings Shipping

Figure 1.1 Product design and business operations planning (Adapted from Taylor, 2003).
4 (P)roduct
investigation of the mutually beneficial tradeoffs with their other main partners in the
supply chain.
This means that it is now virtually a one-way road for all businesses involved in a
supply chain to aim toward the maximization of the provided added value of the ac-
tivities of the whole supply chain instead of the autonomous self-serving pursuit of the
business goals of each separate partner. The rapid development and groundbreaking
technological revolutions of the last three decades – especially in the IT sectors, for
example, electronic data organization, the internet, etc. – signal an historic turn from the
Cartesian approach, where each business aimed to achieve its own goals, often at the
expense of its other partners in the supply chain. Now, the survival of each business is
highly connected with the success of the supply chain it participates in as a whole.
It is much easier now than in the past to collect, circulate and process vast amounts
of data and information from all the business processes using unified technologically
compatible methods in very little (often real) time and very little cost; simulation
modeling is now possible, in the form of the simplest representation with mathematical
and simulation models of particularly complicated systems.
Thus, possibly for the first time in human history, the opportunity has finally ap-
peared to thoroughly investigate and assess the positive and negative consequences of
complex tradeoffs in business operations, and, by extension, the supply chain.
Initially, large industrial businesses managed to optimize and completely integrate
their whole operation as opposed to each operational part (e.g. marketing, produc-
tion, supply chain, etc.), maximizing the added value of the whole supply chain instead
of each separate partner that comprises it.
For businesses to survive in an extremely competitive and rapidly developing
business environment (at the micro- and macro-level), they have no other choice than
to adopt and apply the strategic approach of a unified operation all the more effi-
ciently within their supply chain, starting from the design of their product.

1.2 Definition and classification of products

A particularly thorough introduction of the product as part of the marketing mix of a
business and, more generally, an organization (for or non-profit) takes place in the
corresponding chapter of this book. A product can be whatever has the ability to
eliminate, reduce and/or conceal the sad feeling that something is missing: more
specifically, a need and/or desire. Within a wider approach, the product must be
perceived as a set/packet of properties and advantages through which it is possible to
offer usefulness either directly or even because of the perceived expectation of the
satisfaction of needs and desires.
In the wider sense of the meaning of the word “product”, we don’t mean just
tangible products, but also services and ideas, which are characterized by their in-
tangible elements. But, in their majority, “material” goods are offered with a set of
accompanying services. Take, for example, the purchase of a car: beyond the “ma-
terial” good, the purchase of a car includes the various services that start before the
potential transaction (its acquisition by the final user), for example, the provision of
information, the possibility to choose its final configuration; this process continues
through to the completion of the transaction with the provision of financial assistance,
warranties, free road help, etc., and the provision of services for future maintenance
and repairs.
 (P)roduct 5
Thus, the final decision of a potential buyer will depend not only on the set/packet
of properties of the “material” good, but also – and possibly mainly – on the ac-
companying services, which are all estimated together. Therefore, for reasons of
convenience, the term “product” is used in this chapter to describe a material good, a
service, an idea, a place, an event, or whatever combination of the aforementioned,
which tries to offer usefulness to its final user.
It should be noted that due also to the very acrid competition that exists worldwide
in all markets/sectors, a customer-centric approach has absolutely definitely domi-
nated in the determination of products’ quality characteristics. In other words, the
design of both the product and its production processes starts and ends with covering
the needs and desires of the product’s end users who it is believed could be satisfied
more effectively and efficiently than with competitors’ products.
Hence, businesses should search for the best possible matching (combination)
among the needs and desires of their potential customers who are not adequately
covered, and the particular abilities, skills and resources that the businesses themselves
and their collaborating supply chains possess, in order to offer the best possible long-
term added value to their potential clients.
Marketing as a business operation provides a range of tools for businesses and its
supply chains so that they can correct mistakes and omissions in case of deviations in
the definition of their products in relation to the way their potential customers will
view/regard their products. Nevertheless, it should not be forgotten that a very ag-
gressive environment makes its use virtually impossible due to the minimum profit
limits – as they have now been shaped – in virtually all markets/sectors.
The classification of products is made using various criteria. The most commonly
used are the nature of the product and the willingness to purchase it.

1.2.1 Classification based on the nature of the product

Products, based on their nature, are classified mainly as material and intangible goods
(e.g. services, ideas, etc.). In this book, a rather thorough definition and analysis of
services has been made. This analysis facilitates the understanding of four specific
characteristics of services, which distinguish them from material goods due to the fact
that their main part cannot be perceived with one of the human senses. The four
distinctive features of services are as follows:

1 Intangibility: This refers to the main characteristic of services, that is, the absence
of physical properties that would allow us to perceive them on the basis of our
sensory abilities.
2 Indivisibility: In contrast to material goods, services are produced and consumed
at the same time. Indeed, for the production (provision) of services, cooperation is
necessary between the providers and the customers (users) themselves.
3 Inhomogeneity (Heterogeneity): The simultaneous production and consumption
of services results in the essential weaknesses of the development and application
of a control system that will guarantee the offer of services of a stable quality.
4 Perishability/Wear and tear: In contrast to material goods, services cannot be
stored in order to be made available at a later time.
6 (P)roduct
The greater integration of more and more accompanying services for material goods
provides further proof for the need for good cooperation among the expert executives in
the marketing and supply chain departments, both internally in the business and externally
among the staff of the strategic partners. For example, the success of a newly introduced
smartphone model depends, among other things, on the devoted support of the frontline
staff in the collaborating retail stores. It also depends of course on the quick response of
the distribution networks in terms of the waves of uncertain demand that will assure, on
the one hand, the continuous availability of the product on the shelves of the retailers, and
on the other hand, the lowest possible costs of maintaining supplies of the product.

1.2.2 Classification based on the willingness to purchase

The customers of a business acquire its goods with the intention that either they will
satisfy their personal needs, and/or those of people close to them, or they will use them
in the production process of other goods and services in their business or organization.
Thus, based on the intention of purchase, products are classified as either:

• Consumer goods, which are bought to cover the buyer’s needs, or other people’s
with whom the buyer is connected, that is, they are products and services that are
bought by the end consumers for personal consumption; or
• Industrial goods, which are bought as inputs in the productive processes of other
products.

Most products, however, can satisfy both consumer and industrial needs. For ex-
ample, a packet of A4 paper or even a car can be regarded as consumer products, since
they are acquired to cover the personal needs or desires of the buyer, or as industrial
goods in the case where they are used in the production process of business entities.
Furthermore, the tires of the wheels of a new car intended for private use are an
industrial product, since they are acquired by a manufacturing company, while the
tires thatwill be replaced later are consumer products.

Consumer goods
Consumer products are classified by the degree of involvement of the buyer, specifi-
cally the time spent and the effort made by the buyer to make their purchase decision,
and the frequency of purchase of the specific goods, that is, the manner in which
consumers buy them.

• Convenience goods: This covers products with a high frequency of purchase, even
on a daily basis, of low cost, and often without a previously conducted price
comparison among the choices available. Thus, the degree of involvement of the
buyer is very low, that is, a minimum amount of time and effort are devoted to
choosing them. Due to their nature, for these products, the strategy of wide
distribution is appropriate, so that it can guarantee direct easy access to the
consumer public. The most frequently used strategy of communication is that of
attraction, where the producer of the product tries to create a branded demand for
the product on the consumers’ side.
Convenience goods are further classified into:
 (P)roduct 7
• Basic products, which are bought very often without much thought, like
bread and the weekly food shopping;
• Impulse buy goods, which the buyer did not plan on buying but decides to
acquire due to the relevant stimulations he receives, like vitamin supplements
to fight a cold, which she or he saw next to the cash register in a
pharmacy; and
• Emergency products, which are bought because of an unexpected event that
provoked the emergency, like an umbrella due to a sudden rainfall.
• Choice goods: These products are distinguished by the obvious higher involvement
of the buyer in their acquisition. They include products that are bought less often,
even once in a few years, whose purchase requires a significant degree of planning,
and sometimes a significant financial outlay. Consumers co-estimate their
opportunity costs, that is, the loss of the possibility to satisfy some of their other
needs and desires. Thus, for the completion of their purchase process, a significant
amount of time and effort is needed, so that a thorough comparison of the
alternative choices is made in relation to the price, the relevant dimensions and the
accompanying services. The distribution network strategy that is often chosen is
that of selective distribution, while for planning and implementation of the
communication strategy with consumers, cooperation between the producers and
their strategic partners is vital at the retail level.
Choice products are differentiated into:
• Homogeneous, for which customers believe that there aren’t substantial
differences among the alternative choices. Consequently, price is of utmost
importance in the final choice, for example, in home appliances (washing
machines, refrigerators, etc.) or even low to middle range cars; and
• Heterogeneous, which are characterized by the special features and properties
of competitors’ products. This has a result that price plays a much smaller
role in the buying decision, as long as it falls within a logical range, like what
happens with scientific services (e.g. doctors, lawyers, and the like), clothing
items for special moments, etc.
• Special products: These products have a unique combination of characteristics.
Because of this, a specific and relatively very small number of consumers
understand that these products are not able to be compared, so they are
predisposed to making a special effort to acquire them, even spending a lot of
money on them. An example of such a product is a specific brand of women’s
handbag for which customers may need to wait for up to 2 years to acquire it, or
hand-made luxury cars with a value of hundreds of thousands of euro.
• No-demand goods: These are products for which demand is not expressed either
due to ignorance of their existence or because consumers do not perceive any
interest in acquiring them. They are classified as:
• New no-demand products, like new/innovative products until a satisfactory
number of “neoterists” get to know them and are convinced of their
value; and
• Regular no-demand products, which are known among potential consumers,
but require intensive promotional effort (personal sales, advertising, etc.) for
8 (P)roduct
the demand to be expressed. An example is blood donation services and life
insurance policies.

Industrial goods
The market for industrial goods displays significant variations compared to that of the
consumer market, not just due to the purpose of acquiring products, but also because
the purchasing behavior of businesses and organizations is characterized by the in-
tense dominance of rationalism. It goes without saying that more standardized/formal
and stricter procedures are followed for the achievement of specific predetermined
goals. Also, the demand for industrial products is due to the demand for consumer
products that will be manufactured by them; in other words, it is a derivative or
secondary demand, in contrast to the primary demand of consumer markets. Therefore,
to the degree that the marketing strategy of businesses is not influenced at least in the
short term, the derivative demand is clearly more inelastic concerning the price in
relation to the primary demand. Furthermore, the industrial markets are, in their
majority, rather oligopsonistic in contrast to the vast majority of the customers in
consumer markets. Consequently, industrial goods customers exercise direct and im-
mediate reaction on the design and application of businesses’ marketing strategy,
starting from the design of new products and the improvement of existing ones, where
decisions are often taken mutually among the strategic partners of the supply chain.
Industrial products are classified based on the following purchasing behavior pro-
cedure, as well as the reason for their use, as capital goods, raw materials, processed
materials, and supply/stock and services.

• Capital goods: These include the building installations (production, administration

offices, etc.), fixed mechanical equipment (e.g. production lines, information
systems, etc.), as well as auxiliary equipment (such as portable micro-tools,
computers, printers, and office furniture). Decisions related to building installa-
tions and fixed mechanical equipment are of vital strategic importance; they
decisively influence the operation of the businesses in the long term, they are
related directly to the production process, and the possibility to change them and
adapt to new conditions is limited and comes with high costs. In contrast,
auxiliary equipment depreciates in much less time and has an auxiliary role in the
production process. In particular, the fixed installations (building and machinery)
are very often designed and produced on the basis of the specialized needs of each
customer.
• Raw materials, processed materials and accessories: Raw materials refer to either
products of agricultural production/origin (animals, grains, fruit, and vegetables)
or natural products (minerals, water, wood, crude oil, and fisheries). Processed
materials are those goods that have already undergone some kind of processing
but need further processing so as to be incorporated into the final product, for
example, cement, fabrics, wire, etc. Accessories or component parts are products
that are incorporated directly and immediately into the final product without
extra processing, such as the mirrors, tires, and seats in a car. In the industrial
products category, the preferences/requirements of each customer play a deter-
mining role in their critical elements, such as the technical characteristics, the
 (P)roduct 9
resupply process and maintenance of cycle and security stock, etc. Also, access to
raw materials, processed materials and accessories, among others, decisively
contributes to the design decisions of the supply chain network of a business.
• Supplies/stocks and services: Supplies/stocks are materials that contribute to the
production process of products for business customers but are not incorporated
into them. They refer to items that are used in the maintenance and repair of
capital goods (e.g. paint, spare parts, grease products, etc.), as well as for
operational purposes, for example, fuel, printing paper, etc. Services refer to the
seconding to third parties (outsourcing) of the execution of operations that do not
belong to the narrow core of the competitive advantage of businesses, such as
cleaning services, security, transportation, etc. Outsourcing is of special interest,
since its meaning constantly takes on greater significance in the operation of
modern businesses that gain operational benefits, since specialized outsourcing
businesses provide a high level of innovative services; they are also significant in
financial terms, since businesses are relieved of the financial burden to cover fixed
investments that do not contribute to the acquisition and maintenance of the
competitive advantage.

The saving of resources and capital by cooperating with specialized companies that
provide special services allows a business to invest in other basic goals and sectors, and
to develop other activities. Additionally, it succeeds in the improvement of the quality
and performance of its services, because these companies provide the appropriate
resources as well as a wide accumulated experience and the appropriate technological
infrastructure. Consequently, outsourcing provides immediate access to the latest
technology without requiring the usual development period within the business.
Upgrading the level of quality of the services provided consequently gains further
satisfaction from the customers/final consumers. However, the long-term cooperation
between businesses and service providers possibly may give rise to dependence of the
former on the latter, due to the gradual loss of know-how on the part of their human
resources. If a business chooses to outsource a large number of its vital processes, then
its ability to innovate becomes limited. Also, there is the possibility that an external
partner is unable to adapt to the particularities of the company, with the result that the
level of services provided does not reflect the expectations of the business. A potential
“bad” provision of services will surely negatively influence the entire image of the
business in the market.

1.3 Decisions concerning the product mix, brand, packaging, and

labeling of a product

1.3.1 Product mix

The product mix of a company refers to the set of single products that it offers to its
customers and the way that these are classified based on their degree of involvement
with each other, with reference to brand, price or special characteristics. A line or series
consists of a group of products that are very closely associated with each other. For
example, a food company has product lines such as fresh milk, dairy products, fruit
juices, etc. The width of the mix refers to the number of different lines (series) that the
business’s portfolio contains. The length refers to the number of items in the product
10 (P)roduct
mix. The depth refers to the entire number of alternatives that each product is offered in,
for example, the number of versions of fresh natural juice based on their ingredients
(orange, apple, orange-pomegranate-grape mix, etc.) and the size of the packaging (e.g.
single serve packaging of 300 ml and family-size packaging of 1 and 1.5 litres). The
consistency shows the degree with which the products lines/series of a business are as-
sociated with one another, taking into account different criteria such as their use,
production process, distribution channels, etc. For example, a local dairy company will
have a greater degree of consistency in its product mix in relation to an international
business that is active in virtually the whole range of electronics products.
The strategic partners of businesses in the supply chain are estimated to influence
more and more often the decisions related to the configuration of the product mix. For
example, if a food company wishes to provide 2–3 extra flavors of ground filter coffee
to its customers, but the retail sales chains which it cooperates with are not disposed to
increasing the number of such related items on their shelves, then the chances of
success in this venture are very limited.

1.3.2 Branding
Branding refers to the name, symbol, design or a combination of the aforementioned,
which is used for ease of recognition and differentiation of products in relation to the
competitors’ products. Brands comprise very important property elements of the
business, since they are associated with the perceptions and attitudes of its customers
in relation to the expected benefits of the products, that is, the placement of the
products on the perceptual map of the customers. The more customers trust a brand
and are fixated on it, the greater its value. Thus, the development and management of
brands is an issue of utmost importance for businesses.
In the relevant literature, various reasons that contribute to the difficult task of
effective brand management are given: the constant availability of products whenever,
wherever and however the customers want them; the possibility of production and
supply of stable and high distinct product quality; the stable provision of high quality
in relation to the price, appropriate or even advantageous placement of products in
store spaces; the achievement of economies of scale, etc. A common determining
element among all factors that contribute to the longevity of brands is the good co-
operation of businesses with their strategic partners in the supply chain. For example,
for a product to be constantly available, on the shelf in retail stores with a regulated
low transportation cost and stock maintenance presupposes – ideally – a very good
coordination and the continuous uninterrupted cooperation of the various actors
involved in the supply chain.

1.3.3 Packaging and labeling of products

Packaging refers to any material that is used as a box or wrapping for a product with
the purpose of the product’s protection, transportation, availability and presentation,
from its production to its final/end use. The role of packaging is multi-dimensional
and is becoming more and more important, especially since 70% of purchasing deci-
sions are estimated to be taken at the point of sale. The main functions that packaging
entails are as follows:
 (P)roduct 11
• It protects the product. Packaging plays a very important role in the protection of
the product from different forms of deterioration (physical, chemical and
microbial), including wear and tear. Hence, it contributes in a big way so that
the product reaches the final user in the desired state that is determined by its
producer and at the same time increases the period of its life.
• It contributes to the effective and efficient transportation, storage and distribution of
the product. The packaged product can be transported and distributed much more
easily, quickly and efficiently in comparison to bulk products. It also facilitates to
a great degree cycle stock and security management, thanks to modern
technologies, in real time. A result of all the above is that it makes it more
difficult to steal the product because of the possibility of tracing/tracking it.
• It communicates with the customer and promotes the product. The vast majority of
consumer markets are of low involvement; therefore, especially in supermarkets and
also some other retail outlets, the consumer has visual contact with more than 100
different products per minute of visiting time at such places. Packaging and labeling
can play a determining role in visual differentiation in relation to competitors’
products, and can facilitate the prospective buyer to recognize a particular product
among the immense range of products that are found stacked on the shelf, one next
to another. It can also potentially highlight and strengthen the basic messages that
the producer wants to convey to customers in order to place the product in their
personal perceptual map. At the same time, it provides a lot of important
information about the product, often more than the minimum required by the
relevant legislation, based on which the business wishes to highlight advantages
about the product, in order to facilitate its choice over other products.
• It facilitates the use of the product by the final/end customer. Depending on the
frequency and the amount of use made of the product by the consumer, the same
product can be contained in different volumes, for example, fresh milk packaged
in different quantities: 250 ml, 500 ml, 1 litre, etc. The same product, for example,
coca-cola, can also be packaged in metal or plastic cans of different volumes, or
even with a different seal depending on its potential use by adults or children,
facilitating among other factors the opening and resealing of the packages.
• It increases the value of the product. The packaging of the product plays a very
important role in its entire environmental footprint, in relation to the supply chain
as well as after its consumption. Hence, the design of the packaging gains more
and more importance due to the intense legal, social and consumer-imposed
constraints and pressures, as a way to keep pollution under control, and to
achieve more sustainable management of the limited natural resources. For
example, packaging materials that are recyclable and/or biodegradable are used,
which are labeled as such on the product packaging. To achieve this goal, the
product packaging must potentially provide further product functions post-
consumption of the original product.

1.4 The new product development process

1.4.1 Stages of the new product development process

Companies should, at regular intervals, renew and enhance their product portfolio in
order to ensure their survival in the market, since virtually all products come to the
12 (P)roduct
end of their life cycle eventually, most often by decline in demand and their potential
withdrawal. Also, the (mainly) technological developments, among many others,
constantly present new opportunities and challenges for the highest degree of sa-
tisfaction of the needs and desires of various market sectors/goals. The addition of a
new product in an existing portfolio may be achieved externally with the acquisition of
another business which already produces it, or by buying a patent for a new product,
or a license or a franchise from another business. It may also take place internally, by
the company itself and its partners, via the improvement/modification of its existing
products, or the development of a radically new product.
There is no mutually accepted manner of defining a new product. However, from
the perspective of a business, a new product is defined as that which – for whatever
reason – is new to the company itself. In this frame, a new product can be perceived in
the following forms/dimensions:

• Innovative product: This is a radical/revolutionary product in the market that has

never been exposed before in the past, and which creates an entirely new market. It
is estimated that approximately just 10% of new products belong to this category
not only due to high costs, but also due to the very great business risk involved.
• New line product: This is the kind of product with which a business enters a new
market for the first time and accounts for about 20% of new products that are
circulated in the market.
• Addition of a product to an existing line: The new product is essentially a different
version of an existing product, such as a new flavor of filter coffee, a smaller
package size, etc. It is estimated that about 25% of new products increase the
depth of businesses’ existing product series.
• Improvement of an existing product: The new product incorporates some relatively
small (not groundbreaking or continual) improvement in an existing one. This
essentially suggests some kind of reaction in the changes of the technological and
competitive environment. This category, as well as the next two categories,
comprise 45% of new products in total.
• Relocation of a product: This refers to an existing product that is “relocated” in the
perceptual map of the customers. It aims toward making the product become
more accepted and used in the newer sections of a market.
• Low cost product: This refers to a product whose value:price ratio changes for an
existing product, while the value offered remains unchanged (functional benefits),
but the production cost is reduced, and by extension, the added value is increased.

The development costs of a new innovative product are generally very high. For ex-
ample, large international businesses may spend hundreds of thousands of dollars (or
euro), with the economic outcome remaining rather vague because a lot of time has been
spent in its development. Moreover, there is a lack of relevant data that would make it
easier to make trustworthy reliable predictions. As a result, a small part (perhaps less
than 10%) of new products consists of groundbreaking innovative products.
It is estimated that 70%–90% of imported new products fail and are withdrawn from
the market within their first year of circulation. Only a very small percentage of new
ideas end up becoming a new product that are actually introduced into the market; thus,
the development process involved in an innovative product is very time consuming, with
high costs and a very high level of business risk. However, if new products are not
 (P)roduct 13

Number of
potential products

Idea
Business
screening
analysis
Idea Idea Product Marketing Commerciali- Time
generation evaluation development testing sation

Figure 1.2 Development of a new product.

developed, businesses will soon stop keeping up with the competition and will them-
selves end up out of the market. As a result, there is no other choice apart from a
methodical customer-centric approach in the development of new products, with the
end result being the acquisition and maintenance of a competitive advantage through
more efficient and effective satisfaction of the customers’ needs as well as those of the
other stakeholders of a business. The development process of a new product involves
many stages. It begins with the collection of ideas, and is followed, in order, by the
selection of the ideas, the evaluation of the ideas, the development of the product and its
market testing. It is then concluded with the commercial development (Figure 1.2).

Idea generation
The development of new products starts with the systematic collection of ideas. Many
thousands of ideas are usually needed in order for some of them to end up as a new
successful product in the market. For example, it is estimated that among 5,000 phar-
maceutical items evaluated at the initial stage, just 4–5 will manage to enter the market
in the form of an original pharmaceutical product after 8–12 years of research, tests and
development, and just one will manage to become commercially successful. Thus, it is
estimated that the development cost of that one successful medicine will surpass 1.2
billion of USD. The truth is that the pharmaceuticals sector is characterized by parti-
cularities, but as a general rule, it is true that all businesses are obliged to develop and
establish systematic methods of collecting a huge tank full of new ideas.

INTERNAL SOURCES OF IDEAS

Internal sources of ideas refer to ideas coming from staff members from all echelons
and all operational units of a business, especially from the Research & Development
14 (P)roduct
(R&D), marketing and production departments. In the customer-centric approach of
the marketing philosophy, which all staff and executives of a successful business must
embrace, each worker must be able to “see” all the internal customers (the other
departments) of the business, the strategic partners of the distribution networks, right
up to the end user of the product/service in whose production she or he participates.
As a result, everyone’s contribution is of value, irrespective of their position in the
business.
Some large businesses have founded and established permanent mechanisms for the
collection of ideas, where executives and other staff members from the R&D, mar-
keting and production departments are encouraged to get together at regular intervals
to come up with ideas for the production of new products and the establishment of
new production processes.

EXTERNAL SOURCES OF IDEAS

Some businesses aim for a large percentage of new innovative ideas from external
sources. The strategic partners of the business in the supply chain – both on the upside
(suppliers) and the downside (distribution networks) – are invaluable sources of new
ideas.
Businesses in many cases look to external partners (outsourcing) who are experts in
providing services for the design of new products. They do this mainly through the
systematic collection and processing of information related to the unsatisfied needs
and desires of the existing and potential customers of the producers.
The most important sources of new ideas are often a business’s customers them-
selves. Businesses often rely directly on the customers to evaluate their ideas for new
products. Through this procedure, many new and interesting ideas emerge. Other
companies take advantage of social media networks in order to extract new ideas from
enthusiastic customers. These ideas often arise from various intense discussions by
customers through online networks which the businesses themselves have established.
In some cases, customers offer companies their own ideas through the use of various
products, and in different ways from those which the products were initially intended.
For example, the main use of yoghurt is as a complete dessert meal, but, in many
cases, it can also be used in various recipes.
Great attention must be paid to the weight attached to the evaluation of customer-
derived ideas. A great deviation is often noticed in terms of the stated preferences of
the consumers. Organic products and the deviation in their final form are an example
of this in many markets within the prism of the market share that they eventually end
up securing.

Idea screening
Initially a selection of ideas must be made, in order to weed out the largest volume of
those ideas that have very few – if any at all – chances of commercial success. The
sooner this has been done, the more useful it is for the effective and efficient use of the
limited resources of a business. The need for the rapid removal of “dead-end” ideas,
commercially speaking from the development process of new products, is particularly
important in the modern business environment where the entry cost is constantly
increasing at very high rates.
 (P)roduct 15
The choice of the most-likely-to-fail ideas, commercially speaking, is based on the
evaluations related to expected sales, the potential price of the product, the devel-
opment time needed until its introduction into the market, the production costs and
the rate of performance of the investment. An especially important role is played by
the availability of raw material supplies and accessories, as well as the potential in-
tentions of collaborating distribution networks to support the product, especially
during the stage of its introduction into the market. Businesses often adopt a stan-
dardized method of recording new ideas in order to make it easier to select the most
promising ideas.

Idea evaluation
For products that pass the first selection stage, a more thorough evaluation then takes
place. At this stage, a more detailed description of the goals and philosophies of the
new product is made, so that more information can be collected for a more complete
evaluation of the potential new product. The main feature of this stage is the testing of
ideas by consumers in the target group, who are called on to evaluate various alter-
native clearly defined product ideas, and to state their preferences and intention to
purchase the product.

Business analysis
In the next phase, a commercial analysis of the ideas that “survived” the filter stage is
conducted. For the full evaluation of the potential commercial success of the new
product, the development of an initial marketing strategy is necessary; the most im-
portant elements of an appropriate marketing strategy must be identified and for-
mulated. Once the target groups and the value offer are clearly defined, the marketing
strategy that emerges should provide valuable forecasts in relation to the calculations
of the expected sales and revenues for the first few years after the product has been
introduced into the market.
Taking into account the total annual costs, the profit and performance forecasts of
the invested capital can be calculated. For the assessment of the total costs involved, it
is crucial to record all its component categories, and the choice of an appropriate
method or allocation of expenses that refer to the other products that the business
produces. Not only a miscalculation upward or downward of the total but also the
unit cost plays a catalytic role in taking the right decisions at this stage. Thus, it is very
important that all the relevant assumptions are taken into account in the calculations,
and a sensitivity analysis is conducted. A very important tool often used in business
analysis is the break-even analysis: based on specific forecasts, the lowest sales
quantity needed is calculated (in currency or product units) to cover all expenses. Due
to the high level of uncertainty, it often remains impossible to make a reliable pre-
diction of the values that crucial parameters will take, concerning the potential course
of the new product in the market (e.g. expected price and acceptance rate by potential
customers, reactions of the competition, changes in the external environment, etc.). It
is, therefore, necessary to conduct a sensitivity analysis for the evaluation of different
potential scenarios (optimistic, most likely to eventuate, and pessimistic).
16 (P)roduct
New product development
Until this point, the new product exists as a concept, an idea that has of course been
described analytically and is pending “acceptance” by the business analysis. In other
words, it is generally accepted that it presents good expectations for survival in a
tough competitive market. The next stage is the development of the product and its
production process, that is, the creation of various prototypes, together with the de-
sign of the process that will ensure its production within the framework set by the
strategic partners of the business in the supply chain, as well as the end users/buyers of
the product. Apart from the operational benefits, the offer proposal of the new pro-
duct often includes aesthetic elements, which also contribute to the determination of
the prototypes.
This stage is especially critical in the future course of the potential new product,
since it demands the systematic and methodical collaboration of interoperational work
teams tasked with this job. These teams are chiefly made up of members of the R&D,
production, supply and marketing departments of the business, as well as members
from the strategic partners in the supply chain, whose contribution is of vital im-
portance in the successful outcome of this effort. In certain cases, this is a very time-
consuming stage (often lasting for some years); this usually refers to the iterative
processes involved in the creation, evaluation and improvement of the prototypes until
the design satisfies the many and often conflicting goals and preferences of the dif-
ferent stakeholders (the business, suppliers, distribution networks, final customers,
regulating authorities, among others).

Marketing testing
Market testing refers to the limited pilot introduction of the product in real market
situations, via the availability of a relatively small amount of product in specific
geographical regions. Market testing is especially useful in cases where the introduc-
tion of a new product in the market presupposes a significantly large investment, since
a lot of information is being extracted in relation to the new product and the chosen
strategy of the marketing mix. In this way, an attempt is made to extract even more
reliable conclusions for the predictions related to the acceptance of the product in the
market, the support it will get from the main actors in the supply chain, and the
potential revenues.
High costs are perhaps the greatest deterrent in the use of the market testing stage;
this is why it is often avoided for products that comprise simple extensions of existing
products of a business, or are similar to competitors’ products already in circulation
(i.e. when the development cost is relatively low, or when the business believes that the
chances of failure are very limited). But the damage of a failed introduction of a new
product can be very great, often reaching millions of dollars/euro; in such cases,
market testing can play a very significant role.
It should be noted that there are many cases of new products introduced into the
market after a successful market testing period, which were eventually withdrawn,
even after a relatively short period of time of just a few months, because they ended up
not being well accepted by the market. The opposite has also been verified in practice:
a new product has a disappointing outcome in its first market tests, but it is highly
successful later. Another disadvantage of market testing is the expected “leakage” of
 (P)roduct 17
useful information to competitors. Moreover, competitors are likely to react in-
tensively during the market testing of the product, therefore making it difficult to
extract safe and trustworthy conclusions about the new product. Furthermore, the
timing of the market testing should be adequate so as to secure a relatively correct
estimate of repeat purchases, which often comprises a critical factor of success for a
new product. In the era of virtual reality, many alternatives are available that simulate
the operations of market testing, often with similarly satisfying results, as well as
clearly reduced execution costs.

Commercialization
A very small percentage of new ideas get to the stage of being introduced to the
market. The cost is especially high; the revenues derived from the sales of these new
products deviate widely from the expenses required for its support in term of its
production, stock management, distribution among the marketing channels and,
particularly, in terms of communication with the final consumers for its promotion. In
practical terms, very few businesses have the ability to secure the immense financial
capitals required, and the necessary maximal support and cooperation of the suppliers
and distribution networks for the simultaneous introduction of the product in the
desired and/or target markets. In their majority, manufacturers are initially satisfied
by choosing just a few specific promising regions to jumpstart a successful introduc-
tion of the product into the market, having designed a programme of gradual spread
in the remaining regions.
However, before choosing the regions for the introduction of the new product,
decisions will have to be made concerning the appropriate timing of the presentation
and distribution of the product in the market. In quite a few cases, businesses may
delay its introduction if they think that potential improvements to it may make it more
attractive to potential customers. The same can also be true, however, when the
combination of circumstances of the macro-environmental forces make wild predic-
tions about such a costly investment. In contrast, businesses sometimes need to
quicken the pace for the introduction of a new product in the market due to an ex-
pected introduction of competitors’ products. This situation is probably repeated very
often due to the rapid technological developments at all operational levels of the
supply chain, which the competition rushes to take advantage of. For example, the
recall of entire batches of new products, for example, smartphones and car models, for
some kind of partial repair or even complete withdrawal or replacement, may be due,
among other factors, to the desire of businesses to be ahead of their competitors time-
wise in the introduction of their products.

1.4.2 Integrated management of the new products development process

The development of new products is an act involving a very complicated process that
requires committing huge amounts of precious finite resources (human, capital, fi-
nancial, etc.) on a long-term time scale. The result essentially determines the survival
of the business, and consequently its potential to secure satisfactory rewards for all
those involved in it, for example, investors, higher executive ranks, workers and col-
laborators in the supply chain. Consequently, an integrated and systematic approach
for the management of the development process for new products is needed, in order
18 (P)roduct
to successfully face the constant challenges by finding solutions, discovering un-
avoidable tradeoffs and striking a balance of conflicting forces.
Integrated management in the development of new products presupposes the following:

• Commitment of top management executives of the business: The development of

new products is associated with high levels of uncertainty, as well as being time-
consuming and expensive. It involves many executives from various operational
departments of the business; thus, the constant, clear, precise and indisputable
support and commitment of the higher management ranks is of vital significance
in the management of expected failures, grievances, disagreements, etc. The stable
and unwavering stance of higher management in the development of innovative
products, making the necessary resources available and undertaking the appro-
priate responsibility, plays a determining role in the success of the development
process of new products.
• Systematic development of a new product: For the evaluation of all potential
opportunities for the maintenance and development of a competitive advantage in
a business environment that is full of constant rapid catalytic variables, top
management officials must establish and strongly support mechanisms that will
guarantee the systematic development of a new product. In other words, the
development and support of a corporate culture is required, with a view to
innovation that will influence all the executives and other staff of the business,
rewarding those who take an active role in finding and executing innovative
solutions.
• Creation of multi-functional teams and appointing a manager: The development
of a new product requires good unhindered constant collaboration from the
R&D, production, supply, marketing and finance departments; it often includes
the legal consultants of a business as well as the executive representatives of the
main strategic partners of the supply chain (suppliers and distribution networks).
Traditionally, the work was allocated among different departments and each
department did its own work, following a rather linear process. This approach has
virtually been completely abandoned now, thanks to the use of good commu-
nication of technological information that has broken down the traditional
barriers that separated the different operational units. Communication between
those directly involved, wherever they are, the collection and distribution of vast
quantities of data and information among all stakeholders, and the evaluation of
the tradeoffs among alternative plans through simulation of the whole supply
chain are now taken for granted (or at least they should be).
• For the successful completion of the task of developing a new product, multi-
functional teams are created whose members are responsible to a great degree
exclusively with the execution of the specific task. The main aim here is the success
in completing the task and not the promotion of the priorities and expectations of
each operational unit. In this way, specialized staff from different operating units
contribute to the completion of the added value process, since they offer valuable
knowledge from their own particular field and the operational unit where they
work; they also have a complete and systematic approach to the operation of the
whole business and the entire supply chain. This spherical knowledge of the entire
system (the business and the supply chain) constitutes a necessary condition for
the successful execution of the next steps in the life cycle of the new product; here,
 (P)roduct 19
the challenges to be faced are much greater in intensity and consequence, and
naturally much less controllable, since the introduction of a new product will
cause an extreme reaction on the side of the competitors.
“Success has many fathers, but failure is an orphan”, as the saying goes: the
appointing of a manager is absolutely necessary for the operation of a successful
team. The manager will always pass on his vision and keep it alive; s/he will
coordinate all efforts through the potential allocation of the task; s/he will urge
everyone to take on the initiative, and encouraging the team to continue in their
efforts when faced with a difficult situation; most importantly, the manager will
take on the greater volume of responsibility in the case of failure in the face of the
management and the main shareholders of the company.
• Customer-centric approach: As previously stated, a business, and by extension the
process of developing a new product, should satisfy the expectations of different
stakeholders. A potential failure to complete the minimum expected level of
requirements, even of one stakeholder, is simply unacceptable. The business’s
customers are its most demanding stakeholder: their preferences are like
quicksand, constantly altered in storms caused by rapid and frequent changes
in the external environment (mainly of a technological kind); without customers,
there is clearly no meaning for a business and its supply chain to exist: no demand
means no revenues. A business and its strategic partners in the supply chain (who
are involved in the development of the new product) must identify their
customers’ needs and desires which they can satisfy more effectively and efficiently
in relation to the competition based on their particular abilities, skills and
resources. Thus, just as it is not feasible to develop a new product that attracts
customers but cannot be supported adequately in terms of its production and
supply chain, it is equally catastrophic to try to introduce a new product without
thorough knowledge of the needs and desires of the customers. Thus, the process
involved in developing new products must start with finding opportunities based
on the unsatisfied or partially satisfied needs and desires of customers, and be
completed with the discovery and offer of mutually beneficial solutions for the
customers as well as the business and its supply chain.

1.4.3 The new product adoption process and strategies

The adoption process of a new product involves many steps, such as those outlined in
the following diagram (Figure 1.3):
Initially, the new product is completely unknown to its users. Thus, the first step in
its adoption is informing potential interested parties by promoting it and, for con-
sumer goods, mainly through advertising, the goal being the creation of a demand
for the brand. Advertising underlines the existence of the new product, emphasizing
the brand and highlighting in an attractive way the particular characteristics of the
product in order to lure the interest of the target buyers. The communication
strategy followed should contribute in such a way that the potential customer will
proceed to make an evaluation of the new product in relation to competitors’ pro-
ducts; the advertisement must provide the appropriate information/indications that
the new product offers the highest possible added value. At this stage, the con-
tribution of the distribution networks is very important, mainly in the retail sector,
so as to facilitate comparisons.
20 (P)roduct

Ignorance Awareness Interest Evaluation Trial Adoption

Figure 1.3 The new product adoption process.

Early majority Late majority

Innovators Early
adopters Laggards

Figure 1.4 New products adopter groups.

Since the estimated value:cost ratio of the new product is of the highest importance
in relation to competitors’ products, prospective customers can proceed to testing it.
Every new product is unavoidably accompanied by uncertainty concerning what it can
really offer, so all efforts should be directed toward curbing the hesitations of the
prospective customers, for example, simultaneous highlighting of its advantages,
minimalization of perceived risk with the use of tools like free samples, small-size
packaging, longer warranty period, possibility of getting one’s money back, etc.
Evaluation of the new product once it has been tested will play a decisive role in a
buyer’s intention to adopt it, but customer loyalty presupposes constant maintenance
of quality standards and continual efforts to improve the quality:price ratio, as well as
constant promotion of the product.
The time period needed for potential buyers of the new product to follow the
adoption process shows a wide variation as can be seen in the following diagram
(Figure 1.4).
Consequently, based on the adoption time of the new product, buyers are classified
into the following groups:

• “Neoterists”, 2.5% of the total buyers: They are the first to try the product. Their main
characteristic is the high level of psychological willingness to be original that surpasses
the unavoidably high perceived risk associated with the new product. They are usually
young people with a high level of education and a relatively high level of income.
• Early adopters, 13.5%: They are similar to the neoterists to a great degree, and
they often look for new solutions to satisfy their needs and desires, perhaps paying
more attention to the perceived risks of the new products.
 (P)roduct 21
• Early majority, 34%: These people desire a better value offer than what they are
enjoying at the moment, but prefer to wait till they are better informed by the
experiences of the neoterists and the early adopters that are often published in
various ways through social media.
• Late majority, 34%: These buyers are older in age and are slightly influenced by
the promotional activities of the business selling the new product. They try it when
it has become widely accepted in the market, mainly due to the good price it is
offered at, or the respective adaptation to common social norms.
• Slow movers, 16%: This is the last group to try the new product. It is generally
characterized by an aversion to change, and turns to the new when the old
product they are using is withdrawn.

1.5 Product life cycle

1.5.1 Stages of product life cycle

When the development process of a new product is completed, the next step is its
introduction into the market. The business has already invested precious resources for
the development of the new product; thus, it will make all efforts to ensure that its
trajectory in the market will reward its own expectations and those of its strategic
partners in the supply chain. Ideally, the business would like the new product to
comprise a source of revenue as soon as it hits the market; it is most likely the case,
however, that some time will be needed before it becomes profitable in terms of sales.
Moreover, the product will need to change over time in order to satisfy the needs and
desires of the customers in relation to the competitors’ products. Generally speaking,
after their development, all products albeit each one in a different way will follow four
distinct phases in their life cycle in the market: (a) introduction into the market, (b)
development, (c) maturity and (d) decline (Figure 1.5).

Sales &
Profits (€)

Time
Introduction Growth Maturity Decline
Product
Development

Figure 1.5 Product life cycle stages.

22 (P)roduct
Introduction into the market
When the product is first introduced into the market, it is completely unknown to
potential customers. No sale can be made until customers are informed adequately
about it and the benefits that it could offer them compared to the competitors’ pro-
duct, so that they can be persuaded to try it. Moreover, it is not enough simply for the
new product to reach the shelves of the retail stores; it is imperative for the product’s
successful introduction and trajectory into the market to secure its constant supply in
the market (with as many stock levels as possible). It is, therefore, expected that at the
introduction stage, the business continues to invest significant resources in the new
product, even though revenues will lag behind significantly from expenses. Hence, the
main characteristics of this stage are the thorough, constant and intensive promotion
of the product. The main tools in this effort are advertising and promotional actions,
while the ultimate goal is for the product to be tested by a very small share of the target
market. Commitment to production factors and organization of the production pro-
cess must ensure a constant flow of product in the distribution channels; production of
a minimum stock level will guarantee availability and avoid shortages at retail stores,
offering motivation and support to the target distribution channels. Due to the
magnitude and uncertainty of the risk being undertaken, as well as the limited demand
of the product by neoterists and some of the early adopters, the product is offered in
just a few different versions, focusing on reliability and functionality, rather than the
particular elements that will satisfy the specialised needs of discrete target markets.
With regard to pricing, businesses may choose between two general strategies, market
pruning pricing and market penetration pricing. In market pruning pricing, the business
initially sets a high price to sell the product to the few customers that are aware of the
very high value/usefulness of the product, and can’t wait to acquire it. Later, it will
gradually lower the price so that the people who regard it as less useful/beneficial will
buy it. It is suggested to use market penetration pricing in determining a relatively low
price that speeds up the growth rate of customers who will try the new product. The
aim here is the fast acquisition of a relatively high market share and, subsequently, a
reduction in the unit production cost and the distribution of the product.
This is the stage businesses would like to last for the shortest time possible; in
practice, however, a long time passes until the right conditions are created (recognition
and creation to some extent of a branded demand, support from the strategic partners
of the supply chain, etc.), which will cause a rapid increase in product sales, giving rise
to the transition to the next development stage. The factors that influence the rate of
adoption of new products varies and it is difficult to make a precise estimate of their
impact; it has been found, however, that some factors play a decisive role so that the
product will pass relatively quickly onto the next stage of development. Specifically,
the degree of superiority of an innovation in comparison with competitors’ products,
which reflects the offered value or the value/price ratio, has a positive correlation with
the speed of acceptance of the new product. Similarly, a small degree of complexity,
that is, how easy it is to use the new product, and the degree to which the innovation is
compatible with the sociopolitical values and experiences of the adopters, also leads in
the same direction. Moreover, there is a positive contribution in the potential of a
partial testing or demonstration of the use of the new product: the degree to which
communication of the advantages of the new product in relation to competitors’
products is facilitated.
 (P)roduct 23
It is important to note, however, that some new products remain longer at the
introduction stage than the time that the businesses estimated the investment and
support to be worthwhile, and their journey in the market will end prematurely, and
sadly, rather ignominiously.

Growth
The rapid increase in sales that signals the entry of the product to the development
stage means that it is profitable for the business and it, therefore, no longer needs new
capital for its support. At this stage, the product attracts interest and has been adopted
by all the early adopters, as well as a large number of the early majority of potential
customers. The main goal of the business is the acquisition of a larger market share
since, due to the success of the new product, competing products are now making their
presence known as similar or even improved versions. The business now has the
possibility – and it vigorously pursues this – to increase the distribution channels it
works with in the frame of pursuing a more intensive distribution of the product in the
market. Moreover, the business increases the possible versions/alternatives of the
product, some of which may have improved features, and it offers more support
services for customers.
The unit cost is reduced even more, due to the achievement of economies of scale
and the use of learning curves, as well as the more efficient and effective coordination
of the business, both internally and externally, with its collaborating partners in the
supply chain. The price is maintained at the same level as in the introduction stage,
hence it may be reduced slightly. The expenses for its promotion remain at the same
levels as in the introduction phase, or are slightly increased; due to the increase in the
sales volume, however, the cost per product unit decreases significantly. The goal of
marketing communication is not just the achievement of the product testing, but also
to ensure repeat purchases through persuasion, and its increased use and frequency of
purchase.
The most significant challenge of the business at this stage is to identify the optimal
tradeoffs between the potential benefits and consequences of the available profit
management alternatives. A more wide-ranging alternative is to invest a significant
part of the profits into the product itself, to improve it and promote it more widely by
extending and/or improving the distribution channel; the main aim here is to establish
dominance in the market and to further increase its market share with a view to long-
term benefits. On the other hand, it could aim for higher short- or long-term profits
from the product and utilize them to increase shareholders’ dividends, or improve the
position of other products in its portfolio.

Maturity
The product enters the maturity stage when the sales growth rate slows down and
saturation in the market is eventually achieved, which happens when the total cus-
tomer set is using the product intensively. For most products, this stage lasts longer in
relation to the others, and the goal of businesses is generally to elongate the time
horizon of this particular stage. Hence, the product portfolio (mix of offers) of nearly
all the businesses comprises mainly of products that are found at the maturity stage.
Since constant changes are noticed in the sales levels (in both directions) and the
24 (P)roduct
challenges of the competitive environment are complex with a very high intensity,
businesses tend to focus their attention particularly on the effective management of
their mature products.
This stage is characterized by intense competition among a plethora of similar
goods. Customers usually can’t distinguish significant differences between alternative
products and are particularly sensitive to the price of the product, so there is a ten-
dency to reduce it. Consequently, the profit margin shrinks. Despite this fact, the
most-established businesses have the ability to sell products at the same prices as their
competitors or even at slightly higher prices due to the services provided and the
customers’ habits, which lead to some degree of loyalty toward them. Also, businesses
try to further develop the distribution network for the product to reach more custo-
mers and markets.
Marketing communication focuses more on persuasion since differences between
competing products become all the more blurry. The ultimate aim is the creation and
maintenance of safe distances of the product against those of the competition on the
perceptual map of the customers. The product and its production process continue to
improve, with the use of the rapid technological developments, particularly in terms of
information technology and communications. Even in the case where technological
changes don’t lead to immediate improvements in the product, businesses can
strengthen their support services and warranties. The result of an intensely competitive
environment and market saturation by a rich variety of competitors’ products is the
withdrawal from the market of some competitors when they find they cannot offer a
product with an attractive value/price ratio in market segments that are deemed
sustainable.
From the aforementioned, it is obvious that businesses make a great effort to
lengthen their products’ maturity stage via a mix of relevant strategies. A strategy has
to do with the consumption growth of the existing product, without it undergoing
substantial improvements. This is achieved in different ways such as finding new users
in existing or new markets, as well as discovering and promoting new/additional uses
among existing customers. Moreover, groundbreaking technological innovations force
businesses to seek continuous improvement of their product offers and the integration
of highly developed support services. Furthermore, businesses resort to changes in
other elements of the marketing mix, for example, by following different strategies for
pricing in various discrete market segments, or attracting customers from competitors
with lower prices, so that they can achieve new consumer segments. At the same time,
it is feasible to invest significant amounts of capital and other resources in a broad
intense promotional mix to establish the presence of the product in the market at an
even higher level.

Decline
Some (admittedly very few) products manage to stay at the maturity stage for many
decades or even more than a century (e.g. certain soft drinks). Most products, how-
ever, eventually reach a stage where their sales decrease to a great degree, which means
that they have entered the decline stage. Due to the small size of the market and the
significant reduction in the price of the products, a gradual removal of the less
competitive products is observed, and the profit margins for the remaining companies
are much smaller, to the point of meager. Businesses that prefer to stay in the market
 (P)roduct 25
will shrink the depth of the product to maintain the lines with the highest sales. The
promotion expenses will be limited to the absolutely necessary (low) level, while the
distribution network will focus on the relatively few still profitable channels.
The maintenance of products at the decline stage implies damage to the business,
both in the short and long term, when revenues are lower than expenses, the perfor-
mance of the committed resources is low in relation to its other products, and the
renewal and maintenance of a balanced and sustainable portfolio is postponed. Thus,
great care should be administered in the timely identification of products entering the
decline stage; this makes it more difficult to calculate the costs involved, since a large
part of the expenses are mutual among other products, and it is also difficult to predict
trends in future sales due to uncertainty.
Businesses resort to different strategies depending on the particular circumstances.
In certain cases, they choose to reposition the product in the maturity stage, through
the aforementioned strategies. Sometimes they end up making a radical improvement/
renewal of the product and its accompanying services so that it may even return to the
development stage. The biggest and most established businesses often follow the
waiting strategy for a significant period of time, until the competitive environment is
ascertained; they may then remain in the market or in a particular segment, until the
withdrawal of most competitors, utilizing their dominant position for a more profit-
able survival in a shrunken market. If forecasts are not so promising, businesses may
make more profits in the short term by reducing their operational costs to the least
possible level until they can secure satisfactory sales (product harvest/bleeding). In the
worst scenario, they either withdraw the product from the market, or they try to sell it
to another company.

1.5.2 Main issues concerning the product life cycle

The life cycle of the product offers a very useful semantic theoretical frame of ap-
proach for the stages a product passes through, from its introduction until its potential
withdrawal from the market. Despite this, there are some critical elements that must
be taken into account during its use in the relevant decision making.

Marketing and sales issues

The life cycle of the product refers to the total sales and profits of the entire sector that
the competitive products belong to, while the sales and profits of each individual
product usually show their own different development, for better or worse, in the
relevant sector. Each individual product will often be at a different stage in its life cycle
in relation to the sector. Moreover, sales and profits may show significant deviations
from one market to another where the specific product is available.
The life cycle of the products generally tends to shorten due to the continuous
emergence of groundbreaking technological developments – culminating in innovative
high-tech products, such as smartphones and other electronic goods – which doesn’t
usually last longer than a year. Generally speaking, the life cycle of innovative pro-
ducts shows certain particularities in relation to other products, which are due to their
very short lifespan, and the very high level of uncertainty, mainly concerning demand
forecasts. For standard products, demand forecasts are very precise and reliable, due
to the plethora of historical sales-related data, so it is feasible to use quantitative
26 (P)roduct
methods; for innovative products, however, the absence of relevant data implies the
use of quantitative data methods that support the estimates of business executives and
the supply chain, as well as the collaborating experts.
The high level of uncertainty makes it difficult to predict critical future situations
concerning the new product in the market, such as how quickly it will enter the de-
velopment phase, what the sales growth rate will be, and what level sales will reach.
Also, new high-tech products tend to show reversal signs that may provoke demand
“epidemics”. So, it is clear that significant dangers arise for the business and those
involved in the supply chain as a result of making overestimations or underestimations
of the actual/stated demand. Companies fail to take advantage of sales takeoffs due to
a lack of time, excess costs and quality problems, while underestimation of demand
causes incalculable damage due to excess stock, inactive units and mass returns
(Figures 1.6 and 1.7).
The delayed entry of the individual product into the market in relation to competi-
tors’ products implies a longer stay in the introduction stage, with significant negative
consequences for the business; the product will stay for less time in the profitable stages
of development and maturity, with increased risks related to devalued stock.
Some products that belong to the “fashion” and “trend” category have a lifespan with
very specific features. Fashion products are related to some kind of accepted or popular
style, and are characterized by their short life cycle that is often completed quickly
without showing any significant indications. Trend products are those fashions related
to specific groups of enthusiastic customers and their life cycle is often even shorter and
very volatile. Thus, the marketing strategy used for such products requires special at-
tention due to the high level of uncertainty that characterizes their entire life cycle.
Although it may seem strange, competitors aren’t always enemies. At the in-
troduction and/or development stage, the existence of competitors may contribute to
greater penetration of the product idea in the market and to the development of the

Sales Volume
Units

Uncertainty

Introduction Growth Maturity

Time

Figure 1.6 Uncertainty and sales volume during the innovative product life cycle (Adapted
from Taylor, 2003).
 (P)roduct 27
Current Sales

Tipping points

Cumulative Sales

Figure 1.7 Tipping points in current sales of innovative products.

required distribution networks, due to coordinated efforts for its fast acceptance by
consumers.
Determining the correct stage of the life cycle of an individual product, as well as
estimating the duration that it will stay in that stage, constitutes a huge challenge. It is
also very difficult to correctly predict when a product will pass from one stage to
another, and to determine the contribution of different potential factors involved in
such transitions.
The development of strategic marketing based on the life cycle of an individual product
constitutes a huge challenge for the business: the chosen marketing strategy depends on
the characteristics of the life cycle stage that the product is in. However, the strategy
followed may contribute in a decisive way to staying in a particular stage, or to the speed
and possibility to change to another one. For example, reduced sales of a product may be
due to the fact that the product has irrevocably gone into the decline stage, with the result
that a decision is made for it to be “harvested”/“bled”, or even to be withdrawn. In
reality, however, this may all be due to mishandling of the chosen marketing strategy,
which didn’t help a product to stay in the maturity stage as much as was feasibly possible,
for example, by redesigning the product or ineffective promotional actions.

LOGISTICS ISSUES

Logistics management includes the design of five main business operations: determi-
nation of the desired level of customer service, demand planning, production planning,
supply planning and, finally, transportation planning (Table 1.1).
The main reasons that give rise to the need for an integration process between the
supply chain and marketing, as well as support for this process, could be the following
(Papadimitriou, 2004):

• Increased market differentiation (differentiation of customer needs and prefer-

ences, personalization of market sectors, product differentiation, etc.).
28 (P)roduct
Table 1.1 Logistics management activities

Operation/Function Examined actions

Determination of the desired level of This concerns the philosophy/policy of the business
customer service that addresses the needs of the customer, always in
relation to the possibilities of each business. These
essentially concern actions taken by the business,
viewing the customer (and the customer’s needs) as
the business’s priority. In this way, when a business
makes it its goal to achieve customer satisfaction in
the best possible way, and manages to do this, this is
regarded as a successful result.
Demand planning The planning process of forecasting demand for a
product/service. A precise forecast for customer
demand improves customer service, simultaneously
reducing costs arising from demand uncertainty.
Supply planning The planning process to satisfy market demand based
on available resources and stock levels. Covering
supply demand guarantees that the security stocks
are at the appropriate levels.
Production planning The planning process that examines the available
resources and draws up a schedule for optimal
production based on restrictions imposed by
practical limitations. It may automatically adapt
production plans if certain suppliers don’t have
availability, or a key production element is out of
order.
Transportation planning The planning process for the best and most economical
transportation and distribution methods, taking into
account all restrictions, for example, delivery date/
time, transportation method, etc.

• Increased competition at the level and quality of services and customer service
(increase in demands for added value/additional benefits and usefulness connected
with the market and the sale of goods).
• Shorter life cycle of the product.
• Trends associated with concentration on marketing, creation and development of
new distribution channels.
• Integration of economic and decision-making processes (use of synergies on a
micro-economic scale).
• Development of new technology in the goods sector, information flow, promo-
tion, sales, etc.
• Development of entrepreneurship and innovation in market and economic activities.
• Completion and globalization of the market.

DEVELOPMENT OF ENVIRONMENTALLY FRIENDLY PRODUCTS

Environmental factors play a very important role in the production of new products.
The most efficient design of new products and their packaging is regarded as that
which is recyclable and economical in its use. Environmentally friendly products
fulfill health and market expectations for people and society, being useful, safe and
 (P)roduct 29
cost-effective throughout the duration of their life cycle. They are made with the
supply, production, transportation and recovery of renewable energy. Such products
have been designed to have the maximum amount of renewable or recyclable materials
and to be constructed with the best practices and the cleanest production technologies.
Moreover, according to all the end-of-life scenarios, they are constructed using hy-
gienic materials that are made in a natural way, so that the most appropriate materials
can be used effectively and can be recycled.
Measuring, recording and monitoring all factors that negatively affect the environ-
ment throughout the entire life cycle of a product or service is a painful and difficult
process due to the interaction of factors and the difficulty in accessing precise trust-
worthy information. This also emphasises the importance of ecolabels (green labels).
Ecolabels are means of communication with potential customers in relation to the
producers’ commitment to the internalization of external factors caused by the pro-
duction and use of their products. These means are fully dependent on the market
approach. However, given that ecolabels provide information related to environ-
mental performance, this may help market participants in making choices with more
economical and environmentally effective targets.
Ecolabels are a derivative form of corporate sustainability. They represent a con-
centration of basic reference information, so that much information refers to a single
binary index. A product either fulfills the predetermined criteria and it is awarded the
label, or not.
There are many non-profit organizations that impose sustainability standards for
specific products, which independently control the production of those products, and
then certify that they fulfill the criteria of being produced in a sustainable way.
The ISO 14020 (2000) standard classifies environmental labels into three groups:

1 Type I labels can be awarded to products that comply with environmental criteria
issued by third parties. An example of this is the European ecolabel whose award
criteria are issued based on the results of a life cycle assessment (LCA) under the
auspices of the ecolabel committee. As a clearly recognized guarantee of
environmental excellence, the EU ecolabel may constitute a basic marketing
tool that addresses consumers who are interested in the environment.
2 Type II labels have a self-declared nature from the producers’ side, based on the
environmental performance of their products, for example, their ability to be
recycled at the end of their life cycle.
3 Type III labels consist of a quantitative statement of the environmental
performance of the products throughout their entire life cycle. The purpose of
the environmental product declaration (EPD) is to provide transparent informa-
tion regarding the environmental performance of the products and services for
comparison purposes. The environmental performance information supplied by
the EPD can be verified by third parties.

1.6 Inventory management

The term “inventory” (or “stock”) refers to any product or material that a business
acquires and stores for future use or (re)sale. Stocks are created when the quantities of
raw materials, components and products that are imported – in a company warehouse,
for example – exceed the quantities that are exported out of it.
30 (P)roduct
Inventory management is an important function in a business, but it also raises
issues in all companies in all sectors, as it involves balancing stock costs (supply,
storage, maintenance, and insurance), and commitment of the business’s space and
working capital. Calculation of the optimal stock level of each product is, therefore, a
very important logistics function; this implies minimization of total operating costs
and maximization of overall profits (Chopra & Meindl, 2015).
The problem revolves around the uncertainty that lies between supply shortage
costs and supply surplus costs. Efficient management offers resource savings, better
product distribution and faster customer service. Within the company itself, different
views may prevail on stock maintenance levels. From the sales point of view, main-
taining inventory may imply being able to meet customer demand at any time, thus
being able to generate a profit from it. The effects of stock depletion are obvious.
Research has shown that sales losses caused by shortages are highly significant; when
the product is out of stock (in both the physical and online stores), a sale cannot take
place and customers will take their business elsewhere. On the other hand, with regard
to financial management, inventory may imply capital commitments which, together
with maintenance costs, implies a lower rate of investment and potential losses.
Inventory management encompasses all the procedures that a company must follow in
order to maintain the appropriate stock level for each product in the most optimal
location for each kind of product.
Before a business decides to build up its product stock, it must finalize important
decisions concerning the stock; decisions must be made about which kinds of products
will be stored, in what quantities, how long the stock will remain (in the warehouse for
example), the cost maintaining stock and the levels of security stock that the company
will maintain for each of these items.

Inventory types
According to Singh and Verma (2018), a company’s inventory comprises a large and
very important share of its assets; it includes all raw materials, products undergoing
processing and the finished products that are ready for sale. The following section lists
different kinds of stock:

• Maximum stock level: The maximum number of products that a business can have
at any one time, depending on the capacity of the warehouse that it maintains.
• Cycle stock: The average amount of stock needed to meet demand between
receipts of shipments from suppliers – this is what the company orders at regular
intervals. A company maintains its cycle stock to cover potential demand in
between replenishment intervals. It is the most well-known inventory category and
has been shown to be effective when order costs are not fixed, and maintenance/
shortage costs are proportional to the stock volume. Cycle stock policy requires
careful calculation of the stock level required for each product, to allow the
company to balance maintenance and storage costs. Only the final products
intended to meet customer demand are stored.
• Safety stock: The stock levels maintained to deal with uncertainty so that demand
exceeds forecasts, and can meet forecasts in case of supply delays. Manufacturing
companies also maintain safe stocks of raw materials so that production is not
affected during a sudden or unexpected shortage. Thus, safety stock levels depend
 (P)roduct 31
on two important factors: the distance of the supplier to the company and how
quickly/directly the supplier can respond to an order, and how important the
product is for the company.
• Seasonal stock: Stock intended to meet seasonal demand (expected demand
volatility), that is, demand created for products during one or more specific
periods.
• Pipeline inventory: Stock that the company has ordered but has not yet received.
In other words, this stock is on the move, from the supplier’s to the company’s
warehouse. Pipeline inventory can also be stock on hold, which a business
maintains to cope with an increase in demand during certain periods.
• Growth stock: The kind of stock maintained by the company in the belief that
there will be a future increase in demand. So, this stock will be available to meet
any potential demand, and it will likely be highly profitable.
• Obsolete stock: Stock remaining in the business due to lack of demand for a
specific product. Because it implies a capital commitment, the company must
liquidate this stock in whichever way possible.

Besides the aforementioned categories, stock can also be classified according to the
nature of each product type, into the following categories: capital goods, durable
consumer goods, consumables, raw materials for production, intermediate goods,
finished products ready for sale and spare parts for its installations.

Continuous and periodic inventory control

The two main methods of stock replenishment are: perpetual inventory monitoring
systems and periodic inventory monitoring systems.
In perpetual monitoring systems, or fixed-quantity ordering, when stock decreases
and reaches a certain level (a predetermined supply or order level), an order is au-
tomatically placed for its replenishment. This has to do exclusively with the stock
quantity at that point in time (and not the time when the new order is placed). This
needs constant monitoring so that the need for replenishment will be felt immediately.
In periodic monitoring systems, or fixed-period ordering, a company replenishes stock
at a predetermined point in time. This is usually at the end of a specific period: the
order-quantity level is related to the demand in the same previous period, and it may
also be different from previous orders.

Stock acquisition policy regarding quantity to be transported and frequency of

transportation
There are two options available: (1) the company is stocked (or resupplied) in large
quantities but with a small number of itineraries, or (2) the company is supplied in
small quantities each time, but it performs many itineraries on a frequent basis in
order to meet demand. Let’s take the example of a pharmacy owner, who has two drug
supply options:

• Scenario 1: For high-demand over-the-counter medicines (e.g. painkillers), the

pharmacy owner places a large order at, say, the beginning of each month. In this
case, the supply volume is large, there is enough stock to meet demand, and the
32 (P)roduct
company commits the required capital to acquire the stock. Regarding the four
costs presented in the introductory section of this chapter, purchase and storage/
maintenance costs are high, whereas transportation/sales and shortage costs
(when the product is in short supply) are low.
• Scenario 2: For drugs whose demand is not constant or cannot be predicted (e.g.
flu shots), the owner will order them when they are requested. This implies many
itineraries per order pertaining to small quantities each time. In terms of costs, the
exact opposite to the aforementioned scenario is true.

In short, demand must always be recorded, so that a business will be able to choose
the best policy to acquire and maintain stocks.

ABC analysis
The problem with inventory management is making the right choices about which
items to stock. This will be based on the significance of the product types for the
business, and their sales figures. Pareto’s law assumes that this will be proportional to
their importance: the so-called 80:20 ratio implies that a relatively small number of
items are responsible for the largest percentage of a company’s sales (Figure 1.8).
The 80:20 rule implies that Class A products represent a low 20% share of the
company’s product range, but they form 80% of the company’s sales turnover.
Therefore, these items should be very carefully monitored due to their high importance.
Class B materials possess a 30% share, but they have a very moderate value of just 15%.
The remaining 50% of the goods stocked by the company represent just 5% of the stock
value; hence, this category does not need to be monitored so rigorously (Rushton et al.,
2010). Many researchers agree, however, that features such as criticality, delivery time,
order cost, relevance, reparability and stock durability may affect a product’s classifi-
cation (Ramanathan, 2006). Table 1.2 illustrates an example of ABC analysis:
Pareto’s law lays the groundwork for ABC analysis, which is a useful tool for im-
proving the efficiency and effectiveness of any business’s inventory management. A
common mistake companies make in ABC analysis is that they consider Class B and
Class C products to be far less important than Class A products, with the result that
they accumulate a large amount of Class A stock and very little – or upon request – for
Percentage of total usage value

80%

A
20%
B
10%
C
20% 40% 100%
Percentage of total items

Figure 1.8 ABC analysis.

 (P)roduct 33
Table 1.2 Application of ABC analysis

Product 101 102 103 104 105 106 107 108 109 110
Unit cost 0.05 0.11 0.15 0.08 0.07 0.16 0.2 0.04 0.09 0.12
Demand 48.000 2.000 300 800 4.800 1.200 18.000 300 5.000 500
Revenue 2.400 220 45 64 336 192 3.600 12 450 60
Revenue % 32.52 2.98 0.61 0.87 4.55 2.60 48.79 0.16 6.10 0.81
A B C C B B A C B C

the other two categories, with the respective consequences ensuing (Coyle et al., 2003).
A business should only stock up on items that are urgently needed for its operation, or
what will be needed in the future, and always according to demand forecasts. Order
quantity and frequency are two interacting variables: when the value of one variable
remains constant, the other variable usually presents a fluctuation.

Economic-order quantity
Businesses – especially in times of low demand – are under pressure to keep their
inventory levels low; at the same time, however, they have to maintain high stock
levels to meet market demand. The economic order quantity (EOQ) answers the tricky
question of “How much should I order?” It calculates the order quantity that corre-
sponds to the lowest possible cost.
The main assumptions in its application are that demand is constant, order sa-
tisfaction/completion time is zero and there are no shortages, in a system where the
time horizon tends towards infinity. It also holds true that the average annual total
cost is equal to the sum of the average annual fixed order cost, the average annual
maintenance cost and the average annual proportional order cost. Despite these as-
sumptions being unrealistic, this particular method is still being applied today, as it
has proved to be extremely functional and economically advantageous in production
units where inventory management is directly related to its instant replenishment.
Figure 1.9 illustrates the average annual total cost in relation to the average annual
ordering and maintenance costs in linear form.
The optimal order quantity lies at the intersection of the average annual main-
tenance cost with the average annual order cost, in the quantity where total average
annual costs are minimized.

Stock-related costs
Inventory comprises a significant expense for a business, as it covers not only the
product’s cost, but also the costs associated with a company’s inventory. These fall
into three categories (Forcina et al., 2017):

• Holding/storage cost. This includes all costs associated with stock maintenance:
maintenance/operation of the storage space, capital commitment, insurance costs,
wear and tear and handling costs during storage and transport.
• Stock supply cost. This comprises the costs involved in placing orders and
acquiring the products.
34 (P)roduct

600
Average annual cost (TC)

500

400 Annual ordering cost

300 Annual holding cost

200
Total annual cycle-inventory cost
100

0
0 500 1000 1500
Order quantity (Q)

Figure 1.9 Economic order quantity model (EOQ).

• Stock-shortage cost. This involves the cost due to a product shortage, and profit
losses due to not having stocks, and being unable to satisfy needs through sales
(sales losses), including the loss of a company’s reputation.

The goal of a business is to minimize its stock levels; in this way, it can manage stock
maintenance costs with the lowest financial outlay, minimizing supply costs with a
simultaneous absence of shortage costs. Various methodologies support this practice,
as discussed in the following sections.

The just-in-time philosophy

The goal of a company’s logistics system is to reduce operating costs and ultimately
make a profit. The pressures exerted by continuous competition also push companies
to find ways of meeting product demand directly. The just-in-time (JIT) philosophy is
oriented in this direction (Inman et al., 2011). It is mainly expressed by the fact that
stocks are acquired the moment demand is created. Calderone (2017) states that the
logic behind the JIT philosophy is based on the company producing what it needs,
when it needs it and only in the required quantities. There are three basic principles
that govern the JIT philosophy: the goal of minimizing costs by minimizing stocks; the
receipt of raw materials and semi-finished products only if there is a demand for them,
with final processing being made on completion of the order; and the prerequisite of
cooperation, with very few suppliers, in both the short and long term.
The JIT philosophy is defined as the ability to receive the right amount at the right
time, but this is not just about the flow of materials. When JIT is applied to a pro-
duction system, it concerns minimizing waste, not only in terms of the materials, but
also in terms of machine hours and manpower, which should always be available the
moment they are needed (Alcaraz et al., 2014). This philosophy was initially applied in
the Japanese market by the market leader Toyota, which first applied it in its pro-
duction system (Amasaka, 2014). In recent decades, BMW, Fiat, General Motors,
Hewlett Packard, Harley Davidson and General Electric, among others, have also
adopted the JIT practice. Its degree of success varies for each company. The
 (P)roduct 35
contribution of this method to management is significant in terms of achieving the
business goal of high levels of customer service at the lowest cost (Khan et al., 2017).
The JIT philosophy can be analyzed in greater detail as follows:

• It proposes stock reduction. Stock maintenance costs are high; reducing then may
contribute to a corresponding reduction in transport costs. Businesses that
implement this particular inventory management system can reduce the number
of warehouses they own or even eliminate them.
• It proposes the use of methods and tools in order to achieve perfection, with the
aim of continuous improvement through the elimination of losses: the company
carries out only those activities that add value.
• Products are designed according to customers’ requirements.
• Cycle times are regular: JIT follows the logic of austere production, thereby
reducing intermediate stocks; thus, it goes without saying that cycle regularity is
required at both the line/series level and the level of individual workstations.
• Product families are formed based on the features of the production goals. This is
similar to the adoption of grouping technology: component families are formed
either on the basis of product features, or the characteristics of the production
system, or a combination of the two.
• Special relationships are formed with suppliers, so that materials and components
are delivered promptly. Companies that use this philosophy should be treating
suppliers as partners and allies rather than competitors. By reducing the number
of suppliers and drawing up long-term cooperation agreements, the company
becomes a key customer of each supplier, which gives rise to cases where the
customer and the supplier agree to let the supplier remain the owner of the stock
intended for subsequent sale to a specific customer (the company). Sometimes
they may come to the agreement that some products belong to the customer while
others continue to be managed and replenished by the supplier (Johnson &
Momyer, 1998).

The main advantages of JIT could be summarized as follows: an increase in pro-

ductivity with simultaneous rcost reductions, stock reductions, decreased waste levels
during production, increased innovation, improvement of staff motivation through
the provision of incentives, increased cooperation, increased efficiency and a higher
response level from both companies (Alcaraz et al., 2014).

The lean production philosophy

Lean production generally comprises a set of tools and methodologies that aim to
continuously reduce all production losses. Losses may be due to production stocks,
malfunctions, machine dead times, time-consuming changes in setting up machines,
waiting times, unnecessary movement of materials and people, etc. It is essentially a
management philosophy where stocks are kept at their lowest levels, or do not exist at
all, and materials supply is based on the needs of each business.
From time to time, researchers emphasize the importance of lean philosophy in
logistics management as a weapon for business consolidation, by referring to how a
well-organized and well-designed supply chain should operate. Processes within the
chain are smoothed out to reduce losses or actions that have no added value. Value-
36 (P)roduct
added services are those that give rise to an effective placement of the final product in
the customer’s perceptual map. Lean production has the potential to reduce time by
10%–40%, stocks by 10%–30% and total costs by 10%–25% throughout the supply
chain (Kovac, 2013).
The principles of lean production are as follows:

• Recognition of losses. Actions must be identified that add (or do not add) value to
the product, from the customer’s point of view
• Stable processes. Detailed production guidelines must be implemented, using a
standardized regime.
• Continuous production flow. As far as possible, production must be continuous,
without interruptions, wait times or other issues, with very fast product changes
and in small batches.
• A “pull” production system. Pull production aims toward the production of only
what is necessary at the time it is required.
• Continuous improvement. Constant efforts must be made to achieve perfection,
consistently reducing losses as these are revealed.

Zero-level inventory
In essence, all companies regard stocks as a “bad” thing, and every company wants to avoid
stocking inventory. In contrast, all companies must maintain a certain stock level to meet
their customers’ need. Research suggests that stock represents 40%–60% of a company’s
assets, which is almost the largest asset in its balance sheet. Thus, all companies want to
minimize stock to the lowest possible level. In this way, a company will be able to reduce
ownership and installation costs, thus gaining more liquidity for business expansion.
Zero stock could be achieved when the supply chain’s response time is less than or
equal to the demand time. Zero inventory is defined by Farlex (2012) as: “A system in
which a company keeps no or very little inventory in storage, simply ordering exactly what
it needs to sell and receiving it in a timely manner. Zero inventory is the goal of just-in-time
inventory management and the two terms are sometimes used to mean the same thing”.
But there are still some issues to consider:

• It seems that only large companies, for example, Dell, Toyota, which have a
dominant position throughout the supply chain have the potential to fully achieve
this goal. Some of these companies have invited their salespeople to set up new
factories near their own factories so that delivery time and costs can be greatly
reduced. Small businesses can hardly be expected to achieve this.
• The concept refers to only one zero-stock level at a certain point throughout the
supply chain. Zero stock in the middle of the chain will put more pressure on
partners before and after that point. In other words, the benefits are actually
based on the supplier’s highest risk level. In the short term, supplier costs will
increase. In the long term, these costs will actually be absorbed by the customer
(we know that all the costs arising from the supply chain will eventually be added
to the final price paid by the customer).
• Instead of storing products in their own factories, some companies choose to
authorize a dealer to look after the goods in order to achieve zero stock.
 (P)roduct 37
1.7 Demand forecasting
An important factor in better decision-making is demand forecasting. Demand fore-
casting includes the study and possibility to predict consumers’ future purchasing be-
havior for a particular product. Forecasts are generated by analyzing a product’s
historical sales data. This may be unclear if sales data do not meet or fully capture actual
consumer demand (Feiler et al., 2012). Historical sales data help to indicate future
demand, but they do not take into account the external variables that affect them.
Collecting and processing data using mathematical algorithms make it possible to draw
useful conclusions together with the evaluation of exogenous factors (Kusiak, 2007).
When a business understands the exact quantities it needs to produce, it is already
closer to its goals of reducing costs and maximizing profits. The solution to this
complex problem lies in the timely determination of consumer demand before the
product appears on the market. This is the first stage that all manufacturers must
follow (Hamiche et al., 2018). Research has shown that by using a simple forecasting
method, safety stock can be reduced by half, in comparison to safety stock estimations
made without using any forecasting method.
A distinction must be made between the demand for finished products and the
corresponding demand for the parts it is composed of. In Figure 1.10, demand for the
final product A is labeled “independent”, while demand for component parts B, C, D,
E, F and G are labeled “dependent”. It is plainly clear that if we know the former, we
can calculate the latter (Figure 1.10).

1.7.1 Independent demand forecasting

Demand forecasting methods belong to two major categories: quantitative and quali-
tative. Quantitative methods are then divided into those based on time-series models
and those based on causal prediction models. For a business to start applying a fore-
casting model, it must first define its problem. In other words, it should define that
products it should ascribe a special weight, in order to apply the appropriate forecasting

Independent demand:
Final products

A
Dependent demand:
Raw materials, semi-final
products, etc.

B(4) C(2)

D(2) E(1) D(3) G(2)

Figure 1.10 Independent and dependent demand.

38 (P)roduct
model, so that it can decide on the chosen model for their management. One way for a
business to manage large inventory units is to categorize them, setting boundaries and
management methods according to the category that the products belong to.

Qualitative methods in demand forecasting

Qualitative methods in demand forecasting are based primarily on human judgment
and experience. They differ from quantitative methods in methodology they use and
the results they present. Unlike quantitative methods, they add a sense of “feeling” to
the results, and not a numerically accurate result. This is because quantitative data are
not used; instead, opinions and experiences are examined. Such results can also be
used in combination with quantitative methods, together with other qualitative
methods. They are suitable for use in the long-term horizon by companies that want to
introduce a new product into a market, especially for medium- and long-term policy
planning. The main qualitative methods are described as follows:

• The Delphi Method: This is also known as the method of consent. It was
developed in the 1950s by the Rand Air Force Corporation, whose goal was to
make better predictions with regard to estimating key nuclear targets in America.
To achieve forecasts using this method, certain steps must be followed. The
problem must first be identified and the participants selected. A questionnaire
should then be created that participants should answer more than once
individually. The biggest advantage of this method is that the participants do
not interact with each other, to avoid the personality clashes: the personalities of
some members could overshadow those of others. But this method has a big
disadvantage: the whole process comprises answering structured questions in
questionnaires, without any explanations. This gives rise to the potential to
misinterpret a question, and give a misguided answer.
• Market research. Market research is made of two simultaneous approaches:
academic and practical. Both aim at the collection, analysis, interpretation and
use of data. In the academic approach, the aim is to understand and explain
market practices, by interpreting participants’ behavior, and measuring their
preferences through the application of appropriate variables in a laboratory
environment for the extraction of the results, so that the initial research questions
can be answered. In the practical approach, the research aims to draw conclusions
that will support a company’s strategic decision-making (Steenburgh & Wittink,
2001). According to Zhixian Yi (2017), market research is concerned with
collecting, analyzing and disseminating information to potential users in order
to collect results on their wants, needs and perceptions, so that resources and
services can better target them. Data can be collected by distributing question-
naires, through individual interviews or in groups. It is of utmost importance that
the questionnaires are well structured; badly structured questionnaires with
misguided questions will lead to drawing the wrong conclusions.
• Expert panel consensus. This method seeks experts’ opinion on topics that require
investigation. When it comes to matters for which there is no historical evidence, it
is advisable to ask experts’ opinions (Aidonis, 2016). In research related to medical
issues, experts who have nothing to do with each other are quizzed in rounds/
phases, in order for each viewpoint to be taken into account and evaluated
 (P)roduct 39
separately. This initially takes place using a questionnaire (Favalli et al, 2018). The
board of experts in a company may consist of executives from different depart-
ments. In this way, an issue can be discussed in detail and different opinions from
different perspectives can be heard, which can help in the decision-making process.
A drawback of this method is that the personalities of some executives and the
position they hold may influence the results by underestimating other personalities.
• Basic research. This kind of research is addressed to participants who are
connected to the research object. Where it concerns the prediction of future
product sales, the researcher should address the people who are selling the
product, as they are the ones that come in direct contact with the consumer public.
The sales manager is the person who will collect the results in order to proceed
with the evaluation and extraction of the conclusions.

Quantitative methods in demand forecasting

Quantitative methods for forecasting demand use historical data in the form of a chron-
ological series based on identifying, modeling and clarifying the existence of a trend. These
methods are generally performed using the following steps (Montgomery et al., 2015):

• Determination of the problem.

• Data collection.
• Data analysis: sample tests to detect trends and seasonality; determination of their
features in order to select the appropriate model.
• Selection of the model and its application.
• Model verification and error checking.
• Development of a model prototype.
• Monitoring the performance of the model to see if the procedure followed is
efficient and its good operation can be guaranteed.

The main quantitative methods for forecasting demand are discussed in the next section.

TIME-SERIES MODELS

Time-series models are based on the assumption that a prediction is made through the
analysis of visible trends in the available historical data. A basic tenet of this method is
to clarify the existence of trends and seasonality. Trends are the gradual upward or
downward movement of data over time, while seasonality is the repetitive movement
of data over a relatively short period of time.
Simple moving average. Use of the most recent values of real data to create a
forecast by calculating the average:

At 1+ At 2+ At 3+… + At
Ft = n
n

where:
Ft: Prediction for the next period
n: Number of periods in the moving average
At-1: Actual price in period t-1
40 (P)roduct
The simple moving average is suitable for samples in which no seasonality or trend is
observed. It is one of the most basic forecasting methods, and it is used when the average
demand value does not change. One of the advantages of this particular method is that it
adapts well to stagnant time-series and equal weight is given to each of the historical
demand values. Increasing the number of periods studied reduces variation between
forecasts; in other words, the larger their number, the more accurate the forecast, as
extreme values are not significantly affected. Moreover, the higher this value is, the lower
the ability of the model to adapt to trend time series, since the change in the demand
values is not perceived.
Table 1.3 presents an application of the simple moving average.
Weighted moving average. The weighted moving average is the evolution of the
simple moving average. The differentiating factor is the use of weight coefficients in
the values that we want to emphasise (are more significant for the forecasting).
Weights are based on experience and intuition (but for a given set of past demand
data, they can be optimized).

Ft = w1At 1+ w2At 2 + w3At 3 + … + wnAt n

where:
n
wi = 1
i=1

Table 1.4 shows an example of a weighted moving average

Table 1.3 Application of the simple moving average

Week Demand 2-Week 3-Week

1 12
2 14
3 15 13.00
4 18 14.50 13.67
5 16 16.50 15.67
6 15 17.00 16.33
7 18 15.50 16.33
8 16 16.50 16.33
17.00 16.00

Table 1.4 Example of a weighted moving average

Week Demand Weights

1 12
2 14
3 15
4 18
5 16 0.1 1.6
6 15 0.2 3.0
7 18 0.3 5.4
8 16 0.4 6.4
1.00 16.4
 (P)roduct 41
This evolving method is called the exponentially weighted moving average
(EWMA), and is defined as the method where more importance is placed on the latest
data, simultaneously taking into account the past values.
Simple exponential smoothing. In the simple moving average method, forecasts are
based on past observations without placing any weight on any of them. Virtually
all historical data have the same weight or weight coefficient equal to 1 (one). In
simple exponential analysis, the following formula is used to calculate the next time
period:

New forecast = Last period’s forecast + a (Last period’s actual demand

– Last period’sforecast)

or:

Ft = Ft –1 + a (At –1 Ft –1)

where Ft = New forecast

Ft – 1 = Previous period’s forecast
a = Smoothing (or weighting) constant (0 ≤ a ≤ 1)
At – 1 = Previous period’s actual demand
The method with which the weight coefficient of each value is calculated should
have the following orientation: the coefficient should decrease as the values are
older. This reinforces the view that the most recent observations lead to better
forecasts for the future; exponential methods are thus the safest to use. In simple
exponential smoothing, a specific period’s forecast is equal to the older forecast
with an error adjustment for the last forecast. The closer the value of the ex-
ponential smoothing coefficient is to 1, the more weight the new forecast carries in
relation to the error adjustment. Moreover, as the value of the exponential
smoothing coefficient increases, the ability of the model to adapt to trend time
series increases, as the change in the sample becomes more easily and more quickly
perceptible.
Table 1.5 illustrates simple exponential smoothing, where the coefficient takes two
values: 0.2 and 0.4.

Table 1.5 Example of simple exponential smoothing

Week Demand Forecasting 0.2 Forecasting 0.4

1 12 12 12
2 14 12 12
3 15 12.40 12.80
4 18 12.92 13.68
5 16 13.94 15.41
6 15 14.35 15.64
7 18 14.48 15.39
8 16 15.18 16.43
15.35 16.26
42 (P)roduct
Double exponential smoothing. Double exponential smoothing is used in trend time series
and comprises the evolution of simple exponential smoothing. There are several variants of
this model: Holt’s, Gardner’s and Brown’s (Lifeng et al., 2016); the most used is Holt’s
variant. The forecast comprises the sum of the forecast at the level and the trend forecast.
The smoothing coefficient for the level is usually always greater than the smoothing
coefficient for the trend. The higher the values of these coefficients, the more the latest
values affect the result, and the more sensitive the model is to changes in slope and level.
The model uses all available historical data, ascribing different weights to each one.
Triple exponential smoothing. Triple exponential smoothing, is applied when both
trend and seasonality is observed in the sample. What differentiates double ex-
ponential smoothing is that the seasonal factor is calculated and it influences the
forecast, precisely because seasonality has been observed. An important role of this
method is played by the three smoothing values that are the ones that smoothen the
time series, trend and seasonality values.

FORECAST ERROR AND EVALUATION INDICATORS

All the aforementioned forecasting methods are evaluated by comparing the real
demand values with the forecast values. For this reason, various relationships are
developed, by which the forecast is evaluated. This is explained in greater detail below:

• The forecast error (Forecast error = Actual demand – Forecast value = At – Ft).).
• The cumulative sum of the forecast error (CFE) is calculated as follows:

Mean absolute deviation (MAD) T |e |

t =2 t T>1
MADT = T 1
;
Mean absolute percentage error (MAPE) T |et|
t =2 y
T>1
MAPDT = T 1
t
;
Mean squared error (MSE) T e2
t =2 t T>2
MSET = T 2
.

• Mean absolute deviation (MAD). This is one of the most widely used
indicators and is calculated from the sum of the absolute value of the forecast
errors over the number of periods. This indicator – as well as the following
one (MSE) – is widely used, but due to the simplicity of their calculation, they
cannot determine how big the error is in relation to the demand size. They are
useful for studying the performance of forecasts in a data time series but
cannot be applied to multiple time series.
• Mean squared error (MSE). This indicator is very often used to evaluate
exponential smoothing methods, and other forecasting methods.
• Mean absolute percentage error (MAPE). This is another evaluation metric
that estimates the accuracy of the forecasting method; it calculates the
percentage error proportionally to the actual demand price. It gives the
researcher an idea of how big the difference in the error prediction is in
relation to the actual values in the time series spectrum. It is suitable for
comparing the accuracy of the same or a different forecasting method for two
completely different time series.
Table 1.6 Example of MAD, MSE, MAPE estimations
2
Forecasting Error | Error | Error MAPE

Week Actual demand A B C A B C A B C A B C A B C

1 12 12 13 12 0 −1 0 0 1 0 0 1 0 0.00 8.33 0.00

2 14 16 10 15 −2 4 −1 2 4 1 4 16 1 14.29 25.00 10.00
3 15 13 18 14 2 −3 1 2 3 1 4 9 1 13.33 23.08 5.56
4 11 12 16 10 −1 −5 1 1 5 1 1 25 1 9.09 41.67 6.25
5 10 14 14 11 −4 −4 −1 4 4 1 16 16 1 40.00 28.57 7.14
MAD A MAD B MAD C MSE A MSE B MSE C MAPE A MAPE B MAPE C
1.8 3.4 0.8 5 13.4 0.8 15.34 25.33 5.79
(P)roduct
43
44 (P)roduct
• Mean percentage error (MPE). This is the average of the percentage errors in a
sample. Since the absolute value of the error difference over the value of real
demand is not taken into account, there are values with a negative sign, which
are offset by the positive values. MPE is used to evaluate whether the sample is
biased or not. If the MPE yields a high negative value, it can be concluded that
the sample is constantly overestimating. If the MPE gives the researcher a high
positive value, the conclusion is that the sample is constantly underestimating.

The following tables illustrate an application of the above evaluation indicators of

three forecasting techniques (Table 1.6).

Lead Time
Part Day(s)
Bill -of - Materials
A 1
A
B 2

B(2) C(3) C 1

D 2
D(3) E(1) F(4)
E 3

F 4

Day 1 2 3 4 5 6 7 8

Demand 50
A
Order 50

Demand 100
B
Order 100

Demand 150
C
Order 150

Demand 300
D
Order 300

Demand 150
E
Order 150

Demand 600
F
Order 600

Figure 1.11 Application of the MRP algorithm for the calculation of dependent demand.
 (P)roduct 45
1.7.2 Dependent demand forecast
Dependent forecasting seeks to help companies calculate the materials needed to
produce a product, and the appropriate time that these materials need to be supplied.
It is implemented in the materials requirement planning (MRP) system. The system is
based around dependent demand, that is, demand caused by the independent demand
of the final product. The materials it is concerned with are necessary for the execution
of the production program in intermediate stages, and they are either ordered from
external suppliers or are a product of the production system itself; for this reason, the
first step in designing an MPR department is to determine demand and its position
over time. The inventory production and sales schedule is then determined.
MRP is a set of techniques used to design the production or acquisition of the sub-
products, components and raw materials required to support the overall production
plan. Historically, MRP was the first component to be implemented in a computer-
based production control system, paving the way for today’s integrated business in-
formation systems.
This system’s goals are to ensure the availability of the materials, components and
products that will be involved in either production or sales, simultaneously main-
taining the lowest possible safety stock and scheduling the industrial/manufacturing
activities, delivery schedules and ordering activities.
Figure 1.11 presents a sample application of the MRP algorithm. Suppose that an
industrial production unit accepts a production order of 50 pieces of Product A in 8
days. The material quantities and the production schedule must be worked out. The
required individual materials and quantities are initially provided in tree form (Bill-of-
Materials, BOM), together with the required production time of each individual
material and the final product (lead time) (Figure 1.11).
According to the schedule for the production of 50 pieces of Product A, the pro-
duction unit must start work on this on Day 2, producing 600 pieces of Product F,
continuing on to Day 3 with the production of 300 pieces of Product D, 150 of
product F, etc.
2 Elements of the marketing mix (price):
Conceptual and integrated approach to
supply chain management

Introduction
This chapter highlights the contribution of the management of the supply chain in
determining the appropriate price of a business’s products and services. The good
collaborative relations that are achieved in the frame of the smooth operation in the
supply chain of the involved businesses play a catalytic role, among others, in the
perceived offered value to the final customer and the total cost of acquiring this value.
Having an understanding of the factors that influence pricing, knowledge of the al-
ternative methods of determining prices and investigation of the available methods of
adjusting, and changing and reacting to price changes determine the methodological
framework for finding the appropriate price for the mutually beneficial exchange
between the final customer and the supply chain, and by extension of the business.

Learning goals
After reading this chapter, you will be able to answer the following questions:

• How does the highest level of cooperation of those involved in a supply chain
contribute to determining the appropriate price of the final products?
• How does the smooth operation of the supply chain positively influence the
factors determining the optimal selling price of the products?
• What are the alternative methods of calculating the right price?
• What are the methods of adjusting, changing and reacting to changes in prices?

Structure
2.1 Pricing in the context of the supply chain
2.2 Introduction to pricing
2.3 Factors affecting pricing
2.4 Pricing methods
2.5 Pricing strategies for new products
2.6 Pricing strategies for product mix
2.7 Price-adjustment strategies
2.8 Price-change strategies

DOI: 10.4324/9780429684883-2
 Elements of the marketing mix (price) 47
2.1 Pricing in the context of the supply chain
Through pricing, companies try to reap the benefits from the value that the customers
enjoy from their products, so that a fair and sustainable reward can be secured for all
those involved in the production process of the product and its availability, that is,
shareholders, employees and strategic partners (suppliers, outsourcing partners and
distribution networks) in the supply chain. Determining the correct price of a product
and its management over time is a very difficult task for any business. This is due to
the fact that it is difficult to estimate the perceived price of a product from the point of
view of the end consumer, and also due to the immense challenges involved in the
calculation of the price, which shows variation from one customer to another, and is
often differentiated in each transaction of the same customer. The choice and im-
plementation of the appropriate method and the (appropriate) strategic pricing is of
course a very important activity in the marketing mix, but in essence the pricing de-
cisions are taken at the level of the business, inter-operationally, bearing in mind the
priorities and constraints of the remaining operational departments (production,
supply chain, accounting department), always in collaboration with the strategic
partners of the supply chain.
Supply chain management catalytically influences the selling price of the product,
since the synergies between the strategic partners tend to contribute decisively to the
offered added value for the final customers. In particular, it is becoming more and
more noticeable that the perceived value of the final products, which determines its
maximum permitted price, depends on the combined and coordinated actions of the
whole set of strategic partners in the supply chain and not their individual production
business. Furthermore, through the good management of their supply chain, the
stakeholder companies possess in their toolbox tools valuable tools for finding the best
practices that will allow them to offer final products of the same or higher perceived
value, but at a constantly reduced price. Taking into account the cataclysmic rhythm
of the rapid changes in the wider business environment, particularly due to ground-
breaking innovations, it is quite clear that businesses, and by extension, their supply
chains, they strive on a daily basis to make available to their final customers products
with more and more higher added value at tempting prices as much as possible.
Finally, for one more time, it is obvious that the time when individual companies were
competing against each other has passed irreversibly, and companies are now forced
to confront each other through the supply chains that they have created with their
strategic partners.

2.2 Introduction to pricing

The price of a product refers to the entire set of sacrifices that the customer is required
to make in order to enjoy the benefits deriving from the other three elements of the
marketing mix of the business. Thus, the price is the only one of the four elements of
the marketing mix that produces revenues, whereas the other three elements com-
bined, which “produce” the value for the customer, imply expenses for the business.
Moreover, the decisions related to pricing tend to change quickly, affecting to a great
degree the overall marketing mix of the company, while the flexibility and possibility
of change in the decisions for the remaining three elements, particularly for the pro-
duct and its distribution (supply chain), are clearly more limited.
48 Elements of the marketing mix (price)
The decisions for the determination of the appropriate selling price of the product
are of utmost importance for the business and the entire supply chain, since revenues,
and profitability in particular, depend on them. Small changes in the price often cause
disproportionate positive and negative effects on the profitability of the supply chains,
and consequently on the partners that make them up.
Therefore, price has always been one of the most basic factors that influence the
final buying behaviour of the customers, since all customers try to maximize their total
usefulness through their restricted disposable income. The significance of price on the
final decision of the customers rises all the more due to the reduced asymmetry of
information due to the developments in information technology and communication,
and the increase in the oversupply of alternative solutions for the satisfaction of the
customers’ needs and desires. Access of customers to a huge volume of useful in-
formation related to the alternative choices of how to cover their needs and desires
make customers more informed and thus more demanding in comparison to the past.
Moreover, most competitors have developed to a large extent the ability and the skills
of fast effective adoption and evaluation of new production technologies. Therefore,
in most markets, the differences between the substitute products are often very small,
if only negligible, with the result that the power of the commercial sign – the brand – is
constantly shrinking.
Determining the optimal selling price of a product, that is, the price at which a
company can potentially maximize its profits, is a particularly difficult or even
pointless goal, since it is influenced by many internal and external factors of a busi-
ness, for which there is always a lack of information, and which are constantly
changing. Pricing decisions therefore rest on forecasts and assumptions based on the
previous experiences of a business, particularly the constant collection and processing
of data and information of all the relevant factors which interact in the determination
of the pricing. Therefore, the management of the supply chain plays a significant role
in the pricing process, since, among other factors, the companies involved jointly
collect, publish and process data so that they can come to some kind of collaborative
prediction of the most relevant critical factors involved in pricing.
Due to the difficulty of finding satisfactory algorithms for determining appropriate
price levels in order to achieve the many often conflicting goals of the companies, a
methodological systematic pricing process is not often followed. Thus, pricing deci-
sions are supported by empirical methods and often, under the pressure of securing a
satisfactory level of sales, prices are lowered, which lead in many cases to damaging
transactions for the company.
According to the earlier discussion, the heavy significance of the management of the
supply chain in the achievement of mutually beneficial transactions between the final
customer and those involved in the supply chain is quite clear. It is indicatively
mentioned that through the high collaborative relations of the strategic partners of the
supply chain, it is continuously possible to offer the final customers products and
services of high perceived value, which are equal if not superior to those offered by the
competitors. In addition, it is also possible to search for as well as successfully im-
plement the best production and selling practices and for the final products with high
perceived value at a constantly reduced cost. Finally, the collaborative scheduling and
cooperative forecasting among strategic partners secures particularly precise and
trustworthy dynamic predictions in terms of final product demand and the potential
effects of the expected changes in the key demand determinants.
 Elements of the marketing mix (price) 49
2.3 Factors affecting pricing
Determination of the selling price of a product of a business is influenced by many
factors, and it is often very difficult, if not impossible, to make a precise reliable
evaluation of the effect of each factor and their interaction in the pricing decisions. In
each case, however, the maximum price must secure the sale of at least one product
unit, while the lowest price must be at least marginally higher than the average total
cost, so that the product can contribute toward the profitability of the business.
Besides the perceived value of the product from the customer’s side, and the average
total costs, pricing decisions are also influenced by other internal and external business
factors. Internal factors, among others, include the pricing goals of the business that
are related to the entire marketing strategy of the business, and the marketing mix of
the company. External factors are related to the nature of the market and product
demand, prices and competitors’ strategies, supply chain variables and legal con-
straints. Of particular importance is the variable concerning structure and more
generally, the strategies and tactical goals of the supply chain that the company is
part of.

2.3.1 Customer perceptions about the product value

It has already been emphasized that the management of businesses and their supply
chains comprises a very difficult and complex process, particularly due to the fact the
often conflicting needs and demands of the relevant stakeholders must be adequately
satisfied. The needs and desires of the customers, however, are of utmost importance
in the sustainability of the businesses and their supply chains, since customers provide
the motive for the establishment and operation of companies, through the revenues
that collect from the sales of the products. For this reason, the final customers are thus
deemed the most competent to pass judgment on the correct selling price of a product.
Levit (1969) stated half a century ago that “people don’t buy products, they buy ben-
efits”. Therefore, the customers’ perceptions concerning the value of a product com-
prise cornerstone of any pricing decisions.
In many cases, the marketing executives try to estimate the value of their products
in relation to their quality characteristics, such as functionality, performance, use-
fulness, technical characteristics and the status proffered by owning them. But a one-
sided focus on quality characteristics carries the risk of ignoring the important
meaning of service, that is, the availability, support and dedication offered to the
customer (Christopher, 2017). The product acquires value only when it reaches the
hands of the customer, so the availability of the product comprises a precondition and
first priority for the value offer to the customer. Because of this fact, some companies
focus their attention mainly on two moments of truth. The first refers to the avail-
ability of the product on the shelf of the retail store that the customer visits. If the
product is available, we can then talk about the second moment of truth, that is, the
evaluation of the product by the customer as soon as s/he uses it.
Lalonde and Zinszer (1976) classified the various elements that comprise customer
service: elements occurring before the transactions, elements occurring during the
transaction and elements occurring after the transaction. Elements before the trans-
action involve, for example, the access provided to the customer so that s/he can
communicate with the company or its partners in order to be informed about the
50 Elements of the marketing mix (price)
product offer, as well as the flexibility of adjustment of the system of service based on
the special needs of the potential customers. Elements of the transaction include the
time needed to complete the order, availability of stock, information about the state of
the order, the percentage of orders that are executed without problems (in time, to the
right place, correct product, correct documents), among others. Elements after the
transaction refer to the availability (correct time and place) of the potential need for
spare parts, provision of support services such as maintenance and repair when the
customers ask for them, management of customer complaints and claims due to
possible defective products, etc.
The aforementioned make the extreme importance of supply chain management
quite clear, in terms of the high quality product offer for the customers. No company
that trades on an individual basis, regardless of its supply network and its distributors,
can meet the needs of its existing and potential customers within a modern utterly
competitive environment. In particular, the efficiency and effectiveness, that is, the
first moment of truth, depends on the degree which the strategic partners of the supply
chain will be active as a team that is fully coordinated and has common goals. As the
differences in the quality characteristics among competing products becomes in-
creasingly blurred, it becomes a one-way street for companies to differentiate offers
through services in order to secure a sustainable profit margin, for them and their
strategic partners in the supply chain.
Estimating the offered value to the customers is very important in the correct pri-
cing of the products of a business, but there does not exist a jointly accepted, objective,
reliable, precise, easy way to quantify the value of the perceived benefits from the point
of view of the customers. Given the earlier discussion, it is clear that the overall
perceived value comprises a component with many variables, each one embodying
quite a few variables-parameters of a different weight, and which quite possibly in-
teract with each other. Moreover, the overall perceived value, for example, from one
flight, is not the same for all the passengers, whereas it may show significant variation
depending on the conditions, even among passengers that take the same flight over a
regular period of time.
Despite the objective difficulty in calculating the perceived value of their offers,
businesses provide certain useful tools. One way is the direct or indirect estimation of
the maximum amount that a customer is willing to pay (WTP) for the offered product,
by directly asking the customers themselves. In other cases, businesses resort to trials-
experiments, offering their products at different prices in different markets or different
periods of time, and then evaluate the customers’ reactions. Moreover, businesses can
evaluate the plethora of available data about the market and competitors’ offers,
individually or combined, with the aforementioned practices (Fahy & Jobber,
2014; 2016).

2.3.2 Product cost

Cost determines the bottom value of the selling price of the product. Businesses can
sell products in the short term at a price below cost, but that happens in exceptional
circumstances. Consequently, depending on the chosen method to determine the
selling price of the products, the business should assess as precisely and reliably as
possible the production and selling cost (Christopher, 2017; Chopra, 2020; Armstrong
& Kotler, 2017; Pride & Ferrell, 2016; Perreault et al., 2012).
 Elements of the marketing mix (price) 51
There are seven types of costs, which the businesses must estimate (Mankiw, 2014).
The first three refer to the total costs:

• Total fixed cost (TFC): This is the sum of the expenses of all the fixed production
components, that is, all those variables whose quantity used in the production
process remained stable in the short term. Thus, the total fixed cost is independent
of the produced quantity of a product. Typical example of fixed production
components are the buildings (rents), machinery (deprecation, annual mainte-
nance), executive staff (salaries), etc.
• Total variable cost (TVC): This is the sum of the expenses of all the variable
production components, that is, all those whose quantity used in the production
process changed according to the produced units of the product. Production
components of this sort are, for example, electric (or any other kind of (energy)
used in the production area, raw materials, packaging materials, workers on the
production line, etc. Although the total variable cost is often regarded to increase
linearly in relation to the produced quantity, in practice this does not happen, as
can be seen in Figure 2.1. This is due to the law of diminishing returns which
describes the relation of the used quantity of the production component variable
and the produced quantity of the product.
• Total (fixed and variable) cost (TC): This is the sum of the total fixed and
variable costs. As the total fixed cost is stable, the total cost changes depending on
the units of manufactured product based on the total variable cost (Figure 2.1).

The next three types of cost are related to average cost:

• Average fixed cost (AFC): This is the fixed cost per product unit and is derived
from the ratio of the Total Fixed Cost to Quantity Produced (Q) of the product:
AFC = TFC/Q
• Average variable cost (AVC): This is the variable cost per product unit and is
derived from the ratio of the Total Variable Cost to the Quantity Produced (Q) of
the product: AVC = TVC/Q

P TC

TVC

TFC

0 Q

Figure 2.1 Curves for total fixed, total variable and total cost.
52 Elements of the marketing mix (price)
• Average total (fixed and variable) cost (ATC): This is the total cost per product
unit and is derived from the ratio of the Total Costs to the Quantity Produced (Q)
of the product: ATC = TC/Q

Finally, the marginal cost is of special interest in product pricing. It is defined as the
change in the total cost when the quantity of the produced product is increased by one
(1) unit. It is calculated by the ratio of the total cost to the change in the produced
quantity of the product, as follows (Figure 2.2):

MC = TC / Q MC = TVC / Q

Cost is also classified as a direct cost and an indirect cost, depending on its direct or
indirect link to the production of a specific product (Garrison & Noreen, 2005;
Harrison & Van Hoek, 2012).

• Direct costs: This cost is connected directly with the production of a specific
product. It is also further classified as direct cost of raw materials, and direct
labour cost. The direct materials are those which are incorporated into the
product which is produced from them. These materials can be found immediately
and easily in a product, for example, the wood in a table, the metal in a machine,
the cotton in a thread, the fabric in ready-to-wear garments. They usually
comprise the greater part of the total cost of materials used in the production of a
product. The direct labour cost is the work offered by labourers occupied directly
in the processing of materials, work that is incorporated into the manufactured

MC
ATC

AVC

AFC

0 Q

Figure 2.2 Curves for average fixed, average variable, average total and marginal cost.
 Elements of the marketing mix (price) 53
product. This is the cost of the work that can be found directly and easily in a
product, for example, the workers in the production line of a factory.
• Indirect costs (or general expenses): This refers to all the expenses of the
production operation except those that refer to direct raw materials and direct
labour: direct materials, direct labour and various operational expenses related to
the production (rents, insurance costs, depreciation, energy, municipality taxes,
etc.); in other words, they comprise all those expenses which cannot be feasibly
attributed directly to a particular product, because they relate to the general
operation of a factory. They comprise fixed and variable costs.

An additional important classification of cost refers to the existence of not of a clear

relationship between revenues and expenditures, at measurable and discreet costs
(Harrison & van Hoek, 2012):

• Measurable costs: There is a clear relationship between revenues and expenditures,

that is, a measurable benefit from a particular cost. For example, if two human
hours of work are needed for the production of eight units of an item of furniture,
then we have a clear benefit in revenues (four units) for the cost of each hour of
expenditure (human labour).
• Discreet costs: The relation between revenues and expenditures is unclear; in
particular, while the revenue cost is clear, the expenditure benefit remains unclear.
For example, the cost of cleaning and disinfecting the production spaces or the
security costs can feasibly be calculated with precision, but the benefit that flows out of
the cleaning and/or security costs for the business spaces cannot be easily quantified,
let alone be allocated to the various products manufactured by the business.

For all businesses, a significant challenge is posed by the transformation of the discreet
cost to a measurable cost, particularly the quality cost, which is classified into four
different basic axes (Reid & Sanders, 2016):

• Prevention costs: These are related to the design, application and maintenance of a
system of Total Quality Management, that is, expenses before the start of
production, for example, educational studies and skills acquisition.
• Appraisal costs: These refer to the estimation and evaluation of the supplied
materials, intermediate products, production processes, end products and sup-
plied services, in order to confirm compliance to defined and specified needs.
• Internal failure costs: These relate to the cost of defective end products (scrap),
that is, products which do not meet the designed quality prototypes, which are,
however, identified before they end up in the customers’ hands. These costs relate
to the cost of reprocessing the products which can be repaired and loss of the raw
materials used.
• External failure costs: These refer to the cost of repairing and/or replacing the
defective products that reached the hands of the end customers, for example,
compensation paid out due to recalls, returns and repairs. The cost of external
failures is obviously higher than other categories and more difficult to estimate,
since it includes future sales losses of the product, and all the products of the
businesses overall due to the negative effects on its status.
54 Elements of the marketing mix (price)
The distinctions between direct and indirect costs and measurable and discreet costs
greatly contribute to the precise and reliable estimation – as much as is possible – of
the production costs and the availability of the final products, and consequently, to
the avoidance of damaging mistakes in their pricing decisions.

Activity-based costing (ABC)

The share of the indirect cost comprises a very important challenge for any business,
since the indirect cost is often the biggest part of the total cost. Accidentally under-
estimating the total cost carries the risk of selling the product at a price lower than its
cost, which causes financial losses. In the case of overestimation of its actual cost, the
business then risks offering the product for a rather high price, with the result that it
suffers potential sales losses, and thus, reduction in revenues and profits.
The conventional way to allocate indirect expenses is based on the direct labour used
for each product manufactured by the business. But there are lots of cases where the
direct costs are multiple, even more than five-fold, in relation to the direct labour. It
should also be highlighted that the cost of executing an order obviously includes more
than just the sum of the production cost of the partial products that they are comprised
of. In particular, the execution costs of the order should also include the processing costs
of the order, collection of the products and their final packaging (e.g. palettes), delivery
of the order and processing the payment (delayed payments, legal actions, among
others). Moreover, the execution costs of the orders also depend to a great extent on the
demands of the customers in relation to the time period within which an order must be
executed, the variation of different product codes that it includes and the degree of
cooperation with the customer (e.g. frequent, regular orders, mutual stock management,
communication of information related to demand, etc.).
Hence, the decisions related to pricing must be supported by as much valid in-
formation as possible in reference to the actual cost of each product code and the
servicing of various customer groups, distribution channels and market segments.
Activity Based Costing (ABC) states that the calculation of cost must be supported by
the analysis of the main processes – R&D, production, storage and distribution – as
well as the further analysis of each process in the shared activities that make it up
(Min, 2015; Christopher, 2017; Harrison & van Hoek, 2012).
For each activity that involves costs in the integrated execution of the order, the
appropriate cost driver must be identified and determined, which is responsible for
the consumption of the respective resources. Then, the units must be calculated for the
cost variable which is needed for the specific activity, as well as the as much as possible
valid estimation of the cost per unit for the cost variable. In this way the cost of each
activity can be estimated with great precision and reliability. Then, summing the cost
of all the required activities, form the beginning to the completion of the execution of
the order, the total cost of customer service can be calculated with particular clarity.
Thus, despite the ABC being a method for cost allocation, it actually utilizes more
clearly the most appropriate, adjusted for the special characteristics of each shared/
partial activity, based on the allocation/sharing/partiality of indirect costs.
ABC contributes decisively in the shift of focus in the analytic pricing of the (fully
processed) order, instead of simply and only the cost of the individual product. The
meaning of the emphasis in the estimation of the total cost of servicing the order of
each customer is shown to a great degree if we consider that in agreement with
 Elements of the marketing mix (price) 55

120%
Cumulative contribution to profit (%)

100%

80%

60%

40%

20%

20% 40% 60% 80% 100%

Cumulative number of customers (%)

Figure 2.3 Customer profitability curve.

relevant studies, often, 80% of the total profit of a business comes from about 10% of
its customers, while a significant percentage of the total customer set (more than
15%–20%) show a negative contribution, reducing the total profit (Cooper & Kaplan,
1988; Guerreiro et al., 2008) (Figure 2.3).

LEARNING CURVE

The production cost of a product depends also on the effects of the learning curve
(Siomkos et al., 2018). The learning curve reflects the relation of the increasing pro-
duction experience to the increase in productivity and the reduction in production
costs. When the total production doubles, the total average time (work hours) needed
per product unit is reduced by a stable percentage, for example, 10%.
Learning curves are utilized in many ways by businesses in all sectors of the
economy. They influence the consumption of resources not only in the production of
products but also in all the other processes of a business, as in repetitive management
tasks and the reduction of quality failures. Moreover, it plays a key role in the control
and reduction of the production costs of various processes in the frame of cooperation
among the strategic partners of a supply chain, for example, execution time of an
order by the suppliers and/or the partners in the distribution networks.
The effect of the learning curve is limited in the case where automated processes are
used, and also where generally speaking the involvement of the human factor is limited.
The same is true in the case where a new product is supported to a great extent by existing
products or in general by accessories and component parts that are already being used
intensively in other production processes. Moreover, it should be noted that great care is
56 Elements of the marketing mix (price)

Cost/
Unit (€)

Figure 2.4 Learning curve.

needed in estimating the influence of the learning curve in forecasting the future of the cost
trajectory of a new product. Careful selection and reduction must be made in the future of
the historical data used. It should also be highlighted that a significant variation is noted in
the reduction rate of the used labour among businesses and among sectors (Figure 2.4).

Supply chain management and cost improvement The maintenance and development
of good collaboration relations among the main stakeholders of a supply chain also
contributes, among others, to the improvement of the total service costs for the final
customers, in both the short and long term, which is in fact the greatest challenge. The
coordination of actions of the many strategic partners of a supply chain in decision
making aligned to commonly accepted goals presupposes the mutual access and
management of a large dynamic volume of information and data.
Collaborative forecasting and scheduling of strategic partners is supported by the
search and determination of the potential optimal trade-offs based on which the
supply chain is in the position to offer a high level of service to the end customers at
the least possible total cost. Thus, the interest shifts from the costs incurred by each
individual business to the total costs borne by the supply chain for the servicing of the
final customers. Therefore, the management of the supply chain leads to the re-
organization of processes all along its length, from mining to retail, as if it refers to the
operation of a unified virtual colossal business. The reorganization of the processes
has a dynamic nature with the intention of doing away with ineffectual processes, that
is, those which offer a disproportionately small added value in relation to the re-
sources and the time that they consume. A consequence of the earlier point is the
catalytic role played by the management of the supply chain in the improvement of the
operational costs of the business, as this is reflected in its balance sheets (Harrison &
Van Hoek, 2012; Christopher, 2015; Min, 2015).

Available cash and accounts receivable

Supply chain management focuses particularly on the management of the execution
time of various processes. Its purpose is to investigate realistic solutions that may
 Elements of the marketing mix (price) 57
simultaneously improve the performance of the supply chain in relation to cost,
effectiveness and efficiency. The simultaneous achievement of performance goals
relating to cost, efficiency and effectiveness requires trade-offs. With the common
tool of stock, cycle and security, the improvement of certain goals such as effec-
tiveness entails worsening of the efficiency of another goal, for example, cost, and
vice versa.
Improving the completion time of various processes, such as order execution
time (from the moment the order is received by the customer until the moment the
order is paid for), customer satisfaction increases; at the same time, it also im-
proves the effectiveness of the use of the committed resources and the liquidity of a
business. The execution of an order presupposes that a business have earlier taken
various actions that secure the smooth and continuous production flow of a pro-
duct, as well as payments to suppliers and others, that is, cash outflows. It is im-
possible to collect money from customers before they receive the order and the
correct accompanying documents. So, fast-processing an order makes the max-
imum contribution to both the available cash of the company and customers’
requirements.
Cash flow (collection of payments) is the most neglected of the three flows of a
supply chain. Taylor (2003) presents an example of the typical execution time of the
three flows, requiring 3 days for the demand (agreement by the customer to place the
order with the business), 7 days for the offer (preparation and delivery of the order
and receipt by the customer) and a massive 50 days for the payment to be made
(collection of money from the customer). The management of the supply chain im-
poses radical changes in order to speed up the execution of procedures, as in, for
example, canceling orders and automatic stock replenishment (e.g. Just in Time, JIT)
and immediate payment on receipt of the product. Cash flow delays create problems in
the smooth operation of the supply chain, since the main goal of all stakeholders
toward this end is maintaining cash flows.

Inventory/Stock
Stock comprises the bulk (often more than 50%) of the current assets of a business.
Inventory levels depend on the stock replacement policies followed (raw materials,
stock, etc.), a consequence of the fixed cost of placing an order, maintaining it before
delivery, and the execution time needed to replenish stocks. Security stock levels are
determined by the desired level of customer service (demand coverage rate) and de-
mand insecurity (variations) on the customers’ part, and the offer (due to the execu-
tion time needed for stock replacement by the supplier).
The high collaborative relations that supply chain management imposes on stake-
holder partners lead to significant reductions in the fixed costs involved in the pla-
cement of stock replacement orders as well as the respective time needed to execute
them. This results in the dramatic loss of the optimal order quantity, and therefore the
total cost of placing an order and maintaining stocks. Similarly, collaborative fore-
casting and scheduling contributes to the clear reduction in the observed fluctuations
in demand for intermediary and final products, and in the execution time of orders for
stock replacement. This implies a reduction in the required security stock levels, even
in the case of an improvement in customer service.
58 Elements of the marketing mix (price)
Fixed assets
Fixed assets, such as production, storage and distribution installations, comprise in-
tegral elements of the processes that create value for the customers of a business.
However, they require the commitment of large amounts of capital to acquire and
operate them; consequently, they contribute toward a high fixed cost which does not
change according to the production quantity. The high collaborative relations de-
veloped within the context of the management of the supply chain play a catalytic role
in the conversion of a large share of the fixed operation costs of a business to variable
costs, releasing large amounts of capital and providing greater flexibility to the
businesses involved.
Nowadays, most businesses focus on the processes which their strategic competitive
advantage is based on, such as R&D, product manufacture, Management of customer
relations, etc. For the remaining procedures and partial activities, such as storage,
distribution and transportation, they apply outsourcing, wherever possible and eco-
nomically advantageous, to different strategic 3PL partners (3rd Party Logistics).
Similarly, the production of accessories and component parts of manufactured pro-
ducts is also passed on to selected partners. Such parts used to be manufactured in the
same business in the past; outsourcing allows the business to focus more on innova-
tion, assembly and quality control of the final products. Outsourcing is also used in
other support activities, such as guarding and cleaning the business premises. Another
way to minimize fixed costs through the maximization of the variable cost is the ac-
quisition of fixed equipment via funding, for example, the lorries used in transpor-
tation the business itself executes, and the cars used by the personal sales staff.

Short-term obligations
The most important part short-term obligations of a business refer to the accounts
payable for the supply of raw materials, accessories, component parts, etc. The goals
of supply chain management is also the improvement of the time needed to replenish
stocks, which begins form the moment that the need to replenish stock is perceived.
Placement of the order to the supplier and receipt of the stock follow, completed by
the delivery of the payment to the supplier. Reducing the stock replacement functions
collectively in the same direction as the reduction in the time needed to execute the
order and the reduction in the required cycle and security stocks, drastically improving
the financial liquidity of a business. Improving financial flows allows a business to
repay its suppliers directly and consequently to limit the number of bills payable.
Traditionally, most businesses regarded the delaying of payments to suppliers for as
long as possible as a panacea, in order to maximize the credit they enjoy, and con-
sequently improve the image of their balance sheets. But these cash flow delays thwart
the efficiency and effectiveness of the supply chain, which is reflected in the non-
competitive ratio of the offered value to the selling price. At any rate, the credit offered
by suppliers is in essence a kid of funding service to its customers. So supplier-
creditors will unavoidably embed the funding cost in the total pricing of each order so
that they can price it appropriately. Thus, credit is like a loan from the supplier, often
at a greater cost in relation to the potential benefits, so that most likely, it is damaging
to the profitability of a business.
 Elements of the marketing mix (price) 59
Foreign/Own capital
Improvements in the aforementioned elements of the balance sheets of a business have
significant positive consequences in the foreign/own capital ratio. For example, the
conversion of fixed expenses into variable ones reduces the funding needs of high-cost
investments, which always goes hand in hand with uncertainly concerning their per-
formance. The lower levels of cycle and security stock similarly save precious capital,
which can then be utilized in a more profitable way. Moreover, the more positive
financial flows due to an improved image of available funds, demands and short-term
obligations contribute even more to the performance of the total and own capital and
ultimately to the profitability and viability of the business.

2.3.3 Pricing objectives

Bearing in mind the factors that influence the pricing strategies, the business must set
its pricing goals. Pricing targets must be harmonized with the general goals of the
business, especially the placement strategy of their product. The clearer the pricing
targets are, the easier the application of appropriate methods for the determination of
the product price level will be, as well as the choice of adjustment policies of the prices
based on market changes.
Pricing goals are classified into economic or target profit related targets, marketing
or desirable sales targets, related to the competition that they are up against, product
placement and internal production and supply chain (Perreault et al., 2012; Siomkos
et al., 2018; Paniyirakis, 1999). The most common economic goal in the pricing of a
product is related to its return on investment. Obviously, the management of the
business must take care in making the best possible investment of its capital (own and
foreign) in order to avoid tempting dividends for its shareholders. The height of the
target performance depends on the business risk which accompanies the production
and disposal of the product, and its usual performance in the sector it operates. In
some cases, however, the main pricing target is the viability of the business itself,
especially during periods of extended economic crisis. Non-profit, private or public
businesses usually set the coverage of their expenses as a financial pricing target in
order to meet the funding needs of their operation. Even though the greater goal of
private businesses is the maximization of profit, rarely is a relevant pricing target set
because it is difficult to evaluate its effectiveness.
The sales-related pricing targets often refer to the achievement of some minimum
level or maximization of sales, in terms of product quantity or value, or market share.
In the past, businesses regarded the maximization of sales or market shares as im-
plying the amelioration of profits; hence, such goals were particularly popular.
Nowadays, such theories have been debunked to a great extent because in many cases,
they have been proven to be damaging to companies. However, the achievement of a
minimum sales level or share of the market remains a substantial goal in many cases,
because it is related to the performance of the investment, the achievement of
economies of scale and acquisition or maintenance of a powerful or, in general, strong
position among the competition, among others.
The pricing targets related to the competition often refer to maintaining or upsetting
the balance that has been achieved among competing businesses, mainly in mono-
polies. Monopoly businesses usually avoid a price war between each other, which very
60 Elements of the marketing mix (price)
often turns out to be very damaging to all of them. In many cases, however, the
application of groundbreaking innovations may give rise to a significant cost ad-
vantage to some businesses which rush to take advantage of it, making their products
available at clearly lower prices compared to regular market prices. Typical examples
of this can be found in Japanese automobile manufacturers in the 1970s–1980s, and in
the DELL computer company. In both cases, the transformation of the conventional
relations of collaboration with suppliers and distribution networks into cooperative
relations at the level of supply chain management gave rise to drastic changes in the
manner of the operation of the relevant markets.
In the case of DELL, the ordering process is automated on the one hand by a special
information system, and collaboratively on the other, because orders for computer
system parts are forwarded to collaborating supply businesses. In the case of the
Japanese automobile manufacturers, the supplier companies are either within the
production lines or adjacent to them. This practice supports the application of the JIT
philosophy that achieves a reduction in stock and costs, and waste in general. In this
case, suppliers don’t send large shipments in regular time periods; instead, they send
regular smaller shipments: respectively, from monthly orders to multiple daily de-
liveries of small shipments with lorries leaving directly from the factory. This practice
continues at every link in the chain.
The pricing objectives are sometimes aligned with the placement of the product of
high value or status; in such cases, the price must be set at high levels. In industries
however, whose main feature is the continuous production process, such as, the
production of electric energy, chemicals and petrol products, the product price must
be relatively low so as to secure the continuous operation of the production in-
stallations on a 24/7 all year round basis.
The pricing targets that contribute to the good management of the strategic
partners in the supply chain win more and more ground, since the supply chains are
essentially competing among each other as opposed to individual businesses. There
are cases where most cooperating business links in a supply chain will not raise the
sales cost of their product to the final customer but only one business will do so. In
contrast, in another supply chain where most links will possibly add another link,
the total cost, however, will be lower than the first and it will be more competitive.
In simple terms, a systemic approach exists in the cost in a supply chain. The goal is
to reduce the total cost (system cost) and not the individual components (sub-
systems).
Regardless of the pricing targets that a business sets, in each case, it must prioritize
them on the basis of their importance, as primary and secondary priorities. In essence,
the business must in practice try to succeed in more than one goal, which often entails
trade-offs. Whichever pricing targets a business’s adopts, it is necessary to commu-
nicate them clearly to all stakeholders, both internally (in different departments) and
externally (to the strategic partners in the supply chain).

2.3.4 The overall marketing mix and the product life cycle
The pricing strategy must be harmonized with the complete strategy of the marketing
mix. Thus, pricing related decisions must be matched with the choices related to the
design of the product, distribution and marketing communication, in order to con-
stitute a prompt effective competitive marketing program.
 Elements of the marketing mix (price) 61
If the business has set its product to its customers as a high quality/status product,
then price determination must take place at a high level in order to emphasize its
superiority over potential substitutes. In such a case, special emphasis is placed on the
design of the product and its accompanying services, the chosen distribution networks,
as well as its promotion. In many cases however, the marketing mix design essentially
begins from the establishment of a specific price level which the product must be made
available to the final customers, following targeted pricing. According to this tech-
nique, the business try to design the best placement strategy once it identifies the
perfect retail price based on the perceptions of the final customers, placing particular
emphasis on the production cost of the product based on its desirable features.
The life cycle of the product also affects the pricing decisions. In the introduction
stage, businesses try to choose between two general strategies: market pruning pricing
and market penetration pricing. But the price level in the introduction stage is generally
higher in relation to the next stages in the life cycle of the product, since the average
total cost is particularly high and neoterists/innovators, who are the first to try to the
product, are of course less sensitive to high prices in relation to the other acceptance
groups of a new product. In the development stage, the price usually presents a relative
reduction in order to facilitate further acceptance of the product in the market, and for
the attractiveness of the value/price ratio to be strengthened as more and more
competitors emerge. Reduction of the unit cost due to the large quantity produced and
made available on the market also contributes to this end.
In the maturity stage, the product faces intense competition from the plethora of
similar substitute products; for this reason, the overarching trend to reduce the price
causes the profit margin to shrink. The most well-established businesses, however,
tend to make their products available at the same prices as their main competitors, or
even at slightly higher prices due to the services offered and customer habits which
lead them to be devoted to the products to some extent. At the decline stage, a sig-
nificant reduction is noticed in the price, with further shrinking of the profit margin, a
fact that leads more competitors to leave the market. Pricing decisions at this stage
depend to a great extent on the marketing strategy that the business selects, such as
repositioning the product at the maturity stage, product harvest/bleeding, among
others, while ensuring at the same time that devoted customers do not get dis-
appointed, or that the business brand doesn’t suffer from a bad reputation. In general,
the two most likely possibilities for a business are the further reduction of the price, so
that the business can offer the remaining product stock or a reduction in the pro-
duction cost, where this is feasible, so that the availability of the product can continue
at the adjusted market price (Siomkos, 2004).
Further to the earlier discussion, during the determination of the pricing strategy of
a product, the business must carefully study the potential consequences this may have
on the other products in its portfolio, particularly in its sales (Siomkos et al., 2018;
Paniyirakis, 1999). The greatest danger in such cases is “cannibalism” among the
products of a business, where the rise in the sales of one product is due to the re-
spective loss in the sales of the other products of the same business. In this case ob-
viously, the business does not benefit from a potential increase in product sales, since
its total revenues essentially do not increase and it may also upset the relations of the
managers in charge of the respective products.
62 Elements of the marketing mix (price)
2.3.5 Market and demand

Relation of price and demand

The relation of product price and demand is described in the well known law of de-
mand. According to the law of demand, there is a reverse respective relation between
the selling price of a good and its required quantity, when the remaining determining
demand factors remain stable (ceteris paribus) (Armstrong & Kotler, 2017; Kotler &
Armstrong, 2016; Perreault et al., 2012; Pride & Ferrell, 2016; Mankiw, 2014). Quite
simply, when the price of a product rises, its required quantity reduces, and vice versa.
The remaining determining demand factors of a good include, among others, con-
sumers’ preferences, consumers’ income, the price of substitute (competitors’) and
complementary goods, consumers’ expectations in relation with the future price
evolution and their incomes and the number of consumers (market size).
The demand curve graphically depicts the demand of a good when its price changes
and the remaining determining demand factors remain stable. The demand curve
differs for each product in each potential market and time period. Given the revers
respective relation between price and demand, the demand curve has a negative slope.
There are, however, some cases where it is noticed that the slope of the demand curve
is rising. This signifies status products (Veblen goods), where the product price
comprises a strong indication of its quality, since the determination of its value with
other criteria becomes especially difficult. Examples of Veblen goods may be haute
couture clothing, luxury cars, watches, jewelry, perfumes, cosmetics, among others.
Let’s imagine the case where a business creates a new perfume which has bewitched
everyone that has tried it in comparative trials of high quality perfumes. Let’s also
assume that it can be produced and made available on the market at a significantly
lower cost from competitors’ perfumes currently circulating in the market. One choice
would be to introduce the new perfume to the market at a particularly low price, much
lower than competitors’ perfumes, so that it could achieve a high level of penetration
into the consumer public. But the most likely scenario is that the business that was
going to follow this pricing strategy will be disappointed by its choice, since consumers
would be placing the product on their perceptual map together with other perfumes of
a lower quality. Thus, it is probably a one way street for the business that wishes to
place its product as a high quality one to choose a particularly high price, comparable
at the very least to competitors’ products (Figure 2.5).
A very important notion that refers to the relation between price and demand is the
elasticity of demand to price. This is implied in the degree of reaction of the consumers
in the required quantity of a good when its price changes and is estimated (ceteris
paribus) as a percentage change in the demand of the good in terms of the percentage
change in its price. The demand elasticity (ED) to the price has negative values, except
in the case of status goods. For reasons of simplicity, however, the absolute prices of
demand elasticity to price are often noted. Based on the absolute prices of elasticity,
demand is called a unit when |ED| equals 1, inelastic when it is less than 1 and elastic
when it is greater than 1.
Demand elasticity changes with the price level. Generally, there is a point in the
demand curve where |ED| equals 1. For values greater than that level, demand is elastic
(|ED| > 1), while for lower values, demand is inelastic. Thus, for the business, it is
especially useful to know if demand for its product is elastic or inelastic at the specific
 Elements of the marketing mix (price) 63

P P
D D
B
PA A PB

B A
PB PA

D
D

QA QB QD QB QA QD
Common good Prestige good/Velben

Figure 2.5 Demand curve for a common good and a prestige good (Veblen).

price level that is being sold at. Specifically, if it is inelastic, the business will raise its
revenues by raising the price of the product, since the percentage rise in the price will
be in absolute values greater than the percentage decrease in the required amount. In
contrast, if the demand is inelastic, then it will most likely be advantageous to reduce
the price of the product so that it will increase revenues from its sales. Of course, in
practice, estimating the demand elasticity is particularly difficult since it is impossible
for the product price to change without any alteration to at least one of the other
demand’s determining factors. In any case, however, whichever estimation of elasticity
is more useful for businesses.
There are various determining factors of demand elasticity concerning the product
price. Some of the most important ones are as follows:

• The importance of the good for the consumer. The greater the importance, the less
elastic the demand.
• The existence of substitutes. The more substitute (competitors’) goods, the more
elastic the demand.
• The time period that has passed from the change in its price. In the long term,
consumers can adjust better to changing prices; thus, in the long term, demand
will be more elastic.
• The height of the price of the good. The lower the price, the less elastic the
demand, and vice versa.
• The percentage of income that is spent. The greater this percentage is, the more
elastic demand will be, and vice versa.

Market shape/form
Businesses’ choices in relation to pricing depend to a great extent on the kind of
market that they are active in. Specifically, economists classify markets into four basic
types, based on the number of buyers and sellers, differentiation (or not) of the good
64 Elements of the marketing mix (price)
and the concentration degree of the sellers (Armstrong & Kotler, 2017; Kotler &
Armstrong, 2016; Perreault et al., 2012; Pride & Ferrell, 2016; Mankiw, 2014).
In full/complete (or perfect) competition, many buyers and sellers participate in the
market, and the goods offered are homogeneous, that is, they have the same char-
acteristics, or at the very least, the consumers don’t distinguish substantial differences
between them. Furthermore, there are no (or at the most very few) restrictions at the
market entry and exit points of businesses and there is full information (or the in-
formation asymmetry is very little) for both the buyers and the sellers. The afore-
mentioned conditions have as a result the actions of one individual buyer or seller
having very little influence on the price that is formulated in the market. Indeed,
bearing this in mind, buyers and sellers take the formulated market price for granted.
From the side of the businesses, this essentially means that they face a completely
elastic demand curve. In simple terms, they will not find buyers if they try to charge a
higher price than what is going around in the market, and there is no meaning in
selling at a price lower than the market, since all their produced quantity may be sold
at market price.
Although in practice it is very difficult for all the earlier assumptions to be taking
place simultaneously, characteristic examples of markets with full competition are
those of wheat and most agricultural products, wood, fabrics, petrol, copper and other
mined goods, etc. Moreover, due to the immense changes that have taken place in the
last 2–3 decades, especially in the minimization of asymmetric information, most
markets are very competitive and tend to acquire more and more features of full
competition. Obviously, it is a market type that leaves very little, if any choice margins
for businesses, with reference to the followed marketing strategies, especially pricing
strategies. Supply chain management, however, provides significant potential for
differentiation of manufactured products, especially in accompanying services.
Therefore, the goal of modern supply chains is the creation of business networks that
can supply added-value services. The choice by the remaining members of a new
partner happens with this in mind. Cost savings and opportunities for added value
should be discussed with all the interested parties about the resulting benefits in re-
lation to the implementation expenses to determine the relevant priorities.
Monopolistic competition presents significant similarities with full competition,
except for one significant difference: the product of each business is differentiated, at
the very least, from competitors’ products. The differentiation may be in the quality
characteristics, style, presentation, accompanying services or a combination of the
earlier points. In each case, it is important that buyers think that there are some
substantial differences between the competing products. Therefore, the consumers are
prepared to pay a different price for those products that offer higher value in relation
to their substitutes. Thus, the business does not face a predetermined market price,
that is, it is not a price receiver, but the demand curve of its product has a negative
slope (downwards). Typical examples of this kind of market are restaurants, hair-
dressers, legal and accounting services, etc.
In monopolistic competition, the business trues to create a branded demand for its
product, shaping the appropriate marketing strategies, especially for the product and
communication. Due to the large volume, and simultaneously the small size, of the
sellers each business is influenced less by the pricing policies of competitors in com-
parison to the oligopolistic markets. Each business enjoys significant freedom in its
own small market, but obviously not absolute freedom as in a monopoly. Good
 Elements of the marketing mix (price) 65
collaborative relations with selected partners, especially suppliers, allows to maintain
and build on the business’s competitive advantage. It may lead to the creation of win-
win relations for development and improvement. Examples of this are cases of mutual
product design, solutions for production issues, among others (Early Supplier
Involvement), upgrading of quality systems, information systems, etc.
The oligopolistic market is characterized by the presence of few businesses that
offer the same or a similar product; thus, pricing strategies of businesses depend to a
great extent on those of their competitors. Markets dominated by a few big businesses
are also oligopolistic, but they include a large number of small businesses, for ex-
ample, the retail food sector. The selling price of a product of a business in the oli-
gopoly is lower than in a monopoly, but higher than in full competition; thus, the
total profits of oligopolistic businesses are smaller than in monopolies. Characteristic
examples of monopolistic markets of homogeneous products are cement, electric
energy, among others, while for differentiated (similar) products for electric (e.g.
washing machines) and electronic machines (e.g. computers), dairy products (e.g.
yoghurt), etc.
In oligopolistic markets, in practice, for the choice of the most appropriate pricing
strategy, various methods are used based on game theory. Additionally, in essence,
price wars in an oligopolistic market are damaging for all the businesses involved, so it
is something that is generally avoided. Of course, an oligopolistic business is most
likely to enter into price reductions when it achieves a real cost reduction in the
production and availability of its product. Generally speaking, as the number of sellers
in the oligopoly increases, the more the oligopolistic market will resemble a perfect
competitive market. The continuous technological developments and the international
market in many cases contribute to the increase in the number of oligopolies and
competition among them, with the result of the continuous pressure of the profit
margins. Supply chain management plays a key role in oligopolistic markets and
therefore product pricing. In general terms, in the case of a supply source (one or a few
suppliers), there are the following advantages: better prices due to the purchase of
larger quantities (reductions), lower delivery cost, hence greater quantities bought with
less transportation, creation of strategic and long-term relations.
From the aforementioned discussion, it is clear that businesses which operate in
oligopolistic markets have a great motive to jointly act as a monopoly. But colla-
boration between oligopolies is undesirable in terms of society/community as a whole,
because it leads to a low production level and high prices. For this reason, govern-
ments all over the world place different legal constraints on this kind of unfair col-
laboration in order to put pressure on companies to compete with each other. On the
other hand, the advantages of switching to many suppliers (procurement from many
sources) is related to achieving better prices and conditions for the agreement due to
competition, supply risk in the case of delivery problems, increase in interest and
technological development of suppliers, strikes, protection services, natural dis-
asters, etc.
The fourth kind of market refers to monopolies where just one businesses services
the whole market. Monopolies arise from barriers to the entry of new businesses in a
new market, either physical as in the exclusive possession of a natural resource, or
legal as in state monopolies (e.g. water and sewage, postal services, electric energy) and
patents (e.g. medicines) and creations (e.g. a book). Because, although, the estab-
lishment of the aforementioned strong price leads to irreparable losses, that is, to a not
66 Elements of the marketing mix (price)
at all excellent distribution of productive factors and the loss of social well being,
monopolistic businesses usually set lower prices in ordee to avoid the expected state
intervention. In general, pricing policies of monopolistic businesses are subject to
different legal restrictions and controls.

Competitors’ pricing strategies

The business must bear in mind very seriously the following strategies and the for-
mulated pricing strategies of its most important competitors, since it is active in
monopolistic competition or in an oligopoly (Armstrong & Kotler 2017; Perreault
et al., 2012; Paniyirakis, 1999; Siomkos et al., 2018; Pantouvakis et al., 2015). But
information related to competitive offers is a big challenge for the business, because
knowledge of their selling price is not simply enough; estimation of the offered per-
ceived value as the relevant costs is also needed. The challenge becomes greater in
reference to the identification of the basic categories of competitive products that refer
to the product of the company. For example, competitive products of a new photo-
graphic camera constitute all the photographic cameras that offer similar quality
characteristics, generally all the photographic cameras, as well as smartphones and
tablets which have a camera embedded in them for taking photographs and videos.
The business has to locate the directly similar products from the competition and
stay informed on a regular basis about their price levels, which is quite easy given
contemporary internet tools. At the same time, it must determine as precisely as
possible the perceived value from the customer’s side of the competitor’s and its own
product. If a business offer is similar to that of its main competitor, it must prefer a
price very close to the competitor’s. In the case where customers judge that the pro-
duct of the business offers them greater value against that of the competitors, then the
business is in the position to set a reasonable higher price. In the opposite case, the
business must set a lower price in order to offer an attractive value-price ratio to its
customers. Indeed, in the last case, quite possibly, the business must search for ways to
improve the value proposal and a better placement of the product in the perceptual
map of its customers. The assessment of the average total production cost and
availability of competitive products is very useful so that the business knows the
followed pricing strategies that they follow. In this way, the business will have the
possibility to adjust its pricing decisions based on the practices of the competition and
it will be able to predict possible changes in prices of competitors’ products.
In some cases, the pricing strategy of the business is determined by the ultimate goal
of influencing the competition. This is especially true for leader businesses in a market,
who run the risk of attracting new competitors if they set high prices because of the
expected tempting profit margins. This danger is especially high when entry barriers
are relatively low. In such conditions, it would probably be wiser to choose a relatively
fair price that will discourage new competitors from entering the market, and it may
also encourage the departure of some of those already in the market.
In the case of a monopolistic competitor, where there are possibly already many
strong competitors in the market, then it would be preferable for the business to focus
on niche markets, differentiating its product/service in order to partly avoid direct
competition. In this way, the pricing strategy of the business will not depend to a great
extent on the respective pricing strategies of the competitors.
 Elements of the marketing mix (price) 67
2.3.6 Supply chain factors
Manufacturers of products must give pay special attention to the profit margin that
the strategic partners in distribution networks can enjoy (Armstrong & Kotler 2017;
Perreault et al., 2012; Siomkos et al., 2018). A penetration pricing policy can bring
very small profit margins to both wholesalers and retailers with the result that the
distribution networks will not provide the necessary support for the successful in-
troduction to the market of the new product. On the other hand, forecasting very high
profit margins to secure the acceptance of a new product may lead to an unattractive
relation between value and price for the final customers. In practice, product pricing
does not refer just to the business that produces the products; the relevant decisions
will have to be taken bearing in mind the priorities and limitations of the strategic
partners in the supply chain. In the case where the business cannot completely satisfy
the needs of the stakeholders of a distribution channel, it must seek other channels
with a better match for its strategic goals, otherwise it must resort to the solution of
immediate distribution of its products/services to the final customers.
The dominant trend in the market is the continuous strengthening of the negotiating
powers of the retail businesses due to both the geographical spread and the variety of
goods offered. Thus, the rising negotiating power of the big retail chains gives them a
dominant position against the remaining strategic partners during the structure and
operation of the supply chain. This results in the pricing policy of both the producers
and the remaining stakeholders in the supply chain (e.g. wholesalers) being influenced
to a great degree by the agreements of long term cooperation which they draw up with
large retailers. As compensation for the high degree of concentration of the retail
trade, producers and some intermediaries resort to high investments in communicating
with the final customers for the creation of a branded demand. Branded demand
contributes to consumers’ dedication to the commercial logos, giving a bargaining
power to the manufacturers of the products. Examples of such producers include
companies like Barilla, Unilever, Coca-Cola and many others.
Taking the supply chain of the fresh fruit and vegetable sector as an example, price
determination is often a part of the agreement of long term cooperation between the main
partners of the chain, that is, the producers, the wholesalers (they often take on main-
tenance, standardization and packaging of the products) and supermarket chains. Bearing
in mind the cost structure of the production and availability/sale of the final product, a
lower price is also agreed on for the producers and wholesalers to cover the cost of their
activities, plus a minimum margin of survival profit in cases where there is oversupply of
the product; as a result, the market prices decline to very disappointing levels.
A maximum price is also foreseen in the case of a lack of product in the market due
to bad weather conditions, illnesses, crop diseases, importation difficulties, etc. In this
way, the large retail chains can secure their continuous supply in fresh fruit and ve-
getables within a forecasted price range. There are, however, cases of businesses that
have succeeded in creating a branded demand in the market of fresh fruit and vege-
tables, even though the rule usually regards these goods as a common kind of product.
A typical example in Greece is the Agricultural Cooperative of Zagora-Pelio, whose
products (mainly apples and pears) bear the «ZAGORIN» logo. Despite the fact that
it is competing in a market with full competition, the branded demand that it has
created for its products allows it to make them available not simply as common goods,
thereby securing higher prices than its competitors.
68 Elements of the marketing mix (price)
The conditions of long term cooperation among large supermarket chains and their
strategic partners often include the contribution of wholesalers and producers in
“barker” pricing. Specifically, retail sellers on a regular basis offer various products,
for which the market has determined some kind of reference, at a very low price, up to
marginally higher than the cost, for a certain period of time (3–7 days). It is not their
main goal to sell large quantities of these chosen goods, but to attract customers to
their shops with the hope that they will also do their remaining weekly shopping there.
At any rate, these so-called demand fluctuations in the products comprise a very
important test for all the stakeholder businesses in the supply chain and the logistics
systems that they use. The contribution of the other partners is also suggested in
making these large quantities available at prices with marginally positive profit
margins.
An important additional reason which makes it essential to have a good colla-
boration among the strategic partners in the supply chain in terms of product pricing
is bullwhip effect (Taylor, 2006; Min, 2015; Slack et al., 2010; Chopra & Meindl, 2014)
(Figure 2.6). The reasons for this problem emerging as as follows:

• Existence of complex supply chains that increases the possibility of errors and
delays,
• Sales Promotion through offers,
• Discount on the market price and transportation depending on the volume of
products, bulk orders,
• Mistakes in demand forecasting (where the order levels change according to the
forcasting, that is, order tend to increase more than what was predicted),
• Large time periods needed to satisfy the order, and
• Large time periods needed to satisfy the order enlarge the phenomenon.

Decisions related to the changes in the retail selling prices of the products could in-
crease even more the usual fluctuations in its demand. However, in cases of limited
cooperation and information movement along the length of the supply chain, these
further fluctuations further upset the demand signal that is transferred upwards in the
supply chain. Thus, pricing must be an agreement signal of the main stakeholders in

Supplier Producer Distributor Retailer

Raw materials Finished products

Demand Demand

Figure 2.6 Bullwhip effect.

 Elements of the marketing mix (price) 69
the supply chain after negotiations and the search for mutual beneficial trade-offs. If
one sale is missed either short term or long term, which is even worse, the problem is
mutual for all the stakeholders in the supply chain. Therefore, optimal solutions must
be sought at the level of the supply chain and not the business.
Pricing must also take into account the special characteristics of each distribution
channel through which the producers make their products available in the market,
especially how the different processes and activities between the strategic partners are
shared. If, for example, in a distribution channel, the immediate shipment of a specific
quantity of product is necessary, which implies, among others, the availability of a
high production capacity or high levels of security stock, due to the high service costs,
the price will be high. In contrast, in another distribution channel which has the ability
to ship an order within a certain period of time (e.g. 5–7 days) and which consequently
the customers of a business are prepared to undertake some extra activities (e.g.
transportation ot maintenance of security stock), the price will obviously be lower
than in the previous situation.

2.3.7 Legal constraints

Businesses operating in oligopolistic or monopolistic markets, in addition to the
aforementioned factors, must comply with series of legal constraints when de-
termining the price of their products (Armstrong & Kotler, 2009; Perreault et al.,
2012). In such markets, the businesses are always tempted to resort to pricing po-
licies that maximize their profits, which may also lead to irreparable losses. These
losses refer to the whole of society (producers and consumers) in order to make it
possible to redistribute the benefits from the consumer to the monopoly where there
is cooperation among the main oligopolists. Therefore, in order to limit the irre-
parable losses and redistribution of the consumer surplus to the monopolies
and oligopolies, governments often impose various types of legal constraints
(Figure 2.7).
The anti-monopolistic policy aims to prevent oligopolistic businesses agreeing to
limit competition among themselves, because this leads to a low level of production
and high prices for consumers. In cases where it is verified that two or more oligo-
polistic businesses have created a cartel with the aim of manipulating the prices of
products, governments impose high fines often in the range of hundreds of millions of
euro. Regulatory interventions for monopolies could, among others, include the na-
tionalization of monopolies, the prevention of non-social beneficial mergers and the
separation of existing businesses into smaller ones.
A typical market with intense state intervention is that of pharmaceuticals. Drug
companies spend about 20%, even more than that, of their budget on research and
innovation and the development of a new drug costs on average about 1.3 billion USD
(Woulters et al., 2020). Thus, governments provide motives for pharmaceutical in-
dustries to invest in research and development, protecting through patents the ex-
clusive use of the new active substance for a reasonable amount of time. However, due
to the high relevant social and ethical impacts, they place various limitations in re-
lation to the final selling price, especially where it concerns the introduction of new
drugs in the positive (reimbursed) drugs list, and they also determine the prices of non-
reimbursed drugs (Braoudali et al., 2018).
70 Elements of the marketing mix (price)

Price,
Cost

Consumer
surplus Uncompensated loss
Monopoly Marginal Cost -
price Supply
Redistribution of
consumer surplus to
monopoly
Competition
price
Producer surplus, as in
competition

Demand
Marginal Profit

Monopoly Competition
Quantity
Quantity Quantity

Figure 2.7 Uncompensated loss and redistribution of consumer surplus to monopoly.

2.4 Pricing methods

2.4.1 Pricing methods based on cost

These methods are based on the production cost and availability of the products. In
general, they have a simple application, but their greatest challenge is the expensive
and reliable determination of their cost, which depends among others on the predicted
quantity of the sale of the product. Their disadvantage is that they don’t take into
account the predicted value of the product by the final customers, or the prices set by
competitors. In the case where demand and competition present stability, these
methods may turn out to be especially useful.

Cost-plus and/or profit margin pricing

The literature often presents two different methods, but in essence, it is one and the
same method, which of often called cost-plus when it is used by the manufacturer of
the product (based on production cost), and profit margin when it is used by inter-
mediaries between the producer and the final customer (based on the purchase/market
cost) (Siomkos, 2004; Perreault et al., 2012; Armstrong & Kotler, 2017). The business
estimates the average cost of production or acquisition of the product and then adds a
 Elements of the marketing mix (price) 71
desired profit margin so as to determine the selling price. The profit margin can refer
to some specific amount per unit of product, but it is most often determined as a
percentage either on the production cost or acquisition, or on the selling price of the
product.
This method is especially popular in the intermediary distribution channels, since
they trade a huge number of different product lines (often in the range of tens
thousands). Furthermore, this method presents the advantages of easy application and
competitive harmony which is achieved when all the competitors utilize the same profit
margins. For this reason, retailers and wholesalers often use a predetermined profit
margin percentage for each large product group that they trade in. An example of this
is a supermarket chain which sets different profit margins on fresh fish in relation to
washing detergents. A further more basic classification criterion of products is based
on the rhythm of their trading pace, setting a low profit margin percentage on quick-
moving products and a high one on product lines with a low sales rate (Perreault
et al., 2012).
In general, the reaction of the supply chain to cost is important, because:

• Non-performing production processes increase the cost of the product.

• The not-integrated management leads to an increase in cost.
• Inadequate information and design lead to an increase in cost (e.g. the ineffective
utilization of company capital, lack of coordination, not profitable/advantageous
transportation.
• Lack of standardization leads to increase in cost.
• “Building up” stocks leads to increase in the cost.
• Lack of quality increases the cost.

When this method is adopted by the stakeholders in the different levels of the dis-
tribution channels, then the relevant chain of profit margins determines the price
structure in the channel, and therefore the final retail price. A significant risk that
arises from the application of this method is the determination of the retail price to a
higher level than that which the perceived value or the competitors’ prices would
allow. Another critical point in the application of this method is who first sets the
price. Quite simply, is it the producer, wholesaler or retailer that first decides on the
base price? In practice, the base price is set by the business with the greater bargaining
power in the distribution channel (Perreault et al., 2012). In many cases, however,
the remaining stakeholder find that the strongest business tries to enjoy a dis-
proportionately high profit margin percentage in relation to its contribution in the
overall effort made in the distribution channel. Moreover, it may be the case that the
determination of the base price suits the strategic goals of the business with greater
bargaining power, with lkess significance places on the priorities of the other busi-
nesses. Thus, it becomes clear that the management of business relations of the dis-
tribution channels based on the founding principles of the management of the supply
chain is necessary for the effective and sustainable application of this pricing method.
Despite its utility, this method cannot be used alone in price setting. In the case
where the real sales are lower than those taken into account in the calculation of the
average cost, based on the this method, the price will have to be raised even more,
which will lead to a further reduction in demand. Furthermore, the offered price to the
final customer and the competition are both not taken into account. What’s more, as
72 Elements of the marketing mix (price)
previously discussed, the precise and reliable allocation of the indirect expenses is a
difficult task, especially for businesses which produce or trade in a plethora of product
lines, making it difficult to correctly calculate the average total cost (Fahy & Jobber,
2014; Perreault et al., 2012; Paniyirakis, 1999).
Despite the aforementioned problems, this method is especially useful, even in the
case of determining the final price, because it offers a very good indication of the
lowest possible price for the achievement of a satisfying or acceptable profit level for
the business.

Deadlock or targeted profit pricing

Targeted profit pricing tries to pinpoint the appropriate selling price of a product so
that the business can achieve a predetermined performance level on the investment
(Armstrong & Kotler, 2009; Perreault et al., 2012; Fahy & Jobber, 2014). This method
has a lot of similarities in its application with the aforementioned method of profit
margin. Initially, the business has to determine as precisely and reliably as possible
both the total fixed cost and the average variable cost of production and availability of
the product. Then, it must calculate the total amount of profit and estimate the selling
quantity of the product. The price determination arises form the same mathematical
relation used in the analysis of the dead point.
The dead point analysis is used in the calculation of the quantity for which the total
revenues equal the total expenses. Selling a larger quantity from that of the dead point
means that the business will make a profit, while a smaller quantity of sales will mean
revenue losses. The analysis of the dead point presupposes the calculation of the total
fixed average variable cost, which is thought to be stable regardless of the produced
quantity and the setting of the selling price (Figure 2.8). Following this, the dead point
analysis is calculated by the following mathematical formula:

Total fixed cos t

Break even po int =
Price Total variable cos t

The aforementioned mathematical relation can be used vice versa, that is, to find the
selling price of the product in order to achieve zero profit (or loss) for its predicted
selling quantity. In this case, taking into account that he total variable cost equals the
product of the average variable cost on the projected quantity sold, the price is cal-
culated as follows:

Total fixed cos t + Total variable cos t

Price =
Sales Quantity Forecast

Therefore, to determine the appropriate price in order to achieve the predetermined

performance level on the investment (targeted profit), the following formula is used:

(Total Fixed Cost + Total Variable Cost ) + Profit Target

=
Sales Quantity Forecast
 Elements of the marketing mix (price) 73

Total

Profit zone
Total Cost
Total Revenue & Cost ( )

Break-even
point
Total Variable Cost

Damage zone

Total fixed Cost

Sakes (Units)

Figure 2.8 Break-even analysis.

Targeted profit pricing has the same advantages as well as the same inherent weak-
nesses as discussed in profit margin pricing. Its application also presupposes that the
average variable cost is independent of the quantity sold, which is often not valid due
to the phenomenon of economies of scale and the learning curve. Therefore, it would
probably be risky to use it without taking into account the perceived value of the
product and the prices set by the competition. Regardless of the method chosen to set
the final price, targeted profit pricing offers valuable information and indications in
relation to the future profitability and sustainability of the product. In practical terms,
it can be used to evaluate various alternative choices of the business, especially in
combination with the estimation of projected demand at various price levels, as dis-
cussed later.
The dead point analysis also shows the significance of implementing supply chain
management. As has already been highlighted, the stakeholder companies in a supply
chain with high collaborative relations can, in many ways (ABC, stock management,
speeding up the three flows in the supply chain, etc.), control and lower both the fixed
and variable costs of their processes.

2.4.2 Pricing methods based on demand (value)

The reason businesses and their supply chains exist is to cover the needs and desires of
the final customers. Thus, the final judge of the effectiveness and efficiency of all the
business decisions is the final customer who is not interested at all in the price structure
of the businesses and the intermediaries in the distribution networks. Thus, when
74 Elements of the marketing mix (price)
setting prices, the perceptions of the customers on the value offered must always be
taken into account. Pricing based on value (demand) presupposes that the price must
be set by designing a marketing strategy together with the remaining elements of the
marketing mix, and not therefore as an independent decision.

Good value pricing

This method is recommended in price setting based on its precise relation with the
quality/value (and accompanying services) of the product (Armstrong & Kotler, 2009).
This strategy wins more and more ground due to the increased sensitivity of the final
customers to price which is due to their being well informed regarding competitive
offers, and also partly on the prolonged economic crisis which has contributed to the
marked reduction of their purchasing power. Businesses often introduce versions of
their branded products (e.g. Mercedes Benz and BMW cars, Tommy Hilfiger clothes,
among others) into the market at lower prices, offering products at more attractive
prices in terms of the value-price ratio.
The every day low price (EDLP) is a typical example of good value pricing, where
products are sold on a daily basis at a relatively low price, avoiding price reductions.
Businesses that adopt this strategy are leaders in their market, but they make a great
effort to offer good value in their products/services. This strategy constantly gains
ground in contrast to high-low pricing according to which products are sold at rela-
tively high prices, but at regular intervals, the same products are sold with promo-
tional reductions.

Added-value pricing
In added-value pricing, the business tries to differentiate its position against the
competition, enhancing the product with a characteristically high value in order to
avoid classifying its product as a common good (Armstrong & Kotler, 2009; 2017). In
this way, the business tries to maintain or even increase customer loyalty toward it,
which will allow it to assign a higher price and secure a satisfying profit margin.

Marginal economic analysis

According to the marginal economic analysis, the business must determine the price at
the level which maximizes profits (Perreault et al., 2012; Siomkos, 2004). It re-
commends the right pricing method according to the economic theory by investigating
demand – that is, expected income – and the total cost of production and availability
of the product at the same time. Thus, this method is based on the combination of
demand and cost. It presupposes as much as possible the most precise and reliable
estimation of the demand function on the price of the product, which depends espe-
cially on the market type and from which arises the total revenues function on the
produced and available quantity of the product. Estimation of the total cost function
on the quantity of the product is also required.
Then, from the functions of total revenues and total costs, the functions of marginal
revenue and marginal cost on the product quantity is calculated, respectively. The
marginal revenue curve has a negative (descending) slope whereas the marginal cost
curve has a positive (ascending) curve. The point at which the marginal revenue and
 Elements of the marketing mix (price) 75

MC
Price,
Cost
ATC

Price

Total
Average
Cost
Demand
Max Profit

MR

0 Profit maximization Profit

Quantity

Figure 2.9 Marginal economic analysis.

marginal cost curves meet shows the best combination of price and quantity where the
company can maximize its profits. In practice, the optimal production quantity can be
calculated by equalizing the functions for marginal revenue and marginal cost; then,
based on the demand function, the selling price of the product is estimated, which
corresponds to the optimal production quantity (Figure 2.9).
Demand function and total cost estimates can never be precise. But businesses that
achieve the most precise reliable projections of these functions gain a valuable com-
petitive advantage. Thus, for one more time, the massive contribution of supply chain
management through the development of high collaborative relations between stra-
tegic partners is revealed. Supply chain management presupposes collaborative
prognosis and scheduling so that it can make a maximum contribution in the relia-
bility of demand predictions and in the calculation and control (reduction) of the total
cost of the supply chain. In fact, leader companies in each e.a. ask for and get ana-
lytical updates/information about the cost structure, so everyone needs to know about
and make improvements on their costs.
A variation of the pricing method based on marginal analysis is flexible dead point
pricing (Siomkos, 2004). Specifically, for each potential interesting price level, a pre-
dicted demand of the product is estimated, and by extension, the predicted revenues.
Then, for the respective predicted demand levels, the total production and availability
costs (fixed and variable) of the product are calculated. After that, the price that
76 Elements of the marketing mix (price)
maximizes the projected revenues is chosen, based on the slope of the expected rev-
enues and expenses for each respective demand level.

Reverse demand or targeted cost pricing

Reverse demand pricing begins with the determination of the price that the final
customer is willing to pay for a product, especially for convenience products (e.g. a
Thessaloniki bagel, casual clothing, present for a children’s party) (Perreault et al.,
2012; Siomkos, 2004). After that, from the final retail price, the expected profit
margins of the intermediaries in the supply chain are subtracted, so that an estimate of
the average revenue (per product unit) is calculated for the business. The business
must then find strong production methods for the product so that it covers the pro-
duction cost and it secures the desired profit margins for itself. An advantage of this
method is that in its application, it does not require an estimate of the demand
function on the product price; it only requires the final retail price that the specific
market sector is willing to pay. Despite all this, the expected quantity demanded at the
said retail price must be estimated as precisely and reliably as possible.

Reputation pricing
As discussed earlier, this method is recommended for products with a very high value
and status (luxury cars, jewelry, hotels, etc.). Price is a very strong indication of quality
for these products, as well as the status that its buyers will enjoy. A reduction in their
price may even cause a reduction in demand, since it may be perceived as an indication
of lower product quality, since, generally speaking, it is difficult to determine its value
based on other discreet characteristics (Perreault et al., 2012).

2.4.3 Pricing methods based on the competition

When the differentiation of a product is very difficult, the business must to a great
extent bear in mind the competition’s prices when setting its own prices, and less so the
cost structure and the value offered.

Pricing based on the market leader’s or the main competitors’ prices

According to this method, the business prices the product based on the prices of the
main competitors, mainly using the price of the leader company in the oligopolistic
market (Fahy & Jobber, 2014; Siomkos, 2004; Siomkos et al., 2018). The price is often
determined at the same level which the price leader or the main competitors have set,
but it could be slightly differentiated either upwards or downwards. The main ad-
vantage of this method is avoidance of potential “price wars” which usually turn out
to be damaging for all those involved. On the other hand, it does not take into account
the many possible differences between competitors’ businesses with reference to cost
structure. Thus, in the present time, the management of business relations with the
main stakeholders in the supply chain, both upwards and downwards, is probably a
necessary condition for the successful implantation of this method for a newly es-
tablished business in the market.
 Elements of the marketing mix (price) 77
Pricing based on the prevailing price on the market
This may be applied in markets with similar products where a relatively unified price
has been set by all the competitors. This set market price is adopted by the business for
its own product (Fahy & Jobber, 2014; Siomkos, 2004). In some cases, some of the
competitors may somewhat differentiate their price in relation to the market base
price, if they wish to target a niche market with special characteristics. This method
presents similar advantages and disadvantages with pricing based on the leader
company’s or main competitors’ prices.

Pricing of competitive offers

This method is used mainly for buying supplies in state organizations, and in some
industrial markets (Fahy & Jobber, 2014; Paniyirakis, 1999; Siomkos et al., 2018;
Perreault et al., 2012). The buyer asks the potential supplier businesses to submit
closed (locked) competitive offers with reference to the acquisition of goods based on
predetermined specifications. The selection criterion of the supplier company is the
best/lowest price among those that fulfill the conditions of the tender. Thus, the
businesses taking part in the tender must determine a reasonable trade-off between
expected profit from the drawing up of the agreement and the possibility of securing
the agreement. The pricing process of a competitive offer also constitutes a great
challenge in cases of complex tasks, such as that of construction of buildings. In each
case, the submission of a competitive offer demands precious business resources,
mainly the very careful work of specialized staff of the business.

2.5 Pricing strategies for new products

Pricing new products constitutes a special challenge for a business, since it does not yet
know the reactions of the final customers and the competition from its introduction
into the market. There is also uncertainty in relation to the estimation of the colla-
boration with the remaining stakeholders in the supply chain and its requirements for
marginal profit, and also in the final level of the average total cost after the utilization
of the potential results of the economies of scale and learning curves. In the in-
troduction stage of the product into the market, the business in essence must be able to
choose between pruning pricing and penetration pricing (Armstrong & Kotler, 2009;
Fahy & Jobber, 2014; Perreault et al., 2012; Paniyirakis, 1999; Siomkos et al., 2018).
In market pruning pricing, the business initially sets an especially high price, aiming
to sell the product mainly to neoterists who perceive the value-usefulness of the
product as very high, and cant wait to acquire it. After that, the price is reduced
gradually, so that the product is bought by more and more market segments who will
enjoy fewer benefits from it, and so on and so forth. The gradual reduction of the rpice
also carries the risk of the emergence of new directly competitive products; this
probably constitutes a necessity when when direct substitutes are introduced by the
competitors.
The strategy of pruning pricing can be applied in both monopoly and oligopoly
markets, where competition is zero or extremely low, so the demand curve is most
likely inelastic. It should also be considered important, in terms of size, the market
segment that is relatively indifferent to the high price of a new/innovative product due
78 Elements of the marketing mix (price)
to the perceived usefulness and/or the status it offers. At the same time, due to the
relatively small sales size in relation to the overall potential in the market, it is im-
portant that the average total production cost and availability of the product must not
be forbiddingly too high. Moreover, due to these particular circumstances, product
acceptance and support by the chosen distribution channels is vital, making supply
chain management a critical factor in the success of the venture. At the same time, the
business must secure the reduction of the danger of attracting competitors, and in
general, delaying the introduction of substitute products, by placing entry barriers,
such as, for example, protecting innovations (patents), etc.
A very important advantage in this strategy is that the business quickly acquires a
significant part of the investment that it has put in the new product before the com-
petitors’ products are introduced into the market and the expected “price wars” begin.
This strategy also probably constitutes the only choice in the case where the chosen
placement strategy refers to high/unique value and/or status.
A disadvantage in pruning pricing is the attraction of competitors due to the high
expected profit margins. Also, if a business is obliged to reduce the product price at a
relatively fast rate, it will provoke feelings of disappointment among neoterists and
early adopters who were charged a much higher price. On the other hand, however, if
a business takes too long to gradually lower the price, it risks speeding up entry to the
market of competitors’ products. Especially in the case where a large number of
competitors’ products have entered the market and the business tries to avoid reducing
its prices to the respective levels, it then risks losing a significant market share, and
consequently its competitive advantage. Generally speaking, misusing the policy of
pruning pricing could destroy the new product and lead to market failure.
Implementing pruning pricing may also cause intense social and moral criticism in
relation to products that are likely to concretely improve the survival level of large
segments of the population, as for example, in the case of drugs for human use or new
technologies in agricultural production (Perreault et al., 2012).
Due to the increasingly intense competition among businesses, the relative ease of
adopting and utilizing new technologies by competitors and the virtual elimination of
asymmetric information levels between buyers and sellers, the final customers tend to
be especially sensitive to the price of the product. Moreover, the time period that the
business has at its disposal to exclusively offer the new product/technology in the
market is shrinking more and more. Thus, the market pruning pricing strategy be-
comes increasingly precarious and needs a lot of care in its utilization.
The opposite of pruning pricing is market penetration pricing, that is, determining a
relatively low price in order to speed up the pace during product testing. The ultimate
goal is to achieve a relatively high market share, as quickly as possible, in relation to
the competition, in order for the business to take advantage of the expected reduction
of the unit cost of production and distribution of the product.
This pricing strategy is appropriate when the opposite conditions prevail from those
which make pruning pricing look attractive. In particular, a low market penetration
price in recommended when the target market is especially sensitive to the product
price, that is, demand is found to be elastic. The possibility of a reduction in the
average cost due to the achievement of economies of scale and the outcomes of the
learning curve also strengthen its choice. Moreover, not adopting a low initial price
during the introduction of a product into the market is discouraged and will delay the
introduction of substitute products, due to the low expected profit margin and the
 Elements of the marketing mix (price) 79
dominant position in the market which the leader enjoys in the intense penetration in
the various target segments. Thus, penetration pricing in the market is perhaps the
ideal choice in markets where intense competition is noticed, that is, when the entry
barriers of potential substitute products in the market are low. The high collaborative
relations with strategic partners of the business now constitute a necessary condition
in the successful application of strategic pricing in order to secure a constant supply in
the market and, in general, the support of the distribution channels.
A successful long term business relation is characterized by interdependence, trust,
information exchange and the creation of high added-value relations. Meeting the
agreement terms is not based just on strict fines and sanctions but on the high level of
trust between the two parts. This is implemented by the way the profits are shared and
the information exchanged by the two parts, information which essentially support the
decision making in marketing and supply chain management. The goal therefore. is to
develop solutions that will be beneficial for both sides, that is, the success of the “win-
win” model. This interdependence leads to the obligation of the administration of
both companies to cooperate and invest in the improvement of the offered products
and services.
The disadvantages of penetration pricing include the potential disharmony in the
chosen placement strategy in the case of a high value/benefit product, as it is likely that
a low price will be perceived as an indication of low quality/value. A low initial price
also limits of increasing the price level in turn, since customer often do not easily
accept a potential price increase. Furthermore, the time period for the repayment of
the initial development and the product’s introduction to the market is elongated,
while the expected performance on the invested capital is lower than the pruning
pricing due to the lower profit margin.
The speed with which a business speeds up the pruning or penetration into the
market depends to a great degree on the promotion expenses. In other words, high
investments in product promotion are expected to contribute significantly to speedy
market pruning/penetration, since they react effectively in spreading information and
recognition of the product. Similar results are estimated for investments in the pro-
ducts and the strategic intensity of the distribution (Fahy & Jobber, 2014).
An intermediate pricing strategy for new products between the aforementioned two
points is introductory price dealing, which refers to temporary reductions for the fast
testing and acceptance of a product, followed by a rise in the predetermined levels, as
soon as this “promotional” action is completed (Perreault et al., 2012). In this case, the
business that determines an initial relative high price or a one that reflects the directly
relevant substitute products, which it announces to its final customers; for a limited
period of time, however, it offers the product at a clearly lower “get-to-know-me”
price, in the form of a discount. In this way, the business takes advantage of the
relatively fast penetration into the market without the risk of placing its product as a
relatively low quality/status one; the price may then rise over time without dis-
appointing its clientele.

2.6 Pricing strategies for product mix

Determining the final price also depends on the relative product mix that the business
offers in the market (Armstrong & Kotler, 2009; Perreault et al., 2012; Paniyirakis,
1999; Fahy & Jobber, 2014). In practical terms, it is very rare for a business to produce
80 Elements of the marketing mix (price)
just one product or even a very small number of products. More often, they develop a
series of related products (e.g. televisions, smartphones and juices, among others)
which aim to satisfy the different needs and desires of various market segments. So the
business must set a selling price for a series of products taking into account the
production cost, the perceived value and the competition for all relate products. If, for
example, it sets a very high price in relation to the perceived value for a product, this
may end up defaming all the products in the series. In the same way, setting a low price
may be perceived as the whole product series being of low value, even the more ex-
pensive items.
Furthermore, in the case where a business accepts intense pricing competition in its
main product, instead of entering into a price war, and/or lowering the cost and
quality of the product, it may add to its series a new product with similar char-
acteristics, but with a lower price (fighter brand) and achieve satisfying sales in both
products. One more critical issue in the pricing of a series of products is the avoidance
as much as possible of cannibalism between two products in the series. Therefore,
businesses must ignore both the customers’ and the competition’s perceptions, in order
to protect the existing products in a series, especially if this concerns high technology
products, because this may lead to a reduction in the business’s total sales. Most
important of all is achieving the pricing targets of the whole series and not just for
each individual product.
Product pricing also depends on the complementary or dependent products as in,
for example, shaving tools and blades, or printers and inks. Businesses usually set a
relatively low price for the main product, possibly even below cost, and charge high
prices for accessory/complementary products, which correspond to the larger part of
the overall revenues from this product series. Informing the consumer public well and
closer to time in comparison with the past contributes to the most balanced pricing of
main and accessory products.
Product pricing must also take into account any chance optional products or ser-
vices. Typical examples include cars, computers, company services/packages (e.g. for
accounting, purposes), etc. Car industries offer different versions of their various
models, but they offer a huge range of optional fittings at attractive prices. Sometimes
the pricing of the sub-products of a product is of interest, such as, olive pit powder
from the grinding of olive fruit. Olive presses are obliged to manage appropriately the
produced olive pit powder (sub-product) due to the relevant negative environmental
consequences. Thus, selling olive pit powder as a fuel has a double advantage, thereby
earning an additional income and removing it from the installations.
An important challenge for a business is pricing a product bundle, such as, a holiday
packet which is made up of flight tickets, hotel accommodation and sightseeing trips
(museums) or the combined services of a landline, internet and cable television which
telecommunications services offer. The final price of the total packet is lower than the
partial prices of the products/services and the company’s goal is mainly to promote
products/services that present relatively low demand but their marginal production
cost and availability is rather high.

2.7 Price-adjustment strategies

In many cases, businesses need to make changes to the basic price of their products in
order to adjust to the respective changes in the market, as well as the business strategy.
 Elements of the marketing mix (price) 81
Price adjustment may take many forms; some of the most important are described
later.

2.7.1 Discounts and subsidies

Achieving pricing goals often requires, periodically, the use of discounts and/or sub-
sidies in the intermediaries of the distribution channels (Armstrong & Kotler, 2009;
Perreault et al., 2012; Paniyirakis, 1999). The motive is often provided to wholesalers
or retailers to make prompt payments (e.g. within 30 days) of their orders, with a
monetary discount on the amount payable (e.g. 2%). Quantity discounts are also given
in the form of a reduced price when industrial clients buy a minimum large quantity.
Quantity discounts, while rather common, may cause significant problems in the de-
mand and offer flows in the supply chain. Thus, they must refer to quantities that are
bought within some large time period (preferably a year) and not per order.
Seasonal discounts try to smoothen the offer flow (production and availability) of
the product for the producer, stimulating the sales at periods when demand is limited,
encouraging industrial buyers to acquire the product earlier than needed. In this way,
producers compensate, among others, the intermediaries in the distribution channels
for the maintenance of stock for a longer time period than usual. With the commercial
or operational discounts, the producer via price reductions essentially pays the sta-
keholders in the distribution channels for executing some operations related to the
distribution of the product, such as transportation, stock maintenance and data
colleciton.
Subsidies are price reductions where the intermediaries in the distribution networks
support the availability of the product or the consumers are encouraged to buy the
product. Promotional subsidies are aimed at increasing the advertized amount that the
retailer will allocate for the promotion of the product or the purchase of a position on
the retailer’s shelf for the product. There are also commercial subsidies where the
producer provides a discount on the price in exchange for a used product from the
customer who buys a new product, for example, in a car purchase.

2.7.2 Pricing based on geographical position

The final price that each customer pays may be different in relaiton to distance
(Armstrong & Kotler, 2009; Perreault et al., 2012; Paniyirakis, 1999; Siomkos, 2004).
This is true especially in industrial zones, but it also influences consumer markets since
price differences between regions or countries are often ascribed to the different
transportation costs. A typical example is the prices of many products (e.g. petrol,
fruit and vegetables, among others) that the residents of Greek islands pay in relation
to those who live in mainland regions.
The businesses can use different choices to cover transportation costs. One way is to
sell the product at a stable/fixed price in the storage area of the business so that any
transportation costs is incurred by each individual, that is, free on board (FOB) pri-
cing. Customers who are geographically close to the business consider this kind of
pricing as fair, sometimes as a result of their conscious choice in the design of their
supply chain, but it makes things more difficult in terms of sales to distant customers.
On the other side of the scale is the setting of a single/unified price for all customers,
a fact which means that the business essentially charges the same transportation cost
82 Elements of the marketing mix (price)
for all customers, regardless of the relevant distance. Customers who geographically
far from the business benefit from such a case, while those who are closer to the
business incur damages. Thus, the business is at risk of losing a significant share of its
competitive advantage, especially if there are strong competitors in the wider region.
This kind of pricing also deviates heavily from the foundations of activity-based
costing (ABC) pricing that is widely used in supply chain management. It is, however,
often used in practice when the unit transportation cost is relatively low and when the
business chooses to sell its product everywhere, that is, all geographical regions,
especially when it advertises it at a specific price on a national level.
A middle choice is that of zonal pricing. The business divides the market into
geographical zones and sets one price for each zone, essentially charging an average
transportation cost for all customers living within each zone. An advantage of this
method is the simplification of the pricing processes and of course the facilitation of
executing other processes. Another choice for the company is to absorb the price of
the transportation costs, which is used when a business greatly wishes to secure a
transaction with a specific customer or to penetrate a new market segment.
In general, decisions concerning geographical position influence many processes and
various sectors (Marketing, Human Resources, Logistics and Finance, etc.). Many
factors are influenced by the geographical choice; at the same time, the position of the
installations, that is, deciding on the place of one or more new installations in one or
more potential positions is one of the most important decisions that a business will
take, for the following reasons:

• Decisions concerning geographical position require through careful analysis of a

large number of criteria or success factors.
• The geographical position has an impact on fixed and variable costs.
• The decision to choose the geographical position is a strategic one:
• Therefore, it is a long-term decision.
• Once a business is bound by a geographical position, any change in this
decision will lead to an increase in cost, time and required resources.
• Determining the best geographical position of a business’s installations is a good
investment.

2.7.3 Dynamic pricing

Traditionally, businesses prefer to maintain a relatively stable price for their products
for as long as possible, facilitating the scheduling of the overall operation and the
partial activities. But the major changes arising from technological developments in
the competitive business environment, especially with the use of computers and the
internet, have contributed to the change from fixed to dynamic pricing. Dynamic
pricing is the constant adjusting of price with the aim of adapt them to current con-
ditions in terms of customer preferences and the situation prevailing among the
competition (Armstrong & Kotler, 2009; Fahy & Jobber, 2014).
A typical example of dynamic pricing is electronic auctions and online companies
that offer the customer the option of making their purchases by comparing products
directly from a number of sellers, for example, bestprice.gr and skroutz.gr.
 Elements of the marketing mix (price) 83
2.7.4 Yield or revenue management
Yield management (revenue management) is a common pricing method these days
which is used in various markets such as airline tickets, hotels, etc. (Talluri & Van
Ryzin, 2004; Slack et al., 2010; Chopra & Meindl, 2015). The ultimate goal of yield
management is the maximum utilization of the productive dynamics of a business
whrn the following conditions are running concurrently:

• The productive potential is relatively stable, that is, change is difficult, and it
comes at a very high cost.
• The value of a product varies in different market sectors and it is relatively easy to
segement the market based on perceived value.
• The product – usually a service – cannot be stores for use in the future, so some
utilization of the productive ability means the final absolute of the potentially
produced units of the product/service that were not sold on time. The same applies
in the case where the cost of maintaining stock is especially high.
• The product/service can be sold in advance, that is, before it is to be used by the
customer.
• The marginal cost due to the sale of an additional product/service unit is relatively
low, that is, the contribution of the average variable cost on the total cost is
relatively small.

This method is very common among businesses that use information and commu-
nication technologies intensively, so that they can communicate directly at any mo-
ment with their (existing or potential) customers. But the main requirement in the
application of yield pricing is the development and constant improvement of colla-
borative relations in the frame of supply chain management, especially in purchases
of, for example, electronic goods, where the optimal coordination of the main sta-
keholders is needed (suppliers, producers, wholesalers and retailers). The management
of yield revenues utilizes various techniques, such as:

• Lower prices for those who can wait longer to get their order, and higher prices
for those who want to fast-track their order.
• Lower prices for strategic customers, that is, for those who have drawn up long-
term agreements and have close collaborations, and higher prices for those
customers who choose individual transactions, and hunt a good opportunity to
secure a lower price at a specific time period.
• Higher prices during periods of high demand and lower prices when demand is reduced.
• Higher prices for customers that need a higher level of services, as in the case of,
for example, business people who may need to plan a last minute flight and want a
comfortable seat, and lower prices for customers who need fewer services, like, for
example, young students who may wish to plan a trip 2–3 months earlier and are
prepared to sit in a less comfortable seat as long as they can buy a cheaper ticket.

2.7.5 Promotion pricing

In some cases, businesses resort to temporary pricing for products at especially low
levels, even below the average total cost (Armstrong & Kotler, 2009; Perreault et al.,
84 Elements of the marketing mix (price)
2012). As previously mentioned, “barking” pricing is basically a regular practice in large
supermarket chains: some products are sold at very attractive prices with the ultimate
aim being to motivate consumers to visit their stores to buy them, at the same time as
doing their weekly shopping. These products are periodically changed on a weekly basis.
Similarly, “bait pricing” constitutes a significant reduction in the price of a number
of products with the aim of attracting customers to the store. But the business doesn’t
actually aim to sell those products; when customers come to the shop, the sales as-
sistants try to convince them to buy a similar but more expensive product. Bait pricing
has received much criticism; due to consumers being better informed, it tends to be
used less frequently.
Pricing in special cases is applied in certain regions to smoothen demand. For ex-
ample, in the UK, throughout January, pubs offer drinks and meals at very low prices
to stimulate demand after a highly intensive sales period before and after the
Christmas period. Another commonly used form of pricing is to return money in the
form of a coupon for future purchases within a set period of time, for example,
purchases of clothing and electronic goods, etc. Some producers, for example, car
manufacturers, offer interest rate financing for the purchase of their products or
guarantees for a significant period of the product’s life (e.g. 7–8 years for mechanical
parts). Another form of promotional pricing is coupons offered by producers and
retailers which give customers a discount or free packaging of the product. Coupons
provided by the producers are redeemed at the retailers’ cashiers, while retailers also
received an additional monetary advantage, apart from increased sales.

2.8 Price-change strategies

Aside from price adjustments, at some point in products’ life cycle, businesses must
decide if and when they will take the initiative to change the initial price level of their
products, as well as the way they will react to competitors’ price changes.

2.8.1 Change in the basic price level

Decisions in the change of the initial price are taken by bearing in mind the potential
motives of the business, as well as the potential reactions of the customers and
competitors (Armstrong & Kotler, 2009; 2017; Fahy & Jobber, 2014).
There are many reasons that urge a business to increase the basic price of its pro-
duct. A very important factor is the increase in the production and distribution cost of
the product, so the business will try to move part or all of the overall additional cost
onto its customers. Another important reason is the realization that the customers of a
business perceive a higher value of the product from that which the company had
initially estimated. In other cases, the business or the overall sector it is active in faces
greater demand than its productive capacity, so a price irse will contribute to balan-
cing supply with demand. In each case, the temptation will always be there to increase
the price by a little, since it will lead to a disproportionately high increase in the total
revenues if all the other profit parameters do not change. For example, in a business
which operates in a market with an average profit of 10%, a price increase of 2% – 3%
will lead to an increase in the profit margin by 20% – 30%.
A price increase may be implemented in different ways. One way which will possibly
cause the fewest reactions from customers and competitors is the reduction in the
 Elements of the marketing mix (price) 85
regular discounts offered either as a percentage of the basic price or by increasing the
order quantity in order to secure the discount. Another way is by dividing the overall
product offer into smaller parts. For example, while until recently a car model included
different elements from its basic version, a part of those elements that make up the
package may be treated as optional, to be sold at additional cost to those customers who
would like it to have it. The business also has to decide if it will implement a price
increase in on or more stages. Generally speaking, a sudden increase in price may cause
greater annoyance among customers, but a gradual increase may also disappoint cus-
tomers even more, due to the constant adjustments that they will have ot make in their
buying behaviour. Regardless of the number of stages that are chosen, it is more im-
portant for a business to accompany the price increase with a more careful commu-
nication campaign to convince customers with the relative need for this increase.
A business may similarly take the initiative to reduce the price for various reasons.
Pursuing the future use of the results of economies of scales and learning curves leads
many businesses to price reductions, even at levels near or just a little lower than the
existing average cost. At the same time, the businesses hopes to gain a greater market
share that will improve or further consolidate its competitive position. In some cases, a
price reduction is a necessity when the business realizes it has overestimated the
perceived value of its product by customers and it believes that it can improve its
position through the remaining elements of the marketing mix. Applying foundation
principles in supply chain management with strategic partners can contribute cata-
lytically to reducing the average total cost of production and supply, so the business
can choose to share with its final customer’s part of the additional added value.
Moreover, ra price reduction and the subsequent shrinking of profit margins function
as a deterrent in the entry of new competitors into the market.
The business can implement the price it finally decides on at one or more stages. A
sudden price reduction may have direct positive results in the increase of sales and market
share, but it may also cause profitability to shrink due to the reduction of the profit
margin. A sudden price reduction may also cause more direct and dynamic reactions
from the competition. A gradual reduction in the price has the advantage of allowing the
business to better study the reactions of customers and to gain more knowledge about the
demand elasticity in terms of price. But the impact of a price reduction in the achieve-
ment of goals will clearly be more limited and possibly provide the chance for competitors
to prepare themselves better in how they react to it. The business can also essentially
reduce the basic price indirectly through the establishment of permanent greater discounts
on the basic price or through the creation of new offer packages which are embedded in
accompanying services for the basic product at exclusively low prices.
The final decisions in a price increase or reduction as well as the most appropriate
way to implement the change in price all depend to a great extent on the expected
reactions of both the customers and the competitors. For example, in some cases, a
price reduction could be perceived with skepticism by the final customers. The may
think that this reduces the product quality or that the business faces economic diffi-
culties, so there is the danger of not being in the position to support the products it
sells today in the future (Kotler, 2000), etc. The price reduction then has the exact
opposite results with reference to customers’ reactions. In practice, it is also very
difficult for the business to foresee the potential reactions of its competitors. This
difficulty becomes even greater when the competitors behave in different ways;
different analyses will have to be for each important competitor.
86 Elements of the marketing mix (price)
2.8.2 Reactions to changes in competitors’ prices
At some stage in the life cycle of their products, businesses are faced with the challenge
of a price change in some competitive products (Armstrong & Kotler, 2009; 2017;
Fahy & Jobber, 2014). The first decision that must be taken is whether they will follow
the competitor(s) in changing prices, or if it is better to ignore it. Practically speaking,
the reasons that probably force a business to react to competitors’ price changes are
the opposite of those businesses that are reluctant to reset their prices. If they believe
that they must respond with a price change, then they must decide on the most ap-
propriate alternative.
If the main or some important competitor increases the price of their product, the
business is obliged to increase its own price when there is a general increase in the
production and supply in the market it is active in. An example of this is when
electricity prices are readjusted, when workers’ salaries are increased or a new tax is
imposed, etc. It will also move in the same direction if it tries to place the product as
one of high value or an extremely high demand for the product emerges that cannot be
covered by the supply, at least in the mid-term, as in the market for new housing. Once
the decision is made to keep up with the competition and make price increases, it must
then set a new price level, as well as apply the application speed of the new pricing
policy. In general terms, reacting quickly has the advantage of a relatively direct
harvest of the extra revenue, whereas a more delayed anti-reaction may be perceived
by customers as a goodwill move by the business to further strengthen the long term
cooperation between them.
The challenges for a business are much greater when competitors reduce their prices.
Before a company takes any decision, it must search for the motives that caused their
competitor to reduce prices, particularly to estimate whether this move is permanent or
temporary. The forecasts it makes in terms of the reactions of its client base play a very
important role, in the case where the business does not make any move to change the
price; it also needs to consider whether there is a change of starting a price war with the
competitor if it responds in a similar way, that is, with a price reduction. Generally
speaking, the business must react when the average total cost of the production and
supply of a product shows decreasing tendencies, for example, due to the introduction
of new technology. Furthermore, if the business considers that its customers are not
particularly loyal and the market is generally sensitive to price, perceiving small or
elastic differences between substitute products, then the business may not be able to
remain unresponsive to the competitor’s initiative to make price changes).
If the company decides that it must react to the lower price set by the competitor,
the company’s choices are limited not just in matching its product price to the new
levels that have been shaped by the market. Another choice is to maintain the price at
the same levels and simultaneously invest more in marketing communication activities
to improve the placement of the product as one of higher quality against its sub-
stitutes. This choice will take precedence if they expected profit losses from the re-
duction of prices is greater than the extra marketing communication expenses.
Moreover, the company may utilize the initiative of the competitor to reduce prices in
order to increase the quality of its product, even proceeding to price increase. This
choice becomes attractive when there emerges an opportunity for significant differ-
entiation in the company’s offer, covering a new gap which was created by the
movements of competitors’ products in the perceptual map of the buyers. Some
 Elements of the marketing mix (price) 87
business successfully faced the challenge of competitors’ price reductions by in-
troducing a similar product into the market with a lower cost (fighter brand), main-
taining or even increasing the price of the original existing product. In this way, the
business aims at two different market sectors: the dedicated customers who believe in
the value-quality of the original product, and those who are sensitive to price, thereby
increasing the total market share.

2.9 Pricing of logistics services

Pricing is a branch of the science of accounting. Cost is the disposal of or investment
in purchasing power for the acquisition of tangible or intangible goods and services,
for the purpose of using them to generate sales revenues or meet community needs.
The main features of cost are that it is an investment of money in the form of tangible
goods or services (e.g. purchase of fixed or raw materials, payment of premiums, in-
terest), and the purpose of cost is to generate revenue.
Pricing is the process followed to determine the cost of a good or an operation. The
purpose of knowledge of cost is to set selling prices, and control sales and financial
activities. Pricing can also be defined as the set of systematic tasks aimed at collecting,
classifying, recording and appropriately allocating costs to determine the cost of
producing a product or service.
Real cost categories are as follows:

• Prime cost: This cost is formed from the direct use of materials and labor, which
are incorporated into the product or service.
• Initial cost: This cost is often used as a criterion for the allocation of indirect costs,
and is core to the formation of the full production cost. This does not include
information resulting from a breakdown. If, however, the distribution of expenses
is based on direct quantitative measurements, the corresponding cost is considered
to be direct and participates in the formation of the initial cost (e.g. monthly staff
costs). As a rule, direct materials are the raw and auxiliary materials incorporated
into the product. Materials that are used in the product’s manufacture but are not
incorporated into the actual product are not included in the direct materials.
• Conversion cost. This is the total smooth costs incurred in the process of
converting the raw material into a finished product or converting a material
into another form. Conversion costs include all production costs, direct and
indirect, except for the cost of direct materials.
• Production cost. This is the cost incurred for the production of an intermediate or
final product or service in one or more phases or stages of production.
• Administrative operating costs. These expenses are related to the operation of the
administrative services of the economic/financial unit.
• Cost of disposal (Sales costs). These are the expenses incurred for the promotion,
preparation and realization of the actual sales of the business’s products or
services (e.g. market research, conferences, travel, salesperson’s salary).
• Commercial costs. This is the cost when the indirect costs of the sales function
(operation) are added to the production cost.
• Cost of the financial operation.
• Operating costs for research and development.
• Total cost.
88 Elements of the marketing mix (price)
Service companies offer services either to other companies or to non-professionals.
Apart from direct labor, these services are also related to indirect labor and various
expenses. Classification of this kind of business is done in different ways, depending on
the type of analysis required each time. Because products are not manufactured in the
case of services, such businesses have no raw material costs. The most important costs
in such a business are direct labor and indirect costs which are mainly classified as
service costs.
Monitoring and controlling supply and distribution activities is often approached in
a relatively simple and unplanned way. Control measures are adopted, as problems
will have arisen already; this almost constitutes a form of crisis management.
Therefore, it is important to adopt a more formal approach. Several systematic ap-
proaches have been developed with varying degrees of complexity and detail. These
different approaches also have very obvious similarities between them.
Especially in the case of logistics services, the main issue is, on the one hand, the
minimization of total costs, in combination with a specific and acceptable level of
customer service on the other. The integrated Supply Chain (SC) approach helps in the
investigation of the whole system of positive and negative interdependencies between
individual processes and business activities, together with the expected benefits of the
individual processes and the business as a whole. A series of preliminary market
analysis, research and negotiation studies are therefore needed, with the aim of coming
to the final agreements.
Malindretos (2015) states the following:

• Logistics pricing is closely linked to the processes of creating value for customers
and profitability for the business. This implies linking costs to expected revenues,
which are generated by the former. It means that all expenses are recognized, and
this is not based on their existing administrative structure: each and every expense
must now be justified on the basis of its contribution to the expected profitability
of the business.
• A prerequisite for pricing is the analysis of the alternatives of each operation in
the SC, for example, in the planning of the transportation problem, if it is in the
interests of the business to carry out transportation requirements on its own or by
outsourcing.
• Pricing includes estimating the trade-offs between different SC components, for
example, a reduction of storage centers that implies a reduction of storage costs,
as well as an increase in distribution costs from warehouses to points of sale, and
the provision of a lower level of customer service.

The importance of pricing lies in the following:

• Classification of costs. Costing includes the recording and classification of

expenses. This classification allows management to control costs and ensure the
efficiency of such processes and activities. It also helps in calculating effectiveness.
• Cost control. In a similar fashion, analyzing labor costs can improve their
efficiency. Costing also helps to classify overheads as fixed, variable, controllable
or uncontrollable, in order to achieve cost control.
• Price determination. Costing makes the basic distinction between fixed and
variable costs. This is then used by management to determine product prices,
 Elements of the marketing mix (price) 89
depending on the cost of the product. It allows the management to find the most
ideal price for a product or service, which is not too high and not too low.
• Setting standards. Businesses use standards to calculate future estimates and
budgets. They use them as a basis for measuring the actual effectiveness of the
process or department.

Balanced scorecard
The Balanced Scorecard system was first introduced by Kaplan and Norton in 1996. It
is a broad business approach that translates a company’s strategic mission into tan-
gible goals and measures. These can be scaled up and down the business in order to
develop realistic and useful key performance indicators (KPIs) to support the business.
These should represent a balance between external measures for shareholders and
customers, as well as internal measures for critical business procedures, innovation
and learning. Budget perspectives concern relationships with shareholders, aiming to
improve profits and achieve financial goals. Customer perspectives are designed to
strengthen relationships with customers by using better procedures to retain existing
customers and attract new ones.
The internal element is the development of new ideas to improve and enhance
business competitiveness. Innovation and learning must help generate new ideas and
respond to customers’ needs and developments. A number of critical success factors
are identified and directly related to key business prospects. These are then used as a
basis for generating critical cost and performance metrics that should be used reg-
ularly to monitor and control business performance in all the key areas identified.
A balanced scorecard is a tool that comes from the principles of the original
Malcolm Baldrige Quality Award Criteria, stating that effective leaders take a ba-
lanced look at an organization’s overall results of a company’s performance, instead
of relying too heavily on financial measures, which provide a historical view of a
company’s performance. Therefore, the basis of this tool is that business results are
integrated, and management should not view a measure on its own without con-
sidering the relationship with regard to other results. A balanced scorecard looks at
four different aspects of a business: finances, the customer, internal business proce-
dures and learning and development (Myerson, 2012).

The SCOR model

The Supply Chain Operations Reference (SCOR) model is an important approach
that was developed to help monitor cost and performance. It is a hierarchical model
consisting of four different levels: competitive advantage, strategy implementation and
the definition process, the finer details of the process and its implementation. It is a
process-oriented approach, where the initial goal is to compare, review and improve
key business processes and then to identify and introduce key measures that track the
cost and performance targets that have been set. Finally, a company’s important
performance characteristics are identified, and the appropriate metrics are developed.
SCOR metrics are usually arranged under a series of classifications. There are many
different individual measures that fall into different categories, the main ones being:

• Assets (utilization of capacity, availability of equipment).

90 Elements of the marketing mix (price)
• Cost (storage, invoicing).
• Data (projection accuracy, visibility).
• Flexibility (series, returns).
• Stock-taking (availability, depreciation).
• Commands (accuracy of execution, invoice errors).
• Productivity (direct versus indirect labor, sub-contraction of vehicles).
• Time (order cycle time, promptness of delivery).

A comprehensive approach to the supply chain recognizes that a total systems ap-
proach for the entire business or supply chain can be adopted, and all performance
metrics should be developed on this basis. This is in turn a process-oriented approach
that seeks to allow the monitoring of cost and performance, based on a horizontal
view of a business rather than the traditional vertical operational structure. This kind
of framework can initially be used to help identify the required results to be measured,
and then to determine any relevant diagnostic measures. Appropriate and accurate
diagnostic measures are necessary to enable the identification and subsequent cor-
rection of the problems.

Activity-based costing
The driving force behind Activity-Based Costing (ABC) is that the traditional way of
allocating indirect costs by their use in products based on direct labor makes them
difficult to manage. Direct labor once played a significant role in the cost of a product,
but this is rarely the case today (Harrisson, 2008). The goal of ABC is the most ef-
fective control and management of a company’s total costs using modern techniques
and methodologies. The most rational pricing of products, customers and services
becomes possible through the correct control of the monitoring and allocatio of total
business costs. The full application of ABC techniques provides the necessary in-
formation to the company’s management regarding the profitability (profit/loss: P/L)
of both products and customers, as well as the individual processes that take place.
ABC methodology dates back to the early 1990s, initially at the research level, and
is now considered globally as the most reliable and effective way to estimate costs and
manage processes in any business, thereby supporting informed decision-making. The
ABC system is recognized as the most state-of-the-art cost control technique, finding
application in a wide range of activities and businesses worldwide. The research data
can supply a company’s new information system with the necessary input data, with
the aim of exporting and optimally utilizing the respective results for cost control.
The goal here is to maximize the company’s profitability, in both the short and long
term. The ABC method is concerned with the calculation and control of the cost of the
activities that take place in each company, using them to estimate the allocation of
costs in products and customers (cost objects). It relates exclusively to overheads,
while direct costs are calculated and assigned using traditional methods.
The systematic and most rational monitoring and control of the various cost ele-
ments that the company absorbs during its operation belong to the goals of an ABC
task. With the completion of the study, it is possible to provide the required in-
formation to the management so that it can take restructuring decisions in order to
increase a company’s profitability and turn it into a more efficient operation.
 Elements of the marketing mix (price) 91
The advantages of the ABC method are as follows:

• More accurate and more rational calculation of the cost of product in relation to
conventional systems.
• Better understanding of the activities related to the business and the function of
these costs.
• Better and more efficient control, focusing on reducing overheads by linking them
to cost-generating activities.
• Estimation of each activity’s cost in order to take the most effective corrective
measures (re-engineering) by estimating the expected profit. This makes it easy to
calculate the effects, both positive and negative, of a given intervention, thus
supporting what-if type analyses, which is desirable for the management when
making decisions.
• Comparison of the performance of each activity with the highest corresponding
sector performances, through benchmarking.
• Redesigning the entire product-customer cycle.
• Making decisions using evidence regarding the allocation of part of the activities
to third parties (outsourcing), in cases where it will bring in profits (e.g. storage
needs taken care of by partners).
• Detailed P/L calculation at both the product and customer levels, by analyzing its
components (drill down).
• Better pricing, including a discount policy, in order to gain a competitive
advantage, as well as parallel knowledge of the respective cost-benefit rela-
tionship.
• More efficient collaboration between business departments, as well as the
company’s accounting department.

For all the aforementioned reasons, implementing an ABC system provides an es-
sential tool for the company’s management, to control and reduce costs and also to
make sound business decisions.
There are several different kinds of pricing or billing structures that can be adopted.
The final choice belongs to the privilege of the customer. These different kinds of
pricing or billing structures can be broadly categorized as follows (Rushton, 2010):

• Unit prices or fixed price agreements. An agreed unit price is paid for the services
provided. This is generally the sum of all the operating expenses (including
overheads, facilities and expenses).
• Services offered. The advantages of this approach are that it is easy to understand,
flexible and visible (the price charged varies depending on the volume handled).
This is the traditional payment method for third parties and is commonly applied
in low-volume businesses.
• Agreements on hybrid unit prices. These are based on unit price, but also include
guarantees for a set volume, resource usage, etc. This ensures that seasonal effects
or unexpected fluctuations in demand will not penalize the contracted party,
which would otherwise result in the inadequacy of the contractor’s resources. This
approach allows the unit price to be reduced by degrees as traffic increases.
• Cost-benefit agreements. These make provision for the payment of an agreed sum
for the facilities used and the services provided. In this way, the customer meets
92 Elements of the marketing mix (price)
the real cost of the operation. For the contracted party, this adds a fixed profit
margin, which may be in the form of a lump sum or a percentage of the costs. An
important advantage of this approach is that the costs are visible to the client
company, thereby facilitating the internal budget.
• A significant criticism in the cost-plus method is that it does not offer any
incentive to the contractor to enhance operations through improvements in
productivity. Indeed, any cost cut would lead to a reduction in payments to the
contracted party if the profit regime was based on a percentage of the costs.
• Open contract/management fee. As it suggests, in an open-book contract, the
client company pays for the entire transaction, plus a management fee to the
contractor.
• This kind of setting is commonly used in fully dedicated operations. Performance
is monitored by a budget agreed between the contractor and the customer. The
risk in this kind of setting is that it can synthesize any chance inefficiencies that
are incorporated in the original agreement. It is now common to include incentive
clauses to reduce costs or performance, so that there is a joint benefit when the
contractor identifies improvements.

Benchmarking
Benchmarking is the process of continuously measuring and comparing the business
performance of an economic unit with comparable processes in leading organizations
to obtain information that will help the organization to identify and implement im-
provements. There are many steps involved in benchmarking. These start with an
organization that recognizes the need to improve its supply chain.
It must then determine the most appropriate performance measures, identify the
industry’s top competitor and examine its supply chain to see how this superior
performance is achieved. Internal benchmarking is the easiest to perform, where one
department of a company compares its activities with another department. However,
managers should keep an open mind and look for potential improvements whenever
and wherever they find the opportunity (Waters, 2003).
3 Marketing mix elements: (P)romotion:
Delimitation and integrative approach
with SCM

Introduction
The present chapter describes the interaction between businesses/organizations and
their supply chains, in relation to decisions concerning Integrated Marketing
Communications (IMC). These decisions play a major role in the integration of the
supply chain, especially concerning direct effective two-way communication with
customers, with the ultimate aim of contributing, maintaining and increasing the
business’s competitive edge. In the business environment, radical changes are con-
stantly being observed, which create new opportunities as well as threats for businesses
and their supply chains, in connection with the development of effective IMC plans
and the determination of the mix of the activities and techniques used in IMC.

Learning goals
After reading this chapter, you will be able to answer the following questions:

• Why is the rapport with strategic partners in the supply chain necessary for the
companies to plan and implement the appropriate Integrated Marketing
Communications strategies?
• What are some of the most important factors that are constantly changing the
environment of Integrated Marketing Communications?
• What are the stages for the development of effective Integrated Marketing
Communications plans?
• What are the basic features of the main activities of the Integrated Marketing
Communications mix?

Structure
3.1 Integrated Marketing Communications within the supply chain context
3.2 Introduction to Integrated Marketing Communications
3.3 Integrated Marketing Communications within a constantly changing environment
3.4 The communication process
3.5 Development of effective plans for Integrated Marketing Communications
3.6 Setting out the overall Integrated Marketing Communications mix
3.7 Product packaging for promotion

DOI: 10.4324/9780429684883-3
94 (P)romotion
3.1 Integrated Marketing Communications within the supply chain
context
Decisions related to the Integrated Marketing Communications (IMC) of a business
should be made in collaboration with the main strategic partners in the supply chain.
The customers of a company get messages not just from the business that makes the
product but also from other actors involved in the product’s supply chain. Take, for
example, a business that produces a cosmetics product of high value/status, according
to its placement strategy. No matter how much time/money the business invests in
communicating the high value of the product to the final customers, the promotional
efforts of the business will have meagre outcomes if some retailers placed the product
on the shelf together with similar cheaper cosmetics and not with the other expensive
ones. Similarly, the product manufacturer will be disappointed by the effectiveness of
the promotional campaign for this product if the retailers’ sales assistants are not
appropriately trained/informed/motivated to effectively inform and persuade con-
sumers about the high quality of an expensive cosmetics product.
Likewise, joint planning and coordination should exist among the strategic partners
of the supply chain in relation to promotional activities, for both producers’ actions and
other members; initiatives. The producer may for example wish to offer the product
with a large discount (e.g. 40%) on the retail price to increase the number of potential
customers who will try it, or to smooth out expected variations in demand. Without the
corresponding support from distribution networks for temporary periods of increased
product demand, it’s very likely that a significant number of potential customers will be
disappointed when they see empty shelves when a special offer is still valid. In such
cases, the losses by the producer company may outweigh any of the benefits it may have
gained by offering the discount. A similar disappointment may realize some collabor-
ating retailers who, not knowing the producer’s motives, may order the regular supplies
of substitute products, which may be kept in the warehouse for a longer time period
than expected. High levels of cooperation and coordination between strategic partners
of the supply chain are also required when implementing predatory pricing, which is
systematically applied by large retail chains as a promotional tool. As previously
analyzed in Chapter 2, predatory pricing will provoke a temporary increase in the
demand of certain products; hence, the basic premise in its successful application is the
coordinated actions among all the members of the supply chain.
Close cooperation between the producer and other businesses in the supply chain is
vital in order to successfully implement the pre-announcement of high technology pro-
ducts (Siomkos et al., 2018). Collaborating retail chains play a significant role in pro-
moting pre-announcements for products of collaborating businesses, for example
through their websites or by sending emails to their customers. Moreover, strategic
partners and distribution channels make large contributions in the evaluation process,
and by extension, in the improvement of prototypes and alpha/beta test editions. This is
achieved by integrating the preferred improvements of the strategic partners and final
customers, as well as by the constant flow of information relating to customers’ reactions.

3.2 Introduction to Integrated Marketing Communications

Traditionally, business communications used promotional elements from the mar-
keting mix. In large companies, different departments were tasked with promoting the
 (P)romotion 95
business through advertising, public relations, sales, etc., which often operated in-
dependently of each other. For some time now however, the prevailing opinion is that
business communications require coordination with different stakeholders; interest
toward this direction has therefore moved to IMC.
The promotional mix, and hence IMC, comprises the combination of the tools and
techniques included in the promotional activities, including advertising, public rela-
tions, personal sales, sales promotions, direct marketing, digital marketing and other
modern promotion forms that aim to communicate the value of a company’s pro-
ducts/services and create long-term collaborative relations with customers. As each
one of the various stakeholders receives or elicits different messages about the overall
product placement strategy from the remaining elements, i.e. the product, its pricing
and distribution, IMC tries to integrate the promotional mix, blending in those
messages. For example, customers would be getting contrasting messages if an ex-
pensive cosmetics product had cheap packaging or was being promoted by regularly
timed large discounts on the full price (e.g. up to 50%). Indeed, due to the vast con-
tribution of services in virtually all the value offers of a business, systematic in-
tegration is also required in decisions concerning the three basic elements involved in
services, i.e. people, processes and the physical environment.
A synopsis of the most important activities of the IMC mix can be summarized as
follows (Armstrong & Kotler, 2017; Perreault et al., 2012; Fahy & Jobber, 2014, 2016;
Belch & Belch, 2016; Belch et al., 2020; Shimp & Andrews, 2013):

• Advertising: This refers to every paid impersonal message from a recognized

source, usually the business that produces or distributes the product. It is paid for
because advertisers must pay the mass media to broadcast their messages. The
message is impersonal since it is not possible to get direct feedback from the
message recipient. A basic advantage of this is that the business conveys the
message it chooses to send and the way it desires to do this to a wider audience.
This form of communication is chosen when the business needs to use mass media
because of the relatively low cost per message recipient (€/TV programme
watcher, etc.). The people that the message will potentially reach depends on
the medium chosen, such as the specific TV channel, radio station, etc.
Advertising via information and the creation of positive perceptions can play a
significant role in placing a branded product and the business that makes it in the
desired position in the target group’s perceptual map.
• Public relations – Publicity – Sponsorship: Communication activities try to create
and maintain a mutual understanding between the business and the target
audience they are building a relationship with. Public relations control and
manage the public image of the business or the organization in general terms.
There are different theories concerning the relationship between public relations
and marketing, since public relations are more often used by businesses to
communicate with various stakeholders who are not directly concerned with the
marketing goals of the business. Publicity is a public relations tool concerning
each non-paid impersonal business message, e.g. an interview or presentation, on
a TV program or in a newspaper. The main advantage of publicity is the perceived
increased reliability of the sources used to broadcast the message, e.g. the
journalist/writer of a magazine or website, in comparison with the trust conveyed
by an ad that is paid for by the business. Sponsorship tries to connect the business
96 (P)romotion
or product with an event (e.g. the Olympic Games) or another organization in
order to improve its corporate image or branded product.
• Personal sales: Sometimes, personal (spoken) communication between the sales-
person and the existing or potential customer is the most effective form of
communication between the business and the customer, since it allows for direct,
simultaneous, two-way communication, It is adjusted to the needs and require-
ments of each customer. It is most often in industrial markets. It often accounts
for the largest share of the total budget of a business’s communications expenses,
since each personal contact of the salesperson with the customer costs anything
between tens to hundreds of euros.
• Sales promotions: It is important to provide incentives to potential customers and
intermediaries in the distribution networks, with the main aim of directly
provoking interest among them to try or buy the product. The main advantage
of promotional activities, such as coupons, sample products, gifts, etc., is that they
have a direct and measurable result. Even though their aims are often directed
toward the short-term horizon, their results can contribute to the achievement of
long-term goals, e.g. a rapid increase in the number of people trying the product.
• Direct marketing: This involves directly communicating with prospective customers,
with the ultimate aim of achieving some kind of intended reaction to or sale of the
product. Initially, direct marketing mainly involved sending mail-order catalogues
illustrating the company’s products to selected potential customers. Today, where the
grand majority of potential customers uses some kind of electronic device (computer,
smartphone, tablet) connected to the internet on a daily basis, direct marketing takes
various forms. For example, instant online advertising tries to facilitate the
immediate purchase of the product directly from the producer. Potential customers
can be informed in detail via the internet about products that potentially interest
them, and they can complete all the steps needed for the purchase process, paying by
credit/debit cards. Some businesses use direct marketing exclusively to sell their
customers products, even by using independent partners, as in the case of the health
and beauty products company LR Health & Beauty Systems.
• Digital/Electronic marketing: The internet has shaped a very different business
environment compared to how things worked in the past, with consequences for the
way marketing, and therefore in marketing communications, function. Its main
feature is the interactive media it utilizes, achieving direct, two-way communication
at a very low cost between the business and the customers. Since virtually all people
of all ages, even seniors, use the internet on a daily basis, very few companies exist
that will not use the marketing tools offered to them by digital marketing. Digital
marketing is used in the entire spectrum of IMC, utilizing the internet for ads,
promotional activities and direct marketing, even facilitating personal sales to a
great degree. Furthermore, it can provide the possibility for the personalized
regulation of product prices for each customer separately, based on the customer’s
purchase behavior and their cooperation and communication with the business.

3.3 Integrated Marketing Communications within a constantly changing

environment
Traditionally, the marketing communications of a business were based on the appro-
priate application of communication via the mass media, which fully supported the
 (P)romotion 97
mass marketing of standardized products. However, during the last two decades, cat-
aclysmic changes in the business environment have taken place, due mainly to the
technological innovations deriving from Information and Communications Technology
(ICT) (Armstrong & Kotler, 2017; Fahy & Jobber, 2016; Belch & Belch, 2016; Belch
et al., 2020; Shimp & Andrews, 2013).
Consumers are better informed in relation to the past, increasingly utilizing the
many user-friendly methods available to them to get information and communicate
with others. In essence, the information asymmetry that was common in the past, and
always to the customer’s detriment, has been reduced to a great extent, and in certain
cases, it has almost been eliminated. The customer is more often the party that starts
the communication process, as s/he searches for information about the product in-
terests them, directly from the producer, and even from third parties who may be
existing customers or people who have good knowledge of the market and competi-
tors’ products. The grand majority of consumers and virtually all industrial customers
use the internet intensively on a daily basis to seek information about products that
interest them, completing their purchases digitally to a great extent.
New ICT methods allow businesses to communicate directly in a personalized way
with their customers with new, better targeted, personal, and very effective commu-
nication tools. At the same time, these new methods allow them to collect, process and
utilize – directly and whenever they deem useful – many interesting details for each
separate customer, such as their purchase behavior and the information they search
for on the company’s websites. As a result, the central weight of IMC has shifted from
mass marketing to segmented marketing. Marketing communications and promo-
tional programmes are now being designed and implemented for a plethora of discreet
micro-segments of the market. For example, most businesses use email to send ad-
justed advertising messages and information, even on a daily basis, directly to their
customers about their promotional activities. They also use YouTube to upload
audiovisual material in order to strengthen their corporate image, present products/
services in more detail, etc. Furthermore, they utilize social media to advertise,
strengthen their public relations, and in general, communicate in a targeted way with
customers with special interests. They also develop or take part in the creation of
applications for smartphones and tablets which facilitate communication, completion
of purchase and provision of support after the acquisition of the product, offering an
integrated high-quality experience to their customers.
Traditional communication means, e.g. TV and radio, have obviously lost their past
glory, but they still play an integral part in the communication media used by modern
businesses. Their role has obviously changed in marketing communications, perhaps
indirectly contributing to targeted personal information of existing and potential
customers. Moreover, it is a great challenge for businesses to essentially and effectively
manage and coordinate the plethora that now exists of traditional and new media and
communication tools in order to communicate specific, clear and promptly timed
messages. Businesses often realize that their customers receive different and sometimes
conflicting messages from the various means of communication used by the different
departments of the business and the strategic partners of the supply chain. For ex-
ample, the advertising department may have different targets and approaches for the
advertising campaign it is designing compared with the department in charge of de-
veloping a new product when it chose a specific kind of packaging, and the exterior
appearance of the product in general. Frequent use of promotional actions may also
98 (P)romotion
constitute a constant reminder to customers, or perhaps regulate demand, but it may
also cause irrevocable harm to the image of a status product.
It therefore becomes clear that IMC imposes the coordination of different means of
marketing communications, tools and activities. It goes without saying that this is a
special job: the person assigned to this task will coordinate and be responsible for the
successful implementation of the marketing communications plan to ensure that clear,
timely and effective messages are transmitted to all interest groups. In large organi-
zations, this person must coordinate advertising, personal sales, promotional activ-
ities, etc. in order to utilize the advantages of each communication activity in
combination, to achieve specific, clear and timely targets. This coordination effort
refers to the achievement of both the business’s and the product’s wider commu-
nication targets, as well as the special targets that have been placed on each individual
aspect of the purchase process.
In conclusion, IMC is now the only way forward in creating and strengthening the
corporate image and branding of a company’s products and product lines. Aligning
itself with the goals of modern marketing, IMC is a prerequisite for building and
improving long-term collaborative relations with customers, based on the founding
principles of trust, transparency and mutual benefits between the business and its
customers.

3.4 The communication process

Each form of communication refers to the processes of transmission and message ex-
change via some kind of channel (Armstrong & Kotler, 2009, 2017; Perreault et al.,
2012; Fahy & Jobber, 2014, 2016; Belch & Belch, 2016; Siomkos, 2004; Runia et al.,
2014; Valakas, 2008). In order to achieve this communication, a transmitter is required,
i.e. the sender of the message, a communication medium (or channel) for the transmission
of the message, e.g. face to face, print form, radio, etc., and a receiver, i.e. the recipient
of the message, that is the person/audience that the message addresses (Figure 3.1).
The communication process starts from the transmitter’s need to send some kind of
message to a specific receiver. The transmitter can be a business or supply chain, or a
non-profit organization. It must choose a clear, predetermined message that it wishes
to send to a specific targeted receiver. The receiver can be any interest group of the
business, and not exclusively its final customers. For example, by targeting the wider
support of the local community where its headquarters are located, the business can
sponsor scholarships for young people from the area, even though just a small segment
of its sales are conducted locally. Once the message is chosen, the receiver must then
codify the message using images, words, sounds, etc. in order to attract the attention
of the receiver, with the ultimate aim of the message conveying the desired meaning.
The transmission of the message is done with the use of some kind of communication
channel or medium. Choosing the appropriate channel depends on different criteria
with the ultimate aim of the message reaching and attracting the attention of as many
people as possible in the target group; it is consequently repeated as many times as
possible in order to secure the greatest possible effectiveness of the communication.
When the message is received – and if it is noticed – it will need to be decoded, i.e. it
will be interpreted based on the receiver’s perceptions, attitudes and experiences. Thus,
coding is a process of critical importance. Mistakes made at this stage may lead to
misinterpretations during the decoding process, which are different to the desired one;
 (P)romotion 99

Transmitter

Feedback Message
channel coding

Mesage
Feedback
channel

Message
Receiver
decoding

Figure 3.1 The communication process.

subsequently, marketing communications may have opposite results from what was
expected. This problem appears more often in messages transmitted in different cul-
tural environments, such as in the advertisements of companies that sell products in a
wide range of international markets.
Coding is followed by the receiver’s response – the way the receiver(s) respond when
they are exposed to the message: e.g. how they respond when they are being informed
about a product, how they shape a more positive attitude toward the product, how
they react when testing the product, etc. In modern two-way marketing commu-
nications, it is necessary for the business to receive as much feedback as possible, and
as quickly as possible. Feedback refers not just to potential observed changes in
product sales or visits to relevant websites to get more information; feedback from
personal sales direct, since sellers can discuss objections or hesitations with potential
customers. For other activities in the marketing mix, the business is obliged to install
permanent transmission channels which are easily accessible by the receiver to receive
feedback through standardized surveys measuring the targeted effectiveness. These
surveys should also enable each receiver to freely and easily convey any comment they
wish to the company. Thus, the communication cycle is complete when feedback is
transmitted back to the receiver.
In any form of communication, message transmission may be hindered by obstacles
or noise. Communication obstacles take different forms and their source may be the
actual transmitter, as well as other sources. For example, the transmitter’s message
may not be clear enough, or the message may conflict with other messages that have
previously already been transmitted to the receiver from other elements of the mar-
keting mix. Significant obstacles are also created by errors in the coding of the mes-
sage, as well as by the selection of the transmission channels; for example, the desired
number of advertising hits on the message recipient may not have been achieved.
100 (P)romotion
Obstacles may also appear from the negative predispositions that some of the
members of the target group have in relation to the reliability of the transmitter. The
influence of reference groups or other references contained in the message that go
against the receivers’ established perceptions may also have a negative effect. Noise
refers to the unplanned distortion of the message which may be due to various rea-
sons, e.g. intense conversations between the children of a family while the adults are
watching a TV program, or a phone call that takes place at the same time that a
company’s chief salesperson is reading a text message/email sent by the seller of a
collaborating supplier.

3.5 Development of effective plans for Integrated Marketing

Communications
The basic stages involved in the process of developing, implementing and controlling
effective IMC plans are described below (Belch & Belch, 2016; Belch et al., 2020;
Valakas, 2008; Fahy & Jobber, 2014, 2016; Siomkos, 2004; Runia et al., 2014).

3.5.1 Determination of the marketing strategy

First of all, a review of the strategic plan and the specific marketing goals of the
company should be made. The strategies that the company has chosen will emerge
from the marketing plan, which will take advantage of all opportunities and deal
effectively with any threats in the company’s environment, taking into account its
strengths and weaknesses. Among other things, the marketing plan should have de-
fined, as clearly and precisely as possible, the role of IMC in achieving the set goals.

3.5.2 Analysis of the existing situation of the communications mix

The people in charge of the marketing communications must thoroughly analyze the
current state of the business communications mix, taking into account the available re-
sources (staff, material, etc.) and the skills/abilities that will contribute to the achievement
of the marketing objectives and the evaluation of previous promotional activities.

3.5.3 Determination of the target group

The definition of an IMC plan consists of sub-stages that require coherence and
consistency; therefore, interaction between them should be taken into account when
making the final decisions, starting with determining the audience of the marketing
communications, i.e. the specific target groups that have common characteristics,
which the company wishes to address its messages to (Belch & Belch, 2016; Valakas,
2008). The target audience may be existing or potential customers, decision makers
(e.g. parents who buy their children’s toys), or those who influence decisions (children
who ask their parents for specific toys), etc. (Figure 3.2).
The target audience can also be divided into two groups: a direct target audience
(e.g. loyal business customers, competitors’ customers, etc.) when the purpose of
communicating is to positively influence their purchasing behavior; and an indirect
target audience (people who influence others’ opinions, consulting firms, etc.) which
concerns groups of people who make little or no contribution to product sales as
 (P)romotion 101

Defining a Marketing Strategy

Analysis of the Current State of the Communication Mix

Defining an IMC Program

Identification of the target groups
Defining objective goals
Defining the IMC budget
Selection of IMC mix
Defining the strategies of each activity
Creation of a message and defining the strategy/tactics of the media of
each activity

IMC Strategy Implementation

Monitoring, Control & Evaluation of the IMC Strategy

Figure 3.2 Basic stages in the implementation of IMC plans.

buyers, but can influence the buying behavior of other people. According to another
classification, the target audience may be mass markets, market segments, niche
markets or individuals and groups. In any case, the description of the target audience
should be very detailed, focusing on specific characteristics at individual and collective
levels to facilitate appropriate decision-making regarding the coding of marketing
messages and the choice of means for their transmission.

3.5.4 Determination of objective goals

The objective goals of IMC should essentially transform the overall goals of the mar-
keting plan into the communication and promotion goals of the business and its pro-
ducts. Determining the marketing communication goals contributes significantly to the
effectiveness of the IMC plan; they form a common basis for the coordination of all
stakeholders (the business, the advertising company, sales promotions companies, public
relations, etc.), they define the decision-making roadmap for the appropriate commu-
nications mix, and they provide a consistent set of criteria for evaluating the end result.
Many marketers believe that appropriate promotional objectives should be directly
related to sales, since this is considered to be the main – the ultimate – goal of a
promotional campaign. However, the sales of a company’s products are also influ-
enced by other structural elements in the overall marketing strategy, such as product
quality, support services before, during and after the transaction, pricing, distribution,
etc. Most marketing communication results are also diffused over a long period of
102 (P)romotion

Purchase/
Repurchase
Persausion-
Intention to
Preference purchase
Forming a
Understandi positive
Information ng attitude

Figure 3.3 Hierarchical escalation of the outcomes of IMC.

time, so it is difficult to reliably and accurately assess their impact on sales. The only
possible exceptions to this are most sales promotions and direct marketing programs,
for which short-term communication goals are set that are directly related to sales.
However, many marketers also recognize that IMC goals should take into account
the hierarchical escalation of the IMC results. Therefore, depending on the hier-
archical escalation stage that the target audience is at, the corresponding commu-
nication targets should be set (Figure 3.3).
The goals of IMC may take different forms. Indicatively, they refer to the following:

• Increasing the amount of information about the product

• Understanding the benefits that the product offers
• Developing a positive attitude toward the product
• Enhancing preference for the product
• Motivating consumers to take action
• Brand testing – first purchase
• Repeat purchases
• Increased use of the product
• Increased frequency of purchase
• Attracting customers from the competition

Appropriate communication goals must also comply with certain basic requirements,
such as the following:

• Very clear wording to allow for a quantitative evaluation of the achievement of

the goals wherever possible
• Precise determination of the target audience
• Analysis of the existing state of the common goals in the hierarchical escalation, in
order to facilitate the clear determination of the evaluation criteria concerning the
communication’s effectiveness
• Determination of the time frame within which the goals must have been achieved.

3.5.5 Determination of the IMC mix budget

Determining the budget of the IMC mix constitutes a very important step in the
process of preparing and implementing the promotional program. In the figure above,
 (P)romotion 103
it seems that the definition of the promotion’s objectives precedes the determination of
the budget; companies have to take into account their interactions with each other in
order to make their final decisions. In practice, the maximum budget available is al-
ways a significant constraint in the final form that the promotional plan takes.
Determining the promotions budget is a very complex and difficult process, as it is
almost impossible to determine the effect of the promotion on the product sales.
Promotion is one of the four key building blocks of a product placement strategy; sales
therefore depend on product, pricing and distribution decisions. According to a
generally accepted principle, the budget level depends on the estimated function of the
sales response to the promotion (Belch & Belch, 2016; Siomkos, 2004). It is generally
considered that below a certain limit, promotional costs have no effect on sales. Above
this limit, extra promotion increases sales but it also follows the well-known law of
declining performance: initially there are increasing returns, but after some point the
returns begin to decrease. Finally, above a certain threshold, extra promotion costs
have no effect on sales; hence, the graphical representation of the relationship between
promotions and sales costs is S-shaped. It should also be borne in mind that the effect
of the promotional mix on sales extends over time.
There are several methods used to determine the budget of the IMC mix (Armstrong &
Kotler, 2009, 2017; Perreault et al., 2012; Fahy & Jobber, 2014, 2016; Belch & Belch,
2016; Siomkos, 2004; Runia et al., 2014; Valakas, 2008, Shimp, & Andrews, 2013). Some
of the most important methods are described below:

• Percent of sales: This is the simplest and most commonly used method. The
promotions budget is arbitrarily set as a percentage of the existing or, more
commonly, future sales based on some sector average or business experience. Its
significant advantages are the simplicity and ease of calculations, the maintenance
of a relative stability as long as there are no significant changes in sales, and
budget constraints within reasonable limits. However, this method reverses the
real relationship between promotional costs and sales, as it is erroneously assumed
that promotional costs should be dependent on sales. There is also no way to
determine the appropriate amount of the relevant percentage, especially when a
new product is introduced to the market or when significant differences are
observed in the sector among competing companies at the chosen percentage level.
In this way, it is also possible to allocate more money than necessary to high-
selling products and not enough support to products that are in the process of
being introduced or developed, where significant investments in promotion still
need to be made.
• Competitive exchange rate: The IMC budget is determined by the estimated
average percentage of sales applicable in the sector. These estimates come from a
variety of secondary sources (e.g. publications in the advertising industry). The
two main arguments used by proponents of this method are that collective
knowledge and experience are utilized, and the chances of a “promotion war” is
reduced. However, the particularities of each company are not taken into account,
e.g. the overall strategic positioning of the product, the objective goals of the
promotion, the financial possibilities, the skills and abilities acquired in the
utilization of the various activities and techniques more or less effectively than by
other companies in the sector, etc. It also does not exclude a competing company
from changing the way it determines its promotions budget, at any time and for
104 (P)romotion
any reason. Therefore, it is not at all certain that advertising/promotion wars will
be prevented; at the same time, the company may detect these changes with
considerable delay, having already suffered significant sales losses.
• Economic potential: The promotions budget is determined by the remainder
resulting from estimating the expected inelastic production costs and other
functions from the expected revenue. In essence, this method ignores the effect
of promotional activities on sales. Given the response function of the sales to the
promotion costs, and bearing in mind the likelihood that the budget will be set at
a low level, the impact of promotions on sales will be very limited. Of course, there
is a relatively small chance that a larger amount will be allocated for promotions,
so that, from some point onwards, the effectiveness of the promotional campaign
in terms of sales is marginal and obviously financially damaging.
• Arbitrary distribution: Companies do not follow any specific reasoning in the
distribution of the business budget that will be allocated for advertising and
promotion. Promotional costs depend mainly on the experience and intuition of
the managers, who simply think that they have to spend a certain amount on
promoting the company and its products. Obviously, this method is more likely to
be applied by relatively small businesses and non-profit organizations which do
not recognize the importance of implementing even the most basic marketing
principles, thereby putting their viability at a clear risk.
• Objective goals method: This is the most effective method of determining the
company’s IMC budget. According to this method, after defining the objective
communication objectives, the company will then have to identify the specific
activities and techniques required to achieve these objectives. The budget required
for the implementation of the proposed overall communication strategy is then
estimated. In practice, setting objectives and budgets is a two-way process, as the
management of the company may consider that it is not possible to allocate the
required budget. In this case, the objectives should be reviewed and alternatives
should be sought for a more efficient communications mix that will maximize the
outcomes based on specific budget levels. Particular attention should be paid to
periods of economic downturn in determining the maximum amount available for
promoting the company, as promotion budgets are usually the first to be cut
dramatically with the corresponding consequences when setting objective com-
munication objectives. Despite its very significant advantages, this method is the
most difficult to apply, as it requires answers to questions that require complex
and subjective assessments: What are the specific activities and corresponding
techniques needed to achieve the goals? How much will this marketing commu-
nications mix cost? Is there an alternative marketing communications mix
available to achieve these goals and at what cost?

3.5.6 Determination of the IMC mix

Determining the IMC mix includes choosing appropriate activities, determining the
strategy to be used for each activity, creating a message and defining the strategy/tactic
of the media to be used for each activity, all of which are presented below analytically.
Each activity in the IMC mix is characterized by its specific properties in relation to
the transmission potential of the desired messages, the expected feedback and the
required resources (Armstrong & Kotler, 2017; Perreault et al., 2012; Fahy & Jobber,
 (P)romotion 105
2016; Belch & Belch, 2016; Belch et al., 2020; Siomkos, 2004; Runia et al., 2014;
Valakas, 2008).
The design of the IMC mix is influenced by various factors, some of which are
described below (Perreault et al., 2012; Fahy & Jobber, 2014, 2016; Valakas, 2008):

Adoption curve
The product adoption curve shows the speed with which the various groups of po-
tential customers adopt the new product, as previously discussed in detail in Chapter 1
(The Product). Market segmentation based on the adoption curve provides important
information about the appropriate approach and communication method needed for
each group, taking into account the key features of the processes involved in the
purchasing behavior of its members (Perreault et al., 2012).
Innovators are the first group to adopt the new product, but they make up just a
small part (about 3%) of the total potential market. Innovative customers, whether
consumers or businesses, tend to place significantly more weight on being informed
about the new product, by reliable, specialized, objective sources rather than the ac-
tual manufacturer. Therefore, the company should first convince the relevant experts
to test the new product; these experts will then make their opinion about the product
public. Therefore, techniques such as publicity or detailed “newsletter ads” in spe-
cialized publications or online magazines are the most effective ways to convey this
information.
Early adopters (13–15% of the market) are the next group to accept the new pro-
duct. Their attitude to the product and their adoption pace play a determining role in
the viability of the product since this group possesses the “influencers” for the early
majority group (about 35% of the market) that follows them. Early adopters pass on
their experiences mainly through word-of-mouth to other consumers; this has been
greatly enhanced by the use of the internet (blogs, online commentary, etc.). Early
adopters prefer to be informed about the new product by the company’s sales staff or
the trained salespeople of cooperating retailers, as well as by advertisements broadcast
in the mass media. Some companies offer the opportunity for influencers (bloggers,
etc.) to try the product for free or to visit the production sites and record their ex-
periences, with the expectation that they will describe positive experiences.
The early majority are informed mainly by ads placed in the mass media, the
company’s sales staff or affiliates in the supply chain, and influencers. The later ma-
jority (about 35% of the market) comprise individuals or companies that are still quite
reluctant to accept new products. They adopt the new product following peer pressure
from their social environment, which is their main reliable source of information,
placing limited weight on the marketing communications they receive from the
company and its partners in the supply chain.
Slow movers (10–15% of the market) are the last group of buyers that will try the
new product. They get their information exclusively from their social peers, leaving
very little leeway for IMC and marketers to try to influence their purchasing behavior.

The life cycle stage of the product

The life cycle stage of the product significantly affects the activities mix used in IMC
(Perreault et al., 2012, Valakas, 2008). At the introduction stage, the main objectives
106 (P)romotion
of marketing communications are the product’s acceptance and support among the
distribution channels, as well as the creation of primary demand, mainly attracting
neoterists. Thus, personal sales and sales promotions aimed at motivating sales staff
and distribution networks play a very important role in marketing communications.
The company will also look for publicity by seeking and encouraging experts in the
field to try the product in order to make their experiences public. Sales promotions
may also be intended to motivate potential customers to try the product.
At the development stage, the purpose of marketing communications is to achieve
a significant degree of information sharing about the branded product, in order to
create and enhance preference for it, so that a significant part of the potential market
can try the product and repurchase it. Advertising in the mass media plays a sig-
nificant role, with messages addressed directly to the final customers. At the same
time, personal sales and provision of incentives should be strengthened through
promotional activities to expand the presence of the branded product in the dis-
tribution channels.
At the maturity stage, the branded product is now well known among the ma-
jority of the market players and is at the receiving end of intense competition from
substitute products. Advertising is still very important for achieving a satisfactory
level of commitment to the brand, emphasizing the competitive benefits of the
product, but special emphasis is placed on sales promotions to final customers, as
the market is essentially driven by price reductions. Communications, personal
sales and promotional activities with intermediaries in the supply chain should also
continue.
In the decline stage, the marketing communications budget is gradually reduced, as
profit margins shrink respectively. Some companies, however, may choose to reposi-
tion the product by focusing primarily on advertising.

Availability of budget resources

Some promotional activities, such as TV commercials on national channels, require
high overall budgets, although the cost per ad can be quite low if the target audience is
large (Fahy & Jobber, 2014, 2016; Valakas, 2008). Thus, a relatively small business
that isn’t able to support this kind of advertising financially may resort to other ac-
tivities that involve lower costs, such as direct marketing, etc.

Target market – consumer or industrial – of the product

The promotional mix is influenced by the market that the product addresses (Fahy &
Jobber, 2014, 2016; Valakas, 2008). Industrial markets involve a small number of
customers who are often concentrated in a few specific geographical locations and
usually buy large quantities of the product at regular intervals. Therefore, in the
promotional mix, a lot of weight is placed on personal sales, followed by sales pro-
motions, while advertising plays a limited role. Consumer markets are much more
geographically dispersed, customers are much greater in number, and they buy small
quantities of the product. Therefore, in the marketing communications mix, adver-
tising and sales promotions usually dominate, while the remaining activities are given
less weight.
 (P)romotion 107
Degree of customer involvement with the product
The degree of customer involvement with the product refers to the importance that the
customer places on the product and, therefore, the extent that s/he looks for and
processes information during the purchase procedure (Belch & Belch, 2016; Valakas,
2008). When the customer spends a lot of time and effort searching for and processing
information, the customer is believed to be highly involved in the product; conversely,
low involvement implies a limited effort to be informed about the product, and to
shape attitudes and preferences about it. Therefore, when there is high involvement,
the process followed is: “learn” (acquire information and understand the product),
“feel” (form attitudes and preferences, and have an intention to buy) and “do”
(purchase/repurchase the product). The customer is first informed as fully as possible
about the product; based on the attitudes and preferences formed at this stage, the
customer will then proceed to the selection of the most suitable product. Products in
this range involve a high cost with a long lifespan, which are therefore purchased once
during a long interval, e.g. cars, computers, etc. In this case, the ad focuses mainly on
informing the customer in detail about the competitive benefits of the product, as well
as urging the customer to make a choice.
The process for a product with low customer involvement is “learn-do-feel”: the
customer passively collects and processes information; based on this limited in-
formation and understanding, the customer then proceeds to the selection/purchase of
the product. The customer then forms attitudes about and preferences for the product,
taking his/her experiences into account. Low involvement is observed in regular daily-
purchase products with little perceived risk; the customer therefore considers that s/he
does not need to spend a lot of time searching for and processing information about
such products, e.g. bread, milk, toothpaste, etc. The message should focus on a few
( just one or two) benefits of the product and be repeated as much as possible so that
customers memorize it; customers are highly unlikely to process the message any
further when forming positive attitudes and preferences. Memorizing the product’s
benefits is believed to increase the customer’s chances of trying the product when
trying to meet a related need, and forming a positive attitude or predisposition for it
after trying it.

Choices in the use of IMC push and pull strategies

When designing an IMC strategy, the company managers must decide on the per-
centage mix of the basic strategies to be utilized, i.e. the push and pull factors
(Armstrong & Kotler, 2009, 2017; Perreault et al., 2012; Fahy & Jobber, 2014, 2016;
Belch & Belch, 2016; Siomkos, 2004; Runia et al., 2014; Valakas, 2008). The push
strategy promotes the product to the intermediaries of the distribution channels
(wholesalers and/or retailers) in order to stimulate the intermediaries’ demand for the
product. Once demand is stimulated among the stakeholders in the distribution
channels, they will then try to promote the product to the final customers, in co-
operation with the producer company, in order to stimulate the final/independent
demand for the product. In the pull strategy, the company promotes the product
directly to the final customers, aiming to stimulate demand on their part in order to
create branded demand for the product among the retailers, and consequently among
all the intermediaries in the distribution channels (Figure 3.4).
108 (P)romotion

Push Strategy
Producer’s IMC Activities Intermediary’s IMC
Activities

Producer Wholesalers/Retailers Consumers

Demand Stimulation Demand Stimulation

Pull Strategy

Producer’s IMC Activities

Producer Wholesalers/Retailers Consumers

Demand Stimulation Demand Stimulation

Figure 3.4 Push and pull IMC strategies.

Through the push strategy, the producer company provides incentives to stakeholders
in the distribution channels in order to get their support for the product and, in par-
ticular, to make a decisive contribution toward promoting it to consumers. Incentives
may include the joint design and co-financing of advertising or other promotions (e.g.
final price discounts, merchandising, etc.) to final customers, or giving discounts and
other benefits directly to intermediaries, such as sales volume discounts, or various
support services (e.g. facilitation of payments, sharing the business risk, etc.).
Given the small number of intermediaries and the large product volume that each
intermediary will potentially promote and distribute in the market, the main pro-
motional activity used will be personal sales. This strategy is preferred for products
that are in the market introduction stage, particularly when it is estimated that the
placement strategy does not differ significantly from competing products and the final
choice made by the consumer occurs at the point of sale.
The pull strategy mainly utilizes advertising for the company to try to approach the
target audience interested in its product and creates branded demand for it. This
strategy is therefore preferred when the company considers that it can communicate
the competitive advantages of its highly differentiated product, and consumers will
make their final choice before going to retail stores. Therefore, businesses focus on
providing incentives to get final customers to try and buy the product, e.g. by dis-
tributing samples or offering discount coupons. In addition to advertising through the
traditional mass media, the company can promote the product with collaborating
retail stores, e.g. by product placement on the shelves, small exhibitions, posters,
distribution of printed material, etc.
 (P)romotion 109
In practice, however, most companies combine the push and pull strategies, fo-
cusing more on one or the other, depending on their needs. However, some companies
that sell make industrial goods prefer to use only the push strategy. Similarly, there are
some consumer product companies that use only direct marketing and focus only on
the pull strategy.
The choice between the two philosophies depends on marketers’ knowledge (or
rather, on their estimation) of market demand. When the company knows the de-
mand, either because the products are branded or because it keeps track of sales
history by using specialized business information systems, e.g. CRM (Customer
Relationship Management system), it can predict future demand with relative accu-
racy, it can manufacture, order and store specific quantities of product, and it can
push the products onto the market (push philosophy). For example, the neighborhood
pharmacy knows that there will be demand for specific drugs (due to seasonality or
knowledge of the requirements of the customers served by the pharmacy), so it takes
care to stock them. The great advantage of this practice is being able to serve the
customer immediately, with a general minimization/reduction of the response time.
However, forecasting demand is sometimes difficult. This happens in the case of
product codes that are introduced for the first time in the market or in cases where
differentiation of the item is expected, i.e. a product that customers can personalize,
based on their wishes or needs. In this case, the pull philosophy is appropriate when
the order attracts the production or the order from the supplier. In the case of the
pharmacy, the pharmacist, either because s/he does not know the demand or because
the medicine is specialized and expensive, first waits for a customer to place an order,
and then places his/her order with the wholesaler or dealer. This practice is generally
followed by all pharmacies in the market and is something that consumers public
know and accept. The biggest disadvantage of the pull philosophy is the long service/
response time. But one thing is sure: pharmacy managers – and this applies to most
industries as a whole – use a combination of philosophies.
Regardless of the percentage utilization of these two strategies, the effectiveness of
the company’s IMC strategy depends to a large extent on the cooperation and co-
ordination it has with its strategic partners in the supply chain, throughout all stages
of the IMC design, implementation and monitoring. This is not just in the push
strategy where the company expects the immediate assistance of its strategic partners
to promote and communicate its product to final customers; it also includes the pull
strategy, since an integral part of the total value offer is the immediate availability of
the product wherever possible, which depends on the full coordination of all those
involved in the supply chain.

3.5.7 Implementation of the IMC strategy

In this stage, the shared activities of the promotional mix are completed and im-
plemented, in accordance with the IMC plan.

3.5.8 Monitoring, control and evaluation of the IMC strategy

Evaluating the effectiveness of the IMC program plays a very important role in the
overall process (Belch & Belch, 2016). In addition to assessing the results of each
activity and the tools used, it also helps determine the current situation and is
110 (P)romotion
therefore the starting point when planning the next IMC. Assessing the effectiveness of
individual activities and techniques, as well as the means used, helps reduce misplaced
promotional actions. It also helps in formulating a more appropriate marketing
communications mix in the future, as it provides quantitative data for the evaluation
of different alternative combinations of activities, techniques and media. However, a
very large number of companies and organizations don’t bother to measure the ef-
fectiveness of the marketing communications plan, citing various reasons, such as high
costs, the time required, difficulty in isolating the effects of the communication plan
for specific results (e.g. sales), etc.
Evaluating the effectiveness of the IMC plan requires paying attention to various
notable elements, such as the parameters of the message, the strategies followed by the
media conveying the message and the effects of budget allocation. Audits can also be
performed using a variety of methods for the individual activities, techniques and
means, both before and after the implementation of the marketing communications
program.

3.6 Setting out the overall Integrated Marketing Communications mix

Each activity in the IMC mix is characterized by its special properties regarding the
possibility of transmitting the desired message and the resources required to do this.
The following discussion outlines the six main activities, i.e. advertising, public rela-
tions, personal sales, sales promotions, direct marketing and digital marketing, in-
volved in the IMC mix.

3.6.1 Advertising
Advertising is one of the main activities of the IMC mix (Belch & Belch, 2016; Belch
et al., 2020; Armstrong & Kotler, 2017; Kotler & Keller, 2016; Perreault et al., 2012;
Arens, C., Arens et al., 2014; Pantouvakis et al., 2015; Percy, 2008; Shimp & Andrews,
2013; Blakeman, 2018). Estimated global spending on advertising in 2020 was about
US$ 600 billion, down by around 5% from the previous year due to the COVID-19
pandemic; a year before the pandemic (in 2019) struck, it had increased by 6.3%
compared to 2018 (EMarketer, 2020). The advertising sector is changing very fast, due
mainly to the dominance of the internet as a means of transmitting advertising mes-
sages. The internet’s share of advertising (ads appearing on computers, smartphones
and tablets) is estimated to have reached 54% of total advertising spending in 2020,
with the prospect of increasing even more in the coming years.
Advertising is a very important communication activity not only for companies,
which account for the vast majority of advertising spending but also for public bodies
(governments, ministries, local government, etc.) and other non-profit organizations
(e.g. Arcturus, Greenpeace, etc.).
Regardless of the organization that wants to advertise, the process of implementing
an advertising campaign includes a few basic steps. First of all, the objectives of the
advertisement and the available budget should be clearly defined. Decisions must then
be made about the creation of the message and the media strategy that will be used to
transmit it. The advertising campaign is completed with the evaluation of the results
achieved from its implementation.
 (P)romotion 111
Determination of the objective advertising goals
The objective goals of the advertisement should be clearly defined so that they can be
measurable and functional. The main purpose of each ad is to convey messages that will
contribute to the favorable attitude and behavior of the target audience. Depending on
the purpose of the advertisement, these goals can be categorized attracting attention,
getting information, persuading, comparing and reminding, according to the hier-
archical scaling model of the IMC results (Armstrong & Kotler, 2017). Bearing in mind
the ultimate purpose of advertising in the context of a company’s IMC, the main ad-
vertising categories are as follows (Percy, 2008; Perreault et al., 2012):

• Advertising of a branded product for the consumer: Banding is a large advertising

category whose ultimate goal is to create, stimulate and maintain brand demand
for a company’s products to the consumer public. It aims to inform the public, to
create positive attitudes and to motivate the purchase and repurchase of the
product.
• Commercial (Β2Β) advertising: B2B advertising addresses both intermediaries in
the distribution channels and the industrial customers of the company.
• Retail advertising: This kind of advertising concerns retail businesses with the
ultimate goal being the direct promotion of the image of the stores themselves, as
well as the products/services offered, in order to indirectly improve information
sharing about the product and maintain positive attitudes among the consumer
public about the store.
• Corporate advertising: This kind of advertising aims to promote the corporate
image rather than the company’s individual brands. It is mainly used by large
companies to create and stimulate their corporate image, identity and reputation.

In addition to the above, advertising based on a time horizon of the expected results
can be classified as follows:

• Direct response advertising: Direct response advertising aims to provoke im-

mediate action, as in retail advertising for promotional purposes.
• Indirect advertising: Indirect advertising aims to spread information about the
benefits of the product in order to increase future sales in the long run.

Advertising can be further classified in the following way:

• General demand advertising: This concerns a general product category or the

industry as a whole, e.g. an ad that attracts tourists to a country or a large
geographical area. It is also suitable for leading companies who will be the main
beneficiaries in an industry that faces weak competition.
• Selective demand advertising: This kind of advertising usually refers to a
company’s specific brands or products.

Determination of the budget of an advertising campaign

The main methods for determining the budget of the advertising campaign are per-
centage on sales, competitive exchange rate, financial possibilities and objectives.
112 (P)romotion
Creation of an advertising message
Decisions concerning the creation of the advertising message and the strategy to be
used by the advertising media are now made together, as the nature of the advertising
medium greatly influences the final form of the message. The primary purpose of
creating the message is to attract the attention of the target audience. This is actually a
very difficult task, given the huge variety of advertising messages that the average
consumer receives daily from many different sources and media. Marketers estimate
that consumers are potentially exposed to more than 3,000 advertising messages on a
daily basis.
Creating the message involves several steps. First, the product’s benefits for the
customers should be determined, as this is what will attract customers’ attention; the
product’s placement in the perceptual map of the target audience will also be based on
those benefits. A “great idea” - something that is creative and attractive - should then
be developed. This great idea should be original, attract attention, be persuasive,
differentiate from the competition and be easily remembered by the consumer. In
essence, the great idea has to create a bit of “hype” in order to catch consumers’
attention so that the message reaches out to them.
Advertising experts use a number of approaches to find that great idea and, more
importantly, to implement it. The most common approaches in shaping an advertising
message, i.e. the sales proposal which is the core of the message that focuses on the
most important elements to be conveyed, are as follows (Belch & Belch, 2016,
Valakas, 2008):

• Unique Selling Proposition (UPS): The customer is presented with a unique

benefit offered by the branded product which, on the one hand is not offered or
can not be offered by the competition, and on the other hand will attract the
interest of a financially viable market segment. This approach presupposes
sufficient documentation about the product’s uniqueness which can be maintained
for a long time, i.e. it is difficult for competitors to copy it.
• Creating an image for the branded product: The aim here is to create a
differentiated, distinct, personalized identity for the branded product, even
when it is practically impossible to differentiate it from the competition, based
on its functional characteristics or performance. This approach is increasingly
used for a wide variety of products because it is getting harder and harder to
create and maintain a competitive edge based purely on functional characteristics.
It relies on the development of an image that develops some kind of psychosocial
relationship with consumers, e.g. “charming”, “free-spirited”, “independent”, etc.
• Inherent drama: This involves dramatizing the main feature of a branded product,
which is the reason it is chosen by consumers: the product’s benefits are displayed
and highlighted by means of a theatrical plot or scenario.
• Placement: The focus here is on the placement of the business or brand in a
desirable position on the consumer’s perceptual map. The elements used to base
the product’s differentiated image in relation to the competition may relate to
product features, value for money, potential uses, etc.

Once the above have been decided, decisions then need to be made about the ap-
propriate advertising appeals that will be used in the ad, and the style to be employed.
 (P)romotion 113
Advertising appeals aim to attract the attention of the target audience and/or induce a
positive effect on consumers’ feelings about the product (Belch & Belch, 2016;
Valakas, 2008). Despite the plethora of advertising appeals that can potentially be
used, they can be classified into two main categories:

• Rational/Informational appeals: The aim of rational appeals is to inform the target

audience about the special benefits that can be enjoyed from the use of the
product, such as performance, value for money, guarantees, comfort, etc. The
ultimate goal is to convince the consumer of the product’s competitive advantages
in order to proceed with its purchase and/or repurchase.
• Emotional appeals: The message aims to generate positive or negative emotions
(e.g. love, joy, appreciation, fear, anxiety, recognition, prestige), which will
motivate the target audience to adopt a specific behavior toward both the brand
and the business. Emotional appeals are used in cases where consumers make their
purchasing decisions based on emotion and less on product features. The ultimate
goal of an emotional appeal is for consumers to associate the brand or business
with positive emotions which will have a positive effect on their buying behavior.

Most of the time, a harmonious combination of rational and emotional appeals is

used. The reason for this is that consumers’ buying behavior is usually influenced by
both their feelings about the brand and the company, and the rational incentives of the
appeal that meet their needs. For example, choosing a restaurant may be based on
emotional criteria, such as its social acceptance by reference groups, the general en-
vironment, experiencing of a particular event, etc. but also rational ones, such as the
quality of the meal, value for money, etc.
Following the identification of the advertising appeals, the original great idea must
now be converted into a real advertisement. This process requires decision making
about the choice of style and tone, i.e. the words/phrases that will be imprinted in
consumers’ memory to attract their attention. There are many ways to accomplish
this, using: objective messages, scientific data, life events, lifestyle, testimonies, ce-
lebrity testimonials, direct or indirect comparison with the competition, animation,
illustration, dramatization (for TV, internet), humor, demonstration, etc. or – most
often – a combination of the aforementioned (Belch & Belch, 2016; Armstrong &
Kotler 2009, 2017; Valakas, 2008). Furthermore, formatting elements such as text,
images, and other visual elements should be identified, which will harmoniously be
combined to create the advertising message. Decisions concerning style elements can
be highly specialized, depending on the transmission medium of the advertising
message, e.g. internet, television, radio, print (newspapers, magazines), etc.
The prevalence of the internet as the dominant means of communication sometimes
has resulted in the direct involvement of consumers in the creation of advertising
messages. Many companies search the internet for consumer-uploaded videos related
to their products which help inform others about them, and create positive attitudes in
the minds of the public. Some companies hold contests, asking willing consumers to
submit their ideas in basic form for new promotional messages, or even in complete
form, e.g. videos. While very few of these ideas are usable, the benefits of such material
to companies can be enormous. On the one hand, the cost of creating the advertising
message is significantly reduced, while on the other hand, participating consumers
become even more connected to the brand and the company.
114 (P)romotion
Planning/Designing the advertising media design
Media design involves a number of complex and difficult decisions; sometimes,
however, the information required to make these decisions is insufficient. The most
important steps concern: (a) defining the objectives of the advertising media, (b)
shaping the advertising media mix, initially through the selection of the basic media
types to be used, and then the specific advertising “vehicles”, (c) implementing the
design, and (d) evaluating the results. Defining the media helps to achieve the goals of
the marketing plan, as outlined in the company’s IMC. Essentially, the goals help
determine the criteria that will shape the media mix, how the design will be im-
plemented, and how the results will be evaluated.
The compatibility of the medium in the transmission of the message that can achieve
the IMC’s objective goals is evaluated first of all. For example, if a detailed pre-
sentation of the branded product’s features is required, then a magazine or the internet
is more likely to be selected than TV or radio. At the same time, the selected adver-
tising media should be addressing the specifically identified target audience. The lar-
gest share of total advertising expenditures lies in payments to advertising media; thus,
the choice of media types (e.g. TV) and the advertising vehicles (e.g. a specific TV
show) will all depend to a large extent on the available budget.
Other important criteria in the design of the advertising media relate to the nature
of the medium, such as the extent to which it targets the entire specific target audience,
the potential exposure of the target audience to the advertising message, the impact of
the medium on the consumer, and the cost of buying space and time per ad hit. The
selection of the advertising mix also takes into account the “congestion” of the mes-
sages in the medium, the geographical scope of the medium and the flexibility re-
garding the potential to transmit the message in the appropriate time slot. The
following table summarizes some of the most important advantages and disadvantages
of the basic types of advertising media (Figure 3.5).
A particularly important decision regarding the implementation of the advertising
plan concerns the use of a timeline. Ideally, companies want to broadcast their ad-
vertisements as often as possible, but this is not economically feasible. Therefore, the
use of a timeline for advertising media should be formulated in order to maximize the
results of the advertising campaign. Businesses have to choose between continuous,
alternating and pulsed timelines. The continuous timeline refers to the uniform use of
advertising media during the selected time period. It is recommended for high pur-
chase frequency products, particularly in impulse markets, but it requires a large
budget. The alternating timeline is the exact opposite of the continuous timeline,
where periods of heavy media use are followed by periods of no or very limited ad-
vertising. It is mainly used for seasonal products, e.g. ice cream, which are advertised
at specific times and only on a yearly basis. The pulsed timeline is a combination of
continuous and alternating timelines.

Evaluating the effectiveness of an advertising campaign

The effectiveness of an advertising campaign can be evaluated using various methods
both before and after the appearance of the message. Before the ad appears, the creative
idea is assessed and compared with different advertising designs, messages and mate-
rials. After the ad appears, i.e. during the implementation or after the completion of the
 (P)romotion 115

Medium Advantage Disadvantage

Internet Link to full content website, easy Difficulty in comparing costs with other
search results means, the public controls visibility,
protection of personal data, possibility
of fraud

Television High coverage, satisfactory manner High cost of message production and
of getting attention, excellent levels use, high level of "crowding/congestion"
of creativity & influence, high of messages
impact, low cost per view

Radio High impact, relatively low cost,
satisfactory targeting
Magazines Highly targeted, very detailed,
reliable
Newspapers Fast, flexible, local coverage, up to
date
External spaces Frequent exposure, geographical
flexibility, low cost, small
"crowding/congestion" of messages
Direct mail Very good targeting, message is
tailored to the recipient
Difficulty in attracting attention, low
level of audience exposure, non-visual
effect
Visual content only, lack of flexibility,
slow exposure to the message
High message “crowding/congestion”,
only optical content with low image
quality, passive reading
Small message size, passive reaction of
the audience
High probability of the message ending
up in the junk/spam folder

Figure 3.5 Advantages and disadvantages of the basic kinds of advertising media.

advertising campaign, an evaluation takes place of whether and to what extent the IMC
objectives were achieved, the effectiveness of the selected advertising mix, and in some
cases, the effect of the advertising campaign on product sales.

Advertising companies and other service providers in the advertising sector

Advertising companies play a very important role in all stages of the implementation
of an advertising campaign, particularly for large companies that invest very large
sums of money annually in advertising. Businesses very often turn to the advertising
company about the creation of the message, mainly to buy advertising time/space in
the mass media. The advertising company – not the advertised company – is the one
that buys transmission time for the ads from the mass media because they are con-
stantly cooperating with them; the advertised company usually has just a few occa-
sional transactions with the mass media. There are companies that focus on providing
services for the acquisition of advertising time or space in the mass media; they work
with advertising companies that specialize exclusively in the creation of advertising
(creative offices).
The mass media have a special relationship with their target audience; they try to
meet their needs as effectively as possible against the competition. However, a sig-
nificant portion of their revenue comes from the allocation of advertising time or space
to advertising companies. The contribution of market research companies is also
116 (P)romotion
important for the collection of a wealth of information related to the profiles, attitudes
and buying behavior of the target audience that the advertising company is interested
in. These companies can also undertake the planning and implementation of the
evaluation of creative proposals and the effectiveness of the advertising campaign.
There is also a plethora of independent professionals offering services for creating
advertising as well as designing and implementing advertising campaigns; such services
include filmmakers, directors, composers and music producers, photographers, cam-
eramen, actors, communications consultants, etc.

3.6.2 Public relations

The development and prevalence of the internet as a means of mass communication
has greatly influenced and upgraded the role of public relations in IMC. In essence,
companies are nowadays operating within precarious situations, where at any time,
anything related to their operations and activities can be revealed to anyone with a
vested interest. This is due to the virtual elimination of asymmetry in terms of the
information available to the public, due to the existence of a plethora of information
sources; any interested party, even ordinary citizens, can post or have access to videos,
images, documents, etc. on the internet.
In addition to the creation and long-term maintenance and improvement of a po-
sitive public corporate image, public relations also aims to prevent and properly
prepare the company for crisis management, i.e. negative events and a loss of re-
putation. According to the International Public Relations Association (IPRA, 2020)
“Public relations is an administrative decision-making function that undertakes to build
relationships and benefits between organizations and their communities based on the
provision of information through reliable and ethical methods of communication”.
Therefore, a key condition for achieving the public relations goals is to establish two-
way communication between the organization and its target groups (Figure 3.6).
The objectives of public relations are varied (Belch & Belch, 2016; Fahy & Jobber,
2014, 2016; Kotler & Armstrong, 2016; Belch et al., 2020; DiMarco, 2017; Shimp &
Andrews, 2013). The organization/company is informed about the attitudes and beha-
viors of various groups of common interest through public relations. The aim of public
relations is to create friendly relationships, with the goal of attracting customers and
increasing sales. Public relations can make the greatest contribution to the timely iden-
tification and treatment of internal problems related to the relationship between man-
agement and staff, which can have a very significant impact on the operation of the
business. At the same time, public relations undertakes the management of the company’s
relationship with the media, developing mutually beneficial relations between them and
providing honest information about the operation and activities of the company.
The role of public relations is crucial in the development of efficient two-way
communications between the company and various public bodies (national/local
government, administrative services, etc.), as well as society and the public in general.
Public relations is in charge of developing proactive plans for effective crisis man-
agement, where business relations are tested with all public groups. A highly com-
petitive environment in many industries requires continuous investment of large sums
of money to maintain and improve the company’s competitive position. Public rela-
tions also plays a very important role in attracting new shareholders as well as other
sources of funding (banks, bondholders etc.).
 (P)romotion 117

Company
employees

Mass media Public bodies

Organisation/
Company

Shareholders/ Supply chain

Investors partners

Community/
Customers
Wider public

Figure 3.6 Stakeholders of the organization/business.

Public relations is also very important in managing the company’s relations with its
strategic partners in the supply chain. Such relations can be simple or complex.
Relationships between companies in a supply chain vary greatly depending on the cost
levels and risks involved, the frequency and duration of transactions, and the degree of
mutual commitment. At any rate, even in the simplest transactions with other com-
panies in the chain, good relationships bring benefits, while long-term relationships
lead to improvement of quality and cost reductions in their transactions.
Publicity is one of the most important tools used in public relations. Publicity is an
unpaid impersonal form of presenting a message about the business or its products.
Publicity uses, press releases, press interviews with company executives, press coverage
of the organization’s events, presentation of articles on a company’s achievements,
new products, technological innovations, among others. The duties of a company’s
public relations officers are to provide honest information to the media on important
issues concerning its operation and to motivate the media to present the company’s
news and opinions.
Publicity uses the mass media to address large public audiences without a specific
medium being paid to convey the message. The receiver perceives the message as
“news” transmitted by the medium, in the context of its mission to inform the public.
Therefore, a very important advantage of publicity is that the public gives more
credibility to the message than to advertising or other activities in a business’s pro-
motional mix, since the message source is the means of communication (e.g. the
118 (P)romotion
journalist) and not the business. This, however, can also work as a disadvantage, as it
is left to the media alone to decide whether, when and how to convey the message. An
additional advantage of publicity and public relations in general is the avoidance of
advertising noise, as it can attract more public attention.
Apart from publicity, the company can organize events, such as launches, speeches,
anniversaries, exhibitions, competitions, seminars, etc. The company can also parti-
cipate in events organized by third parties. Participation in community service activ-
ities has the aim of improving the corporate image by raising public awareness on
social issues, such as environmental protection, support for weak social groups,
promotion of cultural heritage, etc.
Of particular importance is the participation of the company in events organized by
third parties through sponsorship. Businesses provide funds or other resources to
event organizers in exchange for some rights and relationships that they can benefit
from. Sport attracts the largest share of sponsorships, such as major athletics events
(e.g. the Olympics), sports teams (football, basketball, etc.) and champion athletes
(e.g. tennis, golf); sponsorships are also available for other activities such as the arts,
social events, etc. The main potential benefits of sponsorship include gaining publicity,
entertaining important stakeholders, strengthening relationships between local com-
munities and the general public, attracting new customers, and ultimately increasing
sales of a company’s products.
Public relations can also take the form of personal communication with selected
public groups through a tour of the business premises, the organization of hospitality
programs, the provision of gifts and donations, etc. to customers, staff or partners in
the supply chain.
Business websites and social networks are the most dynamic emerging means of
implementing public relations. Most companies post a wealth of information on their
websites, including announcements, press releases, financial statements, initiatives,
participation in events of wider social interest, presentations and support material for
their products, etc. which aim to strengthen their corporate image. In addition, they
use social media intensively (e.g. Facebook, Twitter) to communicate in real time with
stakeholders from their various target groups.

3.6.3 Sales promotions

Sales promotions refer to the short-term incentives that a company offers its custo-
mers (consumers and businesses), those involved in distribution networks and its staff,
to get the end users of the product and/or the seller intermediaries (wholesalers, re-
tailers) to become interested in the product, try it and buy (or repurchase) it im-
mediately. The aim here is to increase product sales within a short period of time
(Belch & Belch, 2016; Belch et al., 2020; Armstrong & Kotler, 2009, 2017; Perreault
et al., 2012; Fahy & Jobber, 2014, 2016; Pantouvakis, et al., 2015; Percy, L., 2008).
Figure 3.7 summarizes the target groups of sales promotions, and the main techni-
ques used.
The most important difference between advertising and sales promotions is that
advertising provides incentives for customers to buy the product at some point in the
future, while sales promotions provide incentives to acquire the product immediately.
Advertising, personal sales and direct marketing often work very closely with sales
promotions to achieve the IMC goals.
 (P)romotion 119

Industrial
Consumers Intermed diaries Sales personnel
customers

• Free samples • Participation in • Discounts on the • Competitions

• Offer package trade fairs price • Incentives
• Demonstrations • Conferences • Free product (bonus) on sales
at the point of • Discounts on the quantities volumes
sale price • Funding for • Professional
• Discounts on • Subsidies promotional meetings at
prices or bulk • Guarantes activities resort hotels
packaging • Free goods • Guarantees
• Coupons • Gifts • Promotional
• Special events • Promotional giveaways
• Competitions giveaways
• Gifts &
promotional
giveaways
• Bonus cards
(consumer
loyalty)

Figure 3.7 Main techniques of sales promotion.

Sales promotion has grown exponentially over time and many companies are in-
creasing the IMC budget share dedicated to sales promotions (Belch et al., 2020; Belch &
Belch, 2016; Fahy & Jobber, 2016; Armstrong & Kotler, 2017). As previously mentioned,
the internet has significantly reduced, if not eliminated, the information asymmetry that
traditionally existed to the consumers’ detriment, particularly in consumer markets.
Given the vast array of marginally diverse alternatives available to consumers today,
companies face stiff competition with each other. It is therefore a big challenge for all
companies to convince the very well-informed and less loyal customers to choose their
own product over the competitors’. Thus, customers are particularly sensitive to value
for money, as well as the various incentives offered by competing companies to get
consumers to show preference for their products.
Intense consumer pressure on retailers is shifting from retailers to product manu-
facturers, requiring them to provide incentives to support the product on the shelf.
The continuous shortening of the product life cycle further intensifies the need for the
product’s immediate availability and the pursuit of high sales before the product
becomes obsolete. In addition, the constant bombardment of consumers with a ple-
thora of advertising messages from every possible source and medium has significantly
reduced the effectiveness of advertising to attract consumer interest.
Since almost all competing manufacturers and retailers are constantly seeking short-
term incentives to attract customers, business marketing and sales managers are under
a lot of pressure to meet the company’s sales targets. Thus, sales promotion is perhaps
the most important tool available to achieve immediate results. The advantages of
sales promotions also include relatively easy and economical implementation, as well
120 (P)romotion
as the ability to evaluate the effectiveness of the promotional campaign with great
accuracy and reliability due to its short-term nature.
Perreault et al. (2012) report three possible patterns regarding the effect of sales
promotions on the sales of a product/service. When manufacturers wish to reduce the
accumulated warehouse stocks of long-life products, an increase in sales by sales
promotions is followed by an almost corresponding decrease in sales in the next
period, until consumer stocks are depleted, and sales return to normal levels.
However, in the case of products with a short shelf life (e.g. vegetables, fish) or ser-
vices, sales are temporarily increased due to the promotion, and then return to pre-
vious levels. The ideal pattern for any business is to maintain a minimal level of sales
increases by attracting new customers, which could come from the competition in the
case of mature markets.
Despite its advantages, promotions can also cause problems for a business (Belch
et al., 2020; Perreault et al., 2012; Armstrong & Kotler, 2009, 2017). Firstly, an in-
crease in sales volumes leads to a proportionally very small increase in the company’s
total profits. In some cases in fact, an increase in revenue may lag behind the extra
promotional costs required, leading to profit losses. This situation is exacerbated when
consumers postpone their planned purchases in order to take advantage of coming
promotions. Similarly, retailers of durable goods (e.g. cars, electrical appliances) may
try to shift some sales to the near future if they expect or are aware of the launch of a
higher-priced promotional program for these products.
Perhaps the biggest disadvantage of sales promotions is consumers’ potential ad-
diction to them due to the incentives they offer, often because they are extensively used
by almost all of the competitors, especially in mature, short-cycle and high-tech
product markets. Thus, consumers and intermediaries are often in constant pursuit of
the best promotion among the competition, which they will ultimately choose at that
moment. Excessive use of sales promotions may also damage the perceived image of
the product that consumers form, repositioning it at a different point on their per-
ceptual map. It should not be overlooked that, unlike other marketing communica-
tions activities such as advertising, personal sales and public relations, the results of
the promotion are often short-lived and sales usually return to previous levels.
Consumer promotions aim for the immediate increase in customers trying the
product and sales volumes. Product testing is a very important step in consumer
buying behavior, whether it concerns the introduction of a new product or attracting
new customers from the competition. An immediate increase in sales can help
strengthen the company’s image, as well as enhance customer loyalty to the branded
product. In addition, a short-term increase in sales volumes can play a very important
role in smoothing out sales fluctuations, as in the case for seasonal products. The
greatest possible demand smoothing is one of the cornerstones of a company’s op-
erations management and for the entire supply chain as well, in order to achieve
smooth flows in demand, supply and payments.
Price discounts are perhaps the most important and frequently used kind of con-
sumer promotions. Similar incentives are provided by vouchers that consumers pre-
sent to the retail store cashier to obtain a product at a lower price, as well as for
packaging discounts where two packages of the product are sold at the price of one (or
three for two). Sample products offer a small trial quantity and can go a long way in
increasing the number of consumers trying a new product. Producer companies can
also display and exhibit their products in collaborating retailers’ stores through
 (P)romotion 121
coupons and/or samples. Many retailers (e.g. supermarkets) and service providers (e.g.
banks) issue bonus cards to their customers; depending on the amount of purchases
they make, consumers get discounts for future purchases, or some kind of gift. Reward
programs are a very useful tool for gathering information about a company’s custo-
mers, especially for planning and implementing direct marketing techniques.
Promotions aimed at industrial customers have similar goals as those for con-
sumers. They focus mainly on price discounts or free quantities of product depending
on the quantity that industrial customers buy per order. However, in order to prevent
the bullwhip effect and to smoothen demand, the use of quantitative discounts is
recommended for use in purchases that have a minimum sales volume per specific time
period (e.g. a year). The bullwhip effect acts a kind of acceleration, due in part to the
failure of supply chain members to work together and share information, as well as the
complexity of the supply chain structure itself, especially in the case of a large dis-
tribution network involving many business entities. Production companies and other
members of the supply chain have a distorted picture of the market because they get
their information from the other members of the chain and not from the points of sale.
This phenomenon makes it impossible to estimate demand accurately and reliably,
and it inevitably creates delays. According to J. Forrester who studied this scourge in
detail, there are two kinds of delays: delay in getting accurate information concerning
demand, and delay in moving products from one level to the next. He also argued that
the study of the supply chain as a whole with the use of ICT and dynamic systems can
provide important information on how to reduce this phenomenon.
A particularly popular promotion is the participation of the producer company in
trade fairs, where it aims to attract new industrial customers for its products.
Sales promotions targeting intermediaries in the distribution channels aim for wider
support for a manufacturer’s products. The focus is firstly on the general cooperation
between the company and its strategic partners in the distribution networks, in order
to keep supply and demand levels smooth, which will ensure the continuous supply of
retail stores with the lowest possible level of cycle and security stocks. The financing of
promotions aims to provide space in the highly sought-after shelf positions of the
retailer, as well as the promotion of the product to consumers by the retailers (e.g.
advertising). Other promotions include quantitative discounts, guarantees, promo-
tional giveaways, etc. In many cases, promotional activities account for up to 80% of
the total sales promotion budget, leaving about 20–30% for promotions aimed directly
at consumers.
Promotions aimed at a company’s sales staff have the goal of achieving high sales
volumes of existing products, rapid growth in sales of new products, attracting new
customers from the competition and providing high-quality services to the company’s
customers. Providing additional monetary remuneration depending on the sales vo-
lume within a specific time period is the most common incentive offered to the
company’s sales staff. This can be done through organizing various forms of com-
petitions, participating in business meetings, trade fairs, seminars and conferences
organized in popular places with sightseeing attractions, etc.
Regardless of the target audience and their specific forms, promotions should be
aligned with the other activities and the individual tools/techniques that make up the
IMC mix. Even though the main purpose of sales promotions is to achieve short-term
results in product testing and sales volumes, it is also very important to contribute to
customers’ perceived value of the product, and to achieve long-term goals in general.
122 (P)romotion
Vendor Management Inventory (VMI) can be a solution for tackling demand
fluctuations. VMI is a business model where the buyer of a product provides in-
formation to a supplier about the product and the supplier assumes responsibility for
maintaining an agreed stock level, usually in the buyer’s warehouse. A third-party
supply chain service provider may also get involved, to ensure that the buyer main-
tains the desired inventory levels by adjusting gaps in supply and demand. This ap-
plication was developed as a new tactic for managing retail stocks, the most
widespread practice for improving the efficiency of a multi-company supply chain.
VMI is a tool used to improve the supply chain. This means fewer stock and man-
agement costs, as well as increased efficiency across the food chain for all participants.
It employs the possibility of collaboration in order to share key supply chain in-
formation between suppliers and traders (sellers and buyers) who work together to
meet the needs of the final customer. One of the key points in successful VMI is the
shared risk taken by both parties. In some cases, if the products do not sell for some
reason (e.g. seasonal products), they can be returned to the supplier. In other cases, the
products may stay in the possession of the retailer but they are not owned by the
retailer until they are sold, which means that the retailer is simply housing the pro-
ducts in exchange for a commission (Product Inventory).

3.6.4 Personal sales

Personal selling is a very important activity of a company’s IMC mix, especially in
industrial markets and in the management of a company’s relations with its strategic
partners in its products’ distribution channels (Ingram et al., 2020; Johnston &
Marshall, 2016; Jobber, D. & Lancaster G., 2015; Avlonitis & Stathakopoulos, 2017;
Gounaris & Stathakopoulos, 2017; Armstrong & Kotler, 2017; Perreault et al., 2012;
Fahy & Jobber, 2016; Pantouvakis et al., 2015; Percy, 2008). The sales department
accounts for up to 70% of the total business marketing budget in industrial markets.
Personal sales are in fact an autonomous (sales) department in large companies, op-
erating in collaboration with the marketing department. Personal sales are based on
the personal communication of the seller with the customer which is therefore the only
activity of the IMC that ensures direct two-way communication and the best possible
personalization of the message based on the characteristics and specific explicitly ex-
pressed needs of each customer.
The personal sales environment is changing rapidly due to continuous changes in the
technological, economic and political environment (Ingram et al., 2020). Coordination
of activities between companies within an integrated supply chain is a prerequisite in a
modern highly competitive environment. Thus, the time when the sale agreement was
the result of a process involving the seller of the supplier and the sales officer of the
buyer has passed irrevocably. The prevailing conditions of the business environment for
at least the last 2–3 decades have forced many different employees from the various
operations within a company to have good cooperative relationships, in order to ensure
smooth continuous supply and demand flows. The individual transactions made in past
times have been replaced by strategic long-term partnerships between supply chain
partners; therefore, they involve much more than simply supplying the business with
another batch of a raw material or component, for example.
That’s why supply executives are involved in the close monitoring of suppliers and
in managing the buyer-supplier relationship. Sometimes a relationship can develop
 (P)romotion 123
into a win-win situation for development and improvement, e.g. a joint product design
and production issue solutions (Early Supplier Involvement). In this case, cooperation
and integration issues between partners in the context of modern supply chains are of
critical importance.
As discussed earlier in previous chapters, critical decisions for the completion of a
transaction between two companies operating within an integrated supply chain are
made before the new product is created, as suppliers and customers will have to
collaborate with the producer company to design the new product. Trade agreements
are not limited to the quality characteristics of the products, but may also include
many auxiliary and support services, as well as arrangements for the distribution of
the tasks related to the execution of various activities between the parties involved.
Similarly, many issues regarding the pricing of an order surpass the narrow limits of
achieving a profit margin for that transaction, but they are determined by the terms of
the broader long-term cooperation between the strategic partners, such as the con-
tribution of suppliers to predatory pricing in retail stores. Various issues are also
related to distribution, such as the frequency of transactions, response time, security
inventory management, etc.; in essence, they are the subject of negotiations concerning
wider long-term cooperation between the strategic partners of a supply chain.
Partnerships are entered into with suppliers who have gone through the approval
and accreditation phases. Their performance so far has demonstrated their ability to
consistently provide the desired quality, delivery, prices and services. They respond
positively to unforeseen needs, such as changes in quantities and specifications, and
are able to tackle service problems effectively, simultaneously taking the initiative to
suggest better solutions, find ways to meet buyer needs, and provide information in
advance on emerging issues.
Thus, sellers in many companies no longer focus simply on securing one more
profitable sale by solving a customer problems, but on creating value for the customer
in the long term. The sellers of the business cannot be limited just to explaining the
benefits of their product to the customer; they must also contribute in every possible
way to maximize the value that the customer can potentially gain through cooperating
with the business; they try to train customers in the best use of the product/service, the
optimal adaptation of the product to their needs, etc. Therefore, the seller’s role is
constantly being upgraded to that of a trusted consultant for the customer; this ac-
quires great significance in the building and long-term improvement of competitive
supply chains.
Narrowing profit margins due to a highly competitive environment now render loss-
making transactions prohibitive for the company and the sales department.
Traditionally, sales targets have been based on sales volume which in many cases have
led to loss-making transactions and a reduction in the overall profitability of the
business; this has been the main interest of supply chain managers and experts since at
least the beginning of the 1990s (Cooper & Kaplan, 1988; Guerreiro et al., 2008;
Taylor, 2006; Christopher, 2015). However, as already pointed out, the shareholders
of a company are not interested in maximizing turnover; they are interested in max-
imizing profits.
Both sales managers and salespeople constantly need to improve their efficiency and
effectiveness by utilizing, among other things, new ICT applications, such as artificial
intelligence, social networks, Customer Relationship Management (CRM) software
and Salesforce Automation (SFA) (Ingram et al., 2020). The ever-changing business
124 (P)romotion
environment renders obsolete the traditional hierarchical and bureaucratic organiza-
tional structure of the sales department. It is necessary to assign more responsibilities
to trained salespeople who are constantly being updated, and have closer cooperation
with them; greater coordination of actions with managers and executives from the
other operations of the company is also required. Therefore, the sales manager’s job
takes on an upgraded role, with crucial contributions to the timely identification of
opportunities and challenges in a dynamic competitive environment, and the design
and implementation of innovative response programs.
Sellers are classified on various criteria. The main ones relate to the nature of the
product (consumer – industrial; product – service), the market (consumer, industrial,
public bodies, etc.) and the seller’s role in the sales process (Ingram et al., 2020;
Perreault et al., 2012). The latter is the most important criterion for grouping sellers
according to those who seek and attract new customers by submitting orders (order
providers), those who receive orders from customers (order recipients), and those who
support the sales process by providing specialized information and training, and after-
sales customer services (“missionaries”, technical salespeople, customer service ex-
ecutives). In most cases, however, a company’s salespeople take on all three roles,
namely: presentation, receipt and support of the order/sale.

Personal sales process

From the above, it becomes clear that the sales process is very methodical; it requires
planning and a lot of effort for its effective implementation (Figure 3.8). The process
begins with identifying and then evaluating potential customers. Businesses recognize
that a significant portion of their existing customers are not as committed as they
would like them to be; at the same time, in today’s competitive environment, many
new businesses are entering the industry and existing ones are leaving before the end of
the first five years of a company’s life. Therefore, sellers should constantly look for
new customers in various ways, particularly through the internet, since almost all
modern businesses have a website and social media accounts, or are included in e-
commerce guides. Existing customers of a company or other partners in the supply
chain may also be helpful in recommending new customers.
However, not all potential new customers are the same, hence the need for as-
sessment. Evaluation criteria include the kind of needs that customers have and the
ability of the company to meet these needs more effectively and efficiently in relation

Identification &
evaluation of Approaching the
Preparation Needs analysis
potential customer
customers

Follow-up Completion of Handling of Presentation and

monitoring agreement/sale complaints demonstration

Figure 3.8 Personal sales process.

 (P)romotion 125
to the competition, the potential volume of transactions, the financial capabilities, and
the dynamics of the prospective customer in general. The likelihood of attracting and
retaining the customer should also be assessed in light of intense competition. The
evaluation of potential customers is greatly facilitated by the use of specialized soft-
ware and the relevant wealth of information from various sources available to the
seller.
After selecting the most interesting prospective customers, the salesperson should
make the best preparation possible before meeting with each potential new customer.
This preparation consists of getting the best possible information about the special
needs of the customer and the way s/he operates, defining the goals of the visit,
consideration of the diagnostic questions that need to be answered for a more com-
plete understanding of the customer’s needs, the possible product/service offers that
will satisfy the customer’s needs and their respective benefits, potential customers’
objections and the particular strategies needed to close a deal. Appropriate prepara-
tion helps to increase the seller’s efficiency and effectiveness, strengthens his/her
confidence and creates a good image to the prospective customer.
Choosing the right way to approach the customer contributes greatly to creating a
positive first impression, which can greatly facilitate the continuation of the discussion
within a constructive atmosphere. The salesperson should show the utmost respect for
the customer and the valuable time s/he devotes to the discussion, by listening care-
fully to them, preparing a concise and attractive presentation of the most important
benefits that potential collaboration can provide to the customer and, generally
speaking, maintaining a strong interest in the customer throughout the discussion.
In the past, sellers thought that their main skill was talking a lot with great en-
thusiasm about the product they are trying to sell. But marketing philosophy supports
the most effective and efficient satisfaction of customers’ needs; so a seller is obliged to
ask a lot of questions and to listen carefully to the opinions of the prospective cus-
tomer, in order to better understand his/her needs. Once this precious information has
been analyzed, the seller must locate potential products/services that will secure a
mutually beneficial transaction and suggest them to the customer.
The presentation and possible demonstration of the product play a very important
role in the success of the sales process, if this can convince the customer that the
product effectively meets his/her needs. Therefore, the presentation should focus on
the benefits of the product for the customer, rather than the technical characteristics.
References to technical characteristics are intended to document the product’s benefits
for the customer. The presentation can be short or detailed, depending on the product
and, in particular, the type of customer; in each case, it should be tailored as much as
possible to the customer’s needs. Regardless of the presentation type, the seller should
also determine the specific goals and the strategies needed to achieve them, using
language, i.e. expressions, concepts, examples, etc. that the customer understands. The
seller can be facilitated during the presentation through various methods, such as by
demonstrating the product, offering product samples, using a computer to present
useful audiovisual material, etc. This stage is completed at the end of the presentation,
where the seller seeks customer feedback to identify issues that need to be further
explained.
The next critical step is learning how to handle the prospective client’s objections.
Experienced sellers are well aware of how unlikely it is that the sale process will be
completed successfully before the customer expresses any objections. The customer’s
126 (P)romotion
objections are usually a positive indication that the customer is interested in the seller’s
proposition, but the customer is hesitant because s/he still needs some additional
clarification and explanation. Effective handling of objections involves dealing with
essential and emotional aspects. The most important aspect in this case is the sub-
stance of the objection, i.e. the prospective customer’s concern, which the seller will
either have to prove does not exist or is not important or propose an interesting
solution to counter it. The emotional part is related to the way the seller communicates
his/her opinion about the objection, avoiding offending the potential customer or
facing him/her competitively. The salesperson should listen carefully to prospective
customers in order to understand their concerns and present his/her positions and
suggestions to them in a documented way. Therefore, effective handling of objections
requires good preparation on the part of the seller on the one hand, concerning the
positions and proposals that must be developed for each possible type of objection,
and in the ways to communicate these positions on the other hand, so that the cus-
tomer doesn’t feel that his/her dignity is being violated.
This is all followed by the completion or closing of the agreement/sale. The seller
recognizes the cues as to when this can take place and the prospective customer is
ready to proceed with the order (e.g. no more questions, positive body language,
positive feedback); this should somehow motivate the seller, as customers tend to be
hesitant and procrastinate about anything new. There are several ways to close a deal.
The seller can directly ask the customer if s/he wishes to place an order for one or more
products being offered; the seller may also inform the customer about the loss of some
benefits if s/he does not place an order immediately.
The sales process is completed with a subsequent follow-up, where the seller con-
firms that the customer is satisfied with the agreement and that there are no problems
regarding the receipt and/or use of the product, or the after-sales support services, etc.
This constitutes a very important stage in the creation and maintenance of a long-term
mutually beneficial partnership with customers. Customer complaints must be ad-
dressed as soon as possible to ensure continuity of the cooperation. After all, it costs a
lot more to attract a new customer than it does to keep an existing one satisfied.

Strategic planning for the sales team

Strategic planning of an effective sales team includes two important aspects: design
and management (Figure 3.9). Sales staff design consists of sales forecasting, setting
sales targets, identifying and organizing sales potential. Sales forecasting is, in essence,
the overriding prerequisite for any kind of planning in all business operations, such as

Planning of Sales Organisation Size of sales

Sales targets
sales team forecasting of sales team team

Management Selection Reward and Sales force

Training
of sales team and staffing motivation evaluation

Figure 3.9 Sales force planning and management.

 (P)romotion 127
production, staffing, supply, marketing and sales, distribution, finance, etc. Due to its
paramount importance in the efficient and effective planning of the company’s and the
supply chain’s activities, a variety of tools and methods for estimating demand have
been developed. For the smooth operation of the supply chain, strategic partners must
collaborate in making forecasts and managing demand.
The Collaborative Planning, Forecasting and Replenishment (CPFR) method aims
for continuous collaboration and information exchange throughout the supply chain
to maximize demand forecasting efficiency and ensure automatic product replenish-
ment in warehouses and store shelves. Its goal is to support the transparency of in-
formation along the chain, and to ensure a smooth flow of products from the initial
stage of raw material supply to the final stage in the distribution of finished products
on the stores’ shelves. This minimizes mistakes that can negatively affect sales or profit
margins. In practice, this is supported by technologies for Electronic Data Interchange
(EDI) and Electronic Points of Sale (EPOS). Both technologies create a relationship of
trust and cooperation between the parties involved, enabling information exchange
and know-how toward a common goal. With constant feedback from electronic data,
raw material suppliers, producers, wholesalers and retailers have access to accurate
real-time data, so as to be able to immediately adapt to real consumer needs.
The definition of sales targets refers to the work (expressed in profit or value or sales
volumes) assigned to each sales unit (e.g. seller, geographical area, product) for a
specific period of time (e.g. month, year). Goals are very useful as a roadmap for
salespeople, providing them with incentives to achieve them. They also form the basis
of the sellers’ evaluations and often constitute the framework for determining their
reward system. Sales targets have traditionally been expressed in terms of sales vo-
lumes or values, although emphasis has shifted to contributing to the company’s
profitability and customer service aptitude to avoid loss-making sales and ensure a
healthy customer base.
Sales staff can be organized in a number of ways. One way is based on geography:
each geographical sales area is divided into sections, each of which should be served by
a seller who is responsible for all of a company’s products. Another way is the or-
ganization of sales by product, based on grouping the company’s products into basic
categories and the assignment of a specific series of products to the respective seller,
usually in larger geographical areas in relation to the aforementioned type of orga-
nization. Customer or market organization assigns a specific kind of customer to each
seller (e.g. new – existing, small – large) or market (consumers – businesses).
Key account management has gained prominence in recent times due to the stra-
tegic partnerships that develop within an integrated supply chain. A company’s ex-
perienced sales executives cooperate efficiently with executives from other departments
to coordinate their activities with those of their strategic customers, in order to ensure
efficient and effective supply and demand flows.
Other issues of the sales task force relate to the definition of internal and external
vendors. In-house salespeople provide services from their own office space to the
business via the internet, telephone or customer visits. External vendors visit custo-
mers at their headquarters. Some large companies also use sales teams consisting of
experts in various fields, e.g. sales, production, research and development, finance, etc.
Some companies’ sales staff, e.g. in the pharmaceuticals sector, can be very large,
reaching up to 60% of the total staff. Given the high cost of each salesperson in terms
of fees, bonuses, travel expenses, distribution, etc., companies need to be careful when
128 (P)romotion
determining the appropriate size of the sales team. The main method used to calculate
this is the workload: the total workload to cover the market is estimated, and the
number of salespeople is calculated based on the average expected workload that can
be assigned to each salesperson.
Sales staff management includes selection and staffing, training, remuneration, in-
centives and evaluation. Selection and staffing of the sales team consist of several sub-
stages. The job description should be as clear as possible and the required qualifica-
tions of the eligible seller should be very well specified. Collectively, this makes it easier
to systematically evaluate candidates and select the most suitable ones.
Training also plays a crucial role in the effective management of sales staff. Initially,
all salespeople need to be trained when they are hired, in order to get to know the
business, its products, its customers, etc., as well as to acquire or update themselves on
specialized sales techniques that will help them to be fully acquainted with what they
need to do and how they have to do it. However, taking into account the continuous
rapid developments in critical areas of the business environment, it is necessary to
constantly train and inform salespeople to work smoothly with staff from other de-
partments of the company and the company’s customers.
Designing an appropriate rewards and incentives program is very important in
hiring, motivating and retaining competent salespeople. Remuneration and the in-
centives used are not only financial in nature, but in many cases include public or
individual recognition, sales tenders, etc. Sellers’ remuneration usually takes the form
of a relatively low fixed salary, to which commissions and bonuses are added based on
the sales achieved. According to the chosen mix, the main remuneration methods are a
fixed salary, or commission on sales, or a combination of the two, with bonuses. A
fixed salary provides precious security and stability for salespeople, but it does not
provide them with incentives for further effort beyond what the sales manager re-
quires. On the other hand, the use of commissions provides a strong incentive for
sellers to ensure every possible sale, but in the long run it can undermine customer
satisfaction and loyalty, as sellers tend to neglect to provide support services to their
customers. In any case, an effective remuneration and incentives plan should be simple
and fair, providing security to the sellers at the same time as motivating and rewarding
them for their contribution to the achievement of the business’s sales goals.
The last stage concerns the evaluation of the sales staff regarding their achievement
of the set objectives. This evaluation aims to assess vendors’ performance and provide
valuable information for planning future vendor training and incentives programs.
The evaluation includes mainly quantitative criteria, such as sales revenues and
profits, customer visit numbers, number of new customers, etc. However, it is still very
important to consider quality criteria such as customer service and loyalty, skills ac-
quired by the sellers, knowledge of the company’s products, etc. It would also be
useful to evaluate the sales department as a whole in terms of achieving the set goals
and, in general, as a return on invested capital.

3.6.5 Direct marketing

In the IMC mix, direct marketing is similar to personal sales: it is based on direct
communication with predefined individual customers, particularly consumers (Belch &
Belch, 2016; Belch et al., 2020; Armstrong, & Kotler, 2017; Kotler & Keller, 2016;
Fahy & Jobber, 2016). The main purpose of direct marketing is to provoke an
 (P)romotion 129
immediate behavioral response, i.e. to achieve immediate sales of a product. However, it
can also be aimed at strengthening relationships with targeted consumers through
providing information and/or training for the company’s products/services, maintaining
satisfaction with support services, etc. to pave the way for future sales. Direct mar-
keting, especially through online applications, also contributes to the collection of va-
luable information to create personalized value offers for each individual customer.
Direct marketing has a significant relationship with the rest of the IMC mix (Belch
& Belch, 2016). In essence, it is a form of advertising, as it conveys a message tailored
to each recipient/customer. It also very often takes the form of personalized in-
formation to customers about a specific promotion of the company. For example,
large electronics retail chains (e.g. the Greek electronics chains Plaisio, Kotsovolos
and Public) send emails to their customers, offering big discounts on selected products
exclusively for the next 24 hours. Direct marketing techniques such as telemarketing
and direct selling are also forms of personal sales. Direct marketing is used for public
relations purposes in private and non-profit organizations, such as the Greek online
telethon “Next to you… from afar” to support cultural workers during the COVID-19
pandemic, and the “Smile of the Child” telethon supporting abandoned babies and
children, etc.
Some companies have always used direct marketing, even exclusively, to sell their
products directly to consumers, e.g. by mail catalogs or promotional messages, and by
telephone. The constantly increasing and improved abilities that allow a business to
communicate with its customers, and generally throughout all its business operations
due to evolving ICT tools, have contributed to the increase in the number of com-
panies that use only direct marketing for their sales, e.g. Amazon, Ebay, etc.
Moreover, many successful businesses that traditionally had only physical stores now
take advantage of the opportunities offered by the internet to sell products through
direct marketing, e.g. sending personalized messages to their customers informing
them of their promotional activities.
Based on the above, most business benefits emerge from the increased contribution
of direct marketing to IMC. Direct marketing contributes greatly to shifting the focus
of marketing communications from mass marketing to targeted/personalized mar-
keting, as it enables better market segmentation into smaller, more homogeneous
segments, tailoring each customer’s value offer to individual needs. Due to the rapid
developments in the field of the internet, the cost per sale through direct marketing
tends to be lower compared to other activities in the business’s marketing commu-
nications mix. In addition, it provides the opportunity to attract buyers who are
difficult, if not impossible to access, through other means of communication.
Consumers also enjoy significant benefits, which in turn explains the ongoing de-
velopment of direct marketing. First of all, they have the opportunity to make their
purchases at any time of the day and any day of the year, from their own space,
without having to visit the physical store, find parking, etc. They also have the op-
portunity to be informed about products, compare them, and read reviews about a
variety of alternatives offered by different competing companies. It is also possible to
communicate directly by phone or online with the business’s support line to resolve
any queries or get further clarifications.
The basic premise for the implementation of a direct marketing program is the
existence of an up-to-date, detailed and constantly updated customer database. This
database is made up primarily of data from existing customers or visitors of the
130 (P)romotion
company’s website and it can be supplemented with data provided by relevant spe-
cialized companies.

Direct marketing means

The main means of direct marketing are described below:

• Direct postal mail: This involves sending out letters by postal mail about
promotions, information, reminders, etc. to selected or potential customers based
on an updated list of recipients. In countries like the USA, direct mail has been a
very popular means of direct marketing, but it is constantly losing ground to the
internet.
• Catalogues, brochures and leaflets: Printed or digital catalogs presenting the
company’s products are sent out by mail. The high cost of printing and sending
catalogs, combined with daily usage of computers, smartphones and tablets by
almost all existing and potential business customers, has brought about the
replacement of printed catalogs with digital ones. However, home and garden
retailers (e.g. IKEA, Praktiker) and supermarket chains continue to regularly
print updated leaflets and distribute them to store visitors. Catering companies
(e.g. pizzerias) that offer meal delivery services to the customer’s home usually
distribute advertising leaflets listing their products to potential customers either
during the customer’s store visit or delivered to their home or business mailboxes.
• Electronic mail: The digital version of direct mail is gaining more and more
ground. Most businesses no longer use traditional postal mail. E-mail has the
advantage of minimal costs and direct sending of the advertising message.
However, due to the inconvenience caused to potential customers when they
receive a lot of electronic advertising messages from various businesses (they may
find them annoying), and the need to protect consumers’ personal data, businesses
must comply with various consumer protection laws.
• Direct response TV marketing: This consists of either a short (1–2 minutes) TV
commercial or a detailed (half an hour or more) news ad. The ‘infomercial’
presents the benefits of the product in a concise and convincing manner to the
prospective customer, ending with the phone number of the company so that
customers can get in touch with the company free of charge to obtain the product.
Infomercials present business products in detail, usually on TV channels that
focus on presenting these ads. They differ from the usual forms of advertising, as
they aim to get an immediate response from the customer who will communicate
with the company to place a new order or to get more information. A wide variety
of products fall into this category, e.g. personal care, car or home care, personal
fitness, books, etc. Many TV channels spend a significant portion of their
broadcast time transmitting these messages and advertisers are their exclusive
customers via direct marketing. The advantage of direct response advertising, like
other direct marketing tools, is the immediate, reliable and accurate measurement
of its effectiveness.
• Telemarketing: This involves communicating by telephone to the prospective
(existing or potential) customer. In Greece, it is very widely used by companies in
specific industries such as telecommunications and television entertainment
services (e.g. Cosmote, Wind), electricity providers, etc. It takes the form of
 (P)romotion 131
outbound telemarketing when the sellers of the company or partner company call
potential customers in order to achieve a sale, or inbound telemarketing when the
prospective customer communicates by phone with the company following a
signal received from an advertisement or direct marketing action. It is a very
important tool in direct marketing, as it ensures direct two-way communications
between the seller and the customer, thus allowing for the adjustment of the value
offer based on the expressed preferences, capabilities and moods of the customer
(Fahy & Jobber, 2014, 2016).
The use of telemarketing is increasing because it utilizes advanced communica-
tion through the use of the internet and computer applications. The cost of a
phone call has been drastically reduced due to technological developments; direct
access to the electronic personal data of each customer via the internet allows any
competent business employee to have a very good picture of the customer’s
collaboration with the company and to adjust value offers to the real needs of
specific customers. The total cost of each telemarketing transaction is much lower
compared to live personal sales, as there are no travel, accommodation and food
costs for employees; at the same time, net communication time with customers
increases vertically, due to the elimination of travel and waiting time at the
customer’s space.
• Directs sales: This involves independent partners of the company who undertake
the direct personal presentation, demonstration and sale of the product to the
customer. Various products are sold through direct sales, such as durable
household goods, cosmetics, etc. Most independent partners work part-time in
direct sales as a complementary source of income.
• Digital marketing: This takes various forms, utilizing the advantages provided by
the internet and its applications in direct marketing. Due to its ever-increasing
importance, it is presented in greater detail in the following section.

3.6.6 Electronic/Digital marketing

Greater penetration of the internet among the world’s population continues to be
impressive. Globally, internet penetration was around 5% in 2000, increasing to
around 29% in 2010, and it now stands at 63% in 2020 (Internet World Stats, 2021).
The lowest penetration is observed in Africa, with about 50%, but it is also showing a
steady jump there. On the other hand, the highest penetration is observed in Europe
and North America (about 90%), and it is on the verge of exhausting its dynamics. It
should also be emphasized that the vast majority of the public uses the internet in-
tensively every day, communicating on social media, reading and sending emails, and
benefiting from a variety of applications, among many other others (Figure 3.10).
Internet applications based on who is transmitting and who is receiving the com-
munication are classified as follows (Fahy & Jobber, 2016):

• B2B (business-to-business): Communication between businesses has been com-

pletely transformed with the advent of the internet. The possibilities provided by
ICT have made it possible to integrate various functions, both within the business
and with strategic partners in the supply chain. In essence, the development of the
132 (P)romotion

100%
90.3%
90% 87.2%

80%
71.5% 70.8%
70% 67.7% Africa
63.2%
59.5% Asia
60%
Europe
50% 47.1% Latin America / Caribbean
Middle East
40%
North America
30% Oceania / Australia
World Total
20%

10%

0%
% Penetration

Figure 3.10 Penetration of the internet worldwide in 2020.

(Source: https://www.internetworldstats.com/stats.htm.)

discipline of supply chain management is highly connected with the use of the
internet. Large companies in particular constantly make significant investments in
innovative ICT applications which allow them to coordinate their activities within
the business and with the supply chain even more efficiently and effectively, so
that they can maintain and increase their competitive advantage.
• B2C (business-to-consumer): As stated many times already, the influence of the
internet is enormous in relation to this aspect, particularly due to ICT, concerning
communication and the completion of transactions between the business and the
consumer on matters that relate to advertising, personal sales, public relations,
promotional sales and direct marketing.
• C2C (consumer-to-consumer): The internet provides unique opportunities for
communication and the completion of transactions between consumers. For example,
consumers can search for buyers of used goods via e-auctions, e.g. eBay, etc.
• C2B (consumer-to-business): This is perhaps the most groundbreaking application
of the internet, offering consumers the unique chance to reverse the usual flow of
value offers from the business to the consumer. Businesses benefit from
consumers’ desire to make an offer for a business product/service (or even a
bundle of goods) and to offer data and marketing services to the business.
Consumers benefit in turn from the low prices or free offers, securing a particular
income level and greater flexibility in the value offers that they receive. For
example, food bloggers can include ingredients/products from a specific business
in recipes that they post on their blogs or they may be able to sell advertising space
to the businesses on their webpages.
 (P)romotion 133
The reasons for the internet’s dominance as the main means of implementing a
business’s IMC plan have been presented above in great detail. The main benefits can
be summarized as follows (Belch & Belch, 2016; Chaffey & Ellis-Chadwick, 2016;
Armstrong & Kotler, 2017):

• Integration of functions within the business and among strategic partners in the
supply chain (suppliers, producers, distribution networks).
• Possibility of two-way communications between interested parties, wherever they
may be, 24 hours a day.
• Ability for more effective market segmentation of the more homogeneous
departments and the achievement of a high coverage, exclusively for each desired
target goal.
• Unique opportunities that facilitate the active participation of customers/con-
sumers in the creation of the message that the business will send due to the very
high level of interaction.
• Provision of a plethora of highly detailed information about products, support
services and the social corporate image of the business, fully utilizing audio-visual
media.
• Possibility for direct communication with customers at virtually any time of the
day (email, SMS, social media etc.).
• Customer access to a plethora of information and the possibility to complete an
order 24 hours a day, whenever it suits the customer, from the comfort of his/her
own space.
• Possibility to complete the transaction exclusively and immediately via the
internet for certain categories of products such as software, e-books, music, etc.

However, the internet is not perfect. Customers often fall victim to scams, making
them wary of placing orders, especially with companies that operate exclusively online.
As with all other advertising media, the internet gives rise to advertising “pandemo-
nium”. Various ads flood the internet, with the result that only a very small number of
them actually end up attracting the attention of the customer. Apart from the reduced
effectiveness of online advertising, it is also annoying for users who often form ne-
gative attitudes toward advertisers. A large part of the public and the competent
public bodies have persistent, intense concerns about companies’ access to the per-
sonal data of internet users and the ways this data is used. As a result, legislation is
constantly being drawn up for the protection of personal data, which must be com-
plied with by companies that collect and process such information.
The internet is utilized by all the IMC operations of the company in order to achieve
their goals more effectively and efficiently. Some common applications of digital
marketing are:

• Advertising through search engines: Companies pay a fee to search engines such as
Google, Bing, Yahoo, etc. to display their homepage and/or brand names in the
top (first-page) results. Similarly, companies can benefit by advertising their
products on the websites of their strategic partners in the supply chain, as in the
case of some affiliated retail chains
134 (P)romotion
• Internet advertising: This refers to advertisements that are streamed in parallel on
television or exclusively on the internet. These ads usually appear before the
content that the user wants to watch or download from certain applications.
• Portable gadget marketing (smartphones and tablets): The majority of the
consumer public are rarely without their smartphone during the day. In addition
to computer-aided marketing techniques, more and more companies are
developing and utilizing relevant phone apps to serve their existing and potential
customers more effectively. The main advantage of portable devices is the
interactive nature of these small web-connected gadgets. Companies also
communicate quite often with their customers through promotional SMS
messages.
• E-mail marketing: E-mail tends to be a very important substitute for printed
correspondence between businesses and their customers. Businesses often use e-
mail to inform their customers about new products, promotions, and activities
that strengthen their corporate image.
• Promotional activities: The internet can be used to send discount coupons and
organize competitions, among a host of other activities.
• Use of coupons: Companies create accounts on social media, e.g. Facebook,
YouTube, etc. to stream ads or videos, targeting groups of potential customers.

3.7 Product packaging for promotion

Packaging is one of the most important business functions, which constitutes an
urgent necessity in our daily lives. Almost everything we trade or consume is
enclosed in one way or another by some form of packaging. We can define
packaging quite simply as all materials of any kind which are used to protect,
manage, deliver and present products, from raw materials to finished products,
from the producer to the user or end consumer. Today, more than ever, companies
are realizing that packaging can have an immense influence on consumer decision-
making, and it can improve business performance in storage and transportation
by standardizing their respective logistics activities while minimizing their op-
erational costs and ascribing a pro-environmental image to the market with a high
sense of social responsibility.
Many definitions for packaging can be found in the literature. Most definitions
focus on one or more of its uses or functions, which leads to the conclusion that the
nature of packaging is multidimensional. One of the best definitions of packaging has
been elaborated by Shagir (2004): “packaging is a system of preparation for a products
for their safe, efficient and effective management, transport, distribution, storage, dis-
posal, consumption, recycling or their rejection in conjunction with maximizing value for
the final consumer, increasing sales and consequently the profit generated for the busi-
ness”. Another precise definition of packaging is given by the Sustainable Packaging
Coalition (2018): packaging is defined as “the container that provides a means of
marketing, protecting or handling a product, including unit packaging, intermediate
packaging and shipping packaging”.
According to Directive 94/62/EC of the European Parliament and of the Council of
Europe (20 December 1994) concerning packaging and packaging waste, packaging is
defined as “all products made of any materials of any nature to be used for the
 (P)romotion 135
containment, protection, handling, delivery and presentation of goods, from raw mate-
rials to processed goods, from the producer to the user or the consumer”.
A common element of the above definitions for packaging is that it covers a variety
of important needs:

• First and foremost, the various management, distribution and storage require-
ments of the product being packaged along the entire supply chain: Ballou (2003)
states that in supply chain management, packaging is more important than the
product itself. Packaging has certain physical characteristics (shape, volume and
weight), whereas, in many cases, the product contained inside the packaging may
not have the same characteristics. Many researchers (Twede, 1992; Ebeling, 1990;
Lockamy, 1995) consider packaging as one of the most critical factors that
determines the success of the supply chain and its activities.
• The requirements for marketing and sales promotion of the product: Rundh
(2005) points out that “packaging is an important part of a company’s marketing
mix since businesses spend almost twice as much on packaging needs as they do
on standard promotional activities and advertising”.
• Information needs that support the above procedures.
• Legal and regulatory requirements for consumers’ and producers’ protection.

The purpose of the packaging is also shared by the corresponding purpose of the
various business functions, i.e. the final customer’s satisfaction. As correctly defined
by Dominic et al. (2000), “packaging is an approach that aims to develop packages and
packaging systems in order to support the administrative process and meet customer
requirements”.
Regardless of the expected benefits of the packaging, the relevant decision-making is
an issue that surpasses the narrow limits of the manufacturing business of the product,
and often presupposes the active participation of the strategic partners at different
stages of the supply chain. For example, the retail businesses often set certain speci-
fications – among others – in relation to the dimensions of the products, in order to
facilitate their placement on the shelves of the stores. Also, the packaging must fa-
cilitate reverse logistics, i.e. potential product returns including the packaging mate-
rials from the retailers to the manufacturers.
Generally speaking, decisions concerning packaging influence to a great degree
many sectors/business operations. Initially, as previously discussed, there is a sig-
nificant reaction in marketing, because perfectly designed packaging attracts the at-
tention of the consumer, thus comprising an important differentiation and
communication tool. The influence of packaging on the basic logistics operations is
summarized in Table 3.1, according to Lambert, Stock & Ellram (1998).
As previously discussed, the following points are initially selected for further in-
vestigation due to their importance: information on the packaging, protection offered
by the packaging, and standardization and protection of the product. In the analysis
by Saghir (2004) of various case studies, the following elements are identified as key
factors:

• Packaging Producer: Durability and vibration tests, cost analysis;

136 (P)romotion
Table 3.1 Influence of packaging on the efficiency of logistics procedures

Logistics operations Reactions

Transportation
Increased amount of information
on the packaging
Increased protection of the
packaging
Increased standardization
Recording of Inventory
Increased protection of the product
Storage
Increased amount of information
on the packaging
Increased protection of the product
Increased Standardization
Communication
Increased amount of information
on the packaging
It reduces delivery delays. It increases the amount of
information displayed on the packaging. It reduces
the tracking time of lost cargo.
It reduces damages and theft during transportation,
while it increases the weight of the packaging as well
as the transportation costs.
It reduces the administration/management costs as well
as the waiting time of the transportation means during
the loading period. It increases standardization. It
increases the range of choices for the transportation of
the packaged goods while it reduces the need to use
specialized transportation equipment.
It reduces theft, damages and insurance costs, while it
increases the availability of products (and therefore
sales). It also increases the value of the products and
their transportation costs.
It reduces the replacement time period and labor costs.
It increases the stacking efficiency (better use of space),
whereas it reduces the management/administration,
increasing the size of the (grouped) product.
It reduces the cost of the administrative/management
equipment
It reduces the need for any other form of
communication concerning the product, such as the
need to make telephone calls in order to track/find
lost cargo.

• Producer: Pattern/stacking method on the palette, packaging size, strength

analysis/control, stacking and storage tests, visualization/display, usefulness,
behavior, size, weight and complaints;
• Transporter: Loading efficiency onto the transportation means, distribution costs,
environmental consequences; and
• Retail sales: administration, protection, ergonomics, storage.

The influence of packaging on environmentally-friendly initiatives of businesses is also

significant. Consequently, the recyclability or biodegradability of the packaging is of
vital importance, i.e. to which degree it is possible to recycle the packaging. The latter
factor is highly esteemed since companies place more and more restrictions on waste
disposal. Therefore it is estimated that, given greater consumer sensitization con-
cerning environmental issues, the materials of many products will be recyclable or
biodegradable, or both, in the very near future.
 (P)romotion 137
Best practices for the management of urban waste comprise various procedures
related to their recycling. However, the variables that must be taken into account refer
to the properties of the packaging materials (e.g. glass, aluminum, polyethylene, etc.)
and whether the packaging comes from renewable sources. The environmental foot-
print of the packaging waste may be minimized by consciously choosing packaging
materials and implementing guidelines issued by the respective environmental pro-
tection services.

Goals and objectives of packaging

The purpose of packaging in the modern conditions of the market can be explained in
the following way (Paine, 1991; Baltas & Papastathopoulou, 2003; Sfakiotakis, 2004;
Riganakos, et al., 2020):

• Direct enclosure of the contents in such a way as to facilitate the consumption of

the product during its use, simultaneously serving the needs of logistics systems
for grouping primary packages into higher-level handling units (secondary or
tertiary packaging, as mentioned in the introductory unit of this chapter); in other
words, the unitization and division of the highest levels: In this way, packaging
supports the main functions of storage, transport and distribution, returns and
materials management. Packaging provides protection, facilitates handling,
secures space savings and contributes to an improved appearance of the product.
The packaging box is the main form of transporting and marketing the product,
from the place of production to the place of consumption. Since the packaging
method and the material it is made of has great significance, it must be properly
designed to provide maximum utility and protection during transportation against
any shocks it may sustain. The packaging should be as light as possible (especially
where it concerns reusable packaging).
• Protection of the contents from various forms of decay to keep them in a
marketable state, and to protect/ensure consumer health: One cause of decay is
their physical damage, such as being struck, vibration, compression, etc.; another
kind of decay is environmental damage that occurs due to exposure to water,
light, gases, odors, microorganisms, etc. that may cause product spoilage.
• Maintenance of the contents so that the product retains its original properties for
a specified time period as noted in its labeling: For example, the packaging of
fresh fruit and vegetables allows them to keep their shape and durability for a long
time and during the various handling stages. Products are often subjected to
adverse conditions of high relative humidity and sometimes even rainfall, so the
durability of the packaging determines the product’s quality after exposure to
such conditions.
• Transfer and dissemination of product-related information to all the user groups
that interact with it throughout the supply chain, concerning the content,
destination and management of a product distribution unit and information of
concern to the final consumer, e.g. identity, nature and organoleptic properties of
the product, and how to use it.
• The communication function of the package, which includes written information
and elements of the packaging design, such as shape, color, symbols and/or
138 (P)romotion
trademarks. In addition to providing information, the communication function is
expected to attract the consumer to buy the product. Package labeling is also of
importance: it ensures the product’s recognizability, and it informs the consumer
about the package contents.
• Easy, safe movement of the product among the different stages of the supply
network, and its safe delivery to the final consumption stage. For example, boxes
are superior in terms of the protection they provide to a product, as well being a
convenient form of mass storage. They are constructed in such a way as to allow
easy stacking, thus making the best possible use of storage space. Another
advantage is their ease in loading and unloading, which is once again attributed to
their shape.
• Attractive presentation/appearance of the product at points of sale. The packa-
ging can be used as a marketing too, and facilitates the role of the marketing mix
in the product promotion.
• Quantity control, due to suggested dosage, especially in the case of bulk products
(milk, wine, etc.).
• Environmental protection, e.g. in cases where the packaging can be recycled into
raw material or it is biodegradable.

Generally speaking, food packaging is an integral part of the processing and pre-
servation of foodstuff, and can also minimize many potential sources of spoilage,
imparting improved quality and increasing the shelf life of processed and packaged
foods (Hicks et al., 2002).

Types-categorization/classification
In general, the classification of different kinds of packaging is based on different
criteria:
Based on the material it is made of. A wide range of materials are used for
packaging. The list below provides an indicative list:

• Paper and cardboard, in all their variants: kraft wrapping, corrugated paper, solid
cardboard, Bristol, duplex, triplex, bubble plastic (aeroplast), combination of
aeroplast and cardboard, etc. Paper/cardboard-based packaging has many
advantages over other materials due to its environmental aspect because it is
produced from sustainable/renewable resources. Paper is biodegradable, does not
pollute the soil and is suitable for recycling.
• Glass: Despite its rigidity, glass is actually a very important packaging material
because it is inert and therefore able to contain a wide range of materials without
causing contamination.
• Metal: Steel and aluminum are used, mainly in the form of cans for food and
beverage products, with a wide range of uses.
• Plastics: According to Stewart (2007), of all the materials available to packaging
designers, plastics have the greatest variety; they are many kinds of plastics and
they have many processing methods.
• Steel: This is widely used in food, beverage paint and aerosol products.
• Other materials: e.g. packing shrimp, grass, plastic/airtight bags, stratocell, rapid
fill foam, among many others, etc.
 (P)romotion 139

Figure 3.11 Packaging types/levels.

• Mixed materials: Packaging can sometimes provide significant benefits and is

more energy-efficient when it combines different materials. But this also makes it
difficult to recycle.

Based on the service of the supply chain operations. Packaging of the final products
during their transportation and/or distribution, from the production or central storage
point to the final consumer, is classified according to three distinct types of packaging
(Figure 3.11). The performance of the packaging system is affected by the perfor-
mance of each packaging type/level and the interactions between these levels
(Jönson, 2000):

• Primary or direct packaging. This packaging is directly related to the content, i.e.
the product. It is called ‘direct’ because, quite simply, it comes in direct contact
with the commodity, e.g. the bottle that contains the wine, the metal can or
plastic container that holds the milk. Primary packaging is important for the
placement of items on the shelves of retail stores: it is what consumers put in
their hands. That is why it is also called ‘consumer packaging’ because it
comprises a sales unit for the end user/consumer at the point of purchase. Its
main objectives are:
• protection of the quality characteristics of the products (color, aroma, taste,
physicochemical properties, etc.), from external factors (e.g. impurities
arising from foreign bodies, chemical substances or alterations, temperature,
etc.),
• preservation of the product’s unaltered and standardized state and phy-
siology. The aim is to maintain the product for a long time so that it is ready
for use/consumption, without requiring special actions on the part of
consumers, when it reaches their hands,
• its placement on a shelf or in a storage space, (wholesalers, retailers, shelves,
refrigerators, etc.),
• attracting the consumers attraction, and
• implementation (integration) of value-added practices, e.g. pro-environmental
practices.
• Secondary or indirect packaging. Indirect packaging does not come in contact
with the product (it is not directly related to the contents); it protects the
primary packaging and facilitates the product’s wholesale distribution (through
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its intermediate storage and transportation/distribution), e.g. a carton con-
taining a dozen bottles of wine. This packaging stage is therefore mainly aimed
at producers and traders. It facilitates the transportation, storage and the stock-
taking of goods, and maintains direct packaging in excellent condition.
Secondary packaging is designed in such a way that it includes a predefined
number of primary packages. The main objectives here are protecting the
product from external influences (e.g. dust, sunlight, etc.), handling processes
along the supply chain (from damages and shocks) and its unitization.
Secondary packaging can be removed from the product without affecting its
characteristics.
• Tertiary/group packaging. Tertiary packaging is usually done using pallets, e.g. a
pallet with two layers of cartons where each level has four cartons. It is useful
where there are large numbers of primary and secondary packages divided into
groups within a pallet. Pallets offer time and cost savings during the loading and
handling stages, and they are particularly useful in saving storage space. For this
reason, tertiary packaging is also called goods transfer/transportation packaging,
with the main purpose of facilitating the transportation and protection of the
product from inconvenience and potential damage due to movement of the
product on a continuous basis or for a long period of time.

Based on the commercial appearance of the product, packaging is classified as follows:

• Wholesale packaging, which serves the transaction level between producer

(farmer, industrialist, craftsman) and trader.
• Retail packaging, which showcases the product and aims to attract the consumer
public to purchase it.

Finally, in terms of its use, packaging can be classified as follows:

• Single-use/disposable packaging. This packaging is recycled after use, or it is

destroyed and cannot be reused. Almost all paper and plastic packaging belong to
this category.
• Multi-use/reusable packaging. This packaging can be re-used for the packaging of
the same or another product (e.g. glass drink bottles, iron gas cylinders, etc.). It is
usually made of glass or iron, and to a lesser extent plastic, and is often more
expensive than packaging made with single-use materials.

Challenges
In the last decade, many challenges related to food packaging have arisen in the
business and social contexts. Of greater significance are the aging of the world po-
pulation, the trend toward smaller households, the lower frequency of families eating
together at the table, the growing demand for consumer convenience through
e-commerce, and an increasing awareness around health-related issues, as noted by
Loureiro, Gracia and Nayga (2006).
Marsh and Bugusu (2007a, 2007b) argue that significant changes have occurred in
consumer lifestyles; people now have less free time, while businesses face increasing
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demands for a transition to smaller packaging sizes, and greater differentiation in an
increasingly competitive environment. The expansion and entry of many companies
into international markets has increased the distance between a product’s production
point and point of sale, which demands the use of durable packaging materials and
labeling in a globally understood form (Jahre and Hatteland, 2003). Another im-
portant challenge is mentioned by Mahaffie (2006): no matter how impressive or ex-
pensive a package is after purchasing and using the product, the packaging then
becomes useless.
Hellstrom and Nilsson (2011) note that changes in consumer habits and increased
demand for new products force companies to find and use new innovative packaging
methods for their products. So companies are seeking to redesign or completely
change their packaging in order to facilitate product transport, storage and handling,
at the same time as trying to improve their environmental performance.
Dharmadhikari (2012) notes the significance of environmental requirements in the
design of companies’ networks, at the same time that their supply chain must make all
efforts to deliver the right product, to the right place, at the right time and at a rea-
sonable cost to the consumer; companies are well aware of the importance of optimal
environmental performance as a good business practice, which enhances the brand’s
image in turn.
To these must be added consumers’ increasing awareness of environmental issues,
and the need to introduce new regulatory requirements for recycling used packaging.
As stated by Qing and Guirong (2012), the environmental impact of packaging is
significant: packaging is single-use in most products (especially in the case of food),
and many companies use excessive packaging, even choosing materials that are not
environmentally friendly. A report by the US Environmental Protection Agency
(EPA, 2019) provides a general overview of packaging waste volumes for all business
sectors: “Containers and packaging comprise a significant part of municipal solid waste
(MSW), amounting to 80.1 million tonnes produced in 2017 (29.9% of total produc-
tion)”. For the same year in the EU27, total packaging waste reached 76.9 million
tonnes of generated waste (Eurostat, 2020).
Riganakos et al. (2020) identify the following challenges for packaging, particularly
for direct (primary) packaging:

• Raising global public awareness on the issues of healthy eating (packaging of

consumables, food, beverages, etc.) and environmental protection (non-polluting
packaging),
• Increasing and more intensive competition, which will result in the production of
new products at a rapid pace, and the upgrading of product and packaging
quality, and
• Regulations on the packaging of consumables in the context of an integrated
European market.

The constant efforts made by companies to reduce packaging costs per product should
also be noted, “which in some cases may cost more than the components of the product
itself, and the existence of these products may depend on the actual packaging”
(Kanavouras, 2015). The total packaging costs depend on the cost of the material and
the production method, while the choice of material is directly dependent on pro-
tection and market requirements. Packaging can dramatically affect products’
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handling costs, as it is directly related to the efficiency of the use made of available
space, and the products’ weight. Reusable packaging can reduce costs in cases where
products undergo small circular movements over time and space; in such cases, good
cooperation between the sender and recipient is essential with regard to the company’s
duty to reprocess/reuse the packaging.
4 Marketing mix elements: (P)eople:
Delimitation and integrative approach
with SCM

Introduction
The growing contribution of services as an integral element of the value offered to
customers has highlighted the great importance of managing the remaining 3 Ps in the
services marketing mix of services. In recognition of their staff’s importance, com-
panies often focus on the management of frontline staff in order to achieve the levels
of service that their customers expect. The provision of high-quality services however
presupposes appropriate planning and management of a business’s relations with its
employees, among each other as well as with the staff of their strategic partners in the
supply chain, who they will come in contact with. The ultimate goal concerning the
management of a business’s human resources must be the integration of all operations,
both internal and external.

Learning goals
After reading this chapter, you will be able to answer the following questions:

• What are the particular features of services?

• Why are human resources very important in the provision of high-quality
services?
• What are the challenges that employees must face when dealing with customers?
• What are the appropriate strategies in the effective management of staff employed
in the provision of services?
• Why is good cooperation vital among those involved in both the internal and
external supply chain of a business, in terms of the provision of high-quality
services?

Structure
4.1 Main Features of services (the 4 “I”s)
4.2 Classification of services
4.3 The importance of human resources in the provision of high-quality services
4.4 Challenges faced by frontline employees
4.5 Human resource management in the provision of high-quality services
4.6 Supplementary foundations for the effective provision of high-value services
4.7 Human resource management within the services supply chain context

DOI: 10.4324/9780429684883-4
144 (P)eople
4.1 Main features of services (the 4 “I”s)
Products are classified as either material (e.g. furniture, biscuits) or intangible goods (e.g.
services, ideas). A relatively thorough and detailed definition and analysis of services has
been given in Chapter 2. This analysis makes it easier to understand the four special
characteristics of services which differentiates them from material goods, due to the fact
that their main part cannot be discerned using one of the human senses. Thus, the four
distinctive features of services are as follows (Wilson et al., 2016; Mudie & Pirrie, 2006;
Zeithaml et al., 2018; Hoffman & Bateson, 2010; Verma, 2012; Avlonitis et al., 2015;
Limberopoulos & Pantouvakis, 2008):

4.1.1 Intangibility
This refers to the main feature that differentiates services from material goods, i.e. the
absence of physical features that would allow us to perceive them based on our sen-
sory abilities. While it is possible to evaluate a fruit or vegetable macroscopically using
our senses – sight, touch, smell or even hearing (e.g. the crack a watermelon makes
which tells us how ripe it is) – before putting it into our shopping cart, we are not
always given the same opportunity to assess the services we will receive from lawyers
and accountants, who we expect to help us meet our legal/financial obligations. For
this reason, customers – individual consumers or companies – try to gauge an idea of
the quality of alternative service providers based on various quality indicators that can
be categorized as follows: (a) people (personnel), (b) procedures (the way the services
are provided), and (c) physical evidence (place/space), i.e. the three additional Ps in-
volved in services (People, Processes, Physical evidence). A detailed analysis is made of
these in the present and in the next two Chapters. The above implies that marketing
communication is very complex; a significant part of it relies on word-of-mouth.
Due to their inherent intangibility, it is clearly more difficult to demonstrate or
promote services in such a way that the prospective customer will be able to under-
stand the various dimensions of their quality, which, inter alia, explains the much
greater loyalty/devotion of the customers of service providers in contrast to the de-
votion shown toward material goods. The intangibility factor makes it even more
difficult to estimate the total service costs for each customer, which, in practice, varies
much more than for material goods. It is therefore more difficult to determine an
appropriate pricing policy for services. Another challenge that service companies face
is the great difficulty of legally securing exclusive provision of specific services, since it
is very easy for competitors to copy and create very close variations.

4.1.2 Indivisibility
Unlike material goods, services are produced and consumed at the same time. In order
to produce – i.e. provide – a service, it is vital to have a good level of cooperation
between the providers and the actual users (customers) of the service. In many cases,
the end result depends on other customers’ interactions. For example, learning a
foreign language requires collaboration between tutors (and not just the general staff
of a tutoring business) and students, but the interaction of other classmates can
contribute either positively (they compete with each other in a friendly way) or ne-
gatively (they have different levels/goals). The indivisibility factor of a service
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emphasizes an inability to provide it on a large scale, due to the limited ability of the
provider to produce it at a certain time, before it is needed. For example, a successful
music band can offer a certain number of performances, but not at the same time in
two different places, even if there were such a demand. Service providers face the same
problem in achieving economies of scale when their customers are geographically
dispersed. In many cases, however, e.g. banks which have branches to serve customers
in different areas, support services may be concentrated in one place in order to
achieve the benefits of economies of scale.
Indivisibility also implies a significant differentiation in the configuration of the
spatial element of a service compared with the production space for material goods; in
most cases, the presence of the customer is required for a service, which is not the case
for material goods. A postal services company will configure the transaction space
with its customers quite differently to that of a company that produces marmalade. Of
course, the postal company will configure its mail processing area in a different
manner to that of a marmalade processing plant, since there is a different kind of
customer interaction involved. The indivisibility factor often makes it inevitable for
there to be interaction with customers during the provision of the service. For ex-
ample, travelers’ experience on a flight can be significantly affected by the divergent
behaviors of some passengers, which is probably impossible for the airline to antici-
pate before the flight takes off, in order to take precautionary measures to avoid
unpleasant situations. In other cases, however, companies can group customers in a
way that significantly reduces unwanted interactions; in a football match, for example,
spectators from opposing teams are placed in distinctly different areas of the stadium.

4.1.3 Inhomogeneity – Heterogeneity

The simultaneous production and consumption of services results in, inter alia, the
significant impossibility of developing and implementing a quality control system
equal to that of the production of material goods. It is therefore inevitable that there
will be a much greater variation in the quality of services compared to the quality one
would expect for material products; service quality depends very much on the avail-
ability of the provider’s employees, as well as some sort of cooperation between
frontline employees and customers. The end result is also directly affected by en-
vironmental conditions which are beyond the control of the provider, e.g. an emer-
gency power outage or internet disconnection at a bank branch will result in an
inability to serve customers, who will in turn be dissatisfied. The perceived quality of a
service is a function of many factors, particularly the possibility of harmonious co-
operation between the provider’s employee and the customer, as well as the interaction
of other customers in the production process. For example, the quality of the service
offered by shop assistants in a clothing store depends on their willingness to serve
customers, the cooperation shown by customers to explain their needs and facilitate
the assistant, and the existence of a small or large queue of other (impatient) customers
waiting to be served.
The challenges of heterogeneity are even more acute in the case of companies that
maintain a chain of branches (e.g. banks, fast food restaurants), even more so in
regions (e.g. countries) with a different culture, and those that collaborate with a wide
network of partner stores under franchise agreements. Heterogeneity makes the need
for higher education and continuous training of staff even more imperative,
146 (P)eople
particularly for frontline staff, to ensure that high-value services are consistently being
provided to customers. Businesses are also becoming increasingly aware of the im-
portance of new technologies in tackling inhomogeneity, especially concerning in-
ternet and ICTs. For example, most banks offer a wide variety of services through
their websites, where customers can deal with a variety of transactions on their own.
New technologies also allow for the standardization of services with employee-
customer contact.

4.1.4 Consumability/Perishability – Inability to be stored

Unlike material goods, services cannot be stored in order to be sold at a later date. For
example, an accounting firm that knows there will be increased demand for services in
the last month before the deadline for filing tax returns is not able to create ready-to-
use tax returns on the (electronic) shelf during the less busy period, as such transac-
tions are highly personalized. Since services cannot be stored, most companies in the
service sector will have much higher production capacity than would be needed if
demand were relatively stable. Taking a restaurant as an example, this may result in
the restaurant being in the awkward position of disappointing potential customers on
a Saturday night due to overcrowding, whereas almost every other day, it will be
utilizing a smaller part of its total capacity.
Since services cannot be stored, various tactics must be used in order to strike a
balance between demand and the fullest possible utilization of a company’s capacity.
Normalization of demand is achieved, albeit partially, through tempting offers during
periods of low demand, as is the case in the UK, where pubs offer some drinks and
meals at very low prices in January to stimulate some demand after a peak period
before and during the Christmas/New Year holidays. Similarly, airlines and hotels
make extensive use of “yield management” to maximize their production capacity. For
example, they charge a higher price to customers who need a higher level of service
(e.g. business class passengers, who plan a last-minute trip and want a more com-
fortable seat) and a lower price for customers who require less service (e.g. students
who plan their trip 2–3 months in advance and don’t mind sitting in less comfortable
seats as long as they pay less). Companies often charge higher prices at busy periods
and lower prices when demand is low.

4.2 Classification of services

The classification of services is based on various criteria (Wirtz & Lovelock, 2016,
2018; Limberopoulos & Pantouvakis, 2008; Haksever & Render, 2013). It should first
be noted that a very large part of the service sector is provided by public services.
Public service providers cover the whole range, from local (e.g. municipal water/
sewerage services, regional irrigation networks) to national level (public health system,
education, road and telecommunications networks, national defense, public order,
etc.). Thus, an important distinction of services lies in their ownership status, i.e.
whether they are publicly or privately owned. Another important criterion concerns
whether they are for- or non-profit. Almost all public services are non-profit, aiming to
provide services of public interest for the good of all citizens. Private companies are
nearly all for-profit, but a significant number of them may also be non-profit, e.g.
“Smile of the Child”, “Arcturus” etc.
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The customers of a service company may be other companies. Examples of this are
a (private) company that provides cleaning services for large buildings may undertake
office cleaning work for another similar company, and the (state) meteorological
service which informs airports about weather changes. Services are also distinguished
on the basis of the customer’s position in the service supply chain. Thus, customers
can be internal, i.e. employees who receive services internally from other departments
in order to add value to their own work; and external, i.e. end customers who will
benefit from the service.
Another criterion concerns the degree of contact between frontline staff and cus-
tomers, where services are gradually extended from low to high contact. Low-contact
services require limited, even zero, contact with the company’s employees, such as
telecommunications and electricity services. New ICTs allow service providers’ cus-
tomers to handle a very large part of a transaction themselves, and to complete it on
their own, i.e. “contactless”, via websites and phone applications made available to
them by the company. However, the importance of even a few customer interactions
with company staff should be emphasized; if customers are not satisfied with the
service, they are very likely to look for another more competitive service provider in
the future. At the other end of the spectrum, some services are high-contact: customers
come into lifelong contact with frontline staff and remain on site until the transaction
is completed, e.g. hairdressers, beauty salons, gyms, etc.
Services can also be classified by the “input” processed by the “production” system,
i.e. customers, their material assets and personal information (Wirtz & Lovelock, 2016,
2018; Haksever & Render, 2013). Customers may receive both tangible and intangible
services. For example, hair salon and beauty parlour clients receive services that im-
prove their physical condition, i.e. their body, but they can also attend a concert or take
part in an educational program run by the same business; in this case they undergo
intangible treatment, to help improve their mental and emotional state. Material assets,
such as their car which needs maintenance work, or sending an envelope by post, are
subject to tangible processing. Customer data is subject to intangible processing: for
example, it may relate to legal assistance in drafting a trade agreement, the submission
of an investment plan to a government-funded program, etc.
An important difference between services – particularly tangible ones – which
concern people on the one hand and ownership/personal data on the other lies in the
mandatory physical presence of people during the provision of the service. The service
procedure must be planned appropriately so that customers and frontline staff are
located in the same place at the same time; important care must also be taken to
resolve issues related to security and customers’ peace of mind. Processing ownership
data does not require customers’ physical presence (or it requires only a small con-
tribution) in the overall delivery of the service. This feature of services offers greater
flexibility in the design of production processes, particularly the possibility of ex-
ploiting the potential benefits of achieving economies of scale by standardizing and
automating a significant part of them.

4.3 The importance of human resources in the provision of high-quality

services
The role of the company’s employees is crucial in providing high-value services
(Avlonitis et al., 2015; Hoffman & Bateson, 2010; Wirtz & Lovelock, 2016, 2018;
148 (P)eople
Wilson et al., 2016; Zeithaml et al., 2018; Verma, 2012). A service delivery system is
made up of three main components (Avlonitis et al., 2015):

• Logistics equipment, e.g. in the provision of bank services, which require chairs,
desks, air-conditioning, information systems, security systems to guard transac-
tions, etc.
• Planning and implementation of the procedures used, e.g. the specific steps that
must be taken each time to complete a cash deposit into a bank customer’s
account, or for a house loan.
• Employees who «produce» the «product», i.e. the people who will provide the
service. The main classification of service sector employees is based on their direct
interaction with customers:
• Frontline (front-desk) employees, who come into direct contact with custo-
mers while they are being served, e.g. bank clerks, investment consultants, etc.
• Support services (back-office) employees, who don’t interact directly with
customers, but without whom the completion of a service is not possible, e.g.
the maintenance and support staff of a bank’s information system.

The logistics systems used and the service delivery procedures followed are easily
copied by a company’s competitors, but the manner in which employees are served by
a company’s employees is something that, to a very large extent, cannot be standar-
dized or replicated by the competition.
The importance of human resources is also highlighted by an evaluation based on
the competitive advantage of service provider companies. It is very difficult for a
business differentiate itself by the lowest – most basic – services it offers, and the
design and implementation of service delivery processes; the main burden in gaining
and maintaining a competitive edge lies mainly in the quality of customer service
during the provision of the service. For example, most fast-food restaurants or hair-
dressers in a specific area provide similar services and follow almost the same pro-
cedures as their competitors. The main source of difference lies in the abilities, skills,
composure, empathy and, the general willingness of frontline employees to make
customers happy, and offer them a unique moment of truth.

4.3.1 Human resources and the service-profit chain

The critical role of service employees in customer satisfaction, which may have po-
sitive effects in improving the company’s revenues and profits, lies in the service-profit
chain (Heskett et al., 1994; Hoffman & Bateson, 2010; Wirtz & Lovelock, 2016, 2018;
Wilson et al., 2016; Zeithaml et al., 2018; Verma, 2012; Bruhn & Georgi, 2006).
According to the service marketing triangle, the success of a company’s customer
service depends on how it performs its external marketing (the company’s interaction
with customers), internal marketing (the company’s interaction with employees), and
interactive marketing (employees’ interaction with customers). Many researchers
argue that customer satisfaction, and consequently turnover and business profits, are
highly correlated to employee satisfaction and a customer-centric culture. Some will
go so far as to argue that it is impossible for a service provider to have satisfied
customers if the people it employs are not satisfied. Therefore, a crucial element for a
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successful service-profit chain is the appropriate configuration of a business’s internal
environment, in order to offer a high-value internal service that will contribute to a
high perceived value of the benefits that employees receive.
It is generally considered that employee satisfaction contributes positively to their
loyalty to and remaining with the company, as well as to their own productivity, which
has a direct impact on both the offered and perceived value of the services provided to
(external) customers. A highly perceived external value is the cornerstone of customer
satisfaction and loyalty, therefore contributing to the business’s longevity. However,
perceived value and customer satisfaction also depend on other factors, such as how
the (physical) environment is designed, how the service delivery process is created, and
how it is implemented (presented in detail in later Chapters). Therefore, it should be
noted that customer satisfaction and employee satisfaction are interdependent, and
companies that have high levels of both employee and customer satisfaction are laying
strong foundations for success (Figure 4.1).
From the above mentioned, it is obvious that it is the human factor that essentially
differentiates the marketing of services from that of material goods (McDonald, 2011;
Wilson et al., 2016; Zeithaml et al., 2018). Even when companies fully understand their
customers’ needs and create appropriate service delivery procedures that will meet
customers’ expectations, the employees’ role in the actual delivery of the service is
crucial. For example, a vague outline of employees’ roles and responsibilities, in-
sufficient education and training, and/or a lack of motivation on their part are very
likely to result in poor quality services which give rise to customer dissatisfaction.
Moreover, the cost of a quality failure, i.e. the costs borne from an unacceptably low
level of quality of a product/service, increases dramatically in the case of external
failure compared to internal failure.

Value of
Internal
Service
Profitability
Staff
&
satisfaction
Development

Customer
loyalty Staff loyalty

Customer Employee
satisfaction productivity
Value of
External
Service

Figure 4.1 Service-profit chain.

Source: Adapted from Heskett et al. (1994).
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In the provision of services, the customer, as their co-producer, immediately senses
quality (external) failure, and the cost of correcting this is very high; in some cases, it is
not even possible to do so, e.g. poor photographic coverage of a wedding. In contrast
to material products, the production process is usually not visible to the customer and
the company has the ability, albeit belatedly, to conduct a final product quality check
before a product is delivered to the customer. This is why most quality failures in
material products are not visible to the customer (internal failure); consequently, the
cost of dealing with them is much lower compared to when this happens with a service.
As a result, quality failures cost a business much more than quality failures in material
goods; this highlights the crucial role of employees in customer service.

4.3.2 Impact of human resources on the dimensions of the perceived service

As previously mentioned, the concept of quality is multidimensional. A business’s
human resources affect all five dimensions of the perceived service:

1 Reliability: The ability of the company to accurately deliver the promised service
whenever the customer requests it depends on the many and various services
exclusively offered by the frontline staff. In many cases however, the assistance
coming from support staff (e.g. those responsible for the maintenance/manage-
ment of the information system) is extremely important in providing services in
the way that the company has committed itself to supply them to the customer.
2 Response: The willingness of the frontline staff to respond immediately to the
customer’s wishes plays a catalytic role in the timely provision of services at the
very moment when the customer needs them. In some cases, customers may not
explicitly express their desire for the provision of a support service, e.g. when
trying to evaluate/select a kitchen appliance (e.g. coffee maker, mixer, etc.). The
employee’s willingness to take the initiative and ask customers directly if they need
any help may have the effect of increasing the customers’ overall satisfaction.
3 Security: Frontline employees play a key role in communicating to customers the
credibility of the company, instilling confidence about the services they can
provide. Customers may already know of the business, e.g. from previous
transactions or referrals from trusted individuals; however, the reliability and
trust that they gain when they receive services from frontline employees always
remain to be confirmed each and every time they use those services.
4 Personalization: Customers perceive a higher value in the service provided when
they feel that the company’s staff have listened to them willingly and attentively,
and have made every effort to tailor the service to their individual needs and desires.
5 Material assets: The appearance (dress, cleanliness, etc.) of the employees should
be harmonized with other “tangibles”, e.g. the decor, printed materials, etc., in
order to communicate the message to the customers about the effort of the
company as a whole in providing high-quality services.

4.3.3 Reasons of the staff’s critical importance in the services sector

The critical role of employees, especially frontline staff, in terms of the profitability
and development of a company/organization, now becomes clear. The following ideas
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play a vital role (Wirtz & Lovelock, 2016, 2018; Wilson et al., 2016; Zeithaml et al.,
2018; Verma, 2012):

• The frontline employee is often associated with the service itself, in the sense that
the employee is the sole creator-producer of the service. Examples of this are
services offered by an accountant, the caretaker of an elderly person, the cleaner
of a building, a civil engineer, teacher, etc. Therefore, enriching and improving the
skills and working conditions of frontline employees is an absolute must for a
company that wants to improve the value it offers to customers.
• Frontline employees are the company’s representatives, a kind of “ambassador”
in the eyes of the customers, as they are the people that customers come in contact
with first, and they are the ones that create the value of the services being provided
by the company. Even when the service is provided collectively by a group of
employees, as is the case, for example, with the medical care that patients receive
in a private clinic, each employee (doctor, nurse, administrative staff) represents
the business itself in the eyes of the patient, who is the “customer” of such a
service. The misguided action of just one employee is enough to damage the
perceived level of the overall customer (patient) satisfaction to a very significant
degree, which may even countervail the overall effort of all the other employees.
• Frontline employees are marketers: they undertake to implement the marketing
strategy of the company, with the ultimate goal of creating and maintaining long-
term mutually beneficial partnerships with customers. Frontline employees are the
first to hear about any changes concerning customers’ expectations, and provide
valuable information on segmentation and targeting of market segments. They
also shape the “product”, based on the individual needs of each customer; they
implement a critical part of the integrated marketing communication of the
company; they are often responsible for determining the final price of the service
offered; they also work with the company’s staff and its partners in the supply
chain in the distribution of the service.
• They are highly influential in the perceived satisfaction of the customers, and
consequently their loyalty. Customers who are dissatisfied with a service are
unlikely to return to the business. If they test the services of a competitor and are
satisfied with them, then they are most likely to stay with the competitor; the
intangible nature of services makes it very difficult to benchmark potential
alternatives. Turnover and profitability depend directly on the performance of
human resources, particularly customer contact.
• Frontline staff are an integral part of the brand in the customers’ eyes: in their
minds, the company is identified by the employees who serve them.

4.3.4 Categories of human resources based on customer contact and

participation in the implementation of the marketing mix
Judd (2003) categorized the human resources of services and the influence that these
human resources have on the customer into four broad groups based on their degree
of involvement in the design and implementation of the traditional marketing mix,
and their degree of contact with the customer (McDonald et al., 2011).
Contractors are those who come in direct contact with customers. They are re-
sponsible for the design, and the immediate implementation in particular, of the
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traditional marketing mix; this includes the sales workforce and the technical support
staff that customers directly turn to concerning any issue they may have. Educating
and continuously training this staff, empowering and motivating them appropriately,
are essential conditions for a better understanding of customers’ needs and desires,
and providing satisfactory services.
Modifiers come in direct contact with customers, but their involvement in the tra-
ditional marketing mix is limited; examples of modifiers are hotel/restaurant recep-
tionists, law firm secretaries, and tellers in a public service. Despite their small
contribution to shaping the service that customers receive, their direct contact with
customers can play a decisive role in the perceived value of the overall service: their
failures can degrade the result of the overall effort made by other employees of the
company/organization. Therefore, it is essential for this group of human resources to
receive appropriate training and development of emotional skills such as empathy,
composure, willingness to serve, inter alia.
Influencers do not have direct contact with customers, but their involvement in the
implementation of the marketing mix is crucial. Examples of influencers are restaurant
chefs, car mechanics, cellphone technicians that do not receive the faulty phone directly
from the customer, etc. They obviously have a huge and direct impact on the perceived
value of the services provided, which is why a business should enable them to get in touch
with customers on a regular basis in order to make such employees understand the key
role that they play in customer satisfaction. A business should seek out, hire, train and
motivate people with special technical expertise that wish to develop their skills on a
continual basis, so that they can make the most of the capabilities provided by the internal
business environment in order to offer the highest possible value to each customer.
The final employee category – the “isolateds” – don’t usually come in direct contact
with customers, and their contribution in the implementation of the business mar-
keting mix is very indirect. Examples of this group are restaurant managers and the
accounting department staff in a beauty salon. In essence, the services that these
employees offer are necessary inputs for the provision of the services offered by
frontline employees. Therefore, it is very important that the business constantly in-
forms the isolateds about the needs of both the external (final) and internal (contact
staff) customers, as well as the overall marketing strategy. Failure on the part of the
isolateds may have a significantly smaller impact in terms of customer satisfaction,
compared to a failure of frontline staff, but each mistake will clearly have a negative
effect on the results of the efforts of all those involved in the business (Figure 4.2).

4.4 Challenges faced by frontline employees

Frontline employees face certain challenges in the performance of their duties, as they
are considered the link between the company and its customers. Due to the direct
contact they have with customers during the creation of the service, they must cope
with specific sources of conflict, as well as with the difficulty of evaluating the offsets
between efficiency and effectiveness.

4.4.1 Frontline employees as boundary spanners

Frontline employees act as boundary linkers connecting the business’s interior, i.e.
back-office functions, with the business’s customers (Wirtz & Lovelock, 2016, 2018,
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High contact

Contractors Modifiers
• Sales assistants • Cashiers
• Service technicians • Secretaries
• Marketing • Welcomers
management

Direct Indirect
involvement involvement
with the with the
marketing mix marketing mix
Influencers Isolateds
• Production • Accounting office
personnel • Supplies department
• Business executives
• Research &
Development

No or low contact

Figure 4.2 Employees’ role based on contact with customers and participation in the mar-
keting mix.

Wilson et al., 2016, Zeithaml et al., 2018). This means that frontline employees play a
crucial role in collecting, processing and transferring the required information between
the external (customers) and internal (support functions) environment of the business,
and vice versa.
The role of frontline employees and the corresponding skills and abilities they must
possess vary from one industry/company to another. At one end, there are the rela-
tively low-skilled employees, such as waiters at a fast-food restaurant, salespeople at a
clothing store, telephone assistants at a telecommunications call center, cashiers at
retail stores and so on. Their remuneration is also relatively low, as is the corre-
sponding education and training they usually receive. At the other end of the spectrum
are the highly educated and skilled employees, such as civil engineers, accountants,
lawyers, professors, doctors, etc. who are usually remunerated respectively, and who,
either voluntarily or at the instigation of the business, are constantly kept up to date
about interesting developments in their field.
Regardless of their role and qualifications, all frontline employees, beyond the ne-
cessary relevant mental and physical skills and abilities needed, should possess highly
developed emotional skills and continually seek to improve them, as the performance
of their duties is essentially defined by emotional features. This means that regardless
of their mental disposition and the attitude of customers toward them, frontline
employees are obliged to smile, be friendly and look willing to serve. It is not enough
for a salesperson in a clothing store simply to be willing to serve a customer
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immediately, to listen to customers’ needs and preferences, and to offer them the best
possible options to meet their needs/wishes. At the very same time, regardless of how
the salesperson is feeling, s/he should be smiling, maintain constant eye contact with
the customer and create a warm, friendly, pleasant atmosphere. In many cases, this
emotional work will have to be performed under duress, such as when serving a re-
latively antagonistic customer, or someone who is dissatisfied with the behavior of
another employee, or even another customer in the store. The conflict and stress that
contact staff experience can be quite intense, since it is very important that this es-
sentially emotional work is done spontaneously and not pretentiously.
Thus, businesses must ensure that they are providing their employees with appro-
priate support, in order to enable them to offer competitive services and effectively
execute the task they have been assigned (Wilson et al., 2016, Zeithaml et al., 2018),
which can be done in the following ways:

• Selecting employees who already have a satisfactory level of qualifications for the
provision of work with an emotional involvement. Traits such as empathy,
composure, kindness, patience, sociability, etc. are highly regarded in this sense.
Some companies find this out by asking prospective employees to work for a day
or two in real conditions to see how they react in different situations.
• Training in the management of emotional work. Many companies train their
employees to manage anger issues that may arise from the vindictive resentful
behavior of some customers. A significant portion of frontline employees commu-
nicate with customers and provide services over the phone, so training should also
include elements of optimal communication without seeing the customer.
• Configuring the workplace so that a pleasant natural work environment is created
with proper lighting and air conditioning, providing spaces where employees can
take a short break, ergonomically designed offices, etc. This is becoming more and
more important, as new ICT applications are constantly increasing the percentage
of frontline staff who communicate with customers remotely from their office.
Thus, companies are often tempted to reduce their operating costs by reducing the
space and equipment available in the places where contact staff work.
• Designing and implementing procedures that support and motivate employees to
talk openly with each other about their unpleasant work-related experiences. The
benefits of this are many: employees are relieved of the stress and anxiety they
experience as a result of such incidents, especially when they discover that their
colleagues have had similar experiences; they realize they are not alone, and are
not necessarily responsible for these events. Solidarity also develops between
employees, while they also discuss various useful practices to deal effectively and
painlessly with these unpleasant situations.
• Providing short breaks to frontline staff after an incident with a high-demand
customer, by letting them switch roles with other colleagues. In supermarkets, for
example, cashiers could be assigned the task of restacking shelves to relieve the
pressure of having more direct contact with customers.
• Transferring the most difficult customer cases to managers who have more
experience and a greater share of the responsibility in the business, in order to
alleviate the pressure on frontline employees.
• Finally, it is very useful for managers (directors, executives, etc.) to have similar
experiences of emotional work situations faced by frontline employees, in order to
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better understand the real conditions of frontline staff’s work environment and to
manage staff more effectively.

4.4.2 Sources of conflict

Frontline employees often face conflicts due to their particular role; the conflicts arise
from having direct customer contact (Wirtz & Lovelock, 2016, 2018; Wilson et al.,
2016; Zeithaml et al., 2018; Hoffman & Bateson, 2010; Avlonitis, et al., 2015). They
will negatively affect employee satisfaction to a great degree, at the same time un-
dermining their ability and willingness to serve customers. Sources of conflict can be
classified into the following main categories:

• Business-customer conflicts (organic): In many cases, frontline employees experi-

ence negative emotions due to their role as the connecting link between manage-
ment and customers. Businesses specify the various services they provide to their
customers, and they follow a specific pricing policy. Quite often, however,
customers directly or indirectly ask frontline employees to offer something other
than what the company’s management has specified for the service. For example,
the management of a hair salon may have stipulated that hair dyeing is an
independent service from hairstyling and that the customer will have to be
charged extra if she wishes to have her hair styled after having it dyed. The
hairdresser, however, will feel particularly uncomfortable allowing a client, who
did not ask for the extra hairdressing service, to leave the store with wet/unstyled
hair, especially when the tips that the customer leaves and her future visits to the
same hairdresser will all depend on her overall experience.
It should be highlighted that the management is interested on the one hand in
the optimal satisfaction of their customers’ needs, and on the other in being able
to serve a minimum number of customers, e.g. per hour, to balance efficiency with
effectiveness. For example, employees of customer service call centers should look
for appropriate ways to satisfy customers at the same time as answering a
minimum number of calls per hour.
• Person-role conflicts: Frontline employees often feel that they do not receive the
necessary support from the business when dealing with unpleasant situations
concerning customers. In many cases, the principle of “the customer is always
right, even when the customer is wrong” makes the employee feel the need to
defend him/herself and apologize for situations for which s/he is not guilty. The
pressure, stress and offense caused to a frontline employee’s personality and basic
principles motivate that employee to behave in ways that are not compatible with
the role of a service provider. These conflicts become more intense among low-
skilled/unskilled employees (a sales assistant in a clothing store), compared to
highly qualified ones (a doctor at a private clinic).
• Conflicts between customers: Frontline staff are almost always serving many
customers, either in turn (e.g. in a shop, a hair salon) or simultaneously (e.g. in a
gym, an airline flight, etc.). The simultaneous presence of two or more customers
in the service area may raise a conflict of interest. The hairdresser’s desire to take
more care of a particular customer by meeting some of her special requirements
(e.g. a particular style) may provide higher value to that client, but it may cause
dissatisfaction to a man who wants a relatively quick basic haircut and has to wait
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longer to get that service. Accordingly, people who participate in a fitness
program (e.g. aerobics) may have different preferences and needs, with the result
that some people want a more intense program than others or are more focused
on training certain parts of the body (e.g. the trunk, legs etc.). These conflicts are
usually more intense and more difficult to handle for low-skilled frontline
employees (e.g. the secretary in a law firm) than those with higher qualifications
(e.g. the associate lawyer in the firm).

Businesses need to be aware of and deal with conflicts that frontline employees face in
a timely manner in order to avoid negative consequences. One of the most significant
conflicts is the increased rate of employee turnover in the company. Replacing em-
ployees with new ones entails high costs that cannot be accurately estimated; these
include recruitment, training, familiarization with the service system(s), integration
into the service team, alignment with the culture and principles of the business, de-
veloping personal relationships with customers, etc. Such conflicts lead to reduced
employee satisfaction; based on the service-profit chain, this implies a lower external
service value, reduced customer satisfaction and loyalty, and therefore reduced rev-
enues and profits for the company.
Organic conflicts stem mainly from business failures in the design and implementation of
service delivery processes for meeting customer expectations. In many cases, this is due to
exaggerated promises communicated to customers, which it turns out cannot be ade-
quately satisfied. But there will always be some customers who insist on those promises
being kept, and will be unhappy if they aren’t fulfilled. Thus, only promises for services
that the company actually has the capabilities to provide should be conveyed to customers.
The effective management of role conflicts presupposes the existence of frontline
employees who have innate abilities for emotional work, such as composure, empathy,
etc. However, little importance is given to these skills in staff selection and recruit-
ment, particularly concerning employees who work at lower levels, which is usually
accompanied by low pay and development prospects. As a result, the conditions
created contribute to the low perceived appreciation of the employees’ role, both by
themselves and by customers. It is also very important for companies to design and
implement procedures that will encourage employees to report their conflicts to the
management. Great attention should be given to these remarks in order to find ap-
propriate solutions to them in a timely manner, which may include reviewing service
delivery procedures, and redefining the role of liaison officers where appropriate. The
management’s role is vital in the elimination of such conflicts, which should show, in
practice, and under every circumstance, its commitment to ensuring a supportive and
productive environment for its employees.
Conflicts between customers can effectively be avoided, particularly by creating
customer groups – in terms of expected services – which are as homogeneous as
possible. For example, a language learning tutorial should divide students into groups
with a similar background, desire to learn and learning abilities, in order to limit
potentially negative situations due to participants’ conflicting aspirations.

4.4.3 Balancing between efficiency and effectiveness

Frontline employees are required on the one hand to provide high-value services to
their customers, and on the other to serve as many people as possible within a
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specific time frame. For example, a chartered accountant should conduct thorough
audits, be polite and cooperative with each client; on the other hand, she must
handle as many cases as possible in a day/week. The same is true of a salesman in a
clothing store: he must serve every customer to the best of his abilities by listening
attentively and providing useful information courteously and willingly, at the very
same time that he does not leave other customers waiting too long before they are
also served.
It follows from the above that frontline employees constantly face daily battles
when trying to balance efficiency (number of customers served) with effectiveness
(customer satisfaction) (Wilson et al., 2016; Zeithaml et al., 2018). The difficulty of
standardizing delivery procedures and service specifications, specifically for most
tangible goods, often results in high-stress levels and exhaustion among frontline staff.
The most constructive way to balance effectiveness with efficiency is by providing
strong internal support, mainly by the managers of frontline employees, in conjunc-
tion with the use of new ICT methods.
As already pointed out, the value of a service depends to a large extent on frontline
employees, as they are the link in the chain that connects the internal (support
functions) with the external (customers) business parts. Ongoing developments in
many technological areas, particularly ICT, are constantly improving the ways in
which frontline employees and those involved in support functions are collaborating.
For example, when a customer calls a telecommunications company to report a
problem with their phone connection, the employee has access to the entire record of
that customer’s discussion with other service staff, in order to better understand the
customer’s problems, deal with them and propose the most effective solutions. The
employee can also directly contact a colleague in another department, or even the
manager, in order to give the customer an appropriate answer. Managers also have the
ability to evaluate in real time the efforts of frontline staff, so as to help guide them
better in finding a balance between efficiency and effectiveness. In any case, it should
be a common belief among all employees in the business that gaining a competitive
advantage presupposes and highlights the painstaking collective efforts at all levels,
even in the finer details. It is therefore necessary to develop a strong team spirit and
solidarity within the company, and by extension, of the supply chain.

4.5 Human resource management in the provision of high-value services

The design and implementation of an appropriate strategy mix is a necessary condi-
tion in the formulation of appropriate staff conditions, especially for frontline em-
ployees, which will help the business provide high-value services to its customers
(Wirtz & Lovelock, 2016, 2018; Wilson et al., 2016; Zeithaml et al., 2018; Hoffman &
Bateson, 2010; Rao, 2011; Verma, 2012; Haksever & Render, 2013). These strategies
essentially relate to the internal marketing of the services marketing triangle, i.e. the
relationships and interactions between the company’s management and its staff. These
strategies can be classified according to the main functions which allow the manage-
ment to effectively contribute to the human resources’ efforts and abilities to fulfill the
services promised to clients, namely: selection and staffing, training and strengthening,
provision of support systems and incentives, evaluation and rewarding, and staff re-
tention (Figure 4.3).
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Selection & Training &

Staffing Strengthening

Staff
Support
retention

Evaluation
& Incentives
Rewarding

Figure 4.3 Cycle of strategies for human resource management in the provision of high-value
services.

4.5.1 Selection and staffing

Frontline staff take the lead in delivering the promised customer service. Hiring the
right employees is perhaps a cornerstone on which all the company’s subsequent ac-
tions will be based, so that they can meet their customers’ needs and desires (Wirtz &
Lovelock, 2016, 2018; Wilson et al., 2016; Zeithaml et al., 2018; Hoffman & Bateson,
2010; Rao, 2011; Verma, 2012). In some organizations/companies, e.g. clinics and law
firms, great importance is usually placed on the recruitment of qualified and deserving
employees. In others, however, e.g. a summer-operating restaurant or hotel placement,
little attention may be paid to staff selection, which may inevitably have disappointing
results. Recruiting the appropriate staff requires successful implementation of the
following sub-actions:

• Human resource planning: Staffing services with the appropriate human resources
and planning this effectively are the main objectives of a service business in order
to develop and maintain its competitive edge. The roles should be well defined,
and the number of staff needed correctly determined, in order to fill them with the
most suitable employees.
• Competing for the best employees: The company must stake out its market share
for capable employees, as it respectively does for its share of the consumer market.
It should therefore segment the market for potential employees and target the
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departments that are most attractive for the company. It will then have to
formulate its differentiation strategy by planning the employment positions,
appropriate pay levels, etc.; finally, it must place itself in a desirable position in the
conceptual map that the best potential candidates have of the company.
• The business as a preferred employer: Businesses should seek to gain the reputation
of being the kind of employer that every employee would like to work for.
Companies that achieve this offer a variety of benefits to their employees, such as
very good initial and in-service training, internal support in the performance of
their duties, continuous career and development opportunities, fair and satisfac-
tory remuneration based on their performance, among other benefits. Value
services, which facilitate employees in their daily lives and allow them to focus on
the optimal satisfaction of their customers, take various forms, such as privileged
access to additional medical services compared to those provided by a National
Health System, part-funding of nurseries and/or summer camps for those with
young children, fully equipped leisure centers, flexible working hours, adequate
car parking, etc. In essence, such “extras” reflect the philosophy that when an
employee feels cared for, the management will “pass on” that care in the form of
optimal customer service. Employees in the services sector often interact a lot with
each other, so the reputation of a company is also positively affected by the high
level of its current employees. Prospective employees are much better informed
than in the past, taking advantage of the many opportunities available to them on
the internet to obtain information about prospective employers (companies);
companies that are looking to hire new staff may be a preferred employer in the
minds of some employees. Companies offering services should therefore pay
special attention to their public image, particularly their reputation as employers
that offer an attractive work package to their future employees.
• Selection and recruitment of staff based on abilities and innate trends for provision of
services: Selection and recruitment of frontline staff should focus on two main
categories of criteria - technical knowledge, and innate tendencies for keeping up a
good mood and friendly personality while on the job. First and foremost, staff
must have developed the appropriate knowledge and skills to constitute a strong
link in providing customers with the promised services. The company will
therefore try to single out the candidates with the best qualifications, training,
previous service, support skills and knowledge (e.g. use of specialized software),
evidenced by diplomas, certificates and degrees. As has repeatedly been empha-
sized however, the provision of services is intertwined with the emotional work of
frontline staff; it is therefore crucial that the selection and recruitment of
employees be based on criteria concerning their innate tendency to socialize and
serve other people, based on their sociability, empathy, helpfulness, and patience,
among other skills.

In view of the above, it is clear that the appropriate frontline staff should meet both
technical and interpersonal requirements. Businesses need to determine as accurately
as possible the qualifications required of prospective employees in order to attract the
most suitable staff through job advertisements. It is also very important that these
advertisements display critical elements of the brand and how it is differentiated from
the competition, in order to facilitate candidates in their assessment of whether they fit
into the business environment.
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In many cases, for the most complete evaluation of prospective employees, in ad-
dition to traditional methods, companies ask candidates to work in real conditions for
a day or two, or to participate in a role-play which simulates the real situations of their
future workplace. The benefits are twofold, for both the company and the prospective
employees, who will be able to have a better picture of their potential role in the
business, so that they can decide if the position is right for them. Some companies also
adopt multiple structured interviews to ensure a more careful evaluation of candidates
and to limit the effect of potential interviewer bias, so as to avoid selecting individuals
with a similar profile to that of the interviewer. Personality tests are often used, which
greatly facilitate in the evaluation of candidates regarding the skills they possess, such
as a willingness to work with other employees, understanding customers’ needs, ease
of communication, etc.

4.5.2 Training and strengthening of frontline staff

Frontline staff training

Frontline staff training constitutes yet another cornerstone in the provision of high-
value services to customers (Wirtz & Lovelock, 2016, 2018; Wilson et al., 2016;
Zeithaml et al., 2018; Hoffman & Bateson, 2010; Rao, 2011; Verma, 2012). Training
can be organized and implemented by the company itself, but it is often outsourced to
specialized training and staff recruitment companies. Training is costly and works
cumulatively; it should therefore be an integral part of fitting in with and contributing
to the optimal holistic management of human resources, its ultimate goal being to
satisfy and retain the most capable employees. Training starts with the recruitment of
employees, but their continuous training and retraining is a requisite for maintaining
and improving a company’s competitive edge.
The main objectives involved in staff training include the following:

• Acquisition of a holistic picture of a company’s service delivery processes, i.e.

complete knowledge of how the internal supply chain is structured and operates,
as well as its links with external partners.
• Creation and improvement of a positive attitude among employees regarding the
strategies followed by the company, which derive from the business’s service
culture.
• Development and improvement of employees’ skills. There are three main types of
competencies that interest service providers: technical skills; interactive skills related
to the provision of services, willingly, skillfully and with understanding (e.g.
appropriate communication, patient listening, interpersonal skills, etc.); and social
skills related to the creation and strengthening of personal relationships with
customers, and adapting that relationship to each individual customer’s needs.

Therefore, training concerns three main fields: business knowledge, technical skills and
interactive/social (interpersonal/emotional) skills. Every new employee should be in-
formed about the company’s products/services, and fully understand how the com-
pany operates. Employees need to know the different operational parts of the
business, the collaboration processes between the different groups, the business stra-
tegies used and the business culture in general. This knowledge is vital for a better
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understanding of the demarcation of their role within the company, making the best
use of their interpersonal and technical abilities and skills, as members of a wider
team. It also contributes to the better adoption and implementation of the business
strategy and culture by the prospective employee.
Frontline staff are also trained in issues of a technical nature which are related to
the services provided by the company in general, particularly those they will con-
tribute to. For example, representatives of pharmaceutical companies need to be very
familiar with the products they are responsible for, at the same time as having a very
good theoretical background so as to be able to communicate effectively with doctors
and pharmacists (in the case of non-prescription drugs, such as analgesics, cough/cold
medication, ophthalmological treatments, etc.). They should also be well versed in the
information system and its related software, and any form of infrastructure and
technology available to the company to achieve the objectives of their mission.
Gaps in employees’ technical training trigger a series of chain reactions that result in
failure to provide the promised service. Employees with low self-esteem may feel that
they are not well prepared to perform their role, which usually results in the provision
of services below customers’ expectations. Customers become frustrated and express
their dissatisfaction with employees by further exacerbating their bad emotional state
of mind. Employees with limited or no job satisfaction resign at a high rate, which
means increasing training costs per employee; this may have the effect of the company
making further reductions in training costs, in a desperate attempt to save as much
damage as possible to its profitability, or at least to limit the losses.
At the same time, however, due to the emotional nature of frontline employees’
work, companies often implement training programs to improve their employees’
interactive and social skills. These programs aim to teach employees various techni-
ques: how to elicit customers’ real wishes more effectively, how to deal with dissatisfied
customers in a better way, how to present potential alternatives to customers to meet
their needs, etc. Interpersonal skills training utilizes a variety of techniques, such as
short-term employment in the company’s technical support and complaints depart-
ments, so that employees can gain insights into the effects of failing to meet the
customers’ expectations, as experienced by the customers themselves. A very useful
technique is role-playing, where employees play the role of the customer in order to
gain greater customer empathy. Behavior modeling aims to classify potential customer
behaviors and to develop and implement effective ways of successfully dealing with
each customer category, which will lead to mutual benefits for both customers and
employees, and consequently for the business.

Strengthening employees
A differentiating feature of services is the difficulty of standardizing their “produc-
tion” processes. Although in many cases, e.g. bank transactions such as cash deposits
and withdrawals, it is largely possible to standardize customer service procedures, it is
also quite common for frontline employees to have to deal quickly and effectively with
unpredictable situations. Empowerment, i.e. the delegation of power to frontline
employees to act whenever necessary in order to meet customers’ needs as efficiently
and effectively as possible, is a key element in addressing the high uncertainty that
characterizes services (Wirtz & Lovelock, 2016, 2018; Wilson et al., 2016; Zeithaml
et al., 2018; Hoffman & Bateson, 2010; Rao, 2011; Verma, 2012).
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In practice, giving frontline staff the green light to take the initiative to act is not
enough to achieve the desired result. The employees themselves should be willing to
take the initiative instead of just following strictly defined procedures. Their effec-
tiveness and willingness to act increases significantly when they are trained appro-
priately, continuously improving their respective skills. It is also very important to
have a corresponding reward plan that is clearly not limited to just monetary gains but
also includes various forms of moral satisfaction. Employees should be constantly
kept up to date about the company’s goals and desirable performance indicators,
including the creation of excellent working relationships with all the other operational
departments of the company, so as to enable the implementation of flexible solutions
proposed by frontline employees.
Potential business benefits deriving from empowering employees take many forms.
First of all, the possibility of a quick response in unpredictable situations increases for
cases of special-needs customers, as there is no need for time-consuming decisions and
getting approvals from various company departments/managers. The same applies
when some customers are highly dissatisfied with the company’s services and demand
the immediate settlement of what they perceive as their very fair requests. Providing
personalized solutions, especially in a short period of time, very often increases cus-
tomer satisfaction immensely, and consequently their potential commitment to the
business. Loyal customers not only constitute a consistent customer base but are also
the company’s best ambassadors through word-of-mouth advertising and referrals
among their close circles.
The benefits, however, are not limited to the company’s external customers; instead,
they are extended to the internal ones, i.e. the frontline employees themselves.
Empowered employees clearly feel greater job satisfaction, they behave in a warmer
and friendlier manner toward customers, and they show an increased willingness to
contribute to the achievement of the business’s goals. They are also a valuable think-
tank full of new ideas that can help improve the company’s current services; frontline
employees share and further elaborate their ideas among their colleagues and the
employees of the other operational departments of the company. In addition, they are
more likely to respond positively to service failures and to implement service recovery
strategies more effectively and willingly.
The extent to which the company will enjoy the aforementioned benefits of em-
powerment depends on several factors. Generally speaking, the greater the uncertainty
and variability of the requested services, the greater the potential benefits of empowering
employees for the business, since it becomes difficult to define standard procedures for a
huge variety of personalized needs, at the same time as an increased likelihood of highly
dissatisfied customers. The results of this empowerment also reflect a function of an
employee’s willingness to take the initiative and consequently abandon the security
offered by adherence to the specifications set by the management.
Implementation of the strengthening process presupposes the correct evaluation of
the relevant offsets due to inherent costs. The above analysis makes clear that not all
employees are receptive to empowerment. The recruitment and training of frontline staff
who will make effective use of this empowerment, i.e. those with high qualifications and
skills, implies a certain increase in salary costs and continuous staff training. Due to the
relative scarcity of suitable staff and the difficulty of securing such staff for the provision
of services that involve high seasonality (e.g. tourism activities), a company may face
difficulties in fulfilling the flexibility of its capacity. Empowerment may also greatly
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increase variation in the quality of services provided, both between employees and by
the same employee among the customers s/he serves. Increasing the time a frontline
employee spends serving a customer may cause dissatisfaction to other customers
waiting to be served, who may become even more dissatisfied if they feel that they have
received inferior services over previous customers.
Bowen and Lawler (1992) believe that the degree of employee empowerment is the
product of four elements: permission to make decisions, staying informed about the
business’s performance, awareness of performance-based rewards, and having the
appropriate knowledge that will facilitate their understanding and contribution to the
business’s performance. They distinguish three levels of empowerment: The first and
most basic form of empowerment refers to employees’ level of suggestion involvement
concerning the service delivery processes based on their experiences. However, the
decision to implement these proposals is the management’s responsibility. At the other
end of the spectrum is high involvement, where frontline staff are trained to manage
their own selves. This requires intensive training in areas such as teamwork, problem
solving and operations management. Employees also make the majority of decisions
about the distribution of rewards. In between these two levels is job involvement, which
gives employees the opportunity to significantly redefine their role within the com-
pany. This usually involves the development of teamwork, giving employees greater
freedom to make decisions, and providing them with high levels of feedback from the
management, other employees, and the customers. However, higher-level decisions
and the distribution of rewards remain within the jurisdiction of the administration.

Development of a collective work spirit

Throughout this work, and particularly in this Chapter, it has been repeatedly em-
phasized that in the modern highly competitive business environment, effective and
efficient satisfaction of customers’ needs can be achieved only through optimal co-
ordination of the functions and processes of all those involved, both internally within
the company and externally among their strategic partners in the supply chain.
Developing and promoting a collective spirit of collaboration in customer services is
an essential ingredient for business success (Wirtz & Lovelock, 2016, 2018; Wilson
et al., 2016; Zeithaml et al., 2018; Rao, 2011; Verma, 2012; Bruhn & Georgi, 2006). In
many cases, companies promote collaboration between frontline employees in a
variety of ways, such as setting up customer service teams, so that customers can get in
touch with more than one employee. This helps to relieve the pressure that an em-
ployee may feel, strengthen solidarity between employees, transfer employees’ ex-
periences and mutual training and, consequently, achieve higher goals. In order to
reinforce the idea of collaboration in teamwork, most bonuses related to the
achievement of performance goals usually apply to the whole team, and not to each
individual employee.
However, in addition to highlighting the paramount importance of cooperation
between frontline staff, it is essential to develop and strengthen in every legitimate way
the collective spirit of mutual assistance and support between frontline staff and other
staff in the various support departments. Every support staff member must know who
the final customers are, their needs and desires, and how their (the frontline staff’s)
contribution plays a crucial role in effectively meeting those needs. A good under-
standing of the end results of the company’s support departments on the part of the
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employees is an essential component of the collective effort; understanding that the
distance between successful and mediocre service is very small will make a big dif-
ference in the difficult mission of frontline employees. Setting collective goals at a
company or branch level makes it clear to all staff that success and failure affect
everyone and are both proportionally allocated.
Many companies ensure that employees who have little or no customer contact
work with frontline employees on some days, in order to see the kind of work they do
and help them with their work, and vice versa. This technique is very effective as all
employees gain unique experiences that contribute to a fuller understanding of the
provision of high-value services in the supply chain; if a link in the chain is “broken”,
the end result, i.e. the service offered, will be disappointing. Each operational de-
partment in the company has its own priorities and the achievement of its objectives
entails making sacrifices in order to fulfill the objectives of other departments, which
may explain the often competitive climate that prevails between the various opera-
tional departments.
As an example, we can take the marketing department which would like to have
more flexibility in their provision of customer service, and have employees dedicate all
their creativity to each customer, so as to increase customer satisfaction, and therefore
sales revenues. In the customer service department, more flexibility means more dif-
ficulty in planning the operations: the level of uncertainty it must deal with increases,
and a greater burden is placed on the frontline staff. The accounting department will
be skeptical about the marketing department’s requirements, as greater flexibility is
usually achieved by increasing production capacity, which leads to increased costs for
staff, infrastructure, operating costs, etc. And finally, the personnel department will
need to look for ways to provide additional staff at certain times (hours, days) in order
to achieve the required work flexibility.
The development and promotion of teamwork is also achieved by building inter-
operational teams, where customer service is outsourced to a team of employees from
different parts of the business, usually involving relatively complex projects.
Interdepartmental groups are also established to plan and implement structural
changes to existing service processes or to develop new services.
Developing and promoting a collective spirit of cooperation among company em-
ployees is not an easy task, and it presupposes many obstacles and difficulties to
overcome. This collective spirit cannot be based solely on the selection of employees
with innate interpersonal and technical skills and abilities. The company should, on
the one hand, take care of the relevant training of the employees and, on the other
hand, make clear the commitment of senior management to this goal, as a living
example of teamwork on a daily basis on every occasion.

4.5.3 Securing support systems for provision of services

The effectiveness of the work performed by frontline employees also presupposes the
establishment and successful implementation of support systems that focus on pro-
viding customers with high-value service (Wilson et al., 2016; Zeithaml et al., 2018;
Rao, 2011). From the discussion so far, it is clear that the company should develop
and implement appropriate internal procedures which will facilitate frontline staff in
their difficult mission. For example, the head technician in charge of computer repairs
at a large electronics chain, who comes in direct contact with customers, can inform
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them when the requested service will be completed. The technician needs access to all
the relevant necessary equipment, a good information system in order to know when
spare parts are available for the completion of the provided services, and any support
functions that will supply him/her with the materials they require in a timely and
reliable manner. The same applies to teachers in a private language learning center: in
order to provide a high level of teaching services, they need to have good access to
appropriate secretarial support, access to educational aids (e.g. computer, projector, e-
learning platform, etc.), spacious well-equipped classrooms, etc.
Traditional administrative systems where procedures are established by senior
management and imposed downstream may be appropriate for achieving internal
objectives such as economies of scale, commitment to delivery and meeting the needs
of certain employees. However, they cannot respond to a highly dynamic competitive
environment where processes must be geared toward meeting the ever-increasing needs
and expectations of the customers. It is thus obvious that the kind of management
systems and organizational structures that are needed must encourage and support the
active participation of employees in the design of procedures and the identification of
the required support systems. Thus, frontline employees need two forms of support:
technical and procedural. The technical support refers to tools, machines, information
systems, information material, etc. which facilitates frontline employees’ mission. For
example, a hotelier is facilitated by access to a fully updated booking system, the
availability of maps and other material of touristic interest, comfortable seats in the
reception area, etc. Procedural support involves support services, such as having
secretarial services and paramedical staff in a microbiology laboratory.
In any case, there are no established procedures concerning how to deliver a service;
a special feature that differentiates them from the production processes of industrial
products is that they cannot be copied or applied easily in different business en-
vironments. Even if a company manages to design and implement an optimal process
to deliver a competitive service, it can become obsolete at any moment due to the rapid
changes taking place in the wider business environment. Therefore, redesigning service
delivery processes is a never-ending task. It usually requires significant investment in
new equipment and technologies. Technological developments in information and
communication technology are often turbulent, such that an integral part of ensuring
competitive services is the provision of frontline staff with appropriate equipment and
an easy-to-use multi-functional information system that can be constantly adapted to
any new requirements that its role may call for.

4.5.4 Evaluation and rewarding

Evaluation
The smooth operation of the company’s internal supply chain should be continuously
monitored by evaluating the effectiveness of the internal and external processes in-
volved in the delivery of its services. Given the importance of human resources,
evaluating the effectiveness of service companies focuses on employee performance.
However, evaluating employee performance in the services sector is clearly more
difficult, compared to that of the production of material goods (Sherwood, 1994;
Haksever & Render, 2013; Hoffman & Bateson, 2010; Mudie & Pirrie, 2006;
Rao, 2011).
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In many cases, the end service that the customer receives is a component of the
individual services provided by the different employees; hence, it is particularly dif-
ficult to assess the contribution of each component. The various services provided to
each customer are often quite different from each other, which makes it impossible to
standardize their value. A special feature of services is the participation of the cus-
tomers themselves in their provision, so the final result will depend to a large extent on
the willingness and readiness of the customer to cooperate appropriately with frontline
staff. Subsequently, the consequences of potential service failures are usually perceived
in their full extent after a significant period of time, as some preparation may be
required on the part of the customer when they decide to change service provider. The
production flow involved in services also varies much more than for material goods,
due to the indivisibility factor. A restaurant, for example, requires a minimum number
of employees to operate, whether it serves one customer or 20, so its performance will
be at a higher level when it is serving at peak business hours compared to less busy
times.
The difficulty of assessing the performance of service workers depends, inter alia, on
the discreet nature of the role and the degree to which a material product is involved in
the service. A greater level of discreteness makes it more difficult to evaluate service
employees in the performance of their duties. For example, a footwear sales assistant
doesn’t usually need specialized training and this role is not considered to require high
qualifications. However, this kind of work does actually involve high levels of dis-
cretion in its execution, making it particularly difficult to evaluate the employee’s
performance. On the other hand, a computer technician clearly needs higher qualifi-
cations to perform the role effectively, but more standardized procedures are followed.
It is therefore easier to estimate the technician’s performance through, for example,
the number of completed repair/maintenance jobs that s/he performs per day. The
greater the involvement of a material product in the customer service process, the
easier it is to evaluate employee performance: it is clearly easier to evaluate the per-
formance of a café barista than it is to evaluate the secretary of a law firm.
There are two main ways to evaluate an employee’s contribution to the services
provided. The first is by conducting both formal and informal systematic evaluations
by the management of the company in order to evaluate employee performance,
discrepancies between employees, the reasons for failures on their part, and to identify
the issues that need improvement. Another way is to get customers to evaluate em-
ployees’ performance and grade the satisfaction they received from their service.
Employees should receive feedback on their evaluation from both the management
and the customers. This contributes to the improvement of the services provided;
moreover, when employees are evaluated with positive comments by customers, they
may be rewarded for this, and their motivation may increase.

Rewards and provision of motivation

Rewarding and motivating employees plays a catalytic role in their performance and
retention in the company (Wirtz & Lovelock, 2016, 2018; Bruhn & Georgi, 2006;
Wilson et al., 2016; Zeithaml et al., 2018; Rao, 2011). But employees often feel that
they are not fairly rewarded for their efforts because companies usually focus on
quantitative evaluation criteria, paying less attention to the quality of services, as it is
clearly more difficult to evaluate. But even the best employees are at some point likely
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to become burnt out and will look for another job if they find that the quality of their
work is not recognized or rewarded. This is why some companies directly link em-
ployee rewards with perceived customer satisfaction regarding the services that cus-
tomers receive.
Competitive and fair remuneration, consisting of a salary, allowances, company
shares, etc. is often considered sufficient to motivate and reward employees’ efforts,
while employees consider that a fair reward for the work they offer to the company is a
basic condition for staying in that company; providing incentives is therefore not an
essential requirement of the job. A reward that exceeds the perceived fair pay may
have significant short-term effects in incentivizing employees, but it does not make
guarantee the desired duration of this motivation. For this reason, it is useful to
provide incentives based on rewards, which employees can receive over and over
again. In general, the system should be designed to reward the best employees and
promote their excellence. In any case, however, this system should be accepted by
employees as fair, consistent and transparent; thus, the contribution of the staff
themselves in determining it is very valuable.
Wirtz and Lovelock (2016, 2018) suggest three important foundations for the
provision of effective incentives to company employees:

• The objective of the task. Employees often feel that when the work they do is
interesting and exciting, it motivates them to offer the best of themselves. Work of
this sort features a high level of discretion provided to employees during the
execution of the project, a level of complexity about it, structured tasks with
integrated deliverables, making a significant impact on the lives of others and the
ease with which immediate and clear feedback on the employee’s performance can
be provided.
• Feedback and recognition. All people feel better when they belong to a team and
their contribution to the well-being of their team is recognized. A very important
source of employees’ daily motivation is being continuously recognized for the
contribution they make in achieving the goals of the group they belong to,
whether these groups are small (e.g. the service team) or large (the whole
company). Therefore, it is a good idea to continuously provide feedback to
employees about the evaluations they receive from customers, colleagues and their
superiors, and to reward them on a group or individual basis. Rewards should be
given in recognition for successfully handling difficult situations that could not be
foreseen during employees’ training/retraining periods.
• Achievement of goals. Most employees experience great satisfaction when they
achieve clearly defined goals, even if they are difficult to achieve. These goals
should form the basis of performance rewards (bonuses), with feedback and
recognition. They should also be communicated to and accepted by all employees.
In fact, the reward should be offered very soon after the employee achieves the
relevant goal, so as not to lose a part of its value.

4.5.5 Keeping the best employees

The last important component in the effective management of human resources is the
retention of the most capable employees (Hoffman & Bateson, 2010; Wilson et al.,
2016; Zeithaml et al., 2018; Wirtz & Lovelock, 2016, 2018; Danyi, 2008; Mudie &
168 (P)eople
Pirrie, 2006; Rao, 2011). The truth is that employee mobility from one company to
another depends on factors that lie beyond the direct control of a company, such as
the culture (e.g. in England there is more labor mobility than in Greece or Japan), the
current supply and demand of the labor market, employees’ skills and abilities (the
higher the skills levels, the more harmful to the company employee mobility becomes),
the field of activity, etc. However, the most efficient companies will take great care to
retain the best employees, by attracting and hiring the most suitable ones, i.e. those
that fit the corporate culture, with the corresponding technical and interpersonal skills.
The contribution of education and continuous training in this respect is immense. In
many cases, companies invest a lot of resources in attracting, training and empowering
customer contact employees, but they often make the mistake of taking those em-
ployees for granted. Retaining the most capable frontline employees cannot be
guaranteed solely on good pay and goal achievement bonuses.
It is considered very important by employees for the message to get across to their
superiors and top management that they are considered an integral and vital part of
the business, and that the planning of the business is based on them, i.e. their in-
tegration into the company’s vision. This implies that the management must convey its
vision and long-term goals clearly and effortlessly, showing the employees that the
achievement of those goals depends on the special contribution of human resources.
Therefore, the company should use marketing tools and apply marketing principles to
meet the needs of its employees, just like it does with the needs of its customers.
Conflicts faced by frontline workers are often stated as significant reasons for their
intention to change work environment. It is therefore very useful for companies to
define employees’ roles as clearly as possible in order to avoid and limit the occurrence
of conflicts. Ways to immediately identify and successfully manage conflicts, as well as
discover their sources, should be sought.
Cross-training contributes to a better understanding of the interdependence of the
various business departments, the limitations and priorities of other operational de-
partments, the consolidation and improvement of work relations with colleagues in
other departments, and the enrichment of employees’ roles. A powerful incentive for
retaining the most capable employees is having strong prospects for development
within the company, which are linked to clear well-defined pre-determined criteria, in
harmony with the corporate culture.

4.6 Supplementary foundations for the effective provision of high-value

services

4.6.1 The service culture

Employees’ effectiveness in providing services is greatly influenced, among other
things, by the corporate culture, i.e. the common values, rules, traditions, goals and
beliefs of the people who make up the business and guide their behavior (Wilson et al.,
2016; Zeithaml et al., 2018; Wirtz & Lovelock, 2016, 2018; Hoffman & Bateson, 2010;
Verma, 2012; Rao, 2011). Successful service providers have a customer-centric,
service-oriented corporate culture. This means that all employees have adopted the
ultimate goal of providing a high level of service as a way of life, both internally, i.e.
with other employees in the company, and externally, i.e. with the company’s end
customers.
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One reason that makes customer-centric service culture necessary is the great het-
erogeneity observed in services compared to material goods. No matter how complete
and thorough employees’ training is, they are always likely to cope with unforeseen
situations which they will have to resolve. The service culture makes it easier to set
more specific job specifications, which means that the service provided is less likely to
deviate from the desired range.
Another reason why a customer-centric service culture is so important is the sub-
stantial inability of the company’s management to directly and effectively control all
employees who come into contact with customers during the provision of services. A
customer-centric corporate service culture can greatly ensure that the services pro-
vided are compatible with the expected behavior of employees toward customers. A
strong customer-centric corporate culture is easy for new employees to assimilate and
implement, at the same time allowing the facilitation of the coordination and co-
operation of the company’s existing employees.
A necessary condition for the development of a customer-centric corporate culture
is service leadership, i.e. the daily application on an every-case basis of the principles
laid down by the company’s heads/leaders. Employees do not recognize nor do they
adopt the values and principles stipulated by the company’s management; they accept
those that are confirmed through the company’s actions. Therefore, as with almost
every aspect of management, managers are the first that must apply those principles
and values in their daily lives, if they want their employees to adopt them too.
The development of a customer-centric culture requires continuous, methodical and
coordinated efforts at all business levels and operations. The transition from a tra-
ditional, function-oriented to a customer-centric culture requires the adoption and
day-to-day implementation of a variety of simple, basic practices rather than a small
number of groundbreaking changes. In fact, it is not enough to just develop a
customer-centric culture to ensure that high-value services are provided to end cus-
tomers; painstaking efforts must be made to maintain it on a daily basis by identifying
and dealing with malpractices. Developing and maintaining a customer-centric culture
becomes even more difficult in international companies who must transmit and im-
plement it in different cultural environments.

4.6.2 Focus of the entire business on the front line

The customer-centric approach to service delivery supports the reversal of the service
marketing triangle so that the customer and frontline staff are in the top position, and
the management is at the bottom (Wirtz & Lovelock, 2016, 2018; Wilson et al., 2016;
Zeithaml et al., 2018). In this way, emphasis is placed on that end of the supply chain
where the customers are located, and those who offer them high-value services, i.e. the
frontline staff. The emphasis on customers and frontline staff is evidenced by the fact
that customer satisfaction and loyalty are very strong indicators of a company’s
sustainability (turnover) and profitability. However, according to the profit-service
chain, customer satisfaction and loyalty can only come from satisfied dedicated em-
ployees, particularly the frontline staff that customers come into contact with.
This view is in line with the fundamental principle of supply chain management
where the whole supply chain is oriented toward meeting customers’ needs; it is
therefore the customers who essentially set the rules for the operation of the supply
chain. Concerning the management of the supply chain, much greater importance is
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given to the retailers’ operations, as this is the link that the customer comes into
contact with; therefore, the cost of any external errors is clearly higher than the in-
ternal failures occurring in the upstream links of the supply chain. Similarly, the in-
verted service triangle focuses on frontline employees who should be given every
possible support by all operational departments, and most importantly by manage-
ment, so that they can meet customers’ needs effectively and efficiently.

4.7 Human resource management within services supply chain context

Businesses usually emphasize how frontline staff offer customers high-value services.
However, the value of the services provided depends not only on the capabilities of the
frontline staff but also on their cooperation and interaction with the rest of the company’s
staff (internal supply chain), as well as the contact staff of the strategic partners of the
company in the external supply chain. For example, the hotel receptionist is the first
person hotel customers come in contact with; the perceived value of the customer service
here depends on those first moments that they will experience during their communication
with the receptionist. However, the total value of their hotel stay depends on more than
that, e.g. the cleaning services, the breakfast quality, and whatever else is offered by the
support staff of the company. Any problems that go beyond the immediate responsi-
bilities of the frontline staff, such as the hotel’s on-site restaurant service or the partner
company’s information system, can cause significant customer dissatisfaction should
things go wrong. Coordination and good cooperation are therefore essential among all
the employees of the company and its partners’ contact staff in the supply chain.
The importance of supply chain management increases when the end result depends
on the contribution of the business associates. For example, a travel agency promises
its customers unique experiences by organizing a complete excursion to various
touristic destinations. The end result of its customer satisfaction, however, does not
depend solely on the services offered by its internal supply chain (support teams and
liaison officers); it will also depend, above all, on its strategic partners in the external
supply chain. In other words, overall customer satisfaction depends on the compo-
nents of the services received from the collaborating service providers, such as the
airline that customers traveled with, the hotels where they stayed, the guides they
toured the sights with, the restaurants where they had lunch, the sights they visited,
etc. Any failure in even one of these links in the chain of the participants’ experiences
is enough to cancel the efforts made by everyone else, including the travel agency.
As has already been mentioned many times so far, in today’s highly competitive
environment, companies usually have to focus on the core activities and processes that
give them their competitive advantage, and outsource support functions in part, or
even entirely, to third parties. For example, a telecommunications service provider is
more likely to work with other companies to find new customers, provide technical
support, send printed materials (e.g. service contracts), provide lifelong customer
service (e.g. for the payment of bills), etc. Therefore, all developments in the business
environment will lead to an increasing interdependence on service companies from
their strategic partners in their supply chain. Consequently, as happens in the in-
dustrial sector, so it is in the case of the services sector, especially for large companies:
supply chains rather than individual companies are competing against each other.
It therefore becomes clear that, particularly for service companies where a sig-
nificant part of the overall customer experience depends on the input of external
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partners, it is necessary to appoint a supply chain manager. This manager should be
entrusted with the responsibility of achieving the best possible coordination and
synchronization of the internal operations and procedures of the company, together
with those of the main stakeholders in its supply chain. Among other things, it is
necessary to have a common, collaborative demand forecast on which to base col-
lective planning, which will ensure the best possible satisfaction of customers’ needs.
Due to the inherent high uncertainty of the conditions that affect the quality of the
services provided, the head of the company’s supply chain should plan alternative
programs to deal with unforeseen circumstances, in close cooperation with the supply
chain partners. If, for example, weather conditions or a lack of safety measures on a
mountain path do not allow the implementation of a specific excursion that was
scheduled to take place, alternative activities should be provided that will compensate
the participants in a pleasant way.
From the above, it is clear that all staff, particularly frontline employees, should be in
a direct position to cooperate extremely well internally as well as with the staff of the
collaborating bodies in their supply chain. Ultimately, what matters to the customer is
the overall satisfaction gained from working with the business. The customer is not at all
interested in how this was made possible; the customer is not interested in the details of
the company’s internal and external supply chains. Customers also consider that in the
case of a negative experience due to a mistake made by any employee while providing the
service, to either the company or its associates, the company they trusted is responsible
and accountable for it; it is the company that selected the specific employees and col-
laborating partners of the supply chain, and therefore, they are ultimately to blame.

4.7.1 Marketing Manager and Logistics Manager: friends or foes?

There is no business today in which the Marketing Manager and the Logistics
Manager do not coexist. Together, they are responsible for two of the most critical
business functions: the operation that creates, maintains and seeks to increase de-
mand, and the one which satisfies it. There is also no company in which the daily tasks
of these two managers do not overlap; this also entails that there is no company where
these two managers do not come into conflict with each other, which creates problems
in the effective satisfaction of customers’ orders and requirements, and in the op-
eration of the company in general.
Thus, we must ask ourselves the question: “Why is this happening?” The answer
could be found in two places (among others). By investigating their functions, these
two executives set different goals: one wants to increase profits, the other wants to
reduce operating expenses. Therefore, to achieve the above objectives, the Marketing
and Logistics managers must operate differently. The former seek opportunities,
collaborations, etc. in the external business environment, while the latter focuses on
how the internal processes of the company are organized and operate.
The company’s management often receives complaints from these two managers,
who consider that they work very hard with their efforts going unrecognized. In
practice, of course, both are right. On the one hand, it takes a lot of effort in today’s
highly competitive environment to achieve a sale, gain a new customer or even
maintain an existing customer base. On the other hand, each and every logistics
employee knows very well how much effort is required to execute an order success-
fully, and to achieve the required level of service and response, as set by the company.
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But there is one thing that complicates this conundrum: nowadays it is easier to assess
the performance of the marketing manager, just by calculating the sales achieved, and
comparing them with the original goals. On the other hand, determining the con-
tribution of the logistics manager in the reduction of total costs is a difficult and arduous
task that requires know-how, tools, systems and access to appropriate data.
It is of course a known fact that the success of a business depends on the daily
cooperation of these two executives, to achieve the goals that the company has set. Case
studies lead to the same cycle: “Successful marketing leads to increased sales, which
automatically requires an efficient logistics system”. At the same time, however, “an
effective logistics system can be considered one of the most important marketing tools”.

4.7.2 New trends in the cognitive and scientific objectives of supply chain
executives
Effective management of modern supply chains requires that the executives of each
sector have specialized knowledge and skills in specific scientific and cognitive subjects.
Given the increasing use of systems and technological solutions throughout the
supply chain, it is important for logistics executives to be aware of new technologies.
Understanding how a company, for example, uses information systems for warehouse/
inventory management and integrated Enterprise Resource Planning (ERP) systems
leads to more efficient use and full exploitation being made of their potential.
Knowledge of new technologies, such as 3D printing, drones, the Internet-of-Things
(IoT), robotics and automation, cloud computing, etc. will also make a significant
impact on the adoption of a new form of supply chain in the near future.
The workforce is becoming more and more global and multicultural, with pro-
duction capacity and mobility being its main features. The growth of companies into
international markets is the main feature of the new economy. In this kind of eco-
nomic and technological evolution, it is very important for logistics executives to
develop leadership skills so that they can operate in an international business en-
vironment. It is therefore essential that executives understand the basic principles,
benefits and challenges of world trade.
Understanding and recognizing the importance of managing supply chain processes
is a necessary skill for today’s logistics executives. The knowledge that today’s ex-
ecutives are expected to have enables them to gain a complete picture of the supply
chain through the design of inter-company business processes, allowing them to fully
comprehend that what business all boils down to is, quite simply, customer satisfac-
tion. The customer is always the main target when designing a supply chain strategy.
Streamlining and optimizing the entire supply chain can also reduce overall costs.
A supply chain executive must also be able to effectively design and manage various
logistics projects. The skills that the management of a project must possess are the
ability to appropriately plan resources and tasks, budgets and schedules, as well as
manage the risks that practice and experience have proven over time to be part of the
daily life of logistics executives.
Finally, great emphasis must be placed on the cognitive goals of communication
and negotiation that these executives must have. Good communication with custo-
mers, partners and team members is considered (and not unjustly) as one of the most
critical success factors of logistics executives. Negotiating skills are also essential for
achieving optimal results.
5 Extended marketing mix elements:
(P)hysical Evidence: Delimitation and
integrative approach with SCM

Introduction
The physical evidence found within an environment for the provision of services, also
known as servicescape, comprises a very important and integral part in strategic
business differentiation. It greatly influences the perceived experience and satisfaction
of a company/organization from both the employees’ and customers’ point of view,
and consequently, their behavioral reactions. The provision of high-value services
assumes very good knowledge of the many dimensions of servicescape, as well as the
way these dimensions interact to meet the needs and desires of the involved parties.
The company’s main goal is the design of an appropriate service delivery environment,
which will result from the good cooperation of all the main stakeholders in both its
internal and external supply chains.

Learning goals
After reading this chapter, you will be able to answer the following questions:

• What are the strategic goals of servicescape?

• What are the main kinds of servicescape, and what are their basic features?
• What are the main theoretical models that explain servicescape in the internal and
behavioral reactions of staff and customers?
• What are the main dimensions of servicescape, and how do they influence the
behavior of the people present within that environment?
• Why is good cooperation very important among stakeholders in the internal and
external supply chains when designing an appropriate service delivery environment?

Structure
5.1 Introduction to the physical evidence of services
5.2 Strategic roles of servicescape
5.3 Types of servicescape
5.4 Theoretical models of the impact of servicescape
5.5 Dimensions of servicescape
5.6 Servicescape design strategy in the context of supply chain
5.7 Location problem
5.8 Layout approaches

DOI: 10.4324/9780429684883-5
174 (P)hysical Evidence
5.1 Introduction to the physical evidence of services
A basic feature that distinguishes services from material goods is intangibility. In
contrast to material goods, customers cannot feel, taste, smell or check services
macroscopically in order to help them evaluate a service before they receive it. Even
so, customers utilize the five senses to evaluate the quality of services, before, while
and after they receive them, through the stimuli they receive from the physical evi-
dence of the environment they come in direct contact with, through the company’s
employees, while they are receiving the service. Physical evidence plays a decisive role
in the effective and efficient flow of the processes involved when delivering a service, so
that it contributes to the total experience, and subsequently, to customer satisfaction,
especially in high-contact services (Wirtz & Lovelock, 2016, 2018; Avlonitis et al.,
2015; Baker et al., 2020; Wilson et al., 2016, Zeithaml et al., 2018; Hoffman &
Bateson, 2010; Verma, 2012; Rao, 2011; Bruhn & Georgi, 2006; Mudie & Pirrie, 2006;
Bordoloi et al, 2018).
The physical evidence involved in services refers to elements of the service delivery
environment, i.e. the place where customers meet with frontline employees, who
perceive customers’ feelings and influence their whole experience. Physical evidence
concerns elements that customers perceive through sight (colors, size, shapes of ob-
jects, and installations), sound (music, noise), smell (odors, scents), touch (tempera-
ture, textures), and even taste (e.g. a sweet offered to children by a pediatrician to
make them feel more comfortable). The physical evidence of services includes both the
external and internal business environment – the servicescape – as well as the people –
employees and other customers – who are also present during the service delivery
process that the customer is experiencing; this also includes business websites
(Figure 5.1) (Kotler, 1973, 1974; Baker, 1986; Bitner, 1992; Wilson et al., 2016;
Zeithaml et al., 2018; Baker et al., 2020).
The external environment comprises the location of the business premises, the ar-
chitecture of the buildings and their surroundings (gardens, internal pathways, etc.).
For some services, these elements are crucial in the perceived quality of the provided
services, e.g. catering, accommodation, leisure and the tourism supply chain in gen-
eral. All services that require a customer’s physical presence must have easy-to-access,
clean, secure parking spaces that facilitate people’s access to a company’s premises,
with adequate signage in the surrounding area. It is also very important to ensure easy
access to business spaces with clear, detailed instructions for customers.
The internal environment includes the design of the interior spaces regarding their
spatial planning and functionality, with the necessary equipment, installations and
signage to facilitate service delivery and ensure good communication between frontline
staff and customers. Besides the practical issues, however, special attention should be
paid to esthetic components, e.g. the atmospheric conditions that will contribute to the
creation of a pleasant environment where customers meet with company staff. Care
should therefore be taken to design it, bearing in mind things like desirable tem-
perature, color combinations, scents and music, and avoidance of unpleasant odors
and annoying sounds, among many other aspects of interior planning.
Service companies often focus on elements of the internal and external environment,
paying less attention to other aspects of physical evidence, such as informational
leaflets, brochures, business cards, invoice forms, receipts, etc. Due to the contact
customers have with employees and other customers of the company, the consistency
 (P)hysical Evidence 175

Elements of Physical
Evidence

Internal Environment External Environment Other Material Details

Internal Design Location Leaflets-Brochures

Spatial Planning External design Invoice-Receipt of
Signage Building architecture payment
Equipment Access Notes (university)
Environmental- Signage Websites
Atmospheric Conditions Parking space Staff dresscodes and
appearance
Other customers
Professional cards

Figure 5.1 Elements of physical evidence.

of appearances, dress codes and behaviors also constitute components of physical

evidence. The websites of service providers also form an integral part of their overall
physicality. The lesser attention paid to other material elements can be explained by
the fact that they are often of secondary importance to customers; fierce competition
between service providers however has now highlighted the importance of those other
physical elements in the diversification of a company’s value offer, as all competing
companies recognize that they cannot lag behind in any aspects of physical evidence.
The challenge for all service companies is the design and successful implementation
of an appropriate combination of the elements of their “physicality” which will
communicate to the customer the differentiated as well as the expected level of quality
of the service they provide. It takes just a minor failure of any elements, or a perceived
inconsistency in the combination of the components that make up the physical evi-
dence to lower the perceived overall quality of the provided service from the custo-
mer’s point of view, contrary to what the company wanted/intended to offer.
To illustrate this, Figure 5.2 summarizes the various components of physical evi-
dence in the service delivery flow that may affect the experience of the clients of a
private medical center. The effects of physical evidence begin before the visit to the
medical center: potential as well as existing customers visit its website and see images
of the service environment through the various forms of advertising that the center
chooses to use. If they decide to use the medical center’s services, customers’ sa-
tisfaction will be influenced by elements of the physicality, such as the location of the
facilities, the ease of access and proximity to them in particular, possibly also in re-
lation to other services (e.g. a pharmacy). The architecture of the buildings, the
176 (P)hysical Evidence

Before the visit

• Internet
• Advertising material

Visiting the medical centre

• Location (proximity to the customer and other services)
• Building installations
• Car parking (availability, safety)

Entering the medical centre

• Furnishings in the reception area
• Dress code, appearance and friendliness of staff
• Cleanliness and comfort of the reception area
• Signage and on-site guidance
• Environmental conditions (temperature, lighting)

Consultation with the Doctor

• Furnishings in the doctor's surgery/examination area
• Dress code, appearance and friendliness of the doctor
• Cleanliness and comfort of the doctor's surgery
• Signage and on-site guidance
• Environmental conditions(temperature, lighting)

Payment-completion of Visit
• Issuance of detailed invoice
• Provision of additional documentation or other material

Figure 5.2 Physical evidence of a private medical center.

cleanliness of the surrounding area, and the immediate availability of secure parking
facilities are also elements that are highly valued by customers.
Upon entering the medical center, clients’ impressions will be based on the reception
area (location, cleanliness, comfort), environmental conditions (temperature, air
quality, music, aromas and scents, lighting), furniture, equipment, signage and dec-
oration, which are all related to its general functionality. The dress code, appearance
and friendliness of the reception staff are also integral elements of the overall ex-
perience. Clients will evaluate the physical evidence of the doctor’s surgery/examina-
tion room using similar criteria. The clients’ experience of the medical center’s
physicality is completed with the issuance of a detailed, error-free, easy-to-understand
invoice, with clear, detailed instructions regarding the correct application of the cli-
ent’s treatment. For their younger clients, however, perhaps the most important
 (P)hysical Evidence 177
element of the physical evidence may be the sweet treats (e.g. cookies, candies) offered
as a reward for their cooperation with the doctor.
It is therefore clear that the environment where the service is provided plays a very
important role in the customer’s overall experience and satisfaction, and consequently,
in the profitability and development of the business. The environmental influence is
expected to be higher in services where there is a high level of contact with customers
and business staff (e.g. a hotel), compared to services that are offered remotely (e.g.
online technical support services for telecommunications and electricity). It is also
believed that the environment contributes more to the overall value offer in highly
mixed services (e.g. a wedding banquet vs. a fast food meal). In any case, the business
environment is called upon to play some very important roles: facilitating the service
process, communicating the differentiated service and its expected quality, guiding the
behavior of both customers and employees. Given customers’ wide-ranging desires
and preferences, some large hotel chains (e.g. Marriot) aim to meet the needs of dif-
ferent customer groups by creating corresponding hotel brands: each brand has an
original servicescape which is configured to maximize the expected experience of the
targeted customer group (Zeithaml et al., 2018).
The analysis of the service environment is usually carried out from the customer’s
point of view. However, it should not be overlooked that the business’s physicality
plays an even more important role in employees’ levels of satisfaction; so a company
should make an effort to retain the most able employees, since these particular em-
ployees will spend a lot of time in the business premises on a daily basis. The con-
tribution of satisfied and highly creative employees, especially at the frontline, in the
perceived value of the provided services, and consequently in customer satisfaction, is
crucial (see Chapter 4 (People) for a more detailed discussion). Acquiring and main-
taining a competitive advantage presupposes good cooperation with all the people
involved in a company’s supply chain; thus, the design of the servicescape should take
into account common goals and visions, as well as the priorities and limitations of
their strategic partners. Likewise, the physical evidence of service companies performs
the aforementioned roles in the context of the operation of their supply chain. The
choice of location should be based on a detailed investigation of the concerns of the
customers, the employees and the strategic partners of the supply chain. Supply chain
partners take into account the differentiation and expected quality of various services,
which are highlighted by the company’s physicality in terms of the form and extent of
the cooperation it has with its partners. The spatial arrangements of the indoor en-
vironment also include areas that are not visible to customers, such as the goods
receipt area in a supermarket, which should not be perceived as causing any incon-
venience to customers.
In summary, the arrangement of the physical evidence is one of the cornerstones of
developing and maintaining a competitive advantage for businesses and their supply
chains. The servicescape design requires a detailed systematic analysis in order to de-
termine the appropriate combination of its individual elements, which implies knowl-
edge, experience and a degree of artistic licence. The formation of an efficient and
effective physicality environment, which is an integral part of a company’s long-term
planning, also requires the investment of high-value, financial and time resources.
Potential failures in the design and creation of the servicescape bear significant negative
consequences; in most cases, making any necessary modifications (e.g. more space,
change of location) is difficult and usually comes with high implementation costs.
178 (P)hysical Evidence
5.2 Strategic roles of servicescape
The intangibility nature that characterizes services does not allow customers to use
their senses to evaluate them in the same way as material products. The difficulty of
evaluating services before receiving them is what servicescape is called upon to cover,
which plays multiple important roles in the successful transactions that take place
between customers and businesses. The main roles of a company’s physicality can be
classified into: (a) positioning the company’s differentiation strategy, and commu-
nicating the corporate image and brand, (b) facilitating the production process, (c)
acclimatizing those involved in the service delivery process, and (d) identifying the key
components of the diversification strategy (Wirtz & Lovelock, 2016, 2018; Wilson
et al., 2016; Zeithaml et al., 2018; Hoffman & Bateson, 2010; Verma, 2012; Rao, 2011;
Mudie & Pirrie, 2006; Bordoloi et al., 2018; Avlonitis et al., 2015).

5.2.1 Positioning of the differentiation strategy and communication of the

corporate image and brand
Physical evidence is to services what wrapping or packaging is to material products,
which is why the physical evidence is often called the packaging of a service. Physical
evidence provides customers with information about the type and expected quality
they can expect of a business service. Environmental elements provide information
that is decoded by customers, helping them to draw conclusions about the business’s
differentiation strategy. Physicality also helps reduce the level of the perceived risks
associated with using a service, as well as increasing customer satisfaction and loyalty
from the services provided.
Physical evidence is therefore a very important element of a service’s marketing mix,
with the aim of placing its differentiated value offer at a desirable point in the per-
ceptual map of targeted customer segments, in addition to provoking the desired
sensory and emotional reactions. The company’s corporate identity, philosophy and
esthetics are highlighted through its physicality. As the packaging of the service,
physicality takes on a more important role in enticing potential/new customers. The
consistency and correct combination of the elements of the physical evidence provide
positive indications that contribute to creating and strengthening of potential/new
clients’ trust in the company, resolving any possible doubts and second thoughts that
they may have. In high-contact customer service, the service environment is in fact an
integral part of the brand differentiation strategy, as is the case, for example, of large
hotels, restaurants and fast-food chains.
Besides the elements of the external and internal environment, equally important for
the customers’ overall evaluation of a service is the role of the staff’s appearance, dress
code and friendliness; the similarity of their external features goes in tandem with the
similarity of other customers’ behavior. Since we are all using the internet now, a
company’s website and social media posts also contribute to communicating its dif-
ferentiated image and the quality of its services. Unlike manufacturing companies that
produce material goods where product packaging plays a critical role, in the case of
service providers, it is often found that investments made in the physical evidence are
not always commensurate with the service’s importance. But successful service pro-
viders, especially those with high customer contact (e.g. catering, accommodation,
playgrounds, entertainment, etc.), generally place great emphasis on shaping their
 (P)hysical Evidence 179
physical evidence and do in fact invest significant resources in renewing and improving
them at regular intervals.

5.2.2 Facilitation of the production process

The final result of the service delivery process reflects the interaction of the human,
natural and artificial (anthropogenic) elements that make up the production system.
Physicality affects the production process, since it influences both the customers and
the employees of a company. Therefore, the service environment should facilitate
production processes with the ultimate goal of ensuring the best possible satisfaction
of the needs of the customers, employees and supply chain partners, as well as opti-
mizing the efficiency of the production system. For example, it is particularly useful
for the facilities of a university (e.g. lecture theaters, laboratories, administrative
services) to be located in the same place wherever possible in order to facilitate
movement between them for all stakeholders (students, academic and administrative
staff), so that the layout of the spaces ensures the efficient flow of students and pro-
fessors, students and administrative staff, administrative staff and visitors, etc.
The business environment also indicates the kind of behavior that a company’s
customers, employees and strategic partners are expected to display, e.g. the process
they should follow when serving/being served, the places reserved for the exclusive use
of staff, etc. Spaces should be designed to make it easy for guests to navigate complex
areas, such as a large hotel with a large number of separate spaces that have different
uses (e.g. restaurants, meeting rooms, cafes, playgrounds, etc.). or a large hospital with
a variety of clinics (areas for diagnostic tests, administrative services, etc.). In many
cases, however, businesses neglect to show care toward simple and seemingly insig-
nificant environmental elements such as signage, which leads to frustration for cus-
tomers and frontline staff alike.
Therefore, the company’s physicality plays a decisive role in the correct im-
plementation of the planned service delivery scenario, as well as in motivating cus-
tomers to make spontaneous purchases. The ultimate goal of planning the business
environment should be to enhance the sense of enjoyment and to create a positive
mood for customers, as well as employees who spend a considerable of their daily lives
on the business premises. If the business environment is not well planned, people will
feel frustrated, with negative consequences on their satisfaction and the overall eva-
luation of their experience with the company, whether they are employees or custo-
mers. Consider, for example, a hospital with poor quality ventilation, lighting, lack of
seating, inadequate standards of cleanliness in the waiting area, with an expensive
canteen selling low-quality food and drink. From the above discussion, the reasons as
to why private clinics invest heavily in their physical evidence become apparent, as
they try to provide patients and their companions with high-quality hotel-like facil-
ities, which complement their medical services.

5.2.3 Socialization of the participants in the service delivery process

Physical evidence contributes to the definition and communication of rules, principles,
roles, values and expectations, which facilitate good cooperation between customers and
frontline employees, as their roles, behaviors and relationships are clearly delimited.
Possible shortcomings or failures in identifying and communicating customers’ and
180 (P)hysical Evidence
employees’ roles lead to frustrations on both sides, resulting in the inability of a business
to achieve the desired goals. In high-contact employee-customer services, the service
environment plays a crucial role in shaping customers’ experiences because it can invoke
the right feelings for both the client and the employee. Therefore, it can influence
purchasing behavior by facilitating the service delivery process and the interaction be-
tween customers and frontline employees.
The business environment informs customers about their expected behavior, e.g.
what procedure they must follow during the service procedure, which of the staff will
deal with them according to their needs, the parts of the premises that are off-limits to
customers, etc. Consider a student restaurant: think about the appropriate signals that
inform customers about the location of the salad bar, how to be served at the salad
bar, where students should return their trays after the end of the meal, etc. Or a
hospital: patients and their companions need to know where and how to fill in the
necessary documents upon admission to the Emergency Department, how they can
arrange an appointment with the Outpatients Clinics, visiting hours, etc. Some busi-
nesses, such as cafes, encourage their customers to stay longer on the premises (and
therefore spend more money) by providing features such as free internet access or
specially designed tables and spaces for individual or group work, further contributing
to their acclimatization there.
The main purpose of this socialization process is to project a positive consistent image
to the public, which, however, depends on the image that each company employee
conveys when s/he comes into contact with customers. For example, an employee’s
uniform provides a number of benefits, such as facilitating customers in identifying
company staff, highlighting the corporate image, suggesting a coherent organizational
structure, providing clues as to the employees’ roles according to the company’s hier-
archy (e.g. the army, security services), etc. (Hoffman & Bateson, 2010).
The benefits of an appropriate configuration of the physicality, especially the in-
ternal environment, are not limited just to customers. Physical evidence plays an
important role in encouraging, strengthening and facilitating good cooperation be-
tween company employees by their own as well as the other operational parts of the
company. It also facilitates new recruits to understand their role in the business re-
latively quickly and clearly, and their respective position in its hierarchy. For example,
the most spacious and well-equipped offices are usually intended for senior/top
business executives. Physical evidence also contributes positively in creating good
conditions for the most efficient operation of the representatives of the strategic
partners in the supply chain that the company takes part in.

5.2.4 Identification of the key components of the differentiation strategy

Physicality contributes not just to communicating the differentiated services; very
often, it is the main component of a business’s differentiation strategy. In high-contact
services such as hotels, theme parks and playgrounds, physical evidence is a key pillar
on which the whole differentiation strategy of a company’s services is built on, in
relation to their main competitors. Due to fierce competition, companies very often
try, through regular improvements and renewals of the service environment, to re-
locate their services in order to attract new market segments. For example, restau-
rants, hotels, cafes and nightclubs regularly make expensive renovations to their
décor, lighting, paintwork, furnishings and employees’ dress codes (which often go
 (P)hysical Evidence 181
hand in hand with fashion trends), together with improvements and renovations to the
external environment, etc. External appearances, particularly employees’ dress code,
form an important element in terms of a service’s differentiation strategy. Customers
generally consider the most well-dressed and diligent employees to be the smartest,
most helpful and most pleasant to be served by (Hoffman & Bateson, 2010).
Companies often configure their spaces in alternative ways to better meet the needs
of the different market segments they are targeting. A cruise ship for example provides
different qualities of cabins/rooms (spaces, views, furniture, etc.), as well as restau-
rants, cafes and other onboard entertainment venues to better meet the different
wishes and preferences of various market segments. Therefore, by shaping its premises
in different ways, a company can ensure the successful implementation of discreet or
differentiated pricing.
Potential “exaggerations” of the environment, such as luxury décor, may have a
confusing effect on customers who tend to think that they may be charged more for
this kind of appearance, which in essence, contributes marginally to the perceived
value of the services rendered. It is therefore useful to find the right combination of
physical elements that contribute to, but also effectively communicate, the business’s
differentiation strategy without resorting to unnecessary “luxuries” that lead to un-
desired connotations.

5.3 Types of servicescape

The particular features of a service play a crucial role in determining the appropriate
mix of elements that make up its physical evidence; this includes the importance of the
service environment in terms of the customer’s experience and satisfaction (Wilson
et al., 2016; Zeithaml et al., 2018; Hoffman & Bateson, 2010; Verma, 2012; Rao, 2011;
Mudie & Pirrie, 2006; Bordoloi et al., 2018). Bitner (1992) proposed a typology of
services based on two factors: users and the complexity of the service environment
(Figure 5.3). Users can be only customers (self-service), both customers and staff
(interpersonal service), or only staff (remote services). In the self-service environment,
the customer performs almost all the individual activities of the service process on his/
her own, without, or with just minimal assistance from a company employee, who may
be absent from the environment (e.g. withdrawing money at an ATM), or discreetly be
supervising customers (e.g. at a museum), or providing remote assistance when the
case arises (e.g. online banking). The main goals of the service environment are to

Users of the service environment

Only customers Customers and staff Only staff

Simple Self Simple Interpersonal Simple Remote

Low
Complexity of Service Service Service
Service
Environment Complex Self Complex Complex Remote
High
Service Interpersonal Service Service

Figure 5.3 Types of servicescape according to users and the complexity of the physical evidence
(Adapted from Bitner (1992)).
182 (P)hysical Evidence
attract the targeted market segments, to facilitate the efficient completion of the
process, with the least possible inconvenience to the customer and without the inter-
vention of company staff wherever possible/desirable, and generally, to ensure the
desired level of customers’ experience and satisfaction, based on their expectations.
At the other end of the spectrum are the services where only the employees of a
company are found in the service environment, and they may or may not come into
live contact with customers. Examples of such cases are providers of tele-
communications, electricity, water and sewerage services, online shopping for tangible
and intangible goods, stock market advice, etc. The design of the physicality aims to
motivate staff, promote and facilitate group work between company employees and
representatives of the strategic partners in the supply chain, and to achieve the desired
tradeoffs in terms of the efficiency and effectiveness of the work that the staff perform.
To achieve these goals, successful businesses offer a pleasant working environment
that includes, among other things, fully equipped lounges, leisure centers and gyms, as
well as adequate and secure car parking .
The most demanding service environment is one where customers come into contact
with the company’s frontline staff and interact during the process required to produce
the service. There are many examples of this, e.g. restaurants, hotels, medical centers,
universities, theaters, etc. The design of the physicality presents great challenges, as it
must simultaneously attract, facilitate and satisfy the needs, desires and expectations of
both customers and employees, as well as their interactions. These challenges, in fact,
are even greater if we consider that the business environment hosts not only the cus-
tomers served by the contact staff but also other customers who are expecting to be
served or are being served at the same time, as may be the case with employees from the
company’s support departments and the representatives of other stakeholders involved
in its supply chain. Therefore, physical evidence should ensure harmonious coexistence
and interaction, not only between customers and frontline employees but also between
customers, and between the employees of the different departments of the company.
The complexity of the service environment ranges from low (simple environment) to
high (complex environment). Some services, such as cash withdrawals from ATMs,
require minimal space and limited equipment in terms of complexity. Particularly in
less complex environments, where the simultaneous presence of customers and em-
ployees is not required, design decisions are relatively easy to make, as the parameters
that must be taken into account are fewer. At the other end of the spectrum are the
more complex environments, particularly those that host both customers and em-
ployees, such as hospitals and universities. For example, a university includes a large
number of facilities, e.g. amphitheaters, laboratories, administrative support, catering,
sports and entertainment centers, to cater for the different needs of the students and
academic/administrative staff of the various faculties, departments and research cen-
ters that make it up the whole operation. In these complex service environments,
managers face a number of challenges in finding the most appropriate balance to meet
the needs, desires and expectations of tens of thousands of a diverse range of people,
who are effectively the “customers”.
According to Wakefield and Blodgett (1994), the importance of the servicescape
where consumers are present depends on their length of stay at the premises and their
main purchasing motivation. Depending on the customer’s main purpose, services
range from operational (functional motivation) to leisure (voluptuous motivation).
For example, services such as those offered by the post office and locksmiths are
 (P)hysical Evidence 183

High
Length of stay

he
ft
ce o nt
e
tan m
p or iron
Im env

Low

Utilitarian Hedonic
Purchase motivation

Figure 5.4 Importance of servicescape based on customer’s length of stay and purchase moti-
vation (Adapted from Wakefield & Blodgett (1994)).

functional, while leisure facilities and beauty salons are recreational. The length of
stay in the service environment can range from a few minutes (less than an hour) at a
post office for example, to full days at a hospital or seaside resort. Taking into account
these two factors in combination, the importance of physicality, in terms of satisfying
the needs, desires and expectations of consumers, ranges from relatively low when the
length of stay is short and the motivation is functional, to very high when it comes to
long-term leisure/pleasure services (Figure 5.4).

5.4 Theoretical models of the impact of the service environment

Environmental psychology is the interdisciplinary field that studies the interactions of
people (customers and staff) with the elements of the man-made (artificial), natural and
social environments. Theories and models developed in the context of environmental
psychology are very useful tools for assessing the impact of the overall business/orga-
nizational environment on the behavior of customers and employees (Wirtz &
Lovelock, 2016, 2018; Wilson et al., 2016; Zeithaml et al., 2018; Hoffman & Bateson,
2010; Verma, 2012; Rao, 2011; Mudie & Pirrie, 2006; Bordoloi et al., 2018; Avlonitis
et al., 2015). Mehrabian and Russel (1974) proposed a very popular model still used
today for interpreting the influence of the environment on the behavior of a business’s
customers and employees, called the Stimuli-Organization-Response (SOR) model.
Bitner (1992) relied on the SOR model to create a more integrated and detailed model of
the service environment, which she called “servicescape”.

5.4.1 Mehrabian and Russel’s SOR model

The SOR (Stimuli-Organism-Response) model by Mehrabian and Russel (1974) ar-
gues that stimuli from environmental elements affect people’s emotional states, which
184 (P)hysical Evidence

Response-
Approach/Avoidance
Emotional situations
Staylonger
Environmental stimuli Pleasure Explore further
Stimulation Communicate with
Sovereignty others
Derive satisfaction

Figure 5.5 Stimulus-Organism-Response (SOR) model in the environment (Adapted from

Donovan & Rossiter (1982)).

in turn affect people’s behavior and reactions to their environment (Hoffman &
Bateson, 2010; Verma, 2012; Wirtz & Lovelock, 2016, 2018; Wilson et al., 2016;
Zeithaml et al., 2018; Rao, 2011) (Figure 5.5).
The elements of an organization’s physicality, such as the interior, the exterior and
other elements, form the set of environmental stimuli. These stimuli are perceived by
the five human senses, of both customers and employees, which lead to the formation
of expectations and perceptions about the services being provided. Therefore, it is very
important for the company/organization to properly plan its physical evidence in
order to invoke the desired stimuli among the audience that is interested in it.
Emotional states caused by environmental stimuli are the central variable of the model,
which supports that emotions rather than perceptions and thoughts influence reactions to
the environment. Therefore, the same environment can cause different emotions in different
people; thus, different behaviors can be observed. According to the model, environmental
stimuli influence three basic human emotional states: satisfaction-dissatisfaction, excitement-
relaxation and dominance-submissiveness. Satisfaction-dissatisfaction refers to the extent to
which customers and staff are satisfied with the overall process and experience of a service.
Excitement-relaxation refers to the degree to which people feel that physical evidence excites
and arouses them. Dominance-submissiveness is related to the degree to which customers
and employees feel they can operate freely within the service environment .
Russel (1980) expressed the widely accepted view that emotional states that are
caused or influenced by physical evidence can be described in two dimensions, namely
pleasure-resentment and arousal-relaxation (Figure 5.6). The feeling of satisfaction
(pleasure-dissatisfaction) caused by the environment is highly subjective. A young
person may not be happy about listening to classical music in a cafe, as opposed to
someone older and more initiated into this type of music, who may derive a sense of
pleasure from it. Feelings of overcrowding will most likely cause dissatisfaction to
train passengers especially in summer, but a large crowd will make watching a football
match a more pleasurable experience. On the other hand, the feeling of excitement or
relaxation due to a company’s servicescape is clearly more objective and depends on
the complexity of the environment. For example, a horror ride in a theme park will
clearly cause more excitement than a classical music concert or a visit to the hair-
dresser’s. Therefore, companies must shape their physicality in such a way as to
provoke the desired result, depending on whether this is excitement or relaxation, with
the ultimate goal of creating a pleasant experience.
 (P)hysical Evidence 185

Stimulating

Stressful Exciting
Admission to a Football match
hospital (Emergency)
Unpleasant Pleasant
Gloomy Relaxing
Mandatory (& boring) Beauty parlour
seminar

Sleep-inducing

Figure 5.6 Model of Affect by Russell (1980) (Adapted from Mudie & Pirrie (2006)).

The last stage of the SOR model refers to people’s reactions (customers and em-
ployees) to environmental stimuli. When someone visits a dentist with severe tooth-
ache, for example, it is obvious that the purpose of the employees at the dental clinic is
to create a pleasant experience, or alternatively the least dissatisfaction as possible.
The more satisfaction customers (and employees) derive, the more likely they are to
choose a behavioral reaction that denotes “approach” instead of “avoidance”, such as
extending their stay at the service space, and further exploring and interacting with it.
High levels of satisfaction are expected to lead to a greater desire to communicate with
other people (frontline employees and other customers) in the service area. Customers’
“approach” reactions are associated with increased direct purchases but also have a
positive predisposition for future purchases.
If the physical evidence contributes to a customer’s satisfaction, then the increased
levels of arousal can create even more “excitement”, resulting in even more positive
reactions. But if the service is associated with unpleasant situations, such as the ad-
mission of a patient to a hospital, businesses will have to design procedures and en-
vironments that will alleviate this inherent dissatisfaction, at the same time as creating
a relatively calm, relaxing environment to reduce the stress levels of patients and their
companions. In any case, the environment should be in line with customers’ ex-
pectations of a desired point in the arousal-relaxation spectrum, especially when it
concerns strong emotional expectations. For example, parents organizing a birthday
party for their child in a playground want the environment to excite the young guests,
whereas for a romantic dinner, the environment is expected to contribute to the guests’
relaxation.

5.4.2 Bitner’s Servicescape Model

Bitner (1992) relied on the basic models of environmental psychology to formulate a
complete model, which she called “servicescape” (Figure 5.7). A very important
contribution of the servicescape model is that it explicitly recognizes the effect of
physical evidence, not only among the behavior of customers but also of employees,
including their social interactions. According to this model, the main environmental
dimensions that ultimately affect the people’s behavior in the service area are related
186 (P)hysical Evidence

Environmental Total Internal

Intermediaries Behaviour
Dimensions Environment Reactions

Cognitive (beliefs, classificaiton, Approach

symbolic concepts) Connection
Emotional (mood, attitude) Investigation
Longer stay
Atmospheric Physical (pain, comfort, movement,
Committment
physical condition)
Conditions Execution of the plan
Temperature
Air quality Avoidance
Noise (in contrast
Music Intermediary Staff to/opposite of the
Staff Reactions
Smells Reactions approach)
Etc.

Perceived
Space/ Functionality Social inter-reactions
Environment of the
Spatial planning between staff and
Service Provision
Equipment customer
Furniture
Etc.
Intermediary Consumer Approach
Consumer Reactions Invitation/Approach
Signs/Symbols Reactions Duration/
Signage Investigation
Personal objects Financial outlay
Decor Return
Etc. Execution of the plan
Cognitive (beliefs, classificaiton,
symbolic concepts)
Avoidance
Emotional (mood, attitude)
(in contrast
Physical (pain, comfort, movement, to/opposite of the
physical condition) approach)

Figure 5.7 Servicescape model (Adapted from Bitner (1992)).

to the internal environment of the business, particularly the atmospheric conditions

(temperature, air quality, music, noise, scents and odors), the spaces and their func-
tionality (spatial planning, machinery, furniture) and the signs and symbols (mark-
ings, personal items, decoration style, etc.). In many cases the external environment of
a business (location, ease of access) can have a catalytic effect on the customer’s ex-
perience, compounded by the business’s presence on the Internet (corporate website,
participation in social media) for services such as retail chains of electronic items,
hospitals, travel agents, etc.
Regardless of the individual dimensions of the physicality that are important for each
business, customers and employees perceive the service environment as a whole and not
just as a sum of individual elements. Therefore, the individual elements of the physical
evidence should be in harmony with each other in order to create the appropriate service
environment for the company’s intended differentiation strategy. The way customers
and employees perceive the overall service delivery environment is highly subjective,
with often a wide range of views between stakeholders. However, targeted customer and
employee segments tend to be relatively uniform; for example, a business targeting
customers who are looking for bargains should create an environment that is well-
planned, but not sophisticated and complex, because potential customers will classify it
as an expensive shop. Conversely, if the company is targeting customers seeking luxury,
then the environment should contain, for example, sophisticated furniture, rich decor,
state-of-the-art technology, etc. (Hoffman & Bateson, 2010).
 (P)hysical Evidence 187
Customers/employees may form the same opinion about the perceived service en-
vironment, but each one’s internal reactions are very likely to differ significantly due
to each individual’s personal characteristics. The main factors that mediate between
the perceived environment and internal reactions concern personal characteristics,
purpose of the visit to the company, temporary moods and cultural differences
(Wilson et al., 2016; Zeithaml et al., 2018). For example, an extroverted client will
react more positively to an environment that encourages socialization. A customer
staying in a hotel for just one day for business reasons will react differently to the
hotel’s environmental stimuli than a family who intend to spend the next two weeks on
vacation. Similarly, a customer who visits the bank during a short work break will
experience the queue differently than a retiree who happened to meet an acquaintance
and got caught up in a conversation. An example of cultural differences is the
shopping mall: in countries like the United Kingdom and the United States, customers
tend to get excited about the large size of shopping malls; in Greece, however,
shopping malls tend to be much smaller, and many of them even find it difficult to
remain in operation a few years after opening.
The fourth stage refers to the internal reactions of both customers and employees as
a result of their overall exposure to the environmental stimuli. Internal reactions are
classified into cognitive, emotional and physiological. Cognitive responses refer to the
mental processes caused by environmental stimuli and concern beliefs, classifications
and symbolic concepts. The service environment influences customers’ beliefs about
the quality of the services offered through the non-verbal messages it conveys. If a
client is dissatisfied with the outcome of a lawsuit, if s/he perceives that the lawyer’s
office to be messy, and files can’t be located easily, or the lawyer dresses casually, it is
very likely that the client will form a negative view of the services that were provided
to him/her and will probably blame the lawyer for the adverse outcome. Even when
the environment conveys the “messages” of a successful lawyer (decoration style, at-
mospheric office elements, dress code, up-to-date file system, etc.), a dissatisfied client
will probably look for other reasons to blame the lawyer for the undesirable result. In
a restaurant, physical evidence also provides useful information to help a customer
“classify” it as a simple diner or a high-class restaurant. Customers derive symbolic
meanings from businesses’ physical evidence, such as images and posters.
Emotional reactions do not arise from mental processes, but from subconscious
connections of elements of the physicality, in relation to positive or negative past
experiences. Therefore, it is usually difficult to give a logical explanation for emotional
reactions, which we simply accept, even though they can greatly influence customers’
and employees’ behaviors. Russel’s (1980) model is a particularly important aid in
interpreting the influence of the environment on the emotional reactions of those
involved in a service’s productive processes.
A business’s physical condition also plays a key role in the physiological reactions
that are usually defined in relation to the physical pleasure or discomfort experienced
by customers and employees. For example, if the music is too loud, or the temperature
is too high/low, restaurant customers may feel intense discomfort and leave earlier
than intended, or even avoid visiting it again. Similarly, when employees are at the
business premises for many hours on a daily basis under conditions of work pressure,
the service environment should facilitate their efforts in order to be effective and ef-
ficient at the same time. It is therefore very important for all employees that their work
environment is comfortable, has all the necessary equipment and the appropriate
188 (P)hysical Evidence
spatial layout, and ensures pleasant atmospheric conditions, such as temperature, air
quality, scents, lighting, etc.
Internal reactions are the penultimate stage before the manifestation of both cus-
tomers’ and employees’ behaviors, as well as their social interactions. In line with the
SOR model, the servicescape model takes the view that individuals respond to en-
vironmental stimuli in two opposite ways, approaching or avoiding. If the overall
internal reactions result in perceived satisfaction from the experience of the environ-
ment, then customers choose approach, which means that they stay longer, explore the
business premises more, spend more money, and will most likely return for future
purchases. Correspondingly, satisfied employees stay longer and increase the con-
nection and commitment they feel for the company, their colleagues and customers,
and consequently help the company achieve high returns. On the other hand, com-
panies may deliberately configure their environment in such a way as to prevent
certain unwanted groups of people from approaching it, such as playing classical
music in certain shops, to discourage or limit the time spent by customers who do not
fit their corporate image.
Environmental stimuli ultimately affect the social interactions between staff and
customers. The layout, position and comfort of the seating, the physical proximity and
total surface area, and the flexibility of the space will facilitate or complicate customer-
employee customer-customer interactions.

5.5 Dimensions of the service delivery environment

5.5.1 Ambient factors

Atmospheric conditions are related to properties of the service environment that affect
the five human senses; although they significantly affect people’s emotional state,
perceptions, attitudes and behavior, they are usually not recorded. Atmospheric
conditions are made up of many sub-elements related to music and sounds, aromas
and smells, colors, lighting, temperature, cleanliness and air quality. The aim is to find
the right combination to enhance the desired behavior of customers and employees.

Temperature
Setting the temperature to the desired levels for each season plays a key role in cus-
tomers’ and employees’ experiences (Rao, 2011; Baker et al., 2020). This requires the
use of air conditioning and heating systems, in order to avoid unpleasant situations
where people in service areas feel too cold in winter and too hot in summer. An
ambient temperature contributes significantly to both customers’ and employees’
choice to approach or avoid a business and its premises, their intention to visit it in the
future, length of stay, spending levels, as well as their interactions with employees and
other customers. Cheema and Patrick (2012) concluded that relatively higher tem-
peratures make the most difficult cognitive processes more difficult, and consequently,
customers’ willingness to make difficult decisions. However, high (relative to low)
temperatures have been found to contribute positively to people’s sense of social
closeness to other decision makers, increasing their willingness to take into account the
views of others when making purchase choices (Huang Mr. a., 2014).
 (P)hysical Evidence 189
Cleanliness of the space and air quality
Few studies have focused exclusively on the effect of cleanliness on the overall customer
and staff experience from a company’s physical evidence, but it has been included as a
dimension in the overall quality index of the service environment (Baker et al., 2020).
According to Barber and Scarcelli (2010), cleanliness determines customers’ decisions to
choose, stay or return to a store; in fact, customers’ education level and gender are
important factors that influence their perceptions of a service environment’s level of
cleanliness. Both customers and employees are drastically affected by air quality (Rao,
2011). Elements of air quality are the absence or presence of certain smells (e.g. in a
restaurant), foul odors (e.g. in a butcher’s shop), dust and other particles, and fresh air.

Music
The influence of music on customer’ and employees’ experience has been extensively
studied (Wirtz & Lovelock, 2016, 2018; Rao, 2011; Baker et al., 2020; Hoffman &
Bateson, 2010; Avlonitis et al., 2015). The main elements of music that were found to
influence the formation of perceptions and the behavior of customers concern the genre,
intensity, rhythm and relevance (agreement) with the type of service provided. Its effect
depends on the preferences and general characteristics of each kind of customer (e.g. age,
education). Recent research has shown that music alone is not a very important factor in
the overall experience, but in combination with other elements of physical evidence, it
determines customer and employee satisfaction (Garlin & Owen, 2006). However, more
recent research has concluded that the presence of music alone is positively correlated
with pleasure, satisfaction, and behavioral intentions (Roschk et al., 2017).
In general, high-pitched rhythmic music increases people’s excitement, while soft
intimate music contributes to their relaxation, leads to longer stays in the store, and
increases spontaneous shopping. Soft music also has a positive effect on reducing
customers’ stress levels, so it can improve the overall customer experience of services
that are inherently identified with high levels of concern, such as a visit to the dentist.
Therefore, depending on its intentions to speed up or slow down customers’ pace, a
business such as a supermarket or a clothing store uses a corresponding volume and
rhythm of music. The music genre and rhythm may vary in a store during the day
depending on the kinds of customers that visit it at different times. Music that suits
customers’ preferences contributes positively to their mood while waiting in a queue. If
the music “agrees” with the type of services provided by the company, it can increase
customers’ willingness to make more purchases and on more expensive items, also
potentially securing another visit to the store in the future. On the other hand, music
can be used to repel groups of people who usually display unwanted behavior or
generally do not fit the desired corporate profile. For example, the use of classical
music and, generally any genre and rhythm that are unfamiliar to relatively young
people may contribute significantly to the reduction of vandalism in metro stations or
other public and private facilities whose adequate surveillance is difficult.

Noise
Noises and various other sounds coming from a company’s internal and/or external
environment contribute negatively to customers’ and employees’ overall experience
190 (P)hysical Evidence
and satisfaction, especially when it is high volume (Rao, 2011; Hoffman & Bateson,
2010). Common internal sources of annoying noises are the sounds machines make for
the operation of the business (e.g. air conditioners, electricity generators) and an-
nouncements (e.g. at airport). Regardless of the source and intensity of the unwanted
sounds, a business needs to isolate the service areas as much as possible from the
internal sources of the “nuisance” to customers and staff. The sources of external noise
vary: highways, airport, summer nightclubs, industrial facilities, etc. The business
often has little, if any, control over them. In general, locations with loud and frequent
noise should be avoided; where this is not possible, the best available sound insulation
of the business premises should be ensured. The use of appropriate music can make a
significant contribution to mitigating the impact of unwanted sounds on customers’
and employees’ experience and satisfaction levels. The professionalism conveyed in
announcements also has a positive effect on customers’ perceptions of the business.

Smells
Numerous studies highlight the great importance of scents in customers’ positive per-
ceptions, attitudes and customers (Wirtz & Lovelock, 2016, 2018; Baker et al., 2020;
Hoffman & Bateson, 2010; Avlonitis et al., 2015; Roschk et al., 2017). For example, the
pleasant aromas emanating from a bakery attract customers and are positively related
to their intention to visit, linger, and increase their purchases. Hermann et al. (2013)
found that plain scents resulted in higher sales, increased cognitive processing, and more
favorable overall buying behaviors. As with music, aromas should be carefully chosen
to match the smells that suit the circumstances and the customers, in order to provoke
the desired reactions. According to Madzharov et al. (2015), “warm” smells (e.g. cin-
namon, vanilla) as opposed to “cool” ones (e.g. mint) result in customers feeling that the
space is more crowded. Warm smells also lead to the selection of goods of prestige, and
higher prices for quality goods and generally, more money spent. All elements of the
environment, including scents, work in combination with each other, so a business
should look for the right combination of all these elements. On the other hand, com-
panies should take care to avoid unpleasant odors in service areas, which will have a
significant negative impact on customer satisfaction, as well as on employees’ disposi-
tion. In addition to the use of pleasant aromas to mitigate unpleasant odors, appro-
priate ventilation systems must be installed that will make the atmosphere feel clean; this
entails putting waste bins in the right place.

Colors
Colors are an important component of the service environment that can influence the
moods and emotions of those present, and consequently, their perceptions and attitudes
about the services offered. Therefore, they can have a significant impact on customers’
behavioral responses, as well as on the overall evaluation of their experience and satisfaction
(Wirtz & Lovelock, 2016, 2018; Rao, 2011; Mudie & Pirrie, 2006; Hoffman & Bateson,
2010; Avlonitis et al., 2015; Baker et al., 2020; Roschk et al., 2017). Colors are usually
defined in three dimensions: hue, brightness and intensity. Shade refers to the basic group to
which the color belongs, such as yellow, red, green, etc. Brightness determines how light or
dark the color is, from absolute white to absolute black. Intensity refers to how bright or
dull the color looks, which is due to its high or low density/saturation, respectively.
 (P)hysical Evidence 191
Various studies have shown that “warm” colors (yellow, orange, red) cause excite-
ment and enthusiasm, as well as anxiety. They also make those present in the space feel
comfortable and informal. They are generally considered to be more attractive to
people, which is why they are often preferred in retail stores to attract customers. Warm
colors also speed up decision making and are considered suitable for low-level decisions.
In contrast, “cool” colors (green, blue, purple) are associated with sensations such as
calmness, relaxation, happiness and formality. They help when decision making requires
a lot of time and they are generally used for more complex decisions. It should also be
noted however that intense purple can give rise to dissatisfaction, and even depression.
In terms of brightness, spaces that are painted with light colors tend to look bigger,
while dark colors make them look smaller. It was also found that lighter colors help
the lighting used in a business space to more easily be combined into the company’s
environment. On the other hand, darker colors attract customers’ attention more, so
they are useful for store spaces that customers tend not to visit much. In terms of
intensity, bright colors make objects look larger than duller colors. Children prefer
bright colors, while adults prefer duller shades.
As with all elements of the service environment, color choices and combinations,
either on their own or in combination with other elements, require great care to
achieve the desired result. In some cases, some colors are identified in people’s con-
sciousness with football teams, political movements, etc.; so if a business doesn’t want
to identify itself in this way, it would be wise to use certain colors carefully to avoid
unexpected associations and reactions made by customers. It has also been found that
colors can have different meanings for different countries/people, which companies
must take note of if they have a simultaneous presence in different countries. For
example, in China the color red is very popular; in India, white is considered the color
of mourning, while in Greece it is black.

Lighting
Lighting is a very important element of a business’s physical evidence, especially in
high contact services (Rao, 2011; Baker et al., 2020; Hoffman & Bateson, 2010; Biswas
et al., 2017; Mudie & Pirrie, 2006; Bilgili et al., 2020). When designing lighting, factors
such as natural light (daylight), the colors used to paint the premises, the nature of the
activity to be carried out in the space, visibility levels and the desired moods of cus-
tomers/employees are taken into account. Low lighting levels exude more formality
and serenity, so they are preferred when achieving low rhythms where less mental
processing is required, such as in a restaurant or in queues. In contrast, brighter en-
vironments are noisier, they contribute to greater socialization among customers, as
well as between customers and employees, and they exude a sense of informality,
excitement and cheerfulness. It has also been found that in low lighting conditions,
customers tend to consume more unhealthy foods than in more intense ones, which is
attributed to the fact that bright lighting causes mental alertness.

5.5.2 Spatial planning and functionality

Very important elements of the service environment are also its spatial planning and
functionality, which should facilitate the production process as a whole, as well as the
individual functions that are performed by both employees and customers, including
192 (P)hysical Evidence
employee-customer collaboration (Wilson et al., 2016; Zeithaml et al., 2018; Wirtz &
Lovelock; 2016, 2018; Hoffman & Bateson, 2010; Haksever & Render, 2013; Mudie &
Pirrie; 2006; Bordoloi et al., 2018; Avlonitis et al., 2015; Rao, 2011; Baker et al., 2020).
Spatial planning implies the organization of the service area, as well as the type, shape
and size of the furniture, machinery and other equipment used, and their location.
Functionality is determined on the basis of the ability provided by the furnishings and
machinery/equipment, including their organization in the space, to facilitate the ser-
vice delivery processes based on the promises made to the customers, in the most
efficient way possible.
Spatial planning and functionality are particularly important elements of physi-
cality in self-service areas, where customers will have to go through all the stages of the
production process without, or with very limited, assistance from the staff of the
business. Examples of such services are cash withdrawals from ATMs, electronic
banking, online shopping, etc. In addition to services such as catering, leisure activ-
ities, hotels and retail, spatial planning and functionality play a crucial role in the
overall experience, purchasing behavior and perceived customer satisfaction.
Spatial planning and physical functionality take on even more imperative roles in
complex service environments, such as hospitals, where the routine is to serve hun-
dreds, often thousands, of patients at the same time, with a large staff numbering
hundreds of employees, all with different specialties. In this case, the flow of the ex-
ecution of the procedures should be as fast as possible, and at the same time highly
efficient. Thus, communication and cooperation between medical staff, their direct
access to the patients’ treatment areas, the rapid transfer of patients to the various
hospital areas (e.g. surgeries, diagnostic tests, beds), the movement of patients and
their attendants within the various areas of the hospital, among many other activities
should be facilitated as much as possible.

5.5.3 Signs, symbols and artistic effects

Brands, symbols and artistic effects contribute to the formation of an effective and
efficient service delivery environment (Wilson et al., 2016; Zeithaml et al., 2018; Wirtz &
Lovelock, 2016, 2018; Hoffman & Bateson, 2010; Mudie & Pirrie, 2006; Avlonitis et al.,
2015; Rao, 2011; Nägele et al., 2020). Signs are elements of the internal and external
service environment that contribute as direct or indirect signals for the convenience of
customers, not just regarding the business’s orientation but also within the business
space (e.g. road signs leading to the business premises, the exterior of the company’s
buildings, guidance from the hall area to the restaurant playground). They can also send
signals regarding expected behavior (e.g. smoking is prohibited). They help mitigate
feelings of overcrowding and the consequent stress customers may feel while they are in
the business premises.
Symbols are especially useful for customers who are visiting the business premises
for the first time. Special care is required in the configuration of the environment of a
company that serves a proportionately large number of new or irregular customers,
especially if the production process is based on a high degree of self-service. It has been
found that the lack of a clear signaling system that properly guides customers without
the possibility of misinterpretation in the service delivery processes, leads to customer
disorientation, stress, dissatisfaction and limited overall satisfaction. Symbols help
customers learn the self-service process the size, shape, color and lighting of signs and
 (P)hysical Evidence 193
symbols play an important role in the corporate image. Examples of symbols are
nameplates (toilets, amphitheater, and the manager’s office), instructions (direction to
the toilets, boarding gates), behavior instructions (shoe storage at a playground) and
reminder of rules of conduct (no-smoking signs).
Symbols and artistic effects, such as decorative elements, carpets, photographs and
wall hangings, indicate, in a more indirect, symbolic and esthetic manner, the im-
portance of the space, the rules, as well as the expected behavior of those present.
Items bearing the company logo, such as forms, mailing envelopes, business cards,
should evenly highlight the logo in order to enhance the corporate image.
Well-designed signage of the service environment offers various potential benefits to
customers and employees, and their interactions (Bonfanti, 2013). Providing in-
formation about the rules of operation and delimiting the roles of those present at the
premises of the company contributes to a feeling of familiarity with the service en-
vironment, especially for new customers. When a customer loses their orientation, the
intensity and confusion felt is mitigated when appropriate signage is used; this implies
a reduction of the information that has to be provided by frontline employees, who
can focus on their main tasks while offering greater customer satisfaction. Therefore,
well-designed signage improves the efficiency and effectiveness of the production
process, offers greater satisfaction to customers and employees, strengthens the cor-
porate image and is an important component of differentiation from among the
competition.
A recent study by Nägele et al. (2020) came to some interesting conclusions about
the effect of small business objects with that customers come into contact with, which
may affect their perceptions and behavior. They observed that customers’ touching an
object in a business has a positive effect on the behavioral intentions of the service
provider, but only in cases where customers consider the object to have high esthetics.
The same study also showed that these tangible objects are not only useful to enhance
the psychological connection with new customers but also to strengthen relationships
with existing customers.

5.5.4 Exterior storefront atmospherics

The external environment of service companies, especially its atmospheric elements,
plays a decisive role in the choice of store that consumers will decide to enter for
shopping purposes. Although the relevant literature is quite limited, two theoretical
models have recently been developed which analyze the impact of the external en-
vironment on customers’ satisfaction and behavior (Baker et al., 2020). According to
the first model, the outdoor space includes the architectural and natural elements that
are in the customers’ view outside the business premises, such as decorative plants,
awnings, tables and chairs, etc.; this does not include people, signage and the shop
windows (Baker & Sirianni, 2018; Baker et al., 2020). The model argues that archi-
tectural and physical elements influence the informational components of the external
environment design, i.e. their readability and coherence, and they consequently in-
fluence customers’ behavior, in terms of approach or avoidance.
The model of Bloch and Kamran-Disfani (2018) adopts a broader and more
comprehensive approach to the components of the external environment, which are
divided into two interrelated subcategories: the location of the store and its sur-
roundings, and the store’s architecture. The location and surrounding area of the store
194 (P)hysical Evidence
concerns the neighborhood or the wider area, the possibility of access on foot, the
natural/plant environment, the fenced area, the view from the store, the store’s image,
etc. The architecture of the store refers to the elements related to the exterior design,
such as size, style, color, signage, shop windows, entrance, lighting, etc. According to
the model, the external environment affects customers’ psychological reactions (cog-
nitive and emotional aspects of the store, including its image), as well as their behavior
(desire to enter, length of stay, loyalty, word of mouth). Between the external en-
vironment and the psychological/behavioral reactions, it is believed that a highly
mitigating role is played by the personal customer information (personality, style
preferences, goals, experiences) and consequential factors (weather, overcrowding,
competing stores).
It therefore follows from the above that the design of the external environment, and
especially the choice of the appropriate location, is a strategic decision, because it has
a significant impact on the psychological reactions and overall behavior of customers,
while the cost of corrective actions is very high, or even prohibitive.

5.5.5 Employees
The appearance and behavior of frontline employees are key components of fitness for
most businesses, with the significant exception of self-service, as they come into direct
contact with customers (Wirtz & Lovelock, 2016, 2018; Baker et al., 2020; Avlonitis
et al., 2015; Al Halbusi et al., 2020). The presence of contact staff contributes to the
overall experience, and consequently, to the perceived satisfaction from the provision
of services. In companies such as restaurants, fast food restaurants, customer service
stores for telecommunications companies, banks, and supermarkets, the management
uses dress codes for staff that have contact with customers.
The main factors that have been investigated concern the clothing, physical features
and employee density (employees per floor) of the contact staff. Employees’ attire
affects customers’ expectations of service quality and behavioral intentions (Shao
et al., 2004). Another study showed that the color of clothing worn by employees and
the height/width ratio of employees’ faces had an effect on customers’ perceptions of
the accuracy of the information provided (Bashir & Rule, 2014). Some physical fea-
tures, such as obesity, have been found to have a negative impact on customers’
evaluation of services (Cowart & Brady, 2014). A relatively high number of friendly
employees per store floor also has a positive correlation on customers’ arousal/ex-
citement and satisfaction levels (Baker et al., 1992).

5.5.6 Other customers

Other customers are, inevitably, another element that shapes a business’s physical
evidence, as customers interact with each other (Avlonitis et al., 2015; Baker et al.,
2020; Hanks et al., 2021; Al Halbusi et al., 2020). One of the main factors that a
company can control in terms of customer interaction is density, i.e. the number of
customers in a given space. When there are too many customers in a given space, a
sense of overcrowding is felt. Crowding can be classified into spatial (when there are
many a lot of “things”, e.g. furniture, goods, shelves, etc.) and social (when there are
many people present); spatial crowding is clearly associated with more significant
negative effects on customer satisfaction than social crowding (Machleit et al., 2000).
 (P)hysical Evidence 195
Customers who have functional/practical incentives perceive higher levels of over-
crowding, and therefore experience less satisfaction than those who shop for pleasure
(Baker & Wakefield, 2012). Other researchers have also found an inverse “U” re-
lationship between perceived crowding and customer attitudes and behaviors (Mehta
et al., 2012; Pan & Siemens, 2011). In some circumstances overcrowding is desirable,
to consolidate a sense of security (Maeng et al., 2013). It may even be a key component
of the service experience, e.g. football fans watching their favorite team on the field
(Avlonitis et al., 2015). Another critical factor is the perceived similarity, appearance
and behavior with other customers: positive perceptions are significantly positively
related to the behavioral reactions of the approach (Brocato et al., 2012).

5.5.7 E-servicescape
Due to the ever-increasing contribution of the internet in the service delivery process,
most businesses also have an online presence. Various studies have highlighted the
positive impact of the online service environment on the experience, perceived sa-
tisfaction and buying behavior of customers during their online shopping (Yadav &
Mahara, 2020; Prabhu, 2019; Tankovic et al., 2018; Wu et al., 2017; Teng et al., 2018;
Jain, 2021; Vijay et al., 2017). In previous chapters of this book, it has been pointed
out that many companies, especially retailers, have adopted the omnichannel model of
product distribution, i.e. through various channels that complement each other, for
the fullest satisfaction of their customers. The main channels used include physical and
online stores, which customers visit to complete the whole or a significant part of the
service delivery process. Examples of such companies are telecommunications and
electricity suppliers, electronics and white goods retailers, etc. Therefore, the physical
evidence of the traditional physical store is enhanced by the atmospheric elements of
the online store, which create a multi-channel environment (Lazaris et al., 2017).
Although relatively limited, some studies have explored the role of e-servicescape in
shaping customers’ perceptions of the overall quality of the service environment and
corporate image, exploring their impact on their overall customer experience and their
purchasing intentions when visiting physical stores. Customers’ experiences of visiting
the online store decisively determine their beliefs, and consequently, their expectations
regarding the service environment of the company’s physical store (Loupiac &
Goudey, 2019). That is, consumers shape the image of the physical store based on
what they see on the internet, in terms of colors, materials and the general environ-
ment. Therefore, they will most likely feel frustrated and confused if they find that
these two environments are not aligned. The beliefs formed by consumers based on the
company’s website will also affect their attitudes toward the physical store, as well as
their desire to visit it. The atmospheric elements of the internet play a decisive role in
customer loyalty for physical stores located in shopping malls (Savelli et al., 2017), as
does the evaluation of the company’s name (Tsichla et al., 2016).

5.6 Servicescape design strategy in the context of supply chain

From the previous analysis, it becomes clear that the service environment cannot be
treated as a patchwork of various components. Effective planning of a company’s
physicality requires a holistic and methodical approach, where decisions on the choice
of the nature of the environment, and the location of its components should be taken
196 (P)hysical Evidence
as a whole, and not in fragments (Wilson et al., 2016; Zeithaml et al., 2018; Wirtz &
Lovelock, 2016, 2018; Verma, 2012; Rao, 2011; Baker et al., 2020). Below are some
guidelines for the effective design of the service environment (Bitner, 1993).

5.6.1 Determining the strategic requirements of the physical evidence

The first step is to determine the contribution of physical evidence to the achievement
of the strategic goals and the vision of the company. Physicality is a very key com-
ponent, which should be harmoniously combined with other components in the
overall strategy of a company’s differentiation. Therefore, throughout the design
process of the service environment, managers should keep in mind the company’s
strategic goals and vision. Any significant failures at this level will require significant
resources and time to correct in the future and may be fatal to the company’s com-
petitiveness and viability. Therefore, it is vital to define the service concept, for both
internal and external customers, as well as the future vision of the company. In re-
cognition of the great importance of a company’s operation in the context of its supply
chain, it is also necessary to take into account the strategic goals and visions of the
strategic partners of the company, and to seek the best mutual tradeoffs when sub-
stantial discrepancies are found.

5.6.2 Blueprinting of the service process

The next step is the blueprinting (mapping) of the service delivery process, which will
allow all parts of a business to have a detailed view of the overall process required to
provide customer services, as well as the individual underlying processes required for its
successful implementation. The blueprinting of services is the basis of a comprehensive
depiction of the ways in which people, processes and physicality (the 3Ps of service
marketing) interact in the provision of service. The service plan contributes to under-
standing the role, and consequently, the determination of the type of physical evidence
required for the specific service. When blueprinting a service, all the interactions with the
processes of the strategic partners of the company’s supply chain should not be over-
looked. For example, a supermarket chain cannot ignore the fact that a significant part
of customer satisfaction derives from the constant fullness of the shelves, which, how-
ever, presupposes the uninterrupted supply of goods by its suppliers.

5.6.3 Clarification of the roles of the attendees

As mentioned earlier, there are different types of services based on the users and the
complexity of the service environment (Figure 5.3); it is therefore necessary to clarify
the customers’ and employees’ roles in the production process. For example, when the
only users of the service environment are customers, then physical evidence should be
based on the customer’s perspective, i.e. how to ensure maximum utility for the cus-
tomer. Practically speaking, however, all companies, regardless of the service they
provide and the way they operate, base their longevity on the efficient and effective
work of their employees, as well as on the harmonious cooperation with their partners
in the supply chain. Therefore, the design of the physical evidence should take into
serious consideration the employees’ roles and their contacts with the representatives
of the company’s associates, in order to ensure the optimal flow of the service process.
 (P)hysical Evidence 197
5.6.4 Identification and evaluation of opportunities to improve physicality
Businesses must regularly look for and evaluate potential opportunities to improve their
physicality, in the context of striving to ensure the best possible satisfaction of both the
customers and employees, as well as the strategic partners of the supply chain. In some
cases, physical evidence doesn’t contribute in the expected way in implementing a com-
pany’s diversification strategy to provide high-quality services, as it may not provide the
desired functionality that would facilitate good cooperation between customers and contact
staff. In other situations, the physicality may not be well suited to the needs and preferences
of the market segments that the company is targeting. The service environment is composed
of many components, so it is not uncommon for there to be a certain degree of incon-
sistency/incoherence among components, resulting in confusing/conflicting messages.
Identifying potential opportunities to improve physical testimony can be achieved
in a number of ways, such as carefully observing customers’ behavior and reactions
among all those involved in the business, as well as its supply chain partners.
Alternatively, it is common for businesses to seek immediate feedback from customers
and frontline staff through the use of standard tools such as questionnaires, search
and follow-up discussions, comments on social media, and spontaneous suggestions
and ideas provided by customers and frontline staff.

5.6.5 Updating and modernizing the servicescape

A key feature of all markets is the rapid pace of change, which is due, among other
things, to continuous groundbreaking technological developments, resulting in the
constant introduction of new innovative products and services related to the shaping
of the service environment. Given the conditions of fierce competition between
companies, the very good information flow and the constantly changing preferences of
the customers, the need for relatively regular updating and modernization of com-
panies’ physicality becomes all the more imperative. In some cases, the need to
modernize the physical evidence may arise as a result of efforts to improve the effi-
ciency and effectiveness of the company’s cooperation with others involved in its
supply chain (e.g. new product cooling systems).

5.6.6 Cross-functional collaborations

Designing a service environment is usually the result of a complex and often time-
consuming process involving people from different parts of the business: staff uniform
decisions may be made by the human resource department, production process decisions
may be made by the operations/production manager, servicescape decisions may be made
by the management team responsible for the installations, and communications and
pricing decisions may be made by the marketing department. However, each part of the
business tends to make decisions based on its own priorities and constraints. Therefore, in
order to avoid limiting functionality and efficiency, and transmitting conflicting messages,
the servicescape design must result from the good collaboration of interoperational
groups with active representatives from all the departments of a business.
Some service environments are very complex: a good example is a hospital where
there are restaurants, canteens, florists, a post office and mini-markets, apart from the
main operations of the hospital itself, so there is a need for harmonizing all the
198 (P)hysical Evidence
collaborating businesses when shaping their physical evidence. The same applies in
shopping malls which house a variety of retail stores, offices, restaurants and leisure
businesses, all aiming to offer a unique combination of experiences to their visitors. In
addition, the web atmospherics affect the image that customers form of the company’s
physical store. Therefore, the service environments of physical stores and companies’
internet sites should be in good agreement, although they constitute usually separate
distribution channels used by the company. It has been found that the staff’s skills and
friendliness in physical stores can determine the perceived usefulness of the online
store and the pleasure that customers derive from it (Verhagen et al., 2019).

5.7 Location problem

The problem of location selection refers to the determination of the most advanta-
geous geographical location to install the company’s operations, in relation to the
resources it deals with and the partners/customers it serves/trades with. It also has to
do with the number, location, equipment and size of the new facilities, as well as cases
of relocation, an increase or a decrease in the size of the existing facilities. Choosing
the right location is one of the most important decisions a company makes. Most of
the time it is a strategic decision, which means that it is made relatively infrequently; it
is evaluated in the long term, and any wrong choice will have a significant negative
impact on both time and cost. On the other hand, the location of all the company’s
operations is important, because it has an impact on costs (fixed and variable) and
customer satisfaction, and thus the company’s revenues.
For a retailer, a few meters can make all the difference between profit and loss. A
factory installation in an area where there is difficulty in attracting staff with the
necessary skills significantly affects the factory’s productivity of the factory. Installing
a distribution center away from major highways and terminals can create supply
delays and increase operating costs.
The main goal in the choice of location is to maximize the benefits for the company.
Of course, the orientation differs in decisions concerning location choice in the field of
industry and services. In the case of industry, the focus is on cost: location is an im-
portant cost factor because the decision affects transportation and production costs (e.g.
labor). Therefore, costs differ significantly between the different alternative locations; a
small change in revenues between locations may be observed. Conversely, for decisions
concerning location choice in the services sector, the focus is on revenues. Location is an
important revenue factor because it affects the amount of customer contact and the
workload, while there is a small change in cost between service locations.

5.7.1 Location selection process

The procedure for the selection of the location is done systematically, involving the
following steps:
Step 1: First, the factors (criteria) that determine the selection of the location are
identified. These criteria differ in different cases:

• Industrial units for goods production: land acquisition costs, proximity to

suppliers, resources, terminals, markets, and industrial areas (zones) that provide
financial incentives and favorable tax regimes, etc.
 (P)hysical Evidence 199
• Service provision companies: Proximity to customers, competitors’ locations,
demographic data, access to transportation means, etc.
• Warehouses/distribution centers: proximity to customers, terminals and road
networks, cost of land acquisition, facilities provided, labor costs, etc.

Suppose a retail company is making a choice about the location of its new distribution
center that will supply retail stores and other points of sale in Southern Greece. The fol-
lowing criteria were selected for this example: land cost, proximity to suppliers, resources,
markets, and road networks, and favorable working conditions. It should be obvious that
these criteria do not all carry equal weight. Land cost, proximity to road networks and
favorable working conditions are considered more important, so they have the same weight.
Step 2: Alternative locations are then identified. Let’s say the company concludes on the
cities of Patras and Kalamata as possible choices, because they both meet the above criteria.
Step 3: The necessary information is gathered for consideration concerning the
various alternative sites. The data are oriented toward the selected criteria.
Step 4: Data concerning quantitative factors are then analyzed and the alternative
locations are graded on a selected scale. In the example under consideration, scoring is
made on a percentage scale. The product of the scoring process is then calculated with
the corresponding weight, and the sums of the products that constitute the final score
of each alternative location are calculated. But that is of course not enough…
Step 5: Quality factors involved in the evaluation are also analyzed (Table 5.1).
The site selection process continues in the following way: two problem-solving
techniques for site selection – Center of Gravity and Load-Distance – will be presented
that take into account both the distances from the new location to the points of sale
and the quantities required to be transported.
Figure 5.8 shows the coordinates of four units: X1, X2, X3 and X4. The coordinates
of the new unit X (x*, y*) are required, which will cover the requirements (loads) of
these points in pallets (p), specifically 10, 3, 6 and 8, respectively.

5.7.2 Center of Gravity

Center of Gravity finds the location (the x* and y* coordinates) of a distribution
center that minimizes distribution costs, taking into account the following:

• Location (coordinates) of the points of sale (x1, x2, x3, x4).

• Volume of goods sent to these points (l1, l2, l3, l4).
• Cost of shipping (or distance).

Table 5.1 Example of site selection based on criteria: scoring model

Score out of 100 Weighted score

Criteria Weight Patra Kalamata Patra Kalamata

Cost of land .25 70 60 (.25) × (70) = 17.5 (.25) × (60) = 15

Proximity to suppliers/ .05 50 60 (.05) × (50) = 2.5 (.05) × (60) = 3
resources
Proximity to markets .10 85 80 (.10) × (85) = 8.5 (.10) × (80) = 8
Proximity to road networks .40 75 70 (.40) × (75) = 30 (.40) × (70) = 28
Favorable working conditions .20 60 70 (.20) × (60) = 12 (.20) × (70) = 14
Total 1.00 70.5 68
200 (P)hysical Evidence

X2(7,6)
6
X1(3,5) l2=3p
5 l1=10p
X3(8,4)
l3=6p
4
X (x*,y*) l4=8p
X4(6,2)
2

3 6 7 8 x

Figure 5.8 Location selection methods based on distances and loads.

• x* is calculated by multiplying the coordinate of each point by its load (l),

summing these products and dividing by the sum of the loads.
• y* is calculated in a similar way.

The formulas that calculate the x* and y* coordinates of the new position, respectively, are:

i li xi i li xi
x = y =
i li i li

Table 5.2 shows the coordinates of 4 units/points of sale and the corresponding loads re-
quired to be moved from these units to a distribution center whose location is being decided.

Table 5.2 Coordinates of 4 units/points of sale and the corresponding loads required to be
moved from them

Coordinates Load

Location (x, y) (li) lixi liyi

Unit 1 (X1) (3, 5) 10 30 50

Unit 2 (X2) (7, 6) 3 21 18
Unit 3 (X3) (8, 4) 6 48 24
Unit 4 (X4) (6, 2) 8 48 16
27 147 108

By applying the above-mentioned formulas, we get the following:

liXi 147 liYi 108

X*. = = = 5.4 Y*. = = =4
li 27 li 27

which are the coordinates of the new position.

 (P)hysical Evidence 201
5.7.3 Load Distance
A method similar to the Center of Gravity is the Load Distance method, which is used
to measure distance or Euclidean distance or rectilinear distance. According to
Figure 5.9, the rectilinear distance measures the distance of two points as a result of
successive 90° turns, i.e. it is essentially the sum of the measure of the two perpen-
dicular sides of the right triangle in the figure:
What is the distance between (10, 5) and (40, 30)?
Euclidean distance:

dAB = (xA xB )2 + (yA yB )2 = (10 40)2 + (5 30)2 = 39, 5.

Rectilinear distance:

dAB = xA xB + yA yB = 10 40 + 5 30 = 55.

Let’s consider n existing units with a geographical location determined by their

Cartesian coordinates (xi, yi) for the unit i = 1,.., n. We are looking for the location of
the new unit in the space (x, y), so that the total cost of transporting the moving
quantities between the existing units and the new unit is minimized. Taking the
moving quantities between the new unit and the unit i (fi), and the corresponding
distance between the new unit and the existing unit i (di), the problem can be for-
mulated mathematically as follows:

n
Minimize the sum of fi di products i =1 fi di

To solve the problem, the following procedure is followed:

n
Find the x = xi’ that minimizes the function i =1 fi x xi

with tests for all possible xi’, i = 1, 2, …, n

and:

1
y1 Euclidean
distance

2
y2

Rectilinear
distance
x1 x2

Figure 5.9 Euclidean and rectilinear distance.

202 (P)hysical Evidence

Find the y = yj’ that minimizes the function:

n
j =1 f j y yj

with tests for all possible yj, j = 1, 2, …, n.

The best solution to the problem is (xi’, yj’).
Suppose, for example, that there are three points of sale (POS) with the following
coordinates:

POS 1: (x1, y1) = (1, 2)

POS 2: (x2, y2) = (2, 1)
POS 3: (x3, y3) = (3, 5)

and the corresponding loads: [fi] = [1, 15, 5]; we are looking for the optimal position of
the distribution center that will supply these units, taking into account the rectilinear
distances.
According to the formulas, the sum of k = products is calculated first for each
existing x (x1, x2 and x3) and then for each y (y1, y2 and y3).

n
y1 j =1 fi |y yj | = 1 × 0 + 15 × 1 + 1 × 3 = 18
n
y2 j =1 fi |y yj | = 1 × 1 + 15 × 0 + 1 × 4 = 5
n
y3 j =1 fi |y yj | = 3 × 2 + 15 × 4 + 1 × 0 = 63

n
x1 i =1 fi |x xi| = 1 × 0 + 15 × 1 + 1 × 2 = 17
n
X2 i =1 fi |x xi| = 1 × 1 + 15 × 0 + 1 × 1 = 2
n
X3 i =1 fi |x xi| = 1 × 2 + 15 × 1 + 1 × 0 = 17

The smallest values are found in the coordinates x2 and y2; therefore the co-
ordinates of the distribution center are (2, 1).

5.8 Layout approaches

The spatial design of the warehouse is one of the main factors influencing its overall
performance. Proper design contributes to increased efficiency and optimization of the
procedures performed within it; it also speeds up the processing time, since it is directly
related to their execution times. The spatial study of the warehouse examines the best
way to use the available space. It ensures the most efficient use of existing equipment
that serves the needs of cargo handling and storage. In short, it is the effort made to
maximize the warehouse’s resources with the lowest possible operating costs.
A warehouse is also a dynamic environment with constant fluctuations in stock
volumes and storage units, so its spatial planning must be based on flexibility and
adaptability to possible changes in demand. The warehouse should therefore be able
to display the appropriate reflexes to cover a wide variety of different requirements.
The person in charge of its spatial planning will be called upon to create models for
storage activity which can cover potential differences in the volume of goods and the
 (P)hysical Evidence 203
type of storage products. The layout of a warehouse seems to affect the distances
traveled in it by 60% (Karasek, 2013).

5.8.1 Warehouse layout

The configuration of the warehouse space into its individual parts is designed with the
optimal use of resources in mind, e.g. staff, equipment costs and available space (Gu,
2007). The configuration process also includes factors such as the location/installation
of the different sections, the configuration of the corridors and the dimensions of the
storage spaces.
The relationships among the warehouse activities between the various departments
play a very important role in its design. Selecting the most appropriate and efficient
placement of the various departments and operational spaces minimizes operating
costs, which is represented by the linear equation of the distances covered per pro-
cedure and per department. When designing the aisles, their number, length and width
as well as the possible configurations of their shape are determined, together with the
number of storage blocks and the shelf height. Design layout methods vary from
warehouse to warehouse. The most common layout has the narrowest possible cor-
ridors, a feature that increases the efficiency of the space at the lowest possible cost;
but this also increases the operating costs due to the need for special equipment, as
well as increased congestion between employees. Other layout designs such as cross-
shaped aisles, the Flying-V and the Fishbone have been shown to provide a reduction
of 10–20% in terms of the distance traveled within a warehouse (Karasek, 2013). A
schematic representation of the most common layout forms of warehouses is pre-
sented below (Figure 5.10).
The degree of usability of the storage locations is a function of their proximity to the
receiving/sending stations. The relevant storage locations determine the required dis-
tance that a product unit will have to travel from the point of receipt to its storage
location, as well as the distance required to collect a unit that will be added to an order
that is ready to be executed. The purpose of the warehouse organization/layout is to
minimize the time required in the above procedures.
Three types of layouts related to the placement of pick-up and drop-off stations in a
warehouse are presented below in Figure 5.11, showing different flows: I, U and L. In
Flow U, the receipt of products and the execution of orders are located on the same
side of the warehouse; in Flow I, these spaces are in a different location (opposite to
each other) in the warehouse; in Flow L, the second (usually the product export part)
is located on a vertical side of the warehouse .
In the case of Flow I, receipt and shipment take place across from each other. This
flow type results in a clear separation of the receipt and shipment areas, and the need
for different supervision of each space. There is certainly more storage space near the
main aisle, and thus greater management speed. In Flow U, receipts and shipments are
located on the same side of the building. This kind of flow is observed in most
warehouses. It has an advantage over the previous one in terms of materials handling
speed and distances traveled. Furthermore, cross-docking is facilitated and it is pos-
sible to use the ramps for both loading and unloading, depending on the needs at
the time.
From the above, we can conclude that flow-through is used when the difference in
demand between codes is limited, while Flow U is appropriate where the demand for
204 (P)hysical Evidence

Fishbone: main aisle (white line)

perpendicular to the length of
the warehouse with the shelves
parallel to the length of the
warehouse (the flows are shown
by the orange lines).

Hair comb: main aisle

(white line) parallel to the length
of the warehouse with the
shelves perpendicular to the
length of the warehouse (the
flows are shown by the
orange lines).

Flying V: the aisles form a V

shape with the shelves
perpendicular to the length
of the warehouse (the flows
are shown by the orange lines).

Flying V mixed: the aisles form

a V shape with the shelves
above the V position being
perpendicular to the length of
the warehouse, and those
below it parallel to the length of
the warehouse (the flows are
shown by the orange lines).

Figure 5.10 Common warehouse layouts.

Flow type “I” Flow type “U” Flow type “L”

Flow “I” Flow “U” Flow “L”

Figure 5.11 Flow types in warehouses.

 (P)hysical Evidence 205
mixed code arrangements is greater. Regarding receipt and shipment procedures, flow-
through allows this to be done simultaneously since operations are performed in-
dependently. Greater use made of the loading/unloading stations compensates for the
limited possibility of simultaneous receipts and shipments, but it also assumes thor-
oughly detailed planning in order to maximize the benefits of using the structure. Flow
L is expedient when products are imported into the warehouse from its longest side,
while exports take place across its width.
Another warehouse design parameter is the corridor width. Optimal space utiliza-
tion requires the existence of narrow corridors in order to maximize the number of
storage spaces. On the other hand, optimizing time management per code requires
flexibility and freedom of movement within corridors. Systems that allow freedom of
movement in narrow corridors are also accompanied by higher investment require-
ments in terms of equipment and management systems.
Summarizing the above, the main goal in warehouse configuration is the maximum
utilization of available space together with a parallel reduction of travel times during
the order collection process.
Physical storage of goods is a fundamental function of storage facilities. The goods
remain in this state until they are in demand and are to be delivered to their final
recipients. Collection and storage times depend to a large extent on the storage phi-
losophy, the storage systems installed, the kind of products being moved and the
tactical and strategic decisions being followed. Setting the storage locations for each
product type may follow different storage procedures. Some of these methods are
briefly discussed below:

• Random storage: The location of the incoming storage unit is randomly defined
among the available locations in the warehouse without any specific criteria.
Random positioning leads to high levels of space utilization at the expense of
increased transport distance.
• Nearest open storage location: In this method, the picker selects the first available
storage location to be detected. In this way, the positions located near the central
storage corridor are filled more quickly and more often.
• Reserved storage: Each item to be stored is placed in a fixed position, which is
then “blocked”. In this method, pickers become familiar with the location of each
item, which simplifies and speeds up the collection process. Heavier items are
placed in lower shelves and lighter ones in higher storage positions. This practice
is common in warehouses where different weights are stored depending on
the type.
• Classified storage: A criterion for placing items that follow this particular storage
method is the codes’ popularity in the warehouse. Items are categorized using
Pareto’s Law and ABC analysis: the most frequently moving code category
comprises 15–20% of the codes in the warehouse, and its contribution can reach
85% of the production volume. Fast-moving items are placed in Class A, the next
flow is stored in Class B, and so on. Goods are placed closest to the main storage
aisles, in proportion to their flow rate. In this way, Class A codes are more easily
accessible to the pickers, followed by Class B codes (and so on). This reduces
overall travel times during order collection (de Koster, 2007).
6 Extended marketing mix elements:
(P)rocesses: Delimitation and
integrative approach with SCM

Introduction
Customers are the co-creators of services: they come in contact with their delivery system,
engage in certain activities and often interact with frontline staff. Service delivery pro-
cesses are therefore an integral part of the overall customer experience and a key factor in
their satisfaction. The efficient design and smooth operation of service delivery systems
presupposes good cooperation between the operations (production) and marketing de-
partments of the company, as well as with its main partners in the supply chain.

Learning goals
After reading this chapter, you will be able to answer the following questions:

• Why is the harmonious cooperation of those involved in the internal and external
supply chain of the company necessary in the design of service delivery processes?
• What are the key building blocks of service delivery processes?
• What is meant by “blueprinting” of service delivery processes?
• What are the basic steps for designing the blueprint of a service delivery process?
• What are the basic types of service processes?
• How should businesses manage customer contact and involvement in the service
delivery system?
• What are the general strategic approaches to service delivery processes?
• What is the significance and contribution of outsourcing in the design of processes
in the context of the service supply chain?

Structure
6.1 Introduction to the service processes design
6.2 The interconnection between Operations Management and Marketing
6.3 Key components and blueprinting of service processes
6.4 Service processes design

6.1 Introduction to the service processes design

Service delivery processes refer to the combination of resources and activities of the
production system through which inputs are converted into outputs, with the ultimate

DOI: 10.4324/9780429684883-6
 (P)rocesses 207
goal of effectively and efficiently meeting the needs and desires of the company’s in-
ternal and external customers. These processes therefore constitute the way in which
the company/organization will create the overall experience that customers will enjoy,
i.e. the services promised to them. In other words, service delivery processes describe
the steps and interactions that the company’s customers and staff must perform, as
well as the partner companies in its supply chain, so that customers receive the value
offer promised to them (Wirtz & Lovelock, 2016, 2018; Avlonitis et al., 2015; Johnston
et al., 2012; Hoffman & Bateson, 2010; Verma, 2012; McDonald et al., 2011; Jacobs &
Chase, 2018, 2020).
To better understand the importance of processes in the provision of services, let’s
take a relatively simple example. A group of customers visiting a restaurant should
first be informed by the relevant staff member (the head waiter, cook, manager) about
the range of meals available (usually with a menu card) so that they can order the food
and beverage options that will make up their desired meal. Then, the same or another
employee should prepare the table, taking into account their order. Meanwhile, the
preparation of the ordered dishes takes place in the kitchen, and the dishes are gra-
dually transferred to the customers’ table by the restaurant’s competent employees
(waiter/waitresses). After the customers enjoy their meal and do not need to supple-
ment their order with, for example, a dessert, then they will ask for the bill. The person
in charge of the cashier will issue the receipt/invoice which will be taken to the cus-
tomers’ table by an employee in order for the restaurant to be paid. From this ex-
ample, we understand that a complete service in practice is the sum of a number of
individual activities. Many of these activities take place in the presence of the custo-
mers, while others happen in places that are invisible to them.
Service delivery processes should be designed in such a way as to maximize offsets in
order to achieve a high level of efficiency and effectiveness from the service delivery
system. In essence, the processes constitute the services that are sold to the customer,
and the availability of services is the outcome of the service delivery process. The
consequences of poorly designed service delivery processes include, or may otherwise
lead to, reduced satisfaction on the part of both the company’s internal and external
customers, seriously jeopardizing the viability and profitability of businesses and or-
ganizations. This is a big challenge, especially for marketing managers: they should
help operations managers understand the limitations of the available strategies that
can be exploited, at the same time offering key opportunities for diversifying the
business and improving its profitability.

6.2 The interconnection between Operations Management

and Marketing
Traditionally, a company’s production/operations department has always been and
remains responsible for the design of service delivery processes. However, as has been
pointed out many times, a special feature of services is their indivisibility, i.e. the
simultaneous creation and consumption of services. Therefore, the customer is a co-
producer of the service, which means that the design of service delivery processes
should be based on the customer’s perspective. Consequently, process planning may
not be the sole responsibility of operations management; the contribution of the
marketing management team is very important in order to take notice of the custo-
mers’ views. From the above, it can be concluded that the effective design of service
208 (P)rocesses
delivery processes requires the good cooperation of, among others, the operations and
marketing departments in order to take into account customers’ needs and desires, the
functional capabilities of the company and the services provided by the competition
(Avlonitis et al., 2015; Johnston et al., 2012; McDonald et al., 2011; Verma, 2012;
Hoffman & Bateson, 2010).
Achieving harmonious collaboration and interaction between different business
departments is always a big challenge and the same is true when designing service
delivery systems, where the marketing and operations departments often have dif-
ferent priorities and restrictions in the performance of their roles. For example, the
marketing department would like a particularly dynamic service department through,
e.g. a large frontline staff team; however, this would mean an increase in the total cost
of the services, and most likely a decrease in efficiency. So the operations department
will ask the marketing department for more reliable and accurate demand forecasts,
and it will also contribute with various promotional actions that will lead to the
normalization of demand. Similarly, the operations department would call for a re-
duction in the variety of services provided, particularly in terms of standardization,
and the automation of the services wherever possible, so that the committed pro-
duction factors can be used more efficiently. For its part, however, the marketing
department may raise objections because it is very likely that the customers’ needs and
desires will not be met very effectively, at least in comparison with the competition, so
the overall customer experience may not be the desired one.
Many businesses believe that marketing is just one business operation. But mar-
keting is also a philosophy with a customer-centric approach, which should be dif-
fused and adopted by all the company’s operations and departments. It is often the
case that the customers’ views are not always taken into account when designing the
service delivery procedures. In actual fact, as mentioned above, it appears that cus-
tomers are not only interested in the final services they will receive, but the way the
services are provided also plays a very important role. From the above, it becomes
clear that the first important step in designing high-value processes is a clear definition
of the business’s differentiation strategy - their service concept - which should result
from the harmonious cooperation of the operations and marketing departments.
Combining the different aspirations of the operations and marketing departments is
a major challenge even for the survival of the business itself. But unique opportunities
for the business can be exploited through this process. For example, the marketing
department may decide to offer a wider variety of services to customers, some of which
may be personalized, but the operations department may be opposed to this idea. The
cooperation of the two departments however may result in a service solution of very
high quality and customers may be willing to pay a high price for such services, thus
developing a profitable strategy for the business. Accordingly, if the goal of the op-
erations department to provide a small range of standardized services can be achieved
at a competitively low cost, then the cooperation of the two departments will result in
the creation of another profitable strategy targeting the market segment that is highly
sensitive to price, and the low profit margin will be offset by the large market size.
In conclusion, the managers of the company’s operations and marketing depart-
ments should design the service delivery processes that achieve the best possible tra-
deoffs in terms of efficiency. This is mainly of interest to the operations department,
while the focus of the marketing department is on the optimal tradeoffs in terms of
effectiveness. In this way, the company achieves and maintains some strategic
 (P)rocesses 209
advantages over its competitors. However, this presupposes that marketing managers
should be particularly familiar with the basic concepts and strategies of operations and
human resource management.

6.3 Key components and blueprinting of service processes

This section presents a detailed discussion of the basic components and the blue-
printing of service delivery processes, in order to better understand the need for the
collaboration of the operations and marketing departments, and the impact of the
wide variety of types, complexity and inherent risks of service processes which may
impact customers’ experience and satisfaction.

6.3.1 Key components of service processes

Figure 6.1 presents a general concise diagram of the service production process,
highlighting some key differences between the production process of material goods
and that of services. Starting from the inputs, a significant idiosyncracy of the service
delivery process is that it includes the idiosyncracies of both the company and cus-
tomer, who is in fact the object of the process, which is not the case in the production
of material goods. In other words, service processes are divided into back office and
front office. The customer is present in the back-office processes in the service pro-
duction areas, in contrast to the production processes of material goods which are
carried out in premises where the customer has no contact, i.e. exclusively in the back
office. But perhaps the most important difference between the productive systems of
material goods and services, and which perhaps poses the greatest challenge for
businesses, is that front office processes form an integral part of the output, i.e. the
result of the service delivery process, as they shape the overall customer experience
from the actual provided experience.
According to Figure 6.1, the customer inputs that are processed in a service delivery
system include a combination of information provided by the customer, the custo-
mer’s belongings, as well as the customer him/herself. For example, during the course

INPUTS PROCESSES OUTPUTS

Business Back office Front office

Facilities,
Staff, «Products»
Equipment,
Materials, Benefits
Information Systems
Emotions
Customer
Information
Judgements
Materials
Intentions
Customers

Figure 6.1 Comprehensive and synoptic overview of service systems.

210 (P)rocesses
of a day, a client will inform his lawyer about the events he wishes to be included in a
specific lawsuit, hire the services of a gardener to take care of his flowerbeds, and visit
a barber to get a haircut. So the overall customer experience, in essence, consists of
interrelated services, some of which are processed mainly by customers, others by
information and yet others by personal data.
As mentioned above, processes are distinguished into those which customers cannot
see (back office) and those where they are present (front office). The customer is di-
rectly involved in the back office processes and therefore interacts with frontline
employees, and even with the other customers who are also present in the service
areas. Contact and interaction with other company employees can be done live, face to
face, by phone or through the internet (e.g. through video applications such as Zoom,
Webex, etc.). Remote customer contact with company staff (by phone and online) has
intensified in recent times, especially during the coronavirus pandemic, where social
distancing was required in order to curb infection rates. In addition to the processes in
which the customer has real-time contact with frontline employees, there are also more
and more front-office processes, based on information and communication technol-
ogies, through which customers interact with the company’s staff asynchronously (e.g.
through e-mails), mainly using automated service processes served by advanced in-
formation systems (e.g. online banking and ATMs).
As will be presented in more detail below, in practice, there is a huge variety of
back-office processes, some of which are highly standardized (e.g. withdrawing cash
using a teller), while others require frontline staff to have a particularly high level of
knowledge, skills and experience, (e.g. dentist, lawyer, etc.). In some processes, the
degree of customer involvement and interaction is small and limited, as in the case of a
spectator in a theater, or a plane passenger. At the other end of the spectrum, it is
impossible to provide a service without the active participation of the client, and the
result does in fact depend very much on his/her own actions, as in the case of a
university student at a private college.
Regardless of the way and to what extent the customer participates and interacts in
service delivery processes, including their level of standardization, it is obvious that
any failures in the front office processes will have a much higher remediation cost for
the business compared to its back-office processes, due to the fact that the customer is
involved. Customer involvement in the front office processes further increases the
variability of the service system due to the difficulties in predicting their behavior and
their willingness to work with frontline staff in implementing the planned service
delivery design. However, it should be emphasized that the presence of customers in
the service delivery system offers businesses some important advantages, as it ensures
better communication between customers and frontline staff. The increased involve-
ment of customers in the production process of services also contributes to the re-
placement of part of the work provided by company staff, thus providing it indirectly
with some additional resources. Therefore, the selection of customers, through the
market segments targeted by the company, as well as “training” customers in the
service delivery process, constitute crucial elements for the successful outcome of those
processes.
Back-office processes are to a large extent, if not exclusively, invisible to customers.
Clients are not present and do not participate directly in their execution; they can be
standardized and automated to a large extent, so they are clearly more efficient
compared to front office processes. Examples of back-office processes are: preparing a
 (P)rocesses 211
meal in a restaurant, transferring a parcel from one distribution center to another by
courier, repairing an electronic device, collecting, packaging, invoicing and trans-
porting an online order of a product to the pick-up shop, etc. In essence, back-office
processes are, to a large extent, called upon to effectively support back-office pro-
cesses. The customer experience is drastically influenced by the front office processes
which means that the front office processes should be designed in a consistent and
coherent way with the front office processes in order to maximize the overall value
offer for the client.
A constant strong trend observed in the majority of companies is the movement of
several processes from the back office to the front office, mainly through self-service, thus
making customers to some extent “part-time employees”: customers are replacing the
company’s employees. The reasons that push companies to turn back-office processes to
front office ones are varied; they are presented in detail below. Of course, it is worth
noting that many companies may choose to turn certain back-office processes to the front
office with the aim of achieving direct contact and communication between customers
and employees in supporting functions, such as technicians repairing electronic devices,
car maintenance and repair mechanics, a confectioner who makes a personalized cake for
a customer, etc. In this way a fuller understanding of customer requirements is achieved,
as well as better and more accurate information by company employees on the various
technical issues that arise in the provision of services (Johnston et al., 2012).
Each service consists of a package of events that are experienced by the customer, and
whose key components include (Jacobs & Chase, 2018, 2020; Bordoloi et al., 2018):

• Support facilities, which are a prerequisite for an efficient service delivery process,
e.g. the area where customers will be dining in a restaurant, including the place
where their children will be creatively engaged, the website where they can be
informed about meal options and if they can pre-order, etc.
• Ancillary goods and services, i.e. material goods that are consumed or used by
customers in the service provision process, such as tablecloths and cutlery in a
restaurant or spare parts for the repair of electronic devices.
• Information, provided to the customer as part of an effective customer service
delivery process, such as a menu card of available meals and drinks at a
restaurant, possible options for repairing an electronic device and their corre-
sponding cost, and the time needed to repair them.
• Direct or explicit services, which refer to the basic and/or essential features of the
service; these comprise benefits that can be immediately perceived by customers,
such as a great meal/experience in a restaurant or the effective and timely repair of
an electronic device which now works perfectly.
• Indirect or implied services, which refer to the psychological benefits enjoyed by
the customer, such as the prestige of dining in a famous restaurant or a trouble-
free repair of an electronic device.

The customer’s experience during her participation in the back office processes and in
the package of services that she receives will decisively formulate her overall evalua-
tions and final intentions regarding her future behavior. The more satisfied the cus-
tomer is, the more committed she remains to the company, thus ensuring its
profitability and longevity.
212 (P)rocesses
6.3.2 Blueprinting of service processes
A blueprint is a detailed flowchart of the service provision process, which illustrates
the nature and sequence of activities performed by the customer and company staff in
the various operational departments that facilitate the completion of the service
process (Wirtz & Lovelock, 2016, 2018; Avlonitis et al., 2015; Johnston et al., 2012;
Zeithaml et al., 2018; Wilson et al., 2016; McDonald et al., 2011; Hoffman & Bateson,
2010; Verma, 2012; Bordoloi et al., 2018; Slack & Brandon-Jones, 2018, 2019). It
comprises a particularly comprehensive “roadmap” for understanding the overall
customer experience, with a detailed description of the structure of the processes in
both the front and back-office elements.
In practice, there is a wide variety of blueprints available, depending on the type of
process, the level of detail of the activities depicted, the elements and information it
contains, and even the symbols used. In essence, this does not pose a problem for the
blueprint, as its main purpose is to give all stakeholders a commonly accepted objective
picture of the actual customer service processes, regardless of their role or perspective
(Radnor et al., 2014). The significance of blueprinting stems from the fact that the service
delivery process consists of a chain of activities coming from the company’s customers,
employees and associates, and the final result depends on the chain performance and the
interdependencies between the individual activities. Any failure in any of the activities or
their interactions is enough to “break” the chain of customer experience and the end
result may be disappointing for the customer and all involved in the business. Therefore,
the blueprint can prove to be a very useful tool in the planning and redesigning processes,
locating all the customer’s contact points with employees, as well as in the physical
evidence of the company, identifying the points of possible failures and waiting time
(queuing), and also for evaluating the performance of the service provision system.
The main components of a service process blueprint are shown in Figure 6.2. As the
service process itself is an important component of the overall customer experience, it
is necessary to visualize all the activities that the customer takes part in, in the logical
order they evolve, from left to right, as well as the corresponding elements of the
company’s physical evidence that the customer comes in contact with. All actions
performed by the contact staff should also be presented and distinguished between
those that are visible to the customer (front office) and those that are not visible (back
office). For example, the people in charge of setting appointments at a car main-
tenance workshop answer customers’ phone calls and inform them about the avail-
ability of the workshop to perform scheduled maintenance servicing on their car (front
office action); at the same time, the information system can be consulted, or the en-
gineer responsible may be contacted about the availability of technicians and neces-
sary spare parts (back office action).
All the activities of the support functions are also represented, without which it
would be impossible for the frontline staff to perform their own activities effectively.
Given that the overall function and performance of the business is a function of in-
terdependent interactions with the main partners of its supply chains (e.g. 3PL, 4PL,
suppliers, distribution networks, outsourcers), it is appropriate to list the main ac-
tivities of its partners that are necessary for the completion of the service delivery
processes. The activities of all those involved in the service delivery system (re-
presented by rectangles) are interconnected by lines with arrows indicating the
relevant interactions and flows.
 (P)rocesses 213

Physical evidence

Customer actions
Interaction
line
Contact staff actions in
the front-office

Visibility
line
Contact staff actions in the
back-office
Internal interaction
line
Support
processes
External interaction
line
Suppliers,
Outsourcing

Figure 6.2 General blueprint for services.

In service process flowcharts, lines are usually used to distinguish the aforemen-
tioned action levels. The interaction line distinguishes customer actions from those
performed by the business. The visibility line distinguishes the actions that are visible
to the customer in relation to the invisible ones taking place in the back office. The
internal interaction line separates the actions of the frontline staff from the actions of
the business support functions, while the external interaction line helps to identify the
actions needed to complete the process performed by the external partners of the
business.
The blueprint constitutes a valuable tool for planning and redesigning the processes,
so it should help evaluate the expected performance of the service delivery system. For
this reason, in many cases, the blueprint indicates the possible failure points (usually
denoted with the symbol Ⓕ) and the expected queuing (usually shown by the Ⓦ
symbol). The standards and objectives of the services in each individual activity are
also mentioned in order to make it possible to evaluate the projected performance and
to find the best practices and trade-offs that will make the overall performance of the
service delivery processes competitive.
Figures 6.2 and 6.3 shows the blueprint of a patient’s visit to a doctor’s surgery for a
scheduled appointment. This is a high-contact service in which the object being pro-
cessed is the client himself and the information s/he makes available to the doctor.
Following this example, Figure 6.4 shows the car maintenance service process, where
the degree of customer contact/involvement with the process is clearly more limited
than in the previous example, while the processing element is the asset (the car) and
 Phone call Reception/ Examination Reception/
214

Physical evidence Waiting room room Waiting room

Customer Making an Coming to the Consultation

Examination
actions appointment surgery payment &

Line of interaction
(P)rocesses

Contact staff actions Suggestion of a

in the Front Office Welcome & giving Examination of Receipt of payment &
date & setting the
personal details the patient further instructions
appointment

Line of Visibility

Contact staff actions

in the Back Office
Updating Updating
Availability check patient’s records patient’s records

Line of internal
interactions
Supporting Information Information Information
processes system system system
Line of external
interactions

Suppliers/
Outsourcing

Figure 6.3 The blueprint of the process when a patient visits a doctor’s surgery.
 (P)rocesses 215
possibly some of the customer’s information. In both cases, the blueprints are in-
tentionally quite simple in the sense that they represent service provision systems with
a low level of detail and complexity. In practice, however, more complex and com-
plicated diagrams can be developed for each of the activities that represent the current
situation in summary form. This usually happens in those activities where service
provision system planners consider that failures or queues are highly likely to occur
beyond tolerable levels.
Another point worth noting is the fact that the most important activities for busi-
ness clients in these two examples, which affect their experience and consequently their
satisfaction, are those in which they participate and interact with frontline staff. In
practice, back-office activities, whether they involve contact staff or support functions,
are usually much more complex and complicated than those involving clients.
Potential errors in back-office activities by default have lower recovery costs than
front office activities. But the fact should not be overlooked that the effectiveness of
front office activities depends very much on the back-office activities provided.
Therefore, any possible point of failure or delays in the flow of materials or people in
any activity (and if this is related) should be addressed as immediately and effectively
as possible before any unsolvable problems arise with regard to the quality of service
provided.
The special characteristics of services, such as their indivisibility and the fact that
the customer is a co-producer of the service provided, make the service delivery
processes an integral part of the customer’s experience and perceived value. The design
of the blueprint should therefore be made mainly on the basis of the customer’s
perspective, especially for front office activities. Therefore, marketing and operations
managers need to work closely and harmoniously to create an effective and efficient
procedures flowchart, in the sense that it is based on a common perspective and is
acceptable to all, i.e. all those involved in the business’s internal and external supply
chain, including the customers, who must agree on its validity and reliability.

6.3.3 Blueprint design for service processes

In view of the above, as shown in Figure 6.5, the initial step in the design of a blueprint
is to clearly identify the process to be mapped (Zeithaml, et al., 2018; Wilson et al.,
2016; Shostack, 1984, 1987; Hoffman & Bateson, 2010; Verma, 2012). For example,
the procedure for examining a patient will be very different in the case of scheduled
outpatient clinics compared to the procedures that take place in the emergency de-
partment. Likewise, the process for scheduled car maintenance will be significantly
different in relation to the repair of a car which has been immobilized in a remote area
far from the workshop. An additional element of the process to be mapped is to define
the customer segment(s) that will be served by it, as each market segment usually has
quite different needs, desires and expectations from other customer segments.
Following this step, all the activities that the customer takes part in should then be
visualized and the corresponding physical evidence of the company that the customer
comes into contact with should be provided. Customers’ actions are listed in a logical
time sequence horizontally from left to right, and arrows are usually omitted, implying
that each action follows its left one. Next, the interaction line between frontline staff
and customers is depicted, as well as the visibility line, followed by the actions of the
contact staff, divided into those that are visible to the customer and those that are not
Physical evidence Phone call Store Store
216

Customer Make an Take the car

Leave the car
actions appointment back

Interaction line
(P)rocesses

Contact staff actions Suggest a date

in the Front Office Hand over the Delivery of the
& set the
car car
appointment

Visibility line
Contact staff actions
in the Back Office
Availability Update/inform
check the technicians

Internal interaction
line
Support Workshop The car is at Maintenance
The car is ready
processes scheduling the workshop work on the car

Information Information Information Information

system system system system

Materials Materials Materials in the

supply receipt warehouse

External interaction line

Suppliers/ Resupply of Delivery of

Outsourcing materials materials

Figure 6.4 Blueprint of car maintenance services.

 (P)rocesses 217

Determination of the process to be mapped

Identification of customers or customer segments

Mapping the client's actions and adding physical evidence

Mapping the actions of contact staff & technology

Mapping the actions of the support functions

Identifying signs of failure

Defining a time frame and performance standards

Cost-effectiveness analysis

Figure 6.5 Blueprint development procedure for services.

visible. Information and communication technologies are increasingly used to replace

customer contact with frontline staff with self-service activities supported by the
company’s website or vending machines (bank ATMs, supermarket cash registers,
etc.). Thus, this stage represents the technological activities that support customer self-
service. At this stage and the next one, where the actions of the support functions are
presented, the arrows indicating the respective material, information and people flows
and the way they interact should be added.
On completion of the visualization of all the stakeholders’ actions and the ways they
are interrelated, it is very important to identify potential sources of system failures.
For each potential failure point, the optimal restorative actions should be identified,
including possible actions that will help to prevent (re-)occurrence. It is therefore very
likely that some additional actions will need to be added and/or some of existing ones
modified. The execution time of the individual activities is the main determinant of
service costs, so the next step is to determine the average execution time of each ac-
tivity and its expected standard deviation under normal operating conditions. Taking
into account customers’ requirements and expectations as to what is considered tol-
erable waiting time (it often differs at each stage of the process), certain activities can
be modified so that they are performed according to specific standards. In the last
stage, an analysis of the economic efficiency of the blueprint is carried out in order to
look for ways to optimize the profitability that the process brings.
In view of the above, the main benefits of blueprinting can be summarized as fol-
lows (Hoffman & Bateson, 2010; Zeithaml, et al., 2018; Wilson et al., 2016; Johnston
et al., 2012; Verma, 2012):
218 (P)rocesses
• A complete objective picture of the service delivery process is presented, which is
commonly accepted by all stakeholders and facilitates them to understand the
individual activities and the ways they interact with each other.
• It highlights all possible customer contact points with the delivery system and all
the actions that are visible to the customer. In this way, planners can effectively
control customer exposure to the delivery process in a strategically desirable way.
• It facilitates the evaluation of the service as perceived by the customer and
identifies individual discrepancies between what the company promises or expects
from the customer and what the customer ultimately receives. Effectively
addressing these discrepancies decisively determines the overall perceived experi-
ence, and consequently customer satisfaction, which obviously influences the
business’s profitability and prosperity.
• The stakeholders’ roles are clarified regarding who is primarily responsible for
overseeing, managing and improving each individual activity of the internal and
external supply chain.
• The horizontal and vertical depiction of the service system allows the identifica-
tion of both the strong and weak points of the process which may carry a risk of
failure and create bottlenecks. Correcting these points helps to improve the
customer’s experience.
• An estimation of the added value of each individual activity can be made. The
redesign process should focus on activities that do not offer the expected added
value.
• It recommends a conceptual model which can be used to base the development of
complex mathematical and simulation models for evaluating cost-effectiveness
and profitability, to discover the processes’ optimal offsets in terms of efficiency
and effectiveness.
• It forms the basis for the adoption and successful integration of new technologies,
the redesign of the process and a revision of the differentiation strategy by
proposing new value offers in existing or new market segments.

6.4 Service processes design

Designing service delivery procedures is a complex process that requires significant
time, systematic effort and dedication from a team of experts that can work together
on this task. The design of the procedures should take into detailed account various
aspects of the service delivery system as mentioned above, including the typology of
the service procedures, the perceived risks and the customer experience; these may
affect the overall management, the aspects that add the most value for the customer,
as well as the general approaches used in service systems (Jacobs & Chase, 2018, 2020;
Johnston et al., 2012; Hoffman & Bateson, 2010; Verma, 2012; Bordoloi et al., 2018;
Slack & Brandon-Jones, 2018, 2019; Ravindran et al., 2018; Fitzsimmons &
Fitzsimmons, 2011).

6.4.1 Types of service processes

The classification of service processes is based on various criteria: the most frequently
used ones include the object of the service process, the degree of customer contact and
participation in the process, and the variety and volume per unit of services provided
 (P)rocesses 219
(Jacobs & Chase, 2018, 2020; Wirtz & Lovelock, 2016, 2018; Ravindran et al., 2018;
Verma, 2012; Johnston et al., 2012).

Objective of the service process

The object of the service process can be material goods or assets, information and
people (customers), although it is most likely a combination of the above (Bordoloi
et al., 2018; Verma, 2012; Wirtz & Lovelock, 2016, 2018; Fitzsimmons & Fitzsimmons,
2011). The material goods processed during the service processes may belong to the
customers (as assets), e.g. an electronic appliance being repaired by a technician, or the
common areas of an apartment building that are cleaned by a company. There are also
material goods that a business procures from supply chain partners, e.g. food and
beverages in a restaurant or the books available in a university library.
All services, albeit to a lesser extent, process information provided by the customer.
This information may relate to the personal details in a tax return submitted by the
taxpayer, to the information system of a public service; this data is then processed in
order to issue a person’s tax declaration. In a different kind of case, a customer
contacts their telecommunications and pay-TV provider to renew a contract. The
biggest challenges are usually encountered when the customer communicates in person
with the company’s frontline staff, e.g. in a clothing retail/footwear store, at a bank to
get investment advice, etc.
Treatment of clients can take the form of a change in their physical condition, such
as teeth whitening and hair implants, or a change in location due to travel.

Degree of customer contact and contribution

The degree of customer contact refers to the percentage of time a customer must be in
the system in relation to the total duration of the service. This can vary widely (Jacobs &
Chase, 2018, 2020; Bordoloi et al., 2018; Wirtz & Lovelock, 2016, 2018; Fitzsimmons &
Fitzsimmons, 2011; Ravindran et al., 2018). Some services do not require the presence
of the customer during the delivery process, e.g. dry cleaning or carpet cleaning, or it
may be indirect and relatively small, e.g. buying books and other goods online which are
delivered to the customer’s location. At the other end are services in which there is a
high level of customer participation and degree of contact, e.g. a doctor’s surgery,
dinner at a restaurant, etc. In between, there are services in which the customer’s par-
ticipation and interaction with the staff and the company’s technological infrastructure
is moderate, because they have already provided some important information to the
company and stated their preferences, e.g. in the preparation of a lawsuit by the client’s
lawyer, or the submission of supporting documents to the competent authorities in
order to obtain a building permit, etc.
High degrees of customer contact and participation make it necessary to employ
human resources with high levels of skills, abilities and training. The lower the degree
of customer contact and participation in the production process, the more likely that
staff requirements will be lower. On the other hand, as the degree of customer contact
in service delivery processes decreases, the widespread use of information and com-
munication technologies is facilitated. The degree of customer contact with the service
system also increases as does the opportunity and potential to achieve additional sales,
due to the increased interaction between customers and frontline staff. But there is
220 (P)rocesses
also an inverse relationship between the degree of contact and customer involvement
with the cost-effectiveness of the service process. Increased customer contact implies
high levels of personalization and therefore high costs per unit of service provided.
Conversely, a low degree of customer contact is crucial to facilitating the standardi-
zation and automation of a process, resulting in economies of scale and consequently
low unit costs.

Variety and volume per unit of provided services

The variety of services provided, i.e. the degree of differentiation, is one of the main
features of production processes, which significantly affects the volume per unit of
services provided (Johnston et al. 2012, Bordoloi et al., 2018, Jacobs & Chase, 2018,
2020, Verma, 2012, Fitzsimmons & Fitzsimmons, 2011, Wirtz & Lovelock, 2016,
2018). At one end are the standardized – often automated – service processes, such as
depositing and withdrawing cash with a bank teller, annual car maintenance (e.g. oil
change), changing a car tyre, and even some educational processes in a primary
school. The high degree of standardization of procedures is combined, in most cases,
with a correspondingly high volume per unit (type) of services provided. The main
features of these services are the often large and usually predictable demand, and the
application of conventional, strictly controlled, automated production methods used
for industrial material goods that contribute to achieving a relatively high consistency
in the quality of service provided.
Personalized wide-ranging services are at the other end of the spectrum, with the
result that the volume per unit of services is clearly much smaller than for standardized
ones. Examples of such services are complex surgeries, lawyers’ services representing a
client in a legal dispute, the architectural plans for a new home, the implementation of
a research project at a university, etc. In contrast to standardized services, it is very
difficult to predict the demand of personalized services; the same will apply to fore-
casting their required production factors (materials, personnel, equipment, etc.). Each
project/service also requires a definition of the relevant production processes, and
possibly some special resources.
Modern information and communication technologies provide greater technolo-
gical opportunities for companies, organizations and public bodies so that they can
provide a relatively wide variety of services to customers and citizens using automated
processes that enable mass customization. For example, a customer can create and
purchase their own special holiday package by choosing dates, transport means, ac-
commodation and tickets for the sights of their interest. Similarly, clients can con-
figure their own desktop computer by combining the components of their choice, from
a huge variety of available alternatives, for which they could access a wealth of in-
formation beforehand, in order to make their choices.

6.4.2 Customer management in service processes

Customers are co-producers in the services they use as they come into contact, interact
and collaborate with company staff during their production, consumption and de-
livery. Therefore, in contrast to tangible goods, customers play a crucial role both in
shaping the final results and in ensuring the efficiency of the processes. Customer
contact and participation with the processes also play an essential role in their
 (P)rocesses 221
experience and in the perceived value of the service. Therefore, businesses must make
critical decisions about customer contact points with frontline staff and the role
customers will play, i.e. the way customers participate and contribute to the pro-
duction process. Businesses should also provide incentives and train customers to
develop the appropriate capabilities and skills to effectively implement their intended
activities, in accordance with the way they were designed, paying close attention to
reducing customer failures and design processes so as to provide the best-perceived
experience and customer satisfaction (Wirtz & Lovelock, 2016, 201; Avlonitis et al.,
2015; Jacobs & Chase, 2018, 2020; Verma, 2012; Johnston et al., 2012).
An important feature affecting a customer’s experience is perceived risk or un-
certainty. The three main types of risk that a client may experience are financial,
physical and psychological (Johnston et al., 2012). Financial risks refer to the asym-
metry of information that the customer experiences, such as when buying a used item
from eBay, or investing in company shares. Physical danger may result from a cus-
tomer participating in activities such as a water park, or the use of an electric tool (e.g.
a chainsaw for cutting large branches). Psychological risks can arise from the lack of
trust or ability of customers to effectively perform the role imposed on them by the
service design, or even from the physical aversion experienced by some people coming
into direct contact with strangers, especially in crowded situations. Customers’ psy-
chological state of mind at the time, which changes throughout the course of a day due
to many external factors, can also have a very significant effect on their experience of
the way a service is provided.
Service guarantees are a very important tool for effectively addressing the above-
mentioned risks in both consumer and industrial markets, and can therefore be an
important component in the perceived value of a service (McColl et al., 2019; Ostrom &
Iacobucci, 2016; Meyer et al., 2014; McDougall et al., 1998; Jacobs & Chase, 2018,
2020). They can drastically influence the perceived risk in the purchase of a service,
increase customers’ satisfaction and enhance their loyalty. They may also provide the
impetus for initiatives aimed at improving a service’s quality, so they should be taken
into account when designing the business’s diversification strategy. Effective service
guarantees contain clear statements regarding their terms of validity and the specific
indemnities they include. They should also be easy to understand and communicate to
customers so that they are not misinterpreted, and employees must be properly trained
to implement them effectively.
Based on the above, it becomes clear that when designing service delivery processes,
it is very important to manage the emotions that may provoke certain customer re-
actions; it is therefore particularly useful to take into account some of the basic
principles (Chase & Dasu, 2001, 2014; Dasu & Chase, 2013; Wirtz & Lovelock, 2016,
2018; Jacobs & Chase, 2018, 2020), as described below:

• It requires a relatively dynamic start to spark customer interest and encourage

them to go through the service experience. Any significant failure in the early
stages of the process is also likely to result in customers leaving the process.
• Despite the great importance of a dynamic start-up, the impressions from the last
stages of the process are more strongly reflected in the customer’s overall
experience, and they play a decisive role in shaping the overall perceived value
of the service. This fact should not be overlooked; the process should ensure a
222 (P)rocesses
continuous increase in the intensity of the experience and its final culmination.
For example, many restaurants offer free dessert or liqueur at the end of the meal.
• Procedures that may cause customer dissatisfaction (e.g. waiting time, stress)
should be placed at the earliest possible stages and combined if possible into a
single stage.
• It is helpful to fragment the enjoyable experiences into as many stages as possible
so that customers realize that they last as long as possible.
• The way to retrieve the service, i.e. handling and dealing with service failure,
should be proportional to the reason that caused a customer’s unpleasant
experience. If the source of the problem is the poor execution of the service,
compensation should be paid, and the customer should be allowed to re-use the
service free of charge. For example, if a lady’s handmade evening dress does not
meet her stated preferences, an apology is useful, but it probably won’t be enough
to compensate the client, who expects exactly what she asked for. If, however, the
problem arose from the inappropriate (e.g. rude) behavior of an employee, then
the customer might place a much greater emphasis on getting an apology from the
manager and/or employee rather than on any material compensation.
• The detailed recording of customers’ experiences at all stages of their contact with
the service system is a very important and necessary tool for designing effective
procedures. It contributes significantly to understanding a service delivery system as
it is seen and felt by customers; this is required in order to assess the effects of the
physical evidence and interaction with the company’s employees concerning
customers’ emotions and experiences in general. It also facilitates in identifying
the stages with the most perceived value for the customer. Customers’ experiences
can be represented in various ways such as customer journey mapping, walk-through
audits, emotion mapping and customer experience analysis. Mapping the customer’s
route can be done with a simple flowchart that includes the stages where the
customer comes into contact with the service system. Walk-through tests assess the
customer’s experience (e.g. on a 5-point scale) with a set of selected criteria according
to the customer’s perspective. Emotion mapping is an extension of customer journey
mapping: at each stage of the customer’s contact with the service system, the
customer’s emotions are captured as they travel through the route. Customer
experience analysis combines walk-through audits and emotion mapping; it is the
most comprehensive and systematic way of visualizing the customer experience.

6.4.3 General strategic approaches for service processes

The significance of good design in service delivery processes and the huge variety of
situations that can arise when delivering a very wide range of services have contributed to
the development of many different strategic approaches in the design of service systems;
various general categories have been proposed for their classification (Jacobs & Chase,
2018, 2020; Verma, 2012; Johnston et al., 2012; Hoffman & Bateson, 2010; Bordoloi et al.,
2018; Wirtz & Lovelock, 2016, 2018; Fitzsimmons & Fitzsimmons, 2011):

• Production line
• Self-service
• Personalization
• Separation of high- and low-contact functions with the customer
 Website/SMS/
Physical evidence Website Website Email SMS/Email Shop

Searching for Choice of Order Order

Customer
information goods placement notification Order receipt
actions
receipt
Interaction line

Contact staff actions

in the Front Office Order
delivery

Visibility line
Contact staff actions
in the Back Office

Internal interaction
line
Items
Support
collection
processes

Information Information Information Information Information Information Information

system system system system system system system

Stock Order
replenishment
Order receipt
distribution
External interaction line

Suppliers/ Resupply of Transfer to Order

Outsourcing stock store delivery
(P)rocesses 223

Figure 6.6 Execution of online order at a physical store (click & mortar store).
224 (P)rocesses
The production line approach is akin to the procedures used in the production of
material goods rather than providing services. Essentially, it adopts and applies the
principles of material goods production systems with fully standardized services, such
as fast-food chain features, taking McDonald’s as a prime example. This approach
achieves high efficiency in the service delivery system, where the highly restricted
degree of personalization to customers’ needs is compensated by the low prices they
enjoy. Standardization and automation of the procedures is not limited to the pre-
paration of the meal, but also to the service provided to the customers by the frontline
staff when placing and receiving an order. Essentially, the company trains its custo-
mers to follow specific steps and perform specific actions that facilitate the standar-
dization of the service process. Thus, another very important advantage is that the
customer will always enjoy the same meal and, as often as possible, served in the same
time frame and with an expected standard of service from the contact staff, drastically
reducing any risk associated with variation in the quality of the mea, timing and
interaction with frontline staff.
In this case, the aim is to provide the exact same meal and service from the em-
ployees in any store that the customer visits, as is the case with industrial goods, where
in practice it is impossible for the customer to distinguish between the products made
in the same or another branch of the company. Therefore, the production process of
the company’s food and beverages is fully standardized in terms of the exact amount
of ingredients involved in their preparation including the location, which takes place
at a central level in facilities that serve a large number of stores. Even at the store level,
the preparation time of each item is strictly predetermined, while the relevant proce-
dures and technology requirements are provided so that the quantity of a packet of
French fries in a serving, for example, is always the same. Everything that happens in
the store is strictly predetermined in the blueprint of the store service process so that,
in essence, the store manager simply oversees the faithful observance of the prescribed
actions by everyone involved in the process.
Contact and interaction of customers and frontline staff is similarly standardized;
this approach is a typical example of a process, which provides face-to-face services
with very strict specifications, where the key conditions for success focus on large sales
volumes and high customer involvement in the process. Employees have minimal
discretion in the performance of their duties; each employee is trained to do a specific
standardized job (e.g. cook, cashier), implying that such jobs are usually low-paid and
low-skilled, without any development prospects. The continuous adoption of new
technologies, whose ultimate goal is the replacement of human labor and decision
making with machinery, is also being intensified toward this direction.
The self-service approach is based on encouraging the customer to play a greater
role in the service delivery process, minimizing all forms of interaction with the contact
staff. Typical examples of self-service processes are cash withdrawals and bank ac-
count data updates using ATMs, internet banking transactions that are constantly
enriched in terms of variety and choices, online transactions with most public services
(e.g. issuance of certificates, submission of tax returns, etc.), purchases made through
company websites (e.g. tickets, various material goods, hotel reservations). Figure 6.6
presents the blueprint for the execution of an online order which, in this case, the
customer receives from the physical store of the company (“click & mortar” store).
Contact and interaction with company staff is even more limited if the customer
 (P)rocesses 225
receives the order by post or if the object of the transaction can be picked up online,
such as tickets for a concert or a ferry trip.
Self-service implies an increase in the degree of customer participation in the service
system, substituting the corresponding actions of the company’s employees.
Therefore, customers are co-producers of the service to a greater extent and, conse-
quently, “part-time employees” of the company. The latter is very important for
improving the efficiency of the operations, through better utilization of business ca-
pacity. Due to internet-based technologies, manifestation of demand for services is not
limited to employees’ working hours; it is distributed throughout the operation of the
company’s electronic system, i.e. all day every day, unless something malfunctions.
This means that a significant part of the total demand is diverted to the online self-
service process, significantly reducing pressure on the live service system during peak
hours, with a consequent reduction in the period that the live system is being un-
deremployed, simultaneously with an increase in its utilization capacity. As a part-
time employee of the company, the self-served customer also increases the company’s
capacity exactly when it needs it, as it undertakes to perform most, if not all, of the
actions required to complete the process.
The benefits for businesses in adopting self-service for a large share of their cus-
tomers are manifold, as they drastically reduce customer and frontline staff contact
and interaction; they are thereby able to focus almost exclusively on the back-office
processes that can be standardized and automated to a large extent, thus ensuring high
efficiency. Reducing the cost of human resources is not the only benefit; the greatest is
perhaps the optimal satisfaction of customers’ needs and the benefits provided to
them. Customers benefit from faster service delivery, with much more flexibility in
terms of time and place. They don’t need to go to a particular location to be served:
online services can be conducted from the comfort of their own homes. As an example,
withdrawing cash from a bank cashier to pay bills in the traditional way meant that
customers first had to visit a bank branch, wait in line until it was their turn to be
served, and then go to their local service provider’s branch to pay the bill, before
returning home or going back to work. ATMs reduced customer contact with
frontline staff; customers can withdraw cash at any time of the day without being
limited by banks’ opening hours. Modern online transactions have done away with the
need to travel, while the quality of the service does not depend on the employee’s
mood and behavior; it depends on the capabilities provided in a standardized way to
all customers by the information system and the general support functions. Through
self-service technologies, the customer gains more control over the provision of the
service, having more information and a higher degree of personalization.
As customers are part-time employees, the company should educate them about
their role and increased responsibilities in completing the service delivery process.
Continuous developments in information and communication technologies greatly
facilitate the difficult task of educating customers, e.g. posting relevant instructions,
videos and answers to frequently asked questions on the company’s website, and
creating a very user-friendly online environment. Businesses such as banks have also
trained their staff to provide valuable advice to customers trying to serve themselves at
an ATM, also providing telephone support, often throughout the day. At the same
time, customers often help each other to complete self-service processes, in addition to
using other forms of help, such as live or phone contact, using remote desktop ap-
plications (e.g. AnyDesk, TeamViewer) or by posting useful information on the
226 (P)rocesses
internet (e.g. blogs). It is essentially a great challenge for businesses to persuade their
customers to use a new technology such as that of self-service. However, it should be
emphasized that the relatively high degree of familiarity of most customers with self-
service via the internet should also be taken for granted, especially given to the novel
situations created by the coronavirus pandemic which imposed the use of remote
services on everyone, in order to avoid unnecessary travel and congestion.
Despite the multiple benefits for business and customers, widespread adoption of
self-service technologies presupposes that certain challenges must be addressed ef-
fectively. First of all, there must be a comprehensive redesign of procedures to ensure
the efficient operation of a new service delivery system. As customers will be faced
with new situations and even increased obligations, they will inevitably feel that the
relevant risks are increasing, which is something that should be anticipated and the
corresponding solutions should be developed. In general, reducing or eliminating
customer contact with frontline staff involves enhancing and significantly modifying
support functions, e.g. by supplying relevant information and telephone support for
most of the day.
The personalization approach is the opposite of the production line approach. It
concerns services with high contact levels between customers and frontline staff, with
some “relaxed” specifications (e.g. high-end restaurants, cruises with multiple activity
options) or full personalization (e.g. medical/legal services). The great advantage of
personalized services is the provision of services that suit the individual needs and
desires of each customer, ensuring unique experiences. As the customer’s contact with
frontline staff increases, the opportunity for additional sales also increases, not only at
the moment that the service is taking place but also for the future as customer loyalty
is significantly enhanced. So the focus of this approach is to achieve high efficiency
and a relatively high level of revenue from a relatively limited (in absolute numbers)
customer base. Due to the specialized needs, desires and expectations of each cus-
tomer, a high degree of contact and participation is required of the customer in the
production process, as well as a strong level of interaction with frontline employees;
thus, the possibilities for standardization and automation of processes are very lim-
ited, maybe even zero. Through personalized services, the company aims at the op-
timal efficiency of the processes in the service provision; it therefore runs the risk of
not being able to evaluate the efficiency of such services using quantitative criteria.
These processes require a high level of technical and interpersonal skills and compe-
tencies on the part of the employees involved in the process, which should be con-
stantly improved and updated. Employees should also be provided with a high level of
empowerment to effectively manage the highly idiosyncratic and often unforeseen
situations that may arise when dealing in a personalized way with a client.
The approach used in separating high- and low-contact functions is a hybrid of the
production line and personalization approaches, aiming of taking advantage of both.
It comprises the application of different strategic approaches to the processes ac-
cording to the degree of contact with company staff. In the low-contact stages, the
production line approach is effectively applied to ensure maximum efficiency of the
available capacity and completion of the service with the lowest possible unit cost. A
higher degree of contact is used to create the perception in the customer’s mind that
personalized services are being provided with relatively relaxed specifications, always
taking into account the specifics of the services provided, the capabilities of the sup-
port functions and the price that the customer is willing to pay. A typical example of
 (P)rocesses 227
this approach is courier services, where the customer comes in contact with company
staff only upon delivery or receipt of an item, whereas s/he has no contact, not even an
image of the activities that take place between the parcel reception areas and the actual
delivery of the item. Another similar example is air travel services, where customers do
not know anything about the activities that take place after they leave their luggage at
the departure airport until it arrives at their destination airport.
Service delivery systems that include high-level customer contact and interaction
with frontline staff must, among other things, effectively manage the challenges posed
by demand uncertainty and required service time, with immediate implications for
capacity management. For example, the rate of arrival of patients in the Emergency
Department of a hospital or customers in a supermarket is not constant; it often shows
strong unpredictable fluctuations during the day or from day to day. Businesses often
use different tactics to balance demand with supply. Hospitals, for example, have a
backup team of doctors who are on call and can report to their posts within a short
period of time if called upon due to an emergency. Hairdressers and car repair
workshops apply a booking system so that customers are relatively evenly distributed
during their opening hours (smoothing demand), while achieving an improved cus-
tomer experience that avoids queues, with better utilization of available capacities. To
normalize demand, promotions are often used to stimulate demand during periods
that are expected to have low demand, effectively moving it from peak periods.
Cinemas offer lower prices and other promotional offers to their customers for films
shown in hours and on days with low demand.
In practice, most companies target different market segments, each of which has its
own peculiarities in terms of meeting the needs and desires of the customers that make
it up. It is therefore necessary to select and adapt the appropriate strategic approach
needed in service delivery processes based on the specific features of each market
segment. For example, for basic bank transactions such as withdrawing/depositing
cash and transferring money between accounts, it is more appropriate to use the
production line approach where strictly standardized service procedures are followed.
Modern technological solutions offered by the internet and information systems,
coupled with the conditions imposed due to the COVID19 pandemic, have boosted
self-service through online banking transactions. The separation of high- and low-
contact functions can be effectively used to manage consumer loan applications.
Contact staff can effectively inform potential borrowers about the available banking
products, and enter the necessary data into the information system, while data pro-
cessing and approval/rejection of submitted applications for all branches is done
collectively by a central office implementing strategies of the production line ap-
proach. Finally, clients with a significant portfolio of deposits and investment pro-
ducts will receive personalized consulting services from the bank’s expert advisors.

6.5 Design of processes in the context of service supply

chains – Outsourcing
The term “outsourcing” – a synthesis of the words “outside”, “resource” and “using” –
expresses the use made of external resources. It covers a product/service that can the-
oretically be purchased externally by the business (Frischmuth, 2005), instead of being
produced by the business itself. According to McIvor (2008), outsourcing is the transfer
of product/service activities to external suppliers. Outsourcing may involve the transfer
228 (P)rocesses
of an entire or just a part of a business to an external partner. The concept of out-
sourcing is not uncommon in the business world; it is often used in important activities,
e.g. security and cleaning services of the premises, which are conducted by external
third-party partners.
Outsourcing is not particular to a specific type of business; it is aimed at a wide
range of different companies, and the tasks it can cover are many, ranging from the
simplest to the most specialized. There are companies, for example, that have en-
trusted the majority of their activities to third parties – production, packaging, sto-
rage, advertising and distribution – while the companies themselves retain just the
general administration and supervision tasks, and the commercial/financial manage-
ment of the company (Apak, 2012).

6.5.1 Third-Party Logistics (3PL) Providers

Logistics Outsourcing is the assignment of the management and operational control of
logistics processes to external partners (third parties). Third-Party Logistics (3PL) is
the application of outsourcing all or part of the business activities related to logistics
operation, in collaboration with a Third-Party Logistics Provider and a Third-Party
Logistics User (commercial or industrial enterprise). The basic goal is to ensure that
the products reach the Final Consumer (Customer) in the shortest possible time and
with the least cost, which are both factors of exceptional importance for the com-
pany’s Customer Service. 3PLs do not own the goods they store and transport; they
are responsible for carrying out these procedures for the final customer.
Outsourcing is the assignment of a business’s services and operations to an external
partner, which can be either a company specializing in a particular field, or a single
individual. Naturally, outsourcing can cover most business operations, starting from
the most basic tasks to the more specialized ones. Many companies entrust most of
their business to third parties, from the production of raw material, product packaging
and distribution, to advertising and promotional work, keeping only the management
aspects of the business.
Logistics services and supply chain management include the following: domestic
transportation, international transportation, customs brokerage, warehousing, for-
warding, cross-docking, product labeling, packaging, assembly, kitting, reverse lo-
gistics (defective products, repair, return), freight bill auditing and payment,
transportation planning and management, information technology (IT) services, fleet
management, supply chain consultancy services, customer services, order entry, pro-
cessing and fulfillment, among many others.
3PLs are companies that provide their customers with a variety of logistics services
that they can use (CSCMP, 2013). These services are preferably already integrated or
grouped by the provider. The most important services that a 3PL can provide are
transportation, distribution and storage; other useful 3PL services are inventory
management, packing and forwarding of loads, and cross-docking (direct reloading of
goods from one transportation means to another).
The 1980–1990s saw significant developments in modern 3PLs due to the advent of
IT in the field of transport and storage. Nowadays, technology gives 3PL service
providers a competitive advantage because they are not limited just to providing in-
tegrated transport, distribution and storage services; they also play an important role
in logistics software development and inventory management technologies.
 (P)rocesses 229
Globalization has also played a key role in the rapid rise of 3PLs. Initially, most of
these companies started with a specific location and a small number of transportation
means at their disposal. The largest 3PLs today have been established through organic
growth and the aggressive mergers and acquisitions that have taken place over the
years, with facilities in various parts of the world. An important growth factor in a
3PL is the growing importance and complexity of the supply chain: as a company’s
activities expand, the competitive pressures it is up against increase.
This includes the ability of some 3PLs to provide value-added services in tasks such
as distribution network design, traffic statistics, inventory levels, among others.

6.5.2 Advantages of outsourcing to 3PL companies

3PLs bring a lot of advantages to their customers. Some of the most important and
most visible are discussed in the following section (Simchi-Levi & Kaminsky, 2003).
By choosing to use outsourcing services, the company is likely to reap many ben-
efits. The advantages of outsourcing mainly concern the ability to focus on key ac-
tivities, reduce costs, access specialized knowledge and experience, increase flexibility
and enhance organizational performance (Dinu, 2015).
Perhaps the easiest advantage to quantify, but also the most important one resulting
from the use of outsourcing, is cost reduction and fund savings. The advantage of
having low capital commitment is one of the main reasons why a company outsources
most if not all of its operational processes to 3PL providers. In this way, the client
company does not need to have its own storage spaces and/or its own distribution
networks. External partners bear the costs of development and investment, which
significantly reduces the risk of potential business failure for the company that out-
sources its services. The company’s operating costs are also reduced; by externalizing
their activities, responsibilities and duties are decentralized – risks are reduced and
there are fewer losses. This results in the general improvement of a business’s efficiency
and effectiveness, which is also a very important benefit deriving from the use of
outsourcing.
3PL providers possess knowledge and experience that no simple sales or production
company would be able to possess. In combination with the global networks of large
companies/customers, this kind of knowledge and experience results in the best pos-
sible use of time and greater cost efficiency. 3PL providers are constantly updating and
adapting their systems and equipment to new customer requirements. A lack of time,
means and knowledge for their effective completion by a simple company structure
necessitates the use of such processes; ultimately, it becomes clear that 3PL providers
can meet a company’s technical requirements in a faster and more efficient way than
the company itself.
3PLs also offer a much greater variety of services and geographical flexibility than
the client company itself could achieve on its own.
By using outsourcing services, 3PL customers can now focus on key business issues
for their company. Outsourcing a company’s logistics services to a 3PL provider al-
lows the client company to immerse itself entirely with its core business activities. The
ever-increasing complexity of contemporary businesses makes it impossible for a
company to specialize in every field it operates. A company’s basic capacity is usually
just enough to add value to the final product. Being less distracted by the logistics side
of the business allows the company to focus on its main goals, resulting in the
230 (P)rocesses
production of higher quality products, which is the main reason why consumers would
want to buy them.
The ability of the company to access innovations is an even more alluring element of
outsourcing. Through its synergy with other companies, the business automatically
becomes a dissemination channel for a wide variety of information. Rapid techno-
logical developments combined with the need to gain a competitive advantage make it
absolutely vital to be innovative in specialized knowledge and provide more quality
services (Belcourt, 2006).
An important advantage of outsourcing is the company’s ability to access more
well-trained staff, people that the company would not otherwise be able to hire.
Another important benefit is the development and improvement of efficiency, since the
external partner is more likely to use economies of scale (Belcourt, 2006). Adopting
this strategy also brings significant improvements in employees’ efficiency, since they
now have the opportunity to improve their individual skills and upgrade their
knowledge in their field of specialization. Yet another advantage of the outsourcing
strategy is the increased flexibility that the company gains in matters of organization,
specifically concerning whatever has to do with potential changes and modifications in
the company’s strategy; this is particularly useful when significant changes in the
market may be detected, highlighting new opportunities in the external environment
and changes in consumer habits and needs (Knight & Lamming, 2005).
Wilson and Smith (2014) classified the benefits of outsourcing services into three
major subcategories: financial, strategic, and environmental benefits. More specifi-
cally, the subcategory of finances results in economic impact benefits for the company,
such as cost reductions (improving profitability and operating efficiency, adding value
to the final product or service), cost savings (improving cash flows, increasing effi-
ciency) and reducing capital investments (improvement of ROA, increase of return on
capital). Strategic benefits include accelerated reorganization of business processes
(improving efficiency, achieving a sustainable competitive advantage), focusing on key
capabilities (better focus, improving competitiveness, utilizing internal resources and
skills, increasing customer satisfaction) and strategic flexibility (removal of barriers to
production capacity optimization, conversion of fixed costs into variable costs, in-
creased response to market changes, reduction of strategic risks). Finally, environ-
mental benefits include the development of IT infrastructure (meeting demand for new
information systems, efficient use of information resources), increased potential for
globalization (potential to achieve a global competitive advantage) and improved
supplier relationships (facilitation of cooperation, improvement in customer service).

6.5.3 Disadvantages of outsourcing to 3PL companies

In addition to the multiple significant benefits that outsourcing offers, it still carries
risks and disadvantages that must be considered. Although outsourcing usually works
well for businesses, many of them fail to increase their profitability and reduce their
operating costs to a great degree. The most significant risk lies in the loss of sover-
eignty: the company assigns activities and services to external partners, giving up a
significant part of it. The above risk implies the need for the continuous evaluation of
the company’s external partners. In the event that suppliers are unable to meet the
requirements set by the company, their existing cooperation should be terminated.
 (P)rocesses 231
The inherent dangers when the 3PL provider takes over communications and the
overall interaction of the client company with its customers and suppliers should not
be overlooked; the client company is essentially losing full control of its business
operations. This can of course be avoided through good collaboration and commu-
nication between the client company and the 3PL provider.
At the same time, a very important and critical risk for the company that chooses
outsourcing is misestimated costs. Mismanagement and bad judgment of time and
capital investment needs can increase costs for the client company. So the decision to
outsource a project must be made after making a thorough cost-benefit analysis. Some
costs and benefits can be identified with the help of special cost-benefit analysis sys-
tems; however, there are quite a few costs and benefits that cannot be calculated
through any kind of system.
Another disadvantage is when a client company is completely dependent on its 3PL
provider. In such cases, the failure of the 3PL company also means the failure of the
client company. Moreover, a 3PL’s inadequate response to a company’s business
requirements will lead to sales losses, declining reputation and poorer customer ser-
vice, resulting in long-term shrinkage of a company’s customer base and the inability
of new products to enter the market due to lack of trust.
According to a study by Hoecht and Trott (2006), the risks and disadvantages of the
outsourcing strategy include the following:

• Loss of knowledge and organizational skills.

• Loss of control over the procedures assigned to third parties.
• Loss of ability to maintain employees with specialized skills.
• Lack of opportunities to improve the quality of the work done by human resources.
• Loss of innovation opportunities.
• Cessation of influence in the company’s business environment.
• Inability to match corporate cultures between the company and the services provider.

In short, the benefits of outsourcing are mainly related to lower costs, better quality
and faster service delivery, as presented in Table 6.1.
On the other hand, long-term cooperation between businesses and independent
partners is likely to bring about dependence of the former on the latter, due to the
gradual loss of know-how among their own human resources. Therefore, outsourcing
is likely to lead to the loss of critical capabilities and potential innovations. Businesses
need to maintain their innovation potential to exploit it in the future. If a company
chooses to outsource a large number of its critical activities, then its innovation ca-
pacity becomes limited. It is quite possible that the external partner may not even-
tually be able to adapt to the particularities of the business, so that the level of the
provided services will not meet the client company’s expectations. Moreover, a poor
service provision will negatively affect the overall image of the business in the market.
As a result, when a business decides to outsource a service to a provider, it is very
difficult and costly to get this function back in-house.

6.5.4 Types of Logistics Service Providers

Generally speaking, outsourcing can be divided into six subcategories, depending on
which criterion is taken into account. These criteria may include (Irani, 2009):
232 (P)rocesses
Table 6.1 Advantages of adopting an outsourcing model

Advantage Details

Lower costs • A company that outsources some of its activities to third

parties achieves savings in resources and releases funds, as it
does not need to invest in infrastructure, equipment and other
applications, in order to meet its needs.
• Its operating costs are reduced, as the cost of hiring staff to
operate equipment is comparatively higher than the respective
costs paid to external partners.
• The time needed for performing different functions is reduced
and there is more time available to focus on the main activities.
• The company that chooses the outsourcing method risks very
little, in contrast to the great risk it would undertake if the
company itself purchased, operated and maintained the
equipment needed for various procedures/processes.
Better quality of • Outsourcing succeeds in improving the quality and perfor-
services mance of a company’s services because other companies
provide skills and knowledge resources, and they also have
extensive experience and appropriate technological infrastruc-
ture to execute business processes and operations.
• Upgrading the quality level of the services provided results in
further customer and/or final customer satisfaction.
• By outsourcing, the company’s policy becomes particularly
flexible, and it offers the ability to adapt quickly to customers’
needs, in new techniques and against competitors’ actions.
Faster delivery of • A further advantage of using outsourcing services is the
services reduction in the time required for performing different func-
tions and focusing on the main activities.

• The degree of the outsourcing (partial, total)

• The operation where this strategy is applied (human resource management,
service management)
• The relationship between customer and supplier (one supplier-one customer, one
supplier-many customers, many suppliers-one customer, many suppliers-many
customers)
• The duration of the outsourcing (long-term, short-term)
• The location of the supplier (local, international, global)
• The kind of contract drawn up between the company and the 3PL (financial,
legal, etc.)
The classification of Logistics Service Providers may be based on the following
criteria:

• The kinds of services they provide: individual, combined, integrated, added value.
• The business sector they provide services to.
• The geographical area they cover: on-shoring (in the same country), off-shoring
(beyond the borders of their country), near-shoring (in a country within close
proximity).
• The number of providers: single outsourcing (collaboration with one provider),
co-sourcing (collaboration with multiple providers).
• The business level: operational (transactions and short-term contracts), regular
 (P)rocesses 233
(long-term contracts, negotiations, information systems that allow information
exchange and transparency), strategic (long-term win-win partnership).
• The degree of involvement, where two categories are discerned:
• Partial/Mixed Outsourcing: Partial activation is required of the department
whose activities are outsourced, while the other departments remain as is
within the company. It is generally preferable to outsource some activities to
an external partner, especially those considered less profitable, e.g. human
resource management, cleaning services, etc. This will differ from company to
company; it usually results from a cost-benefit analysis conducted by each
business in order to identify those activities that are most cost-effective from
the point of view of outsourcing.
• Total/Complete Outsourcing: In this case, and by agreement, the entire range
of activities is assigned to a third party while the degree of involvement of the
client company is limited only to the management of the contract. Therefore,
the provider has the absolute responsibility to provide all services. Total
outsourcing is usually preferred by small and medium–sized enterprises –
where it is financially feasible - because large organizations prefer to play an
active role in the activities to ensure that they are aligned with the overall
strategic culture and the objectives set by the company as a whole. Moreover,
total outsourcing is preferable to partial outsourcing, due to the financial
benefits: for example, only one monthly payment needs to be made to the
provider, which covers everything in the contract.

6.5.5 3PL and 4PL Logistics

The following types of logistics providers are distinguished:

• First Party Logistics (1PL) (Individual): a company undertaking the carriage of

goods from point A to point B.
• Second Party Logistics (2PL): a business undertaking the carriage of goods using
its own or leased means of transport.
• Third-Party Logistics (3PL): a company providing many logistics services, e.g.
transportation, distribution, storage, cross-docking, inventory management,
packaging, coding, labeling and order fulfillment.
• Fourth-Party Logistics (4PL): a business that integrates multiple 3PL services
(a joint venture between a single client and multiple partners) in order to provide
integrated supply chain management solutions by providing consulting and
logistics services, infrastructure and technology, as well as the selection of sites,
solutions and personnel.

More specifically, 3PL companies undertake a wide variety of logistics services on

behalf of their customers. These companies set up distribution centers to manage
product deliveries customers using their own means of transport; they also undertake
value-added services.
The idea of Fourth-Party Logistics (4PL) was born from the fact that modern
supply networks are becoming global, making them more complex, and not all
companies have the appropriate network management capabilities to handle this. In
234 (P)rocesses
such cases, a company needs to use its knowledge of supply chains and specialized 3PL
service providers to manage and integrate the entire supply chain, from one end to the
other.
4PLs form alliances with leading suppliers; using their own information systems,
they can ensure an economical and sustainable supply chain solution. In particular,
such an alliance can identify the specialized logistics service providers who will be
needed to perform various activities in the supply chain. Using their own information
systems, 4PLs become the orchestrators of the supply chain and delivers a complete
network management response to its customers, within the agreed service and cost
objectives drawn up in the contract.
According to Bhatnagar et al. (1999), 3PLs and 4PLs can be distinguished as
follows:

• 3PL refers to three steps in the supply chain: Transport, Storage and Distribution.
On the other hand, the 4PL partner is not limited to the aforementioned triptych;
instead, it focuses on the entire scale of the supply chain, whose data it analyzes in
order to optimize its operations.
• The 3PL partner monitors all stocks, while the 4PL manages the stocks.
• The 3PL partner is obliged to possess the appropriate infrastructure in order to
succeed in the undertaken task. On the other hand, the 4PL partner does not need
to have any infrastructure (without this being exclusive). Instead, it needs to have
a high level of know-how, modern management techniques and help from
information technologies.
• A 3PL partner operates based on a structured operational plan of a company’s
logistics circuit. On the other hand, a 4PL partner refers to the formation of the
company’s operating plan, having in its jurisdiction the responsibility of selecting
the appropriate 3PL partners.

It thus becomes clear that 3PL is a very different concept from 4PL: 4PL is not just a
bigger 3PL; it is the partner that can offer complete solutions to the whole supply
chain (Bhatnagar et al., 1999).

6.5.6 Outsourcing procedure

Experience shows that in most cases, the “outsourcing” solution is highly beneficial for
the companies that choose it. But choosing a partner is not a simple process. This
discussion presents the methodology used to select outsourcing partners (Fawcett &
Fawcett, 1995):

• Creation of the Project Team. When developing a project, one of the most
important steps is the creation of an appropriate, socially acceptable team, which
will undertake the steps required in its development. The team should include
executives from the company’s critical departments, such as production, finance,
sales, marketing, and of course, logistics. The team should also include senior
executives, who will oversee the project and be able to make decisions where this is
deemed necessary. Therefore, the composition of the team will include the CEO,
the sales manager and the logistics manager, in collaboration with an external
consultant, someone experienced in outsourcing logistics issues; this person will
 (P)rocesses 235
mark the beginning of the investigation into the suppliers’ market, within the time
schedule allotted for the preparation and delivery of the study. The project team
can be supplemented by a consultant specialized in logistics and outsourcing
topics. Reflections of the current situation, an investigation into the modern
perceptions of outsourcing, a presentation of the conditions and the opportu-
nities, risks and challenges of the specific market all need to be considered.
• Clearly defined needs and objectives. The first concern of the project team is the
clear definition of the logistics needs, in order to satisfy the outsourcing solution
that will be used. The potential benefits also need to be well defined, in order to
determine the expected objectives. The analysis must be detailed, as these findings
will guide the next steps to be taken.
• Creation of a Request For Proposal (RFP) document. Based on the needs and
objectives set in the first step, the project team will compile a document analyzing
the specifications and requirements, which will describe in detail the logistics needs
and the qualifications that the provider should have. At this point, it is good to
use some basic criteria for approaching and initially evaluating the potential
outsourcer partner. These include general information about the candidate,
reputation in the market, information about the installations, information about
the quality of the provided services, elements of cost and pricing models, the
partner’s strategy and culture, and their innovative ideas for development.
• Definition and hierarchy of evaluation criteria: Potential outsourcer candidates
will be evaluated using specialized criteria which must be determined by the
project team, prioritized for weighting factors. The team accepts the offers of
potential collaborators, examines them carefully and compares them using the
evaluation criteria. A visit to the candidates’ premises is deemed necessary to
confirm some of the criteria. The multi-criteria evaluation begins with the details
of the company and the offers they have sent. Table 6.2 presents some of the basic
Quality of Service (QoS) criteria for evaluating outsourcing logistics providers
(Slack, Lewis, 2002) (Table 6.2):

It is appropriate to note that, as may have already been observed, the data for some of
the QoS criteria is obtained once the collaboration has started, and cannot therefore be
used at the evaluation stage. To overcome this, the Project Team could conduct a quick
market research study based on the customers of the potential partners to extract useful
information (e.g. how much they are prone to errors, how consistent they are in their
deliveries, etc.). Based on the criteria of the 1st level of evaluation, the list of candidate
collaborators is compiled, to whom the RFP document will be sent, in order to submit
detailed offers. This list usually consists of 5–8 companies. It is worth noting that the
project team, could also turn to competitors already using the outsourcing solution to
compile this list, who may, to some extent, be willing to share their experiences.

• Selection process. This is the last step in the final selection of the 3PL partner,
which results from the multi-criteria analysis. The evaluation concerns both the
companies and the offers that they have tendered, and it must be done with great
attention paid to detail. At this stage, lower financial bids may be accepted,
further contacts and negotiations may take place, and the entire project team will
meet to study the information presented by project team in order to reach a
selection decision.
236 (P)rocesses
Table 6.2 Evaluation criteria of 3PL’s

Group Criteria

General information about the • Logistics experience

company
Information about the installations-
Equipment
Information about the quality of the
provided services
Information about the costs
• Specialization in a specific field or logistics
services
• Turnover (total and logistics turnover)
• Profitability (other financial indicators)
• Clientele
• Human resources
• Partner network
Condition and size of the spaces-installations
Used equipment
Geographical dispersal of the installations
Availability of installations-equipment at the
desirable moment in time
Computer support systems (ERP, WMS, reporting,
online connection, etc.)
Security systems
Promptness of delivery
(Disaster) Problem-free delivery
Absence of errors
Observance/Monitoring of temperature-controlled
conditions
Observance of health and safety conditions
Flexibility – Coverage/Satisfaction of special needs
customers
Cooperative climate
Range of services provided
Implementation of quality assurance systems (ISO,
HACCP, etc.)
Goods insurance
Cost of services
Comprehensible and transparent pricing system
Comprehensible and simply structured contract
Possibility of redefine the contract

• Concluding an agreement – drawing up a contract. Following the final selection, a

contract must be drawn up between the two parties. The company’s legal advisors
and external outsourcing consultants, in collaboration with the supplier’s counter-
parts, and under the project team’s guidelines, are responsible for building a
comprehensible and flexible contract. This contract should be negotiated, stating
the objectives of the cooperation, incentives, costs, the necessary monitoring reports
and performance measurements, penalties for failure to deliver the contract terms,
changes to the pricing in case of changes in the project’s volume and mode of
operation and manner of communication between the two parties, including the
withdrawal clauses/steps that need to be taken, in the case where one of the two
parties involved in the agreement wishes to depart from it. The contract seals the
agreement and guarantees the obligations and rights of the contracting parties.
• Evaluation and performance monitoring. Experience shows that many collabora-
tions based on detailed contracts describing both the activities and the obligations
and responsibilities of the two parties ultimately fail due to lack of good
 (P)rocesses 237
communication and a breakdown in relationships. Creating an agenda to schedule
regular meetings and report feedback helps toward this end, so that solutions can
be found for critical issues, and the often unpredictable problems that may arise.
The continuous monitoring of relations among the executives of the two parties
involved in the agreement and the management of extreme behavior that works
detrimentally to this collaboration are important elements in the philosophy of
good cooperation; this must be built bit by bit, the ultimate goal being a win-win
long-term cooperation, monitoring and evaluating the partner’s performance (the
other dimension of the “problem”) in this way. According to Hoon (1996), the
following steps should be taken:
• Designation of an Assessment Officer: The Assessment Officer must first be
appointed. This person must be an executive who comes in frequent contact
with the partner and knows the terms of the contract and the context of the
collaboration in detail. It is useful if the Assessment Officer was also involved
in the selection process. Most of the time, this executive is from the Logistics
Department.
• Establishment of evaluation indicators: The Assessment Officer, with the help
of other executives who were also members of the selection team, should
determine the evaluation indicators of the partner’s performance. Some of the
criteria pertaining to the QoS that were used in the selection can also be used.
• Determination of the necessary data and collection period: This step involved
listing the necessary data for the extraction of the evaluation indicators, as
well as their collection period, which may be different depending on the index
used. The way in which this data will be collected must then be determined,
with the cooperation of the partner who is the source of the data. Toward this
end, it is a good idea to make the most of the informational infrastructure
that the partner possesses.
• Multi-criteria analysis and comparison with benchmarked data: Using
weighting factors, a multi-criteria analysis of the collected data is performed,
depending on the evaluation index. The results should be compared with the
competition’s benchmarked elements (if any exist); more importantly, they
should be compared with the partner’s older performance data, which can be
found in a database that has been created for this reason.
• Communication of conclusions: The conclusions drawn from the analysis
must be communicated, both to the Management of the company and to the
partner. If any problems arise, efforts should be made to identify the cause
and take appropriate measures to resolve them. Close cooperation between
the two sides is required, and the partner must understand that well-meaning
criticism is of joint concern.
7 Transportation management

Introduction to chapter 7
Transportation is any movement of animate or inanimate thing, energy, values or even
intangible things using any means. When we say “freight transportation” we are
obviously referring to goods, that is, material goods of any kind, which are the subject
of a commercial transaction. That is, there is a seller and a buyer. Transportation
management includes the management of systems, procedures, methodologies, tools,
modes of transport (road freight, rail, sea and air), intermodal and international trade.
In this chapter, the key parameters of transportation management are discussed from
a business point of view.

Learning objectives
After reading this chapter, you will be able to answer the following questions:

• What are the main means of transportation?

• What are their main features, advantages and disadvantages?

Outline
7.1 Transportation means
7.2 Combined transportation
7.3 Transportation of dangerous goods
7.4 International transportation

7.1 Transportation means

Transportation in the broadest sense of the word means any movement of animate or
inanimate objects, energy, values or even intangible things using any means.
When we talk about ‘freight transport’, we are obviously referring to goods, i.e.
material products, ‘things’ of any kind, which are the subject of a commercial
transaction, so there is a seller and a buyer. However, there are cases where ‘materials’,
‘products’ and ‘things’ are not objects of trade. Examples of this are household goods,
personal items, humanitarian aid, human organs for transplantation, etc. The term
‘goods’ cannot be used here, because the meaning of buying and selling is missing, so

DOI: 10.4324/9780429684883-7
 Transportation management 239
when we mention them, we will characterize them in their general category
(e.g. household goods), or we will refer to them as ‘cargo’.

7.1.1 Transportation means

Means of transport/carriers can be classified into five categories:

1 By rail: Rail transport has the ability to transport large volumes over long
distances at a low cost. Trains can carry materials in bulk form (which usually
take up the whole space in the container/vessel where they are placed), either
packaged or in any other form. Appropriate facilities and equipment for materials
handling are provided for this purpose. In recent years, rail transport has needed
to undergo modernization and improvement of the services provided. The main
competitor of rail transport is road transport, which operates at comparable costs
and delivers at the agreed time, while rail transport presents fluctuations in terms
of promptness of deliveries.
2 By road: Road transport is the most popular means of transport in Europe, but it
is often threatened by traffic congestion, which creates the need for new roads and
new means of transport. Improvements in infrastructure are often also thwarted
or significantly delayed for environmental reasons. There are many different types
of road transport today, which cover any transportation need. Thus, depending
on their intended use, there are tankers, refrigerated lorries, vehicles for the
transportation of chemicals, heavy/large goods vehicles, trucks for transporting
household goods and platforms for transporting containers. Road transport has
its own advantages and disadvantages. It is faster than maritime – sea
transportation, cheaper than air, more flexible than both sea and air, it allows
direct (door-to-door) deliveries, it is not subject to predefined routes and there is a
wide variety of vehicles available for any kind of transportation need. On the
other hand, road transport is more expensive than sea, and slower than air, while
not all products can be transported by road (especially very heavy loads). Finally,
there is limited space available, and road carriers are subject to border controls,
with additional delays as a consequence.
3 By sea: Maritime transport can be divided into two broad categories: domestic
and overseas (international). The kind of ship used in maritime transport varies
depending on the kind of cargo being transported. There are liquid fuel tankers,
gas carriers, car carriers, container ships, reefer ships for goods needing
refrigeration and ships that transport general cargo. Their low cost per mile
and their ability to transport very large goods of all kinds are the biggest
advantages of maritime transport; to some extent, this advantage offsets the very
long time required to complete the service. Moreover, the transportation of
hazardous and specialized cargo can only be done by sea, as this is required either
for security reasons or because some countries prohibit the passage of certain
materials through their territory. The main advantage of maritime transport is its
competitive prices, while virtually everything can be transported by sea. Container
vessels provide door-to-door delivery, no intermediate handling, low risk of
damage/theft and faster transit time. On the other hand, conventional ships are
characterized by slow transit times, they are expensive for small loads, they have a
lower frequency than planes/lorries and they do not directly cover all destinations,
240 Transportation management
while they also require a greater financial commitment (since maritime transport
takes longer).
4 By air: The peculiarity of air transport is that most of the time, it is used to carry
passengers, while the transportation of cargo amounts to just 10%. The main
service categories in this respect are described below:
• Shipping of small parcels, usually up to 35 kg, which are delivered and
received by baggage checkpoints.
• Services provided by air freight transport, especially ‘package express services,
are constantly gaining ground. In the coming years, the cost of such services is
expected to improve with the development of high-capacity air transport.
• Transportation of heavier/larger cargo than the previous category, which is
done through the air freight services of airline companies. The majority of
airlines are of mixed form: they transport passengers, parcels and cargo, but
there also exist airlines that are purely for freight transport purposes.
Items that are often transported by air include clothing/footwear, electronic equip-
ment, printed matter, flowers, spare parts, hospital goods, fruits, vegetables and
photographic equipment. In general, we can say that goods transported by air are of
great value, or they have a short lifespan, or they bear the feature of urgency. The
main advantages of air transport are faster transit time, low risk of damage/theft,
lower packaging costs, less financial commitment during transit and a lower minimum
limit to what can be transported. Air transport can also carry products from anywhere
in the world, with special prices and reduced premiums. Its disadvantage is the high
fares, size and weight restrictions and limited space, while not all products can be
transported by air.
5 By pipeline: This form of transport is the most often used means of transporting
liquid and gas products in Greece, through the privately-owned installations of
refinery factories/companies that exploit products in liquid form. Pipeline
transportation has the disadvantage that it can only be done in places where
this kind of network is installed, and it mainly goes in only one direction.
Although possible in theory, in practice, a change in direction would require
modification of the pump network, which is not an easy matter. But pipeline
transportation has the lowest transport costs, it does not require product
packaging, nor is there unexploited or underemployed equipment.

There are four main types of pipelines:

1 Pipelines for crude oil, from the extraction points to the collection points.
2 Pipelines distributing crude product from the collection points to the refining
points.
3 Pipelines for transporting derived and finished petroleum products.
4 Conveyors for transporting semi-solid products. In this case, products are mixed
with the appropriate amount of water to form a sludge; they are transported
through the pipes with the help of pumps, after which they undergo separation
with different procedures for the product and water, using specialized centrifugal
pumps. Limestone, coal and sulfur are examples of products that are indicative of
this kind of procedure in their transportation.
 Transportation management 241
7.2 Combined transportation
In many cases, combined transport using more than one kind of transportation
method is used; most of the route is usually covered by either rail, pipeline or sea,
while the initial or final part of the route is by road (which is as short as possible). In
this case, we generally have a combined form of transportation which, depending on
the use of the means of transport that it is made up of, can be classified as follows:

• Intermodal transport (means of transport that use compatible methods): This

kind of transportation method is mainly carried out by ships using containers,
which are then shipped overland by other means (e.g. train, truck). In this case,
many companies are involved in this form of combined transport.
• Multimodal transport: This involves the transportation of goods by collaborating
with more than one of the four modes of transport, or even in combination
(shared in some parts of the route), e.g. goods transported overland mainly by
wheeled transport, but at certain points along the route, they are placed on board
a ferry or train, or the train boards a ship. The main feature of this kind of
transportation is that a contract is signed with a company (bill of lading).

7.2.1 Containers
The biggest and most widespread innovation in the field of freight transport is un-
doubtedly the container; as transportation equipment, it can change modes of
transport (ship, train, lorry) easily and quickly, without the need to interfere with the
cargo itself. Containers are essentially standardized metal boxes used for international
transportation, excluding countries with a large geographical area (e.g. USA, Russia),
where they are mainly used for overland transport.
The concept of the container was a real breakthrough in transportation for the
following reasons:

• Businesses can now import or export manufactured products in smaller quantities,

in contrast to conventional shipping which requires a disproportionately large
amount of product to be chartered.
• Goods are transported more safely and are subject to less risk of theft, damage,
moisture, etc.
• The container introduces the concept of combined transport, where cargo can
travel by different means (lorry, ship, train, barge, etc.) with door-to-door
transportation services; in other words, the planned and organized transportation
from one end to another, from the exporter’s premises to the importer’s premises.
• Shipping companies’ networking is strengthened. They can then expand and
extend the countries they serve, offering regular arrivals/departures. In addition,
liners providing container transport services are increasing, offering lower fares,
subject to competition laws.

There are many types of goods containers. The first distinctive feature is their length:
containers are built to be 20, 40 or 45 feet in length. However, the way in which they
are manufactured is subject to specific requirements, in terms of both portability and
242 Transportation management
the conditions laid down by international customs regulations to prevent smuggling
and theft of cargo during their transportation.
Containers are mainly owned by shipping companies, which distribute them to their
customers for conducting goods transportation services. When the transfer is com-
pleted, the empty containers are returned to local return points. Only a small per-
centage belong to the companies that ship their own goods; the containers may then be
used as warehouses. Certain types of containers are not available from shipping
companies (e.g. tanks). In such cases, customers turn to specialized services that lease
out containers; after the transportation activity is completed, these containers are
returned to a pre-agreed location.
Specific infrastructure is required to achieve the transshipment of goods from one
means of transport to another:

• Terminals: Ports, Airports, Railways. These facilities are mainly for the transship-
ment of entire transportation units (whole trucks, containers, etc.).
• Freight Centres: These are organically integrated sets of structures, structured services
and infrastructure, for different modes of transport that can be connected to a
railway station or port or airport. In such cases, we observe transshipments of whole
transport units, as well as smaller cargo quantities that may be unitized (or not).
• Warehouses: These installations are of lower capacity compared to the previous
cases, where land-based media loads are usually carried out (in addition to other
logistics services). This category may comprise a part of the two preceding cases.
• In the transshipment procedure, we will come across the term ‘cross-docking’,
which essentially means the process of transshipment from one land-based area to
another, with the goods initially having been placed in storage facilities for up to
48 hours. In other words, transshipment is not done directly from one medium/
means to another medium/means, nor does the cargo remain in warehouses for a
long time.

Concluding the presentation of the modes of transport, reference is also made to two
classification methods. In the case of (mainly) trucks and containers, there is a dif-
ferent classification for cargo, which is very important in the choice of transportation
means, its packaging, transport costs, safety etc. This is known as quantity-based
categorization: the volume of cargo carried in relation to the means of transport, as
described below:

• FTL (full truckload): Quantity that completely fills a truck.

• LTL (less truckload): Quantity that does not completely fill a truck, but the truck
is fully loaded, with smaller quantities of cargo belonging to other senders/
recipients, so that everything is transported altogether.
• FCL (full container load): Quantity that completely fills a container, regardless of
size and type.
• LCL (less container load): Quantity that does not completely fill a container, but
is fully loaded, with smaller quantities of cargo belonging to other senders/
recipients, so that everything is transported altogether.

Furthermore, in the case of trucks, there is another category, which concerns their
ownership status:
 Transportation management 243
• Trucks for private use: They belong to a production or commercial enterprise and
are used exclusively by the company for its own needs (e.g. purchasing raw
materials, selling its products, transferring equipment for repair, to work-
shops, etc.).
• Trucks for public use (FTC): They belong to truck drivers or transport companies
and are used for third-party transportation. In other words, they work in a similar
way as a taxi intended for passengers.

The second category will be analyzed in the section within the frame of outsourcing
practices.

7.3 Transportation of dangerous goods

Dangerous goods are generally considered goods that pose a danger to the health and
safety of people working in an area and its surroundings. This is a critical factor in road
transport, as around 50% of all goods transported worldwide are considered dangerous.
Dangerous goods can be transported in any form – gases, liquids or solids – as described
below:

• Gaseous materials: (1) Objects containing substances in a gaseous state, (2) solids
that create flammable fumes, (3) substances and objects that release poisonous
gases if they catch fire.
• Liquids, solutions and mixtures: (1) Liquids bound to solid materials and objects,
(2) objects and materials which contain liquids.
• Solids and mixtures: (1) Objects containing solids, (2) solids and objects that
create potentially dangerous dust particles during mechanical stress (i.e. while in
use), (3) solids that decompose at high temperatures, simultaneously releasing
high heat, (4) solids that release poisonous substances or create dangerous
reactions when in contact with liquids.

Transporting dangerous goods by road/overland in Europe is regulated by the

European Agreement concerning the International Carriage of Dangerous Goods by
Road, known as “ADR” (Accord Dangereux Routier). The agreement entered into
force for the first time in 1957 in Geneva under the auspices of the United Nations
Economic Commission for Europe and it now also regulates road transportation in
the Eurozone.
ADR provisions include regulations concerning goods classification, shipping
procedures, manufacturers’ requirements, inspection of packages/tanks, etc. carriage
conditions, as well as loading, unloading, handling, crew and vehicle requirements.
The above provisions are subject to modifications/updates at regular intervals (usually
every two years). Newer ADR versions are incorporated by the European
Commission in the form of a Directive, harmonizing national laws, and implemented
by the EU Member States.
According to ADR, dangerous goods are classified in the following way (source:
https://en.wikipedia.org/wiki/ADR_(treaty)):

• Class 1 Explosive substances and articles

244 Transportation management
• Class 2 Gases, including compressed, liquified and dissolved under pressure gases
and vapors
• Flammable gases (e.g. butane, propane, acetylene)
• Non-flammable and non-toxic, likely to cause asphyxiation (e.g. nitrogen,
CO2) or oxidizers (e.g. oxygen)
• Toxic (e.g. chlorine, phosgene)
• Class 3 Flammable liquids
• Class 4.1 Flammable solids, self-reactive substances and solid desensitized
explosives
• Class 4.2 Substances liable to spontaneous combustion
• Class 4.3 Substances which, in contact with water, emit flammable gases
• Class 5.1 Oxidizing substances
• Class 5.2 Organic peroxides
• Class 6.1 Toxic substances
• Class 6.2 Infectious substances
• Class 7 Radioactive material
• Class 8 Corrosive substances
• Class 9 Miscellaneous dangerous substances and articles

Each class is classified as “restrictive” or “non-restrictive”. In the restrictive classes,

only the substances that belong to those classes and are explicitly mentioned are al-
lowed to be transported; consequently, transportation of substances not mentioned
within the class is prohibited. Non-restrictive classes include substances whose
transportation is prohibited. According to the ADR, vehicles carrying dangerous
goods must be accompanied by specific documentation, with the aim of preventing
accidents that may potentially cause great loss of human life.
Road transport is the backbone of logistics, despite the fact that lorries are also
associated with drawbacks, including pollution, traffic congestion and accidents.
According to the European Agency for Safety and Health at Work, accidents invol-
ving transport-related vehicles are the second leading cause of fatal accidents; in the
EU, about a third of workplace fatalities are related to transportation.
To address this problem, national and international organizations have established
strict regulatory frameworks. For example, European legislation has made road safety a
top priority and set out a series of measures to ensure the good condition of commercial
vehicles in circulation. The most important measures used to achieve this goal are the
introduction of Periodic Technical Inspection and Road Technical Inspection. Road
Technical Inspection is defined as the series of inspections that ensure the good con-
dition of vehicles and compliance with technical regulations in accordance with EU
directives; these require Member States to enact legislative, regulating and adminis-
trative specifications and send audit data annually for the last two years to the European
Commission. The data refer to the number of commercial vehicles that have been in-
spected, classified into seven categories as defined in the Directive, per country of re-
gistration, in relation to the inspected points, and any identified defects. The directive
lists twelve points that can be checked during roadside inspection. If vehicles are not
compliant with the applicable legislation, this must be reported in the inspection reports,
while the use of a vehicle that presents serious defects may be suspended.
 Transportation management 245
7.4 International transportation
International transport is the driving force of a global market. Reliable freight
transportation is governed by both national and international laws; international
conventions are co-signed by almost all countries around the world, making adherence
to their content mandatory for the parties involved (sellers, buyers, carriers, etc.). The
need for their existence arose in order for there to be a commonly accepted code by all
without transnational transport incompatibilities. The most important agreements are
mentioned below:

• CMR Convention (Convention relative au contract de transport international de

Marchandises par Route, Convention on the Contract for the International
Carriage of Goods by Road): CMR governs the procedures to be followed for
international road transport, replacing any relevant local Member States’ law,
with the aim of imposing uniform legislation to resolve disputes between Member
States’ legal systems.
• TIR Convention (Transports Internationaux Routiers, Convention on International
Transport of Goods Under Cover of TIR Carnets): TIR allows the road transport
of goods to non-EU countries in the context of an international transit system with
minimal on-the-road intervention by customs authorities; it also provides the
guarantees required for the completion of customs formalities.
• COTIF Convention (Organisation intergouvernementale pour les Transports
Internationaux Ferroviaires, Convention concerning International Carriage by
Rail): COTIF develops uniform legislation for international rail transport in three
main areas of activity – technical interoperability, dangerous goods and railway
contract law.
• Hague-Visby Rules, for maritime transport.
• Montreal Convention, for air transport.
• IATA (International Air Transport Association) regulations, for air transport.
• Rotterdam Rules, for combined transport.
• ATP Treaty (Accord European relatif au transport international des merchandises
dangereuses par route, Agreement on the International Carriage of Perishable
Foodstuffs and on the Special Equipment to be used for such Carriage): ATP is a
United Nations Convention dating back to 1970 under the auspices of UNECE,
which establishes standards for the control of special equipment for the
transportation of perishable foodstuffs between ratified states.
• For EU member states: the White Paper for Freight and Passenger Transport and
the Green Paper for Environmental Protection.

Of particular importance are the international regulations known as INCOTERMS.

These were launched in 1936 when the International Chamber of Commerce (ICC),
based in Paris, first published a series of international rules called INCOTERMS 1936
(INternational COmmercial TERMS). To adapt these rules to the latest commercial
practices, the original 1936 rules underwent many modifications, resulting in the
current INCOTERMS 2020, which replaced INCOTERMS 2010 and 2000.
INCOTERMS are trade terms created by the ICC, which are contained in the main
body of a freight contract and clearly describe the basic obligations and responsibilities of
the seller and the buyer in relation to the delivery of goods, the transfer of risks and the
246 Transportation management
payment of costs involved during the movement of goods from the supplier’s warehouse
to the agreed destination. Despite their optional nature, they are standardized, well-
recognized terms used for the avoidance of disputes in international transportation.
It is very important to distinguish between the different INCOTERMS concerning
ownership, delivery and risk. The transfer of ownership is determined by the contractual
clauses/laws. The place and time of title transfers as specified by INCOTERMS are directly
related to the delivery of the goods and the risk transfer (for loss, damages and theft).
In an international sales contract, INCOTERMS specify the following points:

• Determination of the critical point of risk transfer from the seller to the buyer
during the goods transit process (to cover loss, damage or theft of goods), thus
allowing the risk-bearing party to take the necessary measures, especially in
matters concerning insurance.
• Clarification of the individual, buyer or seller, who must conclude the carriage.
• Sharing between the two parties of the administrative and transport management
costs at the various stages of the transportation process.
• Clarification of the person/body responsible for packaging, labeling, handling,
loading and unloading of goods or the loading/unloading of containers and the
monitoring process.
• Definition of the respective obligations regarding formal export/import proce-
dures, payment of import taxes/duties and delivery of the necessary documents.

There are 13 widely used INCOTERMS, divided into four groups, depending on the
obligations of the supplier and the buyer, respectively:

• Group E – The supplier makes the goods available to the buyer without further
obligation.
• Group F – The supplier does not pay the fare for the main international goods
transport, but only the fare up to the delivery point, to the international carrier
within the exporting country.
• Group C – The supplier pays the fare for the main international transport without
bearing the risk of the goods being lost or damaged during the transportation.
• Group D – The supplier must make the goods available to the buyer at the
designated destination.

The main ones are:

Free On Board (FOB), where the seller:

• must place the goods at the designated loading port, onboard the ship chosen by
the purchaser and complete all customs export procedures, if any, and
• completes their delivery obligations when the goods are on board, at the
designated shipment port, from where, in the event of successive sales, the seller
receives the goods that were delivered for transportation until the destination
point, as set and indicated in the sales contract.

The buyer chooses the ship, pays the fare and insurance and takes care of the standard
procedures on arrival, and assumes all costs and potential risks for loss or damage of
the goods from the moment that the goods were delivered.
 Transportation management 247
The Cost and Freight (CFR) allows the seller to choose the carrier, draw up the
contract and bear the costs by paying the fare until the agreed destination port,
without/before unloading. The seller is charged with the loading of the goods that
have gone through customs on the ship as well as the shipping procedures. However,
the risk transfer is carried out in the same way as for FOB. The buyer, on the other
hand, assumes the transport risks when the goods have been delivered on the ship at
the port of shipment, and receives the goods from the carrier at the agreed destina-
tion port.
Finally, the Cost of Insurance and Freight (CIF) states that the seller has the same
obligations as the CFR, with the additional obligation that the seller must provide
maritime insurance for the risk of loss or damage of goods, by paying insurance pre-
miums. The buyer assumes the transport risk when the goods are delivered on the ship
at the loading port. The buyer also undertakes the reception and receipt of the goods by
the carrier at the agreed destination port. Buyers are especially likely to respect CIF
terms because they do not undertake the transport management procedures.
In order to use INCOTERMS 2010, it must be clearly stated in the contract of sale,
bearing “the selected INCOTERMS rule with the specified place and closing with the
INCOTERMS 2020 term”. The choice of the appropriate INCOTERMS term: (a) is
part of the trade/commercial negotiation, (b) must be made according to the com-
pany’s organizational capacity, the means of transport to be used, the degree of service
that the company wants to offer to its customer or that is required by its supplier, or
even in accordance with market trends, competition practices, etc. and (c) must be
appropriate for both the goods to be transported and the means of transport.
8 Crisis management and SCM

Introduction to chapter 8
Critical events/incidents and crisis-generating factors regarding SCM are acknowl-
edged, while at the same time, respective counter-measures are suggested to effectively
address the risks involved. Covid-19 is used as a case study approach in order to better
comprehend the effects and their scale of the health crisis on both local and global
SCM systems. Supply chain crises have always existed and always will. For the last
few decades, low-cost supply and minimal inventory have been the main “weapons” of
supply chain management. But in a highly globalized and highly volatile market,
where supply chains are immensely dependent on low-cost suppliers, combined with
the practice of maintaining minimum stock levels, this is proving ineffective.

Learning objectives
After reading this chapter, you will be able to answer the following questions:

• What are the challenges of supply chains today?

• What is called risk in general and risk in the supply chain in particular?
• What are the stages of risks in the Supply Chain?

Outline
8.1 Challenges involved in modern supply chains
8.2 Case studies of supply chain risks
8.3 Conceptual approach of crisis management in supply chains
8.4 Crisis management in supply chain

8.1 Challenges involved in modern supply chains

Today’s supply chains are global. This is not going to change any time soon because
production plants are located far away from their selling points. Moreover, the ben-
efits of acquiring raw materials, semi-finished or finished products from international
sources are many, while the search for and expansion into new markets is the main
strategic goal of businesses nowadays. According to forecasts by Statista (2020),
the market size of international supply chains will reach the exaggerated level of

DOI: 10.4324/9780429684883-8
 Crisis management and SCM 249
$7.1 billion in 2023. On the other hand, specific challenges and risks are being faced
today by companies operating or wishing to operate in the international arena.
Research into the challenges of international supply chains confirms the experiences
of previous years. The five most important challenges as recorded today are: lack of
transparency along the supply chain, required planning over a long time horizon,
demand volatility, the existence of multiple channels for purchasing and distributing
products, and the instability of circumstances as attested in many parts of the world.
Nearly two in five executives believe transparency is the most significant problem in
a global supply chain Statista, 2020; Accenture, 2021). The need for long-term logistics
planning by companies participating in an international supply chain network is a
major challenge. If this is added to the challenge of fluctuations in customer demand
that occur seasonally and over longer periods of time, managing the production and
transportation of goods over long distances to meet demand suddenly starts to re-
semble a Herculean task. The above factors complicate both the volatility of com-
modity prices and the continuous increases in road, sea and air costs/fares.
An important challenge nowadays is that consumers have the ability to make
purchases using multiple channels, which automatically implies the need for multiple
distribution channels. According to GEODIS (2020), three in four companies today
use four or five modes of transport to meet demand. Traditional retailers and
wholesalers are forced to maintain large storage facilities and high levels of inventory
near metropolitan centers, while online stores, online markets and drop-shippers have
to collaborate with a greater number of logistics service providers. In the last three
years, the number of distribution centers has increased by 10% (Bureau of Labor
Statistics, 2021).
To all this must be added the significant geopolitical turmoils that take place in
various parts of the world, as well as economic and social factors such as natural
disasters, wars, currency fluctuations, cultural differences, etc.; such events demand
great flexibility on the part of international supply chains with significant investment
in modern technological solutions and specialized human resources. Examples of such
problems are illustrated in the following section as case studies.

8.2 Case studies of supply chain risks

8.2.1 The Tsunami in Japan

The 2011 earthquake and subsequent tsunami in Japan had devastating effects not
only on the country’s society but also on the automobile industry’s supply chains.
Giant companies such as Honda, Toyota, Nissan and Fuji Heavy Industries (manu-
facturers of Subaru) closed their production plants when their supply chains suffered
from severe component shortages. The financial consequences were huge: 75% of
Toyota’s profits, 81% of Honda’s and 49% of Nissan’s disappeared in just a few hours
(Automotive news, 2011). The factories of these companies around the world – Toyota
in China, Europe and North America, for example – stopped production, in some
cases for up to three months. Honda cut production at its UK plant by 50% in seven
weeks, while three Nissan plants in the USA closed completely. Global car production
fell by 3.6 million units in 2011. It was not just Japanese companies that ran into huge
problems; from Ford to Volvo and General Motors to Renault, automakers found
themselves in deep trouble. Peugeot–Citroën reduced production by 40–70% in most
250 Crisis management and SCM
of its European factories because it did not have enough engine airflow sensors which
it imported from Japan. Chrysler stopped receiving dealer orders for vehicles in 10
colors because the paint sources came from Japan (Automotive news, 2011).
What initially emerged was that a huge number of components, from electronics to
paint and engines to gearboxes, came from Japan. The “just-in-time” (JIT) philosophy
was heavily criticized as being the driving force behind the success of these Japanese
giants. According to this philosophy, companies are pushed to operate without large
stocks and instead receive small quantities from suppliers only when required. But in a
globalized market that requires large supply chains, the “just-in-time” philosophy
which proposes chains that rarely extend over a hundred miles has proved ineffective.
Furthermore, the practice of single procurement was also criticized: it makes car-
makers vulnerable to disruptions when the supply sources are not working/mal-
functioning for whatever reason.
The results of this natural disaster have led almost all companies in the industry to
take immediate action without abandoning their basic principles, using “simple”
philosophies like JIT and local suppliers. Initially, databases with suppliers’ data were
designed and developed, which highlighted potential risks and disruptions in the im-
mediate supply and smooth handling of raw materials and semi-finished products,
components, etc. The 60/20/20 supply model was also implemented: this splits costs
between different suppliers, sharing out the risk. Such a plan must include an alter-
native supplier, in order to seamlessly convert production to an alternative installation
in the event of a breakdown in the main installation, not just for a few weeks after the
event, but more or less immediately, as quickly as possible. Thus, in the case of any
failure on the part of the main supplier (who provides 60% of the volume), production
from the other two sellers can be increased to cope with a small drop in the main
supplier. It is believed that building up a surplus in the supply chain could combine the
supply chain’s resilience with its core principles; in other words, the goal is now:
“Instead of changing our suppliers or our production approaches, what we need to do is to
better understand who is supplying whom.” The end result could be a more durable car
supply chain, but not at the cost of economies of scale, or abandonment of the
principles of JIT and lean manufacturing.

8.2.2 The economic crisis

The economic crisis which rocked almost the entire Western world started around
2006–2008 and continues to this day; it had and still has a huge negative impact on
almost all business activities. The trade sector was one of the first economic activities
to be affected, given that the phenomenon of a simultaneous and significant reduction
in demand for products and services was immediately observed. Among 3PLs (Third
Party Logistics), this led to a dramatic reduction in orders, the cancellation of
transportation contracts by all means of transport, and a general decline in goods
transport and storage volumes; it also stopped a large number of companies operating,
and many merged with bigger players in the field. Nevertheless, the logistics services
industry has shown a small but positive trend in recent years.
This demonstrates the acceptance of executives’ perceptions, by both the companies
they work for and the market, that logistics management is one of the most important
survival weapons for a company in the event of a “financial tsunami”. Businesses
today see logistics management as the tool that will reduce their operating costs and
 Crisis management and SCM 251
the means to create competitive networks capable of meeting all the great challenges
they must face. At first glance, there seems to be a paradoxical relationship between
the economic crisis and the logistics industry, as illustrated by the following two ex-
amples:

1 While there has been a very large decrease in national transportation during the
period 2008 to date, there has actually been a significant increase in international
transport, as well as an increase in storage services (packaging, labeling, pricing,
order management).
2 Most companies continue to carry out their logistics activities internally while
maintaining their own warehouses; at the same time, most management/admin-
istration bodies have stated their intention to outsource this work in the coming
years.

Regarding the above increases, managers identified the following reasons: improved
sales performance, increased sales due to exports, reduced operating expenses, in-
creased sales due to the development of new services and improved performance of the
provided services. Correspondingly, the reasons given for the decreases were: sales
decreases in the local market, higher interest rates, slight price increases, increases in
fuel costs and utility costs (electricity, gas, etc.) and sales decreases due to higher
prices.
The following table shows the effect of the economic crisis to supply chain man-
agement (Table 8.1).
At the same time, interviews were conducted with company executives who had
declared increased profits. The main points on which most executives agreed were as
follows:

• Estimating real demand has become a complex process. Executives often believe
that it is difficult to predict demand even for their loyal customers. As the main

Table 8.1 Effect of the economic crisis according to the supply chain function

Supply chain function Effect

Procurement • Seek out the best suppliers (with cost as the main criterion)
• Regular monitoring and evaluation
• Strict partner selection process
Inventory management • Inability to obtain reliable demand forecasting
• Drastic reduction of stock
• Dominance of the ‘push’ philosophy
• Non-maintenance of safety stock levels
Warehousing • Reduction of orders
• Fewer goods per order
• Lower profits per order/customer
• Increase in the number/frequency of orders
Transportation • Reduction of order/lot size
• Seeking out alternative means of transportation
• Planning of network distribution based on demand
• Longer waiting time for a full load (“is full capacity a priority?”)
• Inability to execute two-way routes
252 Crisis management and SCM
reasons for this, many cite the difficulty of finding reliable information about
demand and the difficulty of communicating with customers.
• Continuous evaluation of partners is essential, as is monitoring their performance;
redefining relationships with third parties is a common practice, which leads many
to enter into short-term and flexible contracts that take demand into account.
• Meticulous inventory level control is now conducted based on the premise: “from
full-service to a cost efficient service”.
• Logistics service providers are stricter in their choice of customers. This simply
means that managers now seek to work with trusted customers who are able to
meet their financial obligations, as cash flow problems are now intensified among
more and more companies in the industry.
• Finally, warehouse/distribution center staff work longer hours and productivity
levels in warehouses decrease, especially during peak times. For this reason,
managers are trying to find ways to increase productivity, at the same time as
minimize warehouse operating costs.

Businesses are desperately looking for solutions as they try to find a way out. In this
context, cost reduction becomes the first strategic choice for overcoming the crisis.
Logistics and supply chain management aim to reduce costs while increasing the level
of service provided. Therefore, logistics tools are potential, reliable solutions and ef-
fective tools for businesses.

8.2.3 The Covid-19 pandemic

With the advent of the year 2020, all national and global economies were hit hard by
the coronavirus pandemic. The situation arising from Covid-19 revealed the vulner-
abilities of supply chains in most, if not all, economic and industrial sectors.
According to a survey by the Institute of Supply Chain (2020), almost 75% of com-
panies reported disruptions in their supply chain in the months of April–September
2020 due to the spread of the virus, while the number was expected to increase in the
coming months. The impact of the pandemic was identified in the following logistics
system functions:

• In the production and distribution of products, with some countries imposing

strict controls on the production and distribution of their products.
• In communications with collaborating companies and other members of the
supply chain.
• In the supply of products, especially from countries whose governments had
imposed correspondingly strict export restrictions on their products.
• In stock management, creating either: high-speed supply chains, food-supply
chains, electronics/electrical goods and general widely-used products, which need
continuous resupplying; or: low-speed product chains such as clothing, furniture,
cars, etc. whose demand was significantly reduced. Due to store closure during the
pandemic crisis (e.g. the catering and tourism sectors), some sectors showed zero
demand for products from the first category of the supply chains.

Businesses have worked much harder throughout this period, following very strict
logistics procedures with staff working work remotely, while managers were called to
 Crisis management and SCM 253
analyze their weaknesses in order to better prepare for other unpredictable but es-
sentially inevitable future crises. The impact of the pandemic has strengthened the
view that in the coming years, smaller and simpler supply chains will be needed, with a
reduced number of participating companies and staff, but with greater flexibility and
adaptability.
It is also apparent that companies need to look for better ways to work with other
members of their supply chain in order to deal with order cancellations/changes, and
the general problems involved in fulfilling orders. Companies must redefine their
supply chain by rigorously evaluating their existing suppliers and adding new ones
that bear fewer risks. Their priorities in investment initiatives are likely to change; the
processes of adopting technological infrastructure and automation solutions with high
transparency levels are likely to be accelerated. Businesses are always looking for
solutions to organize their activities digitally so that they are better able to identify
potential supply chain problems and mitigate their impact.
The main goal of supply chains in the near future will be to create vertical-
expanding supply chains which will lead to an increase in the number of suppliers per
level in the chain. This is believed to be the key to reducing costs and capital items/
expenditure, with faster distribution of products in the markets. However, companies
must possess the appropriate technological solutions that can provide all its members
with a common concept of the supply chain; otherwise, complexity increases, visibility
decreases and control are reduced. One of the positive effects of the Covid-19 pan-
demic was the large increase in online ordering; this showed up the difficult role that
logistics companies were called upon to play in order to meet high demand.

8.3 Conceptual approach of crisis management in supply chains

A variety of definitions of “risk” exist in the literature. A general definition defines risk
as “the threat that something may happen to disrupt or even stop normal and planned
activities” (Waters, 2011). Similarly, supply chain risk is defined as the potential oc-
currence of an event or failure that impedes the free and uninterrupted flow of material
and information, from suppliers to the end-user, causing disruptions in a supply chain
(Tang and Musa, 2011). The consequences of risk can be identified either in a single
company or member(s) of a supply chain, or they may focus on the performance of the
supply chain as a whole, which can be affected by the escalation of results across the
chain (Wagner and Bode, 2008). The impacts of unforeseen events may adversely
affect part or all of a supply chain and may lead to operational, tactical or strategic
problems.
At this point, a distinction must be made between the concepts of ‘uncertainty’ and
‘risk’. Risk has some quantifiable measure of future events, while uncertainty does not.
Uncertainty suggests that unexpected events can happen: we can report events that
may happen in the future, but we do not know what will actually happen or what the
probability of something happening is. Both concepts refer to a lack of knowledge
about the future – and the events that may or may not occur – but they do not
necessarily state whether the events are harmful or not.
The conceptual approach to risk in the supply chain also includes the definition of
sources of risk in supply chains, the risks themselves, and the consequences (effects) of
risks:
254 Crisis management and SCM
• Sources of risk are environmental, intra-business or inter-business (i.e. supply
chain level) variables that cannot be predicted with certainty, and which affect the
performance and success of a supply chain (Lessard, 2013).
• Risks are events, i.e. specific realizations of these uncertainties, e.g. a fire in a
distribution center, a terrorist act, etc.
• Effects/consequences of risk are the (potential) impact of the realization of these
risks on the value(s) of a company’s operation(s), such as cost, safety, reputation,
response time, etc. as well as other economic, social and environmental impacts
(Lessard, 2013).

8.3.1 Sources of risk for supply chains

According to Lessard (2013), “sources of risk are variables whose future values are not
known with certainty, due to a lack of information about the underlying process, or
because they are the result of unpredictable social, economic or political interactions,
or both.”
Supply chains are currently exposed to various risks arising from a number of
issues:

• Political and social unrest: In Europe and the Western world in general, Brexit has
had a negative impact on trade in commercial transactions and exchange rates,
creating instability and disruption among markets and supply chains, especially
within the European area. In the USA, 72% of sportswear and footwear imported
to the country in 2013 were produced in high-risk countries with poor working
conditions. In 2019, Mexico faced a shortage of staple foods, such as corn flour
and wheat flour, when teachers from the National Committee for Labor
Education blocked the railway lines to protest their labor demands. This has
hampered the distribution of supplies to various industries, including hydro-
carbons and grains such as corn, a staple of the Mexican diet.
• Conflict wars: In recent years, the creation and maintenance of war zones have
created huge problems in the physical distribution of goods, especially in countries
serving global markets where the terminals for ships, aircraft, trains, etc. are
located, and also in areas where fuel is extracted.
• Economic instability: Economic instability is another threat to world trade. For
example, the bankruptcy of one of South Korea’s largest shipping companies
(Hanjin Shipping) led to a dramatic reduction in the strength and capacity of the
global shipping supply chain.
• Changes (increases) in customs duties: Japan has imposed strict export controls on
South Korea for chemicals such as hydrogen fluoride, photodilators and
fluorinated polyimide, which are necessary for the production of new-age
cellphones and semiconductors. During the Trump era, the former US
President decided to place tariffs on products coming from the EU, Canada,
Mexico and China, imposing high import duties on all goods (e.g. 10–25% tax rate
on steel and aluminum imported into the US). In response to these attacks, the
Chinese government reacted by imposing tariffs on American products, etc. Until
the decision was revoked, it had forced companies to redesign their supply chains.
• Rising fuel prices: Between 2014 and 2016, crude oil prices increased by 60%. This
rise had serious consequences for areas that supplied low-value products and
 Crisis management and SCM 255
materials. In general, rising fuel prices play an important role in global supply
chains, affecting transportation more than storage and inventory management.
• Economic recession: It is well known that most buyers and suppliers in global
supply chains are heavily dependent on banks to provide them with working
capital to finance their production, stocks and transportation–distribution
activities. The impacts of recessions on global supply chains are not just economic.
Many companies that are based on overseas supply sources experienced severe
disruptions in their ability to acquire materials and products. The reduction of
orders in developed countries spread rapidly through global supply chains,
resulting in severe production cuts at multiple levels of the supply chain. In
some cases, suppliers failed due to a lack of financial capacity to survive the
dramatic drop in orders.
• Urbanization of populations and creation of megacities: The number of megacities
around the world is increasing. More than 40 megacities are expected by 2030,
compared to 18 at the beginning of the century, especially in Asian countries. The
creation of these huge urban centers will create a series of challenges in the supply
chain: delays in the execution of orders due to traffic jams and high population
density, a rise in the need to implement pro-environmental practices, and greater
storage requirements for products at multiple distribution centers are some of the
problems envisioned.
• Population growth: According to research, by the year 2050 the total population
on Earth will reach 9,000,000,000 people. Satisfaction of supply for mass
consumption will deplete fuel reserves. It will create the need for large supply
chains that will transport large quantities of supplies to demand points by sea. At
the same time, it will create ports and terminals capable of handling a large
number of containers.
• Aging of the population: An important demographic element is the increase in the
percentage of people aged over 60. This percentage is constantly rising; by the year
2050, it is expected to reach 22% (a percentage corresponding to 2 billion people).
Aging of the population is estimated to affect global supply chains with increased
door-to-door deliveries to customers, a large dispersion of demand points and
possible staffing problems among logistics companies, such as 3PLs, courier
services, etc.
• Immigration: The world is experiencing the biggest migration crisis since World
War II, where hundreds of thousands of people are being displaced from their
homes, and searching for a safe haven under the threat of danger. This is a
challenge for many European countries as they are not ready to accept huge
numbers of refugees. Furthermore, due to the economic and political instability
affecting many regions of the world, many young people in search of work
opportunities aspire to emigrate to the developing countries of the Western world.
As previously mentioned, Europe’s population is aging; thus, immigration in these
countries can be a key factor in mobilizing the workforce, driving growth and
increasing demand and investment as more people need housing and other
services. In order to achieve these advantages, European countries as well as the
USA, Canada, etc. could offer programs to attract skilled workers and train them
in logistics and supply chain positions.
• Pandemics (health crises): As discussed earlier, pandemics reveal the vulnerabil-
ities of supply chains in most economic and industrial sectors. Most of the
256 Crisis management and SCM
problems lie in the lack of market resupply due to restrictions imposed by national
governments on the suppliers operating in them. During the Covid-19 pandemic,
for example, some retailers procured more than half their stock from China,
according to Statista for 2020. Another Statista study found that 44% of retailers
expect delays and 40% expect stock shortages due to supply chain disruptions
related to the pandemic.
• Climate change: By 2040, companies operating in cutting-edge technologies such
as the semiconductor industry which is needed for electronics, computers,
smartphones, etc. will be located in Korea, Japan, Taiwan and other nodes in
the western Pacific region. The increased occurrence of hurricanes in recent
decades (which according to many researchers is due to climate change) can
disrupt their supply networks and the corresponding supply chains in general.
• Environmental legislation: As mentioned earlier, interest has been focused on the
effects of the environment on supply chain logistics systems in recent years in the
context of the circular economy; at the same time, many Eurozone countries have
adopted a strict regulatory framework for the implementation of environmentally-
friendly “green” practices. For example, Switzerland has adopted the transport of
containers by train instead of by truck. The Netherlands has reduced the
maximum speed of trucks from 120 to 100 km/h in order to reduce carbon
dioxide emissions. Many countries in South Asia, e.g. China, Indonesia, and
Taiwan, have implemented strict control measures in production units as well as
in the circulation of freight transport and distribution.
• Information and communication system failures – Cyber-attacks: In 2017, Ukraine’s
government information systems were affected by malware (worm). The effects
were enormous; it is believed to have disrupted the smooth operation of ports,
factories and offices in about 60 countries. The dramatic development of informa-
tion systems and the ability to access central computer systems have allowed
hackers and terrorists to attack the information systems of multinational corpora-
tions that support global supply chains. More specifically, similar IT systems and
technologies find a wide variety of applications in supply chain management, such
as market and order management activities, management of customer/supplier
relationships, monitoring and forecasting of demand and inventory management,
cash flow management, etc. Companies that are members of a supply chain need to
create new levels of cooperation with businesses that specialize in security issues.
• Globalization: When a company’s materials, factories and customers are widely
spread all over the world, it is at the mercy of global events such as natural
disasters, port and border closures and geopolitical landscape changes. In short,
globalization is the accelerator of all the above sources of risk. Globalization of
markets generally increases the complexity, competition, information gathering
and the need to achieve transparency across chains, as well as giving rise to a host
of legal issues.

8.3.2 Risks
Generally speaking, risks may be classified in the following way:

• Internal risks, which concern the company’s logistics system (or that of the supply
chain). Examples of such risks are the availability (or not) of staff for the facilities,
 Crisis management and SCM 257
risks associated with production support, accidents, breakdowns, equipment
failures, human error, etc.
• External risks, which threaten the entire supply chain. These include problems
related to logistics service providers, distribution risks, inadequate warehouse
facilities, stock shortages, supplier reliability, demand volatility, payment un-
certainties, customer ordering problems and supplier-related ordering issues, etc.
• External risks, i.e., risks coming from the external environment (of the markets).
Examples of such risks are natural disasters, environmental disasters (floods,
hurricanes, tornadoes, bad weather, etc.), or man-made natural disasters (such as
terrorist attacks, war, conflict, crime, breakdown of a nuclear energy system, etc.).
These also include strict legislation and restrictions, economic crises (such as
exchange rates, strikes, fluctuations in market prices, etc.), political instability,
damage to electronic infrastructure and information systems, social inequality, etc.

8.3.3 Impact/consequences of risks

As mentioned above, risk effects (as identified in the previous section) comprise the
impact of their emergence/appearance in supply chain logistics systems. Table 8.2 is
based on the work of Chopra and Sodhi (2012), presenting the effects of risks on the
main functions of Logistics Management, and suggesting general ways of dealing
with them.

8.4 Crisis management in supply chain

According to SCRLC (2013), “Logistics risk management is the systematic process of
identifying, evaluating and mitigating disruptions in a logistics network, with the aim of
reducing their negative impact on performance”. Similarly, Ho et al. (2015) define it as
an “inter-company collaborative effort that uses quantitative and qualitative risk man-
agement methodologies to identify, evaluate, mitigate and monitor unexpected micro-
economic and macroeconomic events or conditions that may adversely affect any part of
the supply chain”. Fan and Stevenson (2018) define risk management in the supply
chain as “the identification, assessment, processing and monitoring of supply chain risks,
by applying tools, techniques and strategies within the company, with the external co-
ordination and cooperation of other members of the supply chain, in order to reduce their
impact and ensure continuity and profitability”.
According to the above definitions, Risk Management in the Supply Chain includes
four main stages, as shown in Figure 8.1.

8.4.1 Recognition/identification of risks

This step involves identifying the various sources of risk. The risks associated with
modern supply chains have been identified and analyzed in previous sections. A very
good presentation and evaluation of these risks were made by Simchi-Levi,
Kyratzoglou and Vassiliadis (2013), where the following risk sources emerged, in
descending order of importance: fluctuation of prices for raw material, fluctuations in
the exchange rate, market changes, fluctuations in energy/fuel prices, environmental
disasters, shortage of raw materials, rising labor costs, geopolitical instability, bank-
ruptcy of suppliers/partners, technology changes, information system failures,
258 Crisis management and SCM
Table 8.2 Dangers and ways of dealing with them, depending on the logistics function
Functional/ Risks
operational area
Supplies • Bankruptcy/financial pro-
blems of suppliers
• Supply delays
• Lack of transparency along
the supply chain. This hap-
pens because most compa-
nies have no vision beyond
the first tier of their supply
chain.
• Dependence on one supply
source, or a small supply
base (e.g. supply from the
source of a primary com-
ponent or raw material).
• Exhaustive use of existing
supply sources
• Lack of flexibility of supply
sources
• Low performance of supply
sources
• Low capacity/response of
alternative suppliers
• Financial risks such as ex-
change rate risks, etc.
• Use of specific and/or finite
sources by the whole industry
• Long-term versus short-
term contracts
Inventory/ • Uncertainty of supply and
warehousing demand
(Storage) • Inaccurate forecasts due to
long order satisfaction
times, seasonality, product
variety, short life cycles, or
small customer base
• Bullwhip phenomenon - ac-
celeration of information
distortion due to promo-
tional activities, incentives,
lack of chain visibility and
oversupply in times of
shortage
• Inventory risks which de-
pend on three factors: pro-
duct price, rate of
depreciation and uncer-
tainty of supply and de-
mand; risks also increase as
the range and number of
products increases
Ways of dealing with risks
• Increasing the supply base and
searching for alternative sources
• Increasing the number of local
and neighboring suppliers
• Commitment of suppliers with
strict contracts and clauses
• Continuous evaluation of sup-
pliers
• Surplus supply for products with
high sales volumes, and concen-
tration of surplus supply with a
few flexible suppliers for pro-
ducts with low sales volumes
• Increasing cooperation between
supply chain members
• Use of information systems and
technologies that allow the crea-
tion of collaborative networks
• Increase of storage capacity and
storage spaces
• Decentralization of stock for
products with a predictable de-
mand and low volume
• Concentration of stock for pro-
ducts with opposite features
• Reduction in the range/variety
of stocks.
• Increased collaboration between
supply chain members, especially
for demand estimation/forecasting
• There are three tried and tested
approaches that are appropriate
for mitigating this risk:
• inventory pooling
• product design based on
common components de-
sign, and
• postponement or delay of
the last production stage
until all orders have been
collected (gray products)
(Continued)
 Crisis management and SCM 259
Table 8.2 (Continued)

Functional/ Risks Ways of dealing with risks

operational area

• Collapse of information in- • Maintaining surplus stock for

frastructure
• Verticalization of the
system, or extensive system
networking
• Product devaluation rate
• Inventory maintenance
costs
Transportation/ • Postponements, delays and
distribution cancelations due to natural
disasters, wars, terrorist
acts, problems with existing
infrastructure, etc.
• General interruption/dis-
ruption of transportation of
products from one point to
another, which can occur at
all stages of the supply
chain
• Excessive handling due to
border crossings or changes
in means of transport
Customer service • Customer crowding
• Consumer purchasing
power
high value or short life cycle
products can incur unseen costs;
however, the strategy can work
beneficially for low–value com-
modities that have low depre-
ciation rates
• Insuring stored goods
• Outsourcing - use of public
warehouses
• Utilization of direct customer/
consumer communication
channels
• Acceleration of customs
clearance
• Changes in mode of transport
and predetermined air/rail ca-
pacity, in accordance with the
current traffic reports
• Insurance of goods in motion
• Modification of supply chain
design
• Outsourcing–use of public
transport
• Digitization of supply chain
management, which improves
the speed, accuracy and flex-
ibility of supply risk
management

Recognizing /Identifyingthe risks

Monitoring the application of strategies Risk Management in Analysis/Evaluation/

to respond to/deal with the risks the Supply Chain Estimationof the risks

Dealing with/Responding to the risks

Figure 8.1 Stages of risk management in the Supply Chain.

260 Crisis management and SCM
telecommunication failures, and cyber-attacks. Many companies systematically record
and keep in print form, and more commonly in electronic form, the relevant sources of
risk related to the operation of their supply chain, in specific registration systems.
To identify risks in their supply chains, companies focus on specific functional areas
of their logistics system: supplies - number and location of suppliers, customer service –
locations of points of sale, number and quantities of shipments, transportation/
distribution – modes of transport, routes and cooperating companies involved in the
supply chain (e.g. 3PLs).

8.4.2 Risk analysis/evaluation/assessment

This stage includes the probability of a risk materializing, and its impact, which can be
measured qualitatively and quantitatively (both methods are often used in combina-
tion). Qualitative assessment can be done by describing the risk, its impact (the op-
erational logistics areas that are affected), as well as its relationships with other risks.
Quantitative assessment is based on historical data and usually includes mathematical
calculations which usually require a greater entrepreneurial and less technical back-
ground from the executives who evaluate them. Many companies work with con-
sultants and experts to make these calculations. Some of the methods that can be
applied are listed below:

• Ranking the severity of and focussing on the most important risks, with the
application of Pareto’s 20/80 rule, i.e., 20% of the risks cause 80% of the
consequences.
• Calculation of the expected value of the risk, which can also be applied to the
severity ranking: for each risk, the probability of its occurrence is assessed and its
impact is calculated (usually in some kind of value). For example, a shortage of
raw materials, where the probability of occurrence is 5% and the impact of the
shortage is valued at €20,000, could have an expected risk value of €1,000. By
calculating the value of the expected risk, risks can be prioritized, enabling
management to focus on the most important one.
• Failure modes and effects analysis (FMEA), which can be used to detect potential
failures. It proposes a systematic examination of each component of a system in
order to identify, analyze and document the possible forms that failure can take
within a system, and the consequences of each failure in the system.
• Total Quality Management (TQM) tools and charts, such as cause-effect
diagrams (herringbone charts, scenario (what if) analysis), control (check-list)
analysis, etc.
• Other decision support tools, such as risk tables, risk charts, risk records,
computer simulation (to test different variables and quantify the risks), prob-
ability and impact tables (to examine different risks and assess their relative
significance), decision matrices and Expected Monetary Value (EMV).
• The “Probability-Impact” table, one of the most widely-used risk assessment
tools, because it provides a simple, effective, explanatory approach to risk
analysis.
• The use of a heat map, which allows executives to easily see the likelihood and
potential consequences of different risks, as shown in Figure 8.2.
 Crisis management and SCM 261

Highly
Medium Important Critical Critical Critical
likely
Most
Medium Important Important Critical Critical
likely
Probability
Likely Medium Medium Important Important Critical

Unlikely Minor Medium Medium Important Important

Rare Minor Minor Medium Medium Important

Of minor
Insignificant Medium Great Critical
importance

Impact

Figure 8.2 Heat map tool.

8.4.3 Risk management

At this stage, the appropriate way to respond/react/deal with potential risks is chosen.
Waters (2011) suggests the following range of risk responses: ignoring or accepting
risks, reducing the likelihood of their occurrence, reducing or limiting their con-
sequences, shifting responsibility elsewhere, sharing or diverting them, developing
contingency plans and adapting to a new environment.
Chen, Sohal and Prajogo (2016) distinguish three perspectives on mitigating supply
risks:

• Developing strong mitigation strategies to counter a risk;

• Ignoring the risk, reducing the likelihood of it happening, reducing its impact,
transferring risk to another level or member of the supply chain, adapting to the
risk, crisis planning and implementation, etc.; and
• Planning/designing appropriate response methods for dealing with the risk.

8.4.4 Monitoring risk management strategies

The last stage concerns the continuous monitoring and updating of the responses
devised to mitigate risks, or dealing with them as proposed in the previous stage. The
aim here is to evaluate the application of the selected procedures. This is accomplished
through periodic reviews, tests and reports arising from previous incidents, applied
measures and drills/exercises, with controls in place to ensure conformity to and ef-
fectiveness of the program; establishing, implementing and maintaining monitoring
procedures; the continuous recognition of opportunities for improvement; and finally,
taking the necessary corrective measures which are believed to positively affect the
supply chain.
9 Delimitation of industrial markets:
Features, significance, and synergies

Introduction
Industrial (B2B) markets constitute an area of main concern as well as being extremely
interesting in the marketing industry, especially concerning SCM strategy design and
decision-making. This chapter introduces the main differences between consumer and
industrial markets and buyers and highlights their significance and areas of interest
regarding marketing and SCM, such as materials handling and warehouse management.

Learning goals
After reading this chapter, you will be able to answer the following questions:

• Why is the contribution of industrial marketing crucial to supply chain management?

• What are the main types of industrial products?
• What are the main categories of industrial buyers?
• What are the main roles of the stakeholders involved in distribution networks?
• What are the fundamental features of industrial markets?
• In what ways does the management of materials and warehouses have a decisive
effect on the effective implementation of the marketing diversification strategy in
the industrial markets?

Structure
9.1 Introduction to industrial marketing in the context of supply chain management
9.2 Classification of industrial products
9.3 Industrial buyers and distribution networks
9.4 Characteristics of industrial markets
9.5 Materials handling
9.6 Storage

9.1 Introduction to industrial marketing in the context of supply chain

management
The ultimate goal of marketing and supply chain management is to achieve the best
mutually beneficial services for the needs and desires of both the consumers and all the
companies involved in the supply chain. As has already mentioned, achieving the goal

DOI: 10.4324/9780429684883-9
 Delimitation of industrial markets 263
of meeting consumers’ needs and expectations involves a number of efficient and ef-
fective transactions between supply chain partners (Harrison et al., 2015; Christopher,
2015; Bowersox et al., 2015; Chopra & Meindl, 2014; Min, 2015; Zimmerman &
Blythe, 2013; Taylor, 2003; Reid & Sanders, 2013). For example, meeting consumers’
needs for fresh pasteurized milk presupposes that each company involved in the re-
levant supply chain will have to procure all the necessary construction materials and
machinery from other companies. Each business link in the supply chain must be
supplied with the items it needs, such as raw materials (e.g. feed, milk), auxiliary
materials (e.g. packaging materials) and/or goods (e.g. ready-packaged pasteurized
milk) so that it can add its own value to a product through (further) processing of
materials (e.g. the farmer’s bulk milk is pasteurized and packaged as fresh milk in
1-liter bottles by the dairy industry) or additional services (e.g. transportation from the
dairy company to the distribution center of a supermarket chain). The outputs of
those companies will be the inputs of the next links in the supply chain that are closest
to the consumer. For all these transactions between supply chain partners, marketing,
as both a philosophy and a business function, plays a decisive role in their effective
and efficient implementation.
Industrial marketing focuses on the application of the principles and methodolo-
gical marketing tools/techniques in transactions governing industrial markets, i.e.,
between the companies and organizations involved in the respective supply chain
(Siomkos & Fotiadis, 2020; Avlonitis, et al., 2015; Pollalis & Patrinos, 1999; Tomaras,
2010; Hutt & Speh, 2010; Biemans, 2010; Saavedra, 2016; Mukerjee, 2009; Kotler,
2006; Brennan et al., 2017; Anderson et al., 2009). Several researchers (Fern &
Brown, 1984; Wilson, 2000) have argued that for marketing purposes, the differences
between industrial and consumer markets are so significant as to justify a focused
study on the application of marketing in industrial markets. However, as presented in
more detail below, industrial markets possess special features that differentiate them
significantly from consumer goods/services markets. Perhaps the most significant
difference between industrial and consumer markets is the emphasis on competitive
advantage: there is a great focus on establishing long-term cooperative relationships
between sellers and buyers in industrial markets, to the point that, although the two
companies continue to operate as independent economic entities, there is an emphasis
on the coordination of large numbers of often two-way flows (natural movements of
products/services), ownership, promotion, negotiation, financing, risk-taking, or-
dering, payment), as if it were a vertical integrated enterprise. Therefore, a business’s
differentiation strategy aims to offer unique value relationships to industrial customers
that will contribute most to the satisfaction of customers’ needs. A business’s differ-
entiation strategy in markets with end customers (consumers) focuses on unique
packages of high-value products/services, or with high value for money. The reasons
for these differences in the differentiation strategies between industrial and consumer
markets include, inter alia, the much greater complexity of industrial transactions and,
consequently, the purchasing processes followed, and inevitably the higher level of
interdependence and the interaction required between customers and buyers in in-
dustrial markets compared to that of consumers.
From the above, it becomes clear that marketing, and especially in the case of in-
dustrial marketing, is one of the two main pillars on which supply chain management
has been built over time, the other pillar concerning logistics. Many of the concepts
and methodological tools/techniques developed in the field of industrial marketing
264 Delimitation of industrial markets
have been harmoniously combined with operations management, logistics, financial
analysis, new product development and business research in supply chain manage-
ment. The purpose of this chapter is to present the particular fundamental features of
industrial markets with the ultimate goal of understanding the mechanisms used to
create, operate and develop supply chains. The chapter concludes with an analysis of
materials and warehouse management, two important functions that have a decisive
influence on the effective implementation of the marketing diversification strategy in
industrial markets, and by extension the supply chain management of the companies
involved.

9.2 Classification of industrial products

Products and services marketed in industrial markets can be classified in a number of
ways. Figure 9.1 shows the most common classification of industrial products and
services, based on their intended use (whether they are incorporated into the com-
pany’s final product or not) and how it enters the company’s accounting books (in
terms of cost structure) (Siomkos & Fotiadis, 2020; Avlonitis et al., 2015; Pollalis &

Construction
Installations
Foundation goods Heavy equipment
Accessory
Equipment

Operational
Materials and
Supplies
Maintenance &
Facilitating repair
Products &
Services Maintenance &
Industrial goods
repair
Services
Consulting

Natural
Raw
Agricultural
Entering goods
Processed
Processed
Components

Figure 9.1 Classification of industrial products.

 Delimitation of industrial markets 265
Patrinos, 1999; Hutt & Speh, 2010; Biemans, 2010; Kotler & Keller, 2016; Brennan
et al., 2017; Mukerjee, 2009; Avlonitis et al., 2016). According to this classification,
industrial goods are divided into three main categories: infrastructure, auxiliary
products/services and entering goods.
Entering goods are incorporated into the final product that is produced by their
buyer. They are further divided into raw materials and processed materials. Raw
materials include natural products such as timber, fisheries, iron and other ores, as
well as agricultural products of either vegetable (e.g. wheat, fruit, vegetables, etc.) or
animal origin (e.g. meat, milk, wool, honey, etc.). The main common feature of these
products is that they have undergone little or no processing, they often have a low
value per unit of product, and they are required in large quantities (rate of use and
supply) in the production process of industrial enterprises. Therefore, their transport
costs form a significant part of their total operating costs. For this reason, industrial
companies that use raw products take into account their transport costs and the need
for a continuous supply of large quantities of these products when designing their
supply chains. As a result, most industrial enterprises are located close to the main
suppliers of raw entering goods.
Processed products have gone through various stages of further processing in relation
to raw materials, which facilitates their direct integration into the final product. They
are then divided into processed products and components. Examples of processed
products are steel, cement and fabric, which need some (albeit relatively limited) ad-
ditional processing to create the final product. For example, a carmaker supplies steel
sheets that are molded to produce cars. Components are products that can be in-
corporated directly into the final product with little or no processing, constituting a
distinct and often replaceable component of the final product, such as the tires, battery,
mirrors and engine of a car. Transportation costs, inventory management and execution
time of supply orders for processed products and components are some of the most
important factors that determine the design of business supply chains. In particular, the
implementation of the Just-In-Time (JIT) supply strategy requires geographical proxi-
mity of (at the very least) the production facilities of industrial enterprises to the
warehouses or distribution centers of their strategic suppliers.
Foundation goods refer to a company’s fixed equipment which it uses for its various
sub-functions; these are classified into installations and additional equipment.
Installations refer to large building structures (e.g. production facilities, warehouses
and distribution centers) and land use rights (e.g. land, plots, fields), as well as high-
value machinery or other technical equipment (e.g. automatic machinery installations,
large presses, supercomputers). A key feature of the installations is their long-term
investment character since their period of operational depreciation usually approaches
a decade (for most machines) and reaches up to 30 years or more for most buildings.
As expected, the cost of acquiring them is very high and requires careful planning
during the preparation and implementation of the investment plan: any significant
failures may lead to very unfavorable future situations that could seriously jeopardize
a business’s viability. Due to the very high investments required for the installations,
especially in a very uncertain and competitive business environment, there has been a
clear shift in the last 2–3 decades of companies trying different strategies to convert the
fixed costs of the facilities into operating costs. Typical examples of these alternative
strategies are leasing and outsourcing of supplies and operations. For example, many
companies today prefer to rent cars for their sales staff instead of buying them. In the
266 Delimitation of industrial markets
automobile industry, components that were previously produced by the company it-
self or its subsidiaries (vertical integration) are now sourced from independent com-
panies, thus relieving the business of the obligation to implement high-cost long-term
investments and the relative risk of doing so.
Auxiliary equipment refers to auxiliary machinery, tools and other light/portable
equipment with a lower value and/or business risk, and often a shorter period of
operation (often up to 3–5 years), such as portable drills, lifting machines, desks,
computers, printers, etc. This equipment is not integrated into the fixed installations
and can usually be used in various functions and tasks (e.g. laptops). In general, goods
classed as accessories are clearly more standardized than the installations themselves,
as there are seldom any modifications – even marginal – based on the individual needs
of the industrial customers, nor are they made to order by the buyers, so the number
of suppliers is often quite large. Therefore, the market for auxiliary equipment is
clearly more competitive than that of the installations, where such investment goods
are available from very few and usually highly specialized companies, and are often
tailor-made for customers, or customized for them based on their specific needs and
expectations.
Facilitating goods and services include materials and supplies, as well as industrial
services that contribute to the smooth operation of production processes. Their main
feature is that they are not incorporated in any way in the final product, nor do they
constitute complementary products. Materials and supplies are classified as: (a)
functional, such as stationery, printer inks, fuels, lubricants and electricity for the
operation of machinery used in the manufacturing process; and (b) maintenance and
repair, such as detergents and other cleaning materials, screws, paints, etc. Most of
them are standardized goods with a low unit value; as they are offered by many
suppliers, they are therefore sold in highly competitive markets. In addition to their
total acquisition cost, crucial factors in the selection of suppliers are also expected
delivery time and the variability, quality and variety, as well as the reliability of each
supplier.
Industrial services can be classified as (a) maintenance and repair, such as main-
tenance of information systems, cleaning of business premises, maintenance of me-
chanical and other equipment; and (b) consulting services, such as accounting,
marketing and advertising, drafting and technical support of investment plans, data
processing and management. Depending on whether or not industrial services are
directly related to the industrial purchaser’s final product, they can also be divided
into (i) maintenance, repair and operation services, which are not directly related to a
specific product or service produced by the client; and (ii) production services, which
are used directly in the production process and the distribution of specific products/
services; therefore, the cost of their use can be directly integrated into their total cost,
such as logistics services. Special features that differentiate services (which are gen-
erally intangible) from tangible goods make the purchasing process more complex; the
selection of suitable suppliers is based more on quality criteria, such as the reliability
of the supplier, their experience in related matters, mutual understanding between the
buyer and the service provider on critical issues, etc. In general, the nature of services
makes it difficult to set strict standards that can be met each time they are provided, as
the end result also depends to a large extent on the buyer’s participation in the pro-
duction process and his interaction with the service provider’s frontline staff.
 Delimitation of industrial markets 267
9.3 Industrial buyers and distribution networks
Buyers and their reasons/motivation to acquire goods/services is the main criterion for
distinguishing industrial markets from consumer markets; the above analysis on the
classification of industrial products shows that the majority of industrial goods are also
available to consumers. Industrial buyers can be defined as those who acquire goods/
services to use them in their production process, as capital, auxiliary or component parts in
their final products/services. Thus, unlike consumer markets where goods are acquired to
optimize personal utility, the same goods in industrial markets are often inputs of a supply
chain production process whose ultimate goal is to provide consumers with finished
products and services with high value for money (Siomkos & Fotiadis, 2020; Avlonitis,
et al., 2015; Pollalis & Patrinos, 1999; Hutt & Speh, 2010; Biemans, 2010; Mukerjee, 2009).
According to the most common method of categorizing industrial markets, industrial
customers are divided into companies that aim to make a profit on behalf of their
shareholders (for-profit), governmental agencies and institutions (Figure 9.2).

9.3.1 Commercial enterprises

For-profit companies cover the entire spectrum of the private economy and are further
classified into users, original equipment manufacturers (OEMs) and dealers. Users are
industrial customers who buy mainly infrastructure goods (installations and additional
equipment) and auxiliary products/services that contribute to their production process
but are not integrated into the final industrial and/or consumer product/service pro-
duced. For example, an automobile industry uses, among other things, building in-
stallations, automated machinery, electricity for machinery operation, materials for

Industrial Buyers

Commercial Government/
Institutions
enterprises Public agencies

Original
equipment
Users Resellers
manufacturers
(OEMs)

Big Small Merchants Agents

Figure 9.2 Classification of industrial buyers.

268 Delimitation of industrial markets
maintenance and cleaning of installations and motor fuels for the transportation of
inputs (e.g. mirrors) and final products, which are necessary elements in its production
process, but none are actually an integral part of its outputs.
Manufacturers of industrial and consumer goods/services are the buyers of the
above goods, which are classified as entering industrial goods. These are for-profit
companies that buy goods from their suppliers in order to integrate them into their
final products/services. For example, a computer manufacturer, such as Dell or
Hewlett Packard, procures the various components that make up a complete com-
puter, e.g. processors, internal memories, graphics and sound cards, power cords,
boxes, motherboards, etc., which it assembles to produce its final products.
Accordingly, an automobile industry procures, among other things, steel sheets,
mirrors, disc brakes, seats and tires, which are further processed and/or combined/
assembled to create a car. The latter example makes it clear that an industrial cus-
tomer can be classified as both a user and a final product manufacturer, depending on
the use made of the products. Manufacturers of finished products can be classified in a
number of ways, but in the context of strategic planning in a supply chain, it is crucial
to segment them according to size (small, large), even though it is sometimes relatively
difficult to determine the appropriate separation threshold. Large manufacturers are
relatively few in number and often geographically concentrated in a small area, but the
volume of their total annual purchases is very large. They often require and try to
actively participate in product design by interacting decisively with their strategic
suppliers; they also have equally high requirements for the immediate execution of
frequent orders (even more than one per day) within strictly defined time limits in a
JIT implementation framework. As a result, suppliers often maintain warehouses and
production facilities near major manufacturers. Smaller manufacturers are clearly
more numerous, highly geographically dispersed and with a much smaller annual
market cycle than larger ones. Their suppliers have to develop a different strategy for
an efficient supply while keeping the total unit cost at an operationally viable level.
Therefore, smaller manufacturers procure more standardized products with longer
order execution times from suppliers’ central warehouses or distribution centers,
which are often within walking distance from them.

9.3.2 Distribution channels

Distribution is an external (outside the business) contact organization (companies
involved in the trading operations as a product or service moves from the producer to
the final consumer) whose management activities and decisions (involvement of the
management in solving its distribution network problems at all levels) aim at achieving
distribution objectives.
All product and service companies use intermediate business entities to make their
products and services available to customers. These entities that facilitate the flow of
goods or services from producer to consumer consist of a distribution channel or
marketing channel. This organization of companies involved in the functions of
contact and physical distribution as a product or service moves from the producer to
the final consumer is called distribution. The goal is the success of the whole system is
the maximization of profit overall. The goals of each organization in the commercial
part of the channel (producer, wholesaler, and retailer) and their successful completion
depend on the effectiveness of the other organizations in the system.
 Delimitation of industrial markets 269
Each flow can move either to the customer or vice versa or to both sides.
Specifically, physical flow, ownership flow, promotion and marketing flow from the
industrial enterprise to the final buyer. The negotiation flow, financing flow and risk-
taking flow move in two directions. The order flow and payment flow move from the
final buyer to the industrial enterprise.
The main role of a distribution channel is the intermediaries (intermediaries) that
help in the operation of the distribution and specifically autonomous wholesale and
retail companies, and facilitation companies such as transport companies, ware-
housing companies, marketing research, warehousing, finance, offices, and finance.
In general, the companies - organizations of the place (with the function of trans-
port), time (with the function of storage) and acquisition (with the functions of sale
and information). We can consider an indirect distribution the one that consists of
more than two members, while the direct distribution consists of only two members
(direct contact with the final buyer).
More specifically, the intermediaries:

• Implement distribution more economically because they drastically reduce the

number of transactions resulting in Improve the efficiency of the transaction
process. For example, if we assume that there is a market, in which four (4)
producers (P) must sell their products to five (5) customers–consumers (K). If each
P tried to approach each of the five K directly, a very complex network of contacts
would result, as P ∗ K = 20. In the same market with an intermediary, instead of a
direct sale, a less complex network of contacts would emerge. (Π + Κ = 9).
• They adapt the difference to the variety of species through the classification
process. Although companies specialize in producing a certain number of
products, the variety of products required by consumers is usually greater than
that provided by a business alone. Intermediaries try to provide a solution to this
problem by bringing together a wide variety of products from different
manufacturers and making this expanded variety available to consumers.
• Facilitate the process of searching for products and services. An immediate effect
of the best variety offered by intermediaries is to facilitate the search process. As
wholesalers, and therefore retailers, offer a wider range of products, the time
consumers have to spend looking for the “right” product for them is reduced.
• Provide facilitation services, such as Transportation, Marketing Research,
Warehousing, Finance, Advertising Agencies, Insurance Agencies

The types of intermediates arise from the distinction between consumer and industrial
products. In consumer products, the members of the channel can be the following
(Figure 9.3):
Retailer (R) is the one who sells products to the final buyer. A wholesaler (W) is one
who makes the most of his sales to other companies, which either resell the products or
use them to produce other (their own) products. Intermediaries can perform all the
functions of marketing, from the purchase and sale of products to their transporta-
tion, storage, financing, etc. Agents are intermediaries who do not have title deeds of
the products whose distribution facilitates.
Brokers (B), agents (A), are intermediaries who do not have ownership of the
products whose distribution facilitates them. They are paid a percentage of the value
of the products sold, while performing a limited number of functions, such as selling
270 Delimitation of industrial markets

I IPB
I = Industry
R = Representative I R IPB
IPD = Industrial Products Distributor
IPB = Industrial Products Buyer I IPD IPB

I R IPD IPB

Figure 9.3 Types of intermediaries for consumer products.

and information, with the difference that B brings together buyers and sellers of a
usually product and, instead of permanent, their cooperation is seasonal.
For industrial products, members of the channel could be the following people
(Figure 9.4).
The main types of distribution channels for industrial products are:

• The first type is the most common due to the small number of Industrial Buyers
for most industrial products (many of which are even produced after a very
specific order with specialized specifications for the product).
• The second type applies in cases where the Industrial Buyers are numerous in
number or are geographically dispersed.

Industrial Buyers

Commercial Government/
Institutions
enterprises Public agencies

Original
equipment
Users Resellers
manufacturers
(OEMs)

Big Small Merchants Agents

Figure 9.4 Types of intermediaries for industrial products.

 Delimitation of industrial markets 271
• The third type is used by B who cannot or do not want to be involved in the
distribution-sale process of their product.
• The fourth type is mainly preferred by B who export the products they produce to
other countries.

9.3.3 Government/public buyers

The market of government/public buyers includes, among others, government services,
Public Enterprises and Organizations (e.g. power companies, post offices, and railways),
Local Government Organizations (Municipalities and Regions), Social Security
Organizations, etc. This is a very large market, perhaps larger in terms of monetary
transactions than that of for-profit companies in some countries. The large volume of
transactions and the secured, albeit late, payment of bills make government/public
customers a very attractive market. The relatively limited resources available in relation
to citizens’ and taxpayers’ needs and expectations, and their demand for transparency in
the management of public funds have resulted in greater complexity of procurement
procedures for public bodies compared to private companies; for this reason, they must
follow strictly defined legal frameworks, with a significant amount of diversity between
the various public services and organizations. Therefore, the observance of strict pro-
cedures makes public procurement a particularly bureaucratic process; stakeholders
should therefore be familiar with the different protocols followed by different public
services and agencies. For relatively low-value supplies, whose amounts are determined
by the relevant legislation, there is the possibility of directly outsourcing the supply of
goods, services, studies, as well as public works, through negotiated contracts. For
goods and services of greater total value, a public announcement for bids with sealed
tenders by interested suppliers is mandatory. In general, the price of the offered goods,
services, studies and projects is very important but it is not the only criterion for se-
lecting the right supplier. Other criteria, such as the quality of the goods/services offered,
delivery/execution time of the order, compatibility with the equipment used by the
public body, and the supplier’s solvency, also play a decisive role in the final decision. In
any case, all the selection criteria and their weight should be explicitly mentioned in the
specifications of the goods/services when announcing the tender.

9.3.4 Institutional buyers

Institutions can take various forms such as public or private, small or large and for- or
non-profit, e.g. hospitals, schools, universities, commercial chambers and associations,
churches, political parties, penitentiaries, associations (e.g. the Greek children’s
charity “The Child’s Smile”), organizations (e.g. the nature organization “Arcturus”),
etc. Institutions that are affiliated, funded and controlled by public/governmental
bodies follow similar procedures with a strictly defined legal framework as mentioned
above. Private institutions exhibit similar purchasing behavior to private companies.
The market for institutional customers is similarly large and some companies, e.g. the
food sector, focus on serving specific institutional categories, e.g. hospitals and
prisons, which require large continuous supply needs of necessary goods/services for
their smooth daily operation.
272 Delimitation of industrial markets
9.4 Characteristics of industrial markets
Industrial markets have certain characteristics that need to be taken into account
when designing marketing strategies, in terms of the cooperation and interaction re-
quired of marketing managers with their counterparts from other business depart-
ments, as well as with representatives of strategic partners in the supply chain.

9.4.1 Derivative demand

The main noticeable difference between industrial and consumer markets, as pre-
viously discussed, refers not to the type of products available in them, but to the kind
of buyers and their motives. Consumers acquire goods and services to meet their in-
dividual/family needs and desires, while industrial buyers acquire them to produce
their own tangible or intangible goods with the ultimate goal of contributing, together
with others in their supply chain, to create and maintain competitive value-added
product offers to consumers. To be precise, however, we must admit that some goods
or services are offered only in industrial markets since it is rather unlikely that an
individual consumer will acquire an excavator for their own use or request the services
of a company that designs investment plans. The truth, however, is that it is difficult to
imagine a product/service that is available in consumer markets, but not in the in-
dustrial ones.
From the above discussion, a very important feature of industrial markets become
apparent: the purpose of the stakeholders is the optimal satisfaction of the derived
(secondary) demand that comes from and depends directly on the primary demand as
manifested in the consumer markets (Siomkos & Fotiadis, 2020; Avlonitis et al., 2015;
Pollalis & Patrinos, 1999; Hutt & Speh, 2010; Biemans, 2010; Brennan et al., 2017).
For example, a grain producer satisfies the needs of the flour industry which supplies
various flours to industrial markets such as bakeries, confectioners, pasta industries,
etc., as well as to consumer markets such as supermarkets. Any fluctuations in the
total demand for finished bread, pastry, pasta or flour products at the retail level will
obviously affect the overall demand for cereals. In a similar fashion, potential sig-
nificant changes in consumer preferences for an alternative dietary pattern, or a
manifestation of their concern for the sustainability of agricultural production (e.g. a
shift to organic products) may lead to changes in future cultivation plans or the
farming techniques of agricultural businesses.
The marketing diversification strategy of companies that serve industrial customers
should not focus on the product/service offered, but rather on the collaboration it
develops with them to optimize the achievement and maintenance of long-term
competitive advantage. Simply put, the ultimate goal of companies operating in in-
dustrial markets is to make a decisive contribution to their customers’ success, which
in turn will ensure their own success. This is due to the fact that the environment in
which the supply chain of cooperating companies operates is very changeable and
highly competitive, and the collective result can be achieved only through the co-
ordinated responses of the stakeholders, and not through any individual piecemeal
solutions that each link in the supply chain wishes to adopt and implement.
In any case, each link in the supply chain, in cooperation with the strategic partners,
must closely monitor all the developments in the market which mediate the availability
of the final product to the consumer (downstream markets). This is relatively easy for
 Delimitation of industrial markets 273
suppliers who have a small number of very important customers: their outputs are
intended for a very limited number of supply chains, such as companies that supply
mirrors and seats to the production facilities of the automobile industry. However,
this task becomes extremely difficult for companies that produce less processed pro-
ducts (e.g. chemicals, cement, fibers, petroleum), or consumer-oriented components
(e.g. integrated circuits, chips, screws) which supply a large number of companies, and
in a wide range of heterogeneous supply chains. In such cases, companies have no
choice but to focus on the most important markets and the most important customers.
Even so, those in charge of monitoring market changes face great difficulties on a daily
basis; the more numerous the links in the supply chain between their business and the
end-user of the product (consumer), the more invisible their work becomes.
The actions and results of companies’ marketing programs at the higher levels of the
supply chain are usually less perceptible to the consumers. However, some companies
aim to create a branded demand (pull strategy) by developing a comprehensive
marketing communication plan that directly targets end customers. Well-known ex-
amples are INTEL in the computer microprocessor sector, Tetra Pak in food
packaging (e.g. milk, juices) and Gore-Tex in waterproof fabric for coats. Derivative
demand has a decisive effect on the appearance of other specific demand features of
the industrial markets presented below, such as demand inelasticity, sharp fluctuations
in demand and supply inelasticity.

9.4.2 Demand elasticity

Demand in industrial markets is generally more inelastic than that of consumer
markets. Any fluctuations in the price of industrial products are passed quite late onto
the price of the end consumer products; this, in combination with consumers’ inaction
to immediately react to price changes means that in the relatively short to medium
term there will be no change observed in the primary demand of the consumer mar-
kets. Therefore, fluctuations in the prices of industrial customers’ inputs have a par-
ticularly limited effect on the formation of the total market demand derivative.
In addition, as detailed below, high transaction costs combined with other factors
impose the need for long-term partnerships or even strategic alliances between sta-
keholders in industrial markets. When price changes are necessary due to external
factors (e.g. reduced supply of agricultural products, increases in tax rates, increased
supplier input price), industrial buyers are reluctant to change the composition of their
supplier base. Even when a new supplier tries to enter a new market or join the
suppliers’ group of an industrial enterprise by offering attractive prices for their goods,
it will still potentially face high entry barriers related to factors such as its reliability,
its potential to satisfy and guarantee an uninterrupted supply of the required quantity,
quality and variety of goods, compatibility issues of the offered goods with customers’
existing production processes, their solvency, etc.
However, this does not mean that the various promotional techniques and the
general activities of the integrated marketing communication mix are irrelevant in
industrial markets. Companies operating in industrial markets are constantly facing
challenges to protect their market share and their growth is based, among other things,
on their expansion into existing markets and/or their penetration into new markets.
Therefore, industrial marketing as a function, but also as a philosophy, plays a cat-
alytic role in building long-term partnerships or even the company’s strategic alliances
274 Delimitation of industrial markets
with the downstream links in the supply chain, with the ultimate goal of ensuring that
the chain, and therefore, the company maintains competitive advantage.
Joint demand also contributes to the inelasticity of industrial input demand. If, for
example, a large supplier of car mirrors can offer its customers goods at steadily re-
duced prices, the total primary demand for cars will not be highly affected, as the
reduction in the cost of a car component will only marginally lead to reduced prices
for the final products. Therefore, the overall derivative market demand for mirrors is
unlikely to show any upward trend.

9.4.3 Demand fluctuations

Supply chain stakeholders are required to handle demand fluctuations both efficiently
and effectively with the lowest possible cost; this increases the further away they are
located from consumer markets (Figure 9.5). The demand volatility faced by the
various links in a supply chain stems from a number of factors, the most important
being derivative demand, increasing supply inefficiency at the higher levels of the
supply chain, and the commitment of some – often all – stakeholders to maximize their
corporate goals, to the detriment of the overall efficiency of the supply chain. The
difficulty of responding immediately to changes at the primary and subsequent sec-
ondary demand level is due, inter alia, to the nature of the upstream production
processes of the supply chain, which usually take much longer to complete in relation
to those at the lower (downstream) stages, as it is analyzed next.
At this point, it is worth emphasizing that any form of variability in a business’s
operations, and consequently supply chains, geometrically increases the cost of ef-
fective management. Variability is evident not only at the levels of primary and sec-
ondary demand but also in other critical parameters of supply chains, such as the
execution time suppliers need to complete an order, production yields (especially of
agricultural and natural products that can be affected by weather conditions), per-
centage of defective products, maintenance and repair times of mechanical equipment,

Supplier Producer Distributor Retailer

Supply flow

Demand of Demand of
Raw Materials Final products

Demand flow

Figure 9.5 Demand volatility in a supply chain.

 Delimitation of industrial markets 275
etc. Therefore, it is crucial for each supply chain to limit variability of any kind as
much as possible, including demand variability (Harrison et al., 2015; Christopher,
2015; Bowersox et al., 2015; Chopra & Meindl, 2014; Min, 2015; Taylor, 2003; Reid &
Sanders, 2013).
The high demand fluctuation observed in industrial markets is due in large part to
the bullwhip effect, i.e. inaccurate or distorted information concerning primary and
secondary demand within a supply chain. According to Figure 9.4, the retailer is the
only link in the supply chain that has direct access to information on primary/con-
sumer demand, which allows it to make highly reliable and accurate demand forecasts
for its goods in the short and medium-term. If this information is not circulated to the
rest of the supply chain, the wholesaler will try to forecast short- and medium-term
primary demand through the retailer’s demand data, the producer from the whole-
saler’s demand and so on. But fluctuation in the retailer’s demand to the wholesaler
does not depend exclusively on the observed changes in the primary demand; it also
depends on other factors for which the wholesaler has limited or no information at all.
As a result, the wholesaler has inaccurate/distorted information about the primary
demand, with increased amounts of misinformation as we climb up the supply chain.
The causes of the bullwhip effect include the demand forecast updates from the
various members of the supply chain, order grouping, changes in the price of industrial
market inputs and the inflated needs of industrial customers. The accuracy and relia-
bility of demand forecasts tend to decrease as the forecast horizon widens. But demand
forecasting is a dominant factor used to base both medium- and short-term planning of
all business and supply chain operations. Companies inform their suppliers about their
short- and medium-term planned orders by basing them on demand forecasts. But the
ordering schedule is updated according to the latest demand data, resulting in a chain of
changes in the projected demand at all stages of the supply chain. The consequences of
updating demand forecasts take on even greater proportions due to the grouping/ca-
tegorization of demand. While retailers face a constant demand for their products from
consumers, optimizing their inventory management requires them to group their orders
based on an optimal order quantity model. Wholesalers in turn have to calculate their
own optimal order quantity, which, in theory, is an integer based on the retailer’s order;
the producer must determine the optimal quantity of the production batch and so on.
Therefore, while demand for consumer products is constant, demand for industrial
products manifests itself at intervals in large order quantities.
One of the parameters for determining optimal order quantity is the price (acqui-
sition cost) of the goods. Any changes in the price of industrial goods, especially in the
form of temporary quantitative discounts (where the price decreases gradually as the
quantity of the order increases, e.g. 5€/unit for the first 100 units, 4.80€/unit for
101–150 units, etc.), will further distort the demand signal. For example, a wholesaler
orders 550 units of product X on average every eight days. Due to a supplier’s pro-
motional action, the wholesaler will increase the regular order quantity to 1,000 units;
therefore, the next order will probably be placed in two weeks. In industrial markets, it
is also more likely for demand to be reversed: any decrease (increase) in the price of a
good is interpreted by customers as a trigger for further reductions (increases), re-
sulting temporarily in a decrease (increase) in the requested quantity. Finally, virtual
needs arise when supply and demand lag behind, with almost all industrial customers
dramatically increasing supply volumes at the same time in the hope of extracting as
much of each supplier’s available quantity as possible.
276 Delimitation of industrial markets
Marketing, in conjunction with other business functions, can make a decisive
contribution to managing the bullwhip effect. Creating and further strengthening
partnerships, or even better, strategic alliances with the main supply chain partners
will ensure that all stakeholders are kept informed about primary demand trends, thus
making it possible to make plans based on common demand forecasts. Consolidation
of the supply chain also leads to a significant reduction in the fixed cost of placing an
order, hence the optimal order quantity is significantly reduced and so are the con-
sequences of order grouping. Appropriate pricing policies and planning promotional
activities can drastically deter ex ante markets by further normalizing the demand
signal. The division of demand based on historical and not real-time recent data will
also lead to the elimination of virtual markets.

9.4.4 Supply elasticity

Another characteristic of industrial markets that interacts decisively with derivative
demand is the difficulty of reacting directly to changes in consumer demand, i.e. the
inelasticity of supply. Response times to changes in consumer markets increase gra-
dually the farther away a supply chain link is located from the consumer markets, due
to the delayed transmission of the primary demand signal with – most likely – the
inaccuracies and distortions mentioned earlier. The total time required between the
moment an order is submitted and the time it is delivered to the industrial customer is
clearly longer in relation to consumer markets; in fact, it tends to increase more and
more as we move up the logistics stages of the supply chain towards the producers of
raw (natural and agricultural) products. For example, the cultivation of wheat in
Greece is an annual event with preparations starting in the fall, so that the grain can be
harvested by early to mid-summer. Therefore, agricultural companies must anticipate
the demand for their product at least nine months before the delivery of future orders.
Critical decisions about the crop plan, such as the area under cultivation and the
specific varieties of cereals to be sown, are based on long-term forecasts and demand
expectations and are unlikely to change until the following cultivation period. This
time period can be even longer in the case of tree crops, for example, where it takes
several years (4–6) for the plantations to reach their full productive age.
The situation of large industrial units is similar to a significant degree, such as that
of chemicals, oil refineries, electricity generation, etc., where the cost of changing the
projected rate of production is very high and huge investments are required in spe-
cialized capital goods that cannot be used to produce alternative products/services.
This is because, among other things, the percentage contribution of the average fixed
cost to the total unit cost of products is very high, so any fluctuations in the rate of
production lead to direct inverse changes in the average total production costs.
Significant fluctuations in the production schedule are likely to cause a rift in the
relationship of these industries with the strategic suppliers of their main inputs.
The effects of supply inelasticity become particularly painful in the event of abrupt
changes in consumer demand. The coronavirus pandemic resulted not only in the
imposition of restrictive measures on the movement of citizens/consumers but also in
the operation of retail stores. Consumer demand for delivery of their purchases in
their private spaces (homes) has reached unprecedented levels. Most large retail chains
did not anticipate the type, size and intensity of the crisis, and hence failed (especially
in the first months) to meet the unprecedented demands of their customers, mainly due
 Delimitation of industrial markets 277
to the inability to receive the appropriate support from their partners in logistics
chain. There have also been cases of particularly successful adaptation to these new
conditions, due to the systematic commitment that some companies have shown to-
wards creating and strengthening strategic alliances with their supply chain partners,
which has resulted in an effectively coordinated supply chain response.

9.4.5 Seller–buyer relationships in industrial markets

The relationships of those involved in industrial markets constitute the main point of
interest in supply chain management, and the marketing department in turn.
Relationships formed in the supply chain are the result of dynamic decision-making
over many years, and actions taken to implement common strategies and tactics
through which stakeholders expect to achieve their strategic goals. Figures 9.6 sum-
marizes the range of relationships found in industrial markets based on two very
important criteria: the degree of relationship integration and the independence of
ownership level (Harrison et al., 2015; Christopher, 2015; Bowersox et al., 2015;
Chopra & Meindl, 2014; Min, 2015; Taylor, 2003; Reid & Sanders, 2013).
The simplest relationships to manage are those involving individual transactions, which
are characterized by minimum requirements in their management, great flexibility and a
strongly short-term character. Although diametrically opposite to strategic alliances,
which are perhaps the holy grail in supply chain management, individual transactions can
withstand the relative pressures of an ever-increasing competitive environment. They are
used in markets that show little or no differentiated products, of little or no complexity,

Max

Single Partnerships Coordination Strategic

Transaction coalitions
Degree of Ownership Independence

Keiretsu

Vertical
Integration

Min Degree of Integration Max

Figure 9.6 Supply chain relationships.

278 Delimitation of industrial markets
and are characterized by perfect competition. The main criterion for selecting the supplier
for each transaction is the minimum purchase price of the product/service. The occasional
and contingent nature of the relationship, with minimal requirements and obligations
between the parties involved before and after the transaction, creates enormous diffi-
culties in the efficient and effective planning of the overall business operation, including
the ability to respond to market volatility and the production process. Therefore, such
relationships are very rarely used by companies that aim for optimum satisfaction of their
customers’ needs and desires in a modern competitive environment that requires flex-
ibility and prompt responses to ever-changing conditions.
A partnership is a long-term partnership that develops between two (or a limited
number of) privately-owned companies which are, however, limited to long-term
contracts without further functional connections between them. Coordination ex-
pands the intensity and scope of the cooperation between two (or a relatively limited
number of) players and links in the supply chain, with the installation of an integrated
critical information exchange system aimed at coordinating the action plans of the
collaborating companies. These kinds of relationships are very important in terms of
achieving strategic alliances, but they have a major drawback: they limit their scope of
application and strategic planning to a restricted number of supply chain actors. The
benefits of such partnerships are not always transformed into a competitive advantage
for the supply chain’s overall performance, which constitutes the ultimate measure
when consumers evaluate alternative product offers. Simply put, no matter how strong
the connection between two or more links in a chain, if the connections between even a
few links remain weak or vulnerable to any changes in the environment, this chain is in
danger of breaking and failing to achieve its purpose. In fact, it is not uncommon for
whatever benefits the collaborators of the partnership or consortium obtain to stem
from a collectively negative environment for the whole supply chain, as they often lead
the other links in the chain to a more difficult position.
Partnerships and coordination are not new forms of relationships that have emerged
from modern supply chain management, even though their frequency is constantly
increasing, as the potential for groundbreaking innovative solutions offered by in-
formation and communication technologies continues to improve. They constituted
the first steps and pillars on which highly integrated corporate relationships were
based, which had little or no ownership independence, such as vertical integration and
the Japanese keiretsu, respectively. However, despite the obvious benefits of both
vertical integration and, to a lesser extent, keiretsu, they are not the most appropriate
form of business relations for companies seeking a very high degree of integration with
the rest of the supply chain. This is related to the legal constraints they face, especially
in terms of vertical integration, to ensure healthy competition in the market. Most
modern global/multinational supply chains usually consist of a huge number of
companies, often tens of thousands, which are scattered and operating around the
world in diverse social, cultural, economic and legal environments. Therefore, it be-
comes very difficult, if not impossible, to effectively control and manage the various
bureaucracies of complex transactions, especially in a highly volatile business en-
vironment, even with keiretsu, let alone with vertical integration.
Strategic alliances combine the benefits of relationships with a very high degree of
integration, together with a high degree of ownership independence, in order to fa-
cilitate their management and ensure their immediate and effective adaptability to
rapid environmental changes. They are the kind of partnerships whose ultimate goal is
 Delimitation of industrial markets 279
the implementation of collaborative planning, forecasting and replenishment (CPFR)
at all stages of the supply chain, from the miners of natural resources to the retail
distribution of goods in the market. The benefits of the appropriate application of the
principles of integrated supply chain management are manifold, the most fundamental
being the acquisition and maintenance of competitive advantage for the entire supply
chain, which is recognized and rewarded by the loyalty of the ultimate critic of the
supply chain, the customer. Competitive advantage is guaranteed in many ways:
keeping all stakeholders directly informed about developments/trends in primary de-
mand, the joint management of a large part of the inventory, sharing relevant in-
formation, reducing the total unit cost of transactions, shortening the period from the
moment a decision is made for a new production batch until stocks are placed on the
retailers’ shelves, an immediate response to changes in primary demand, etc.
The main difficulties in the adoption, implementation and longevity of strategic
alliances, and perhaps the most insurmountable, stem from human nature, particu-
larly opportunism. The development of long-term highly interdependent relationships
between the partners of a supply chain makes the members with the least bargaining
power vulnerable to the moods of the powerful members since they are the most
exposed to opportunities; therefore, they exhibit greater motivation for opportunistic
behavior. This risk increases dramatically among members of the supply chain that
have made specialized investments, and there are huge barriers against making
changes in the direction of the production to meet the needs of other industrial cus-
tomers. Similar risks are faced by companies that rely on a very limited supplier base
(1-2), with specialized inputs for their production process, or the existence of external
partners (e.g. outsourcing of transportation). Although modeling supply chain op-
erations favors strategic alliances to achieve the optimal level of added value for all
stakeholders in the chain, pursuing the same interest is clearly a higher priority than
trying to achieve a common interest.

9.5 Materials handling

The term ‘materials handling’ refers to the handling and movement that products and
materials undergo within the business premises, specifically the movement, storage
and control of liquids, large solids, items by the piece, pallets, containers, vehicles, etc.
inside the business premises. The term “product transport” is used to denote the
movement of products over long distances outside the business. In particular,
“transportation” is the movement from point A to point B while ‘distribution’ is the
movement from point A to many different points B, C, D, etc.
The following questions must be answered for the proper planning of materials
handling: “Why?”, “What?“, “Where?”, “When?”, “How?” and “From whom?”.
Generally speaking, in materials handling, an appropriate method should be adopted
for each kind of material; the right amount of the right product should be provided, at
the right place, at the right time, at the right frequency, in the right position and
condition, and at the right price. Materials handling planning is influenced by the
following factors: product characteristics, product type, traffic volume, layout of
storage spaces and code locations.
Materials handling also refers to the range of equipment and/or devices that have
been designed to work in synchrony, in order to organize the movement, storage and
monitoring of materials in materials handling procedure or activity of a business’s
280 Delimitation of industrial markets
logistics circuit. These comprise the materials handling systems inside the warehouse,
including transportation equipment using a fixed route (e.g. elevators, piping),
handling equipment for limited distances (e.g. bridges, cranes), mobile equipment for
transporting materials (e.g. forklifts, trucks, trailers, wagons), tools that are used in
materials handling and warehouse equipment (e.g. platforms, pallets, scales). The
corresponding equipment for transportation and distribution is referred to as
“transport systems” and is analyzed in the last section.

9.5.1 Concept of unit load in materials handling

The unit load is the minimum storage and handling unit for the purposes of the mass
handling of cargo and minimization of handling, loading and unloading times. It can
also be defined as a collection of materials placed and stored in such a way that they
are treated, stored, and managed as a single entity. The advantages of unit loads are
their standardized use of packaging and storage equipment, limited product in-
formation, controlled weight and more efficient macroscopic use of warehouse space.
Their disadvantages are the cost involved in the assembly and reassembly of stored
units, boxes and packaging materials, the cost of managing empty boxes and their
disposal, and in some cases their inefficiency in the use they make of space.
Listed below are some common forms of unitization:

• Bottles: Made of glass or plastic and used for products in liquid or viscous form.
Product examples include beverages, milk, soft drinks, water, pharmaceuticals
and chemical products.
• Boxes: Made of (corrugated) paper, wood, synthetic plastics, metals (high
strength) or a combination thereof and used for all kinds of products: solid,
liquid and viscous, for all kinds of sizes and weights. They come in different
shapes for every requirement: rectangles, polygons, with lids, etc.
• Small metal containers: Made of tinplate, aluminum and their alloys, and used for
storing food, usually in solid or liquid form (canned food).
• Pallets: The pallet is the main form of tertiary packaging, together with the
container. Their unitization process is called palletization, which aims to facilitate
the loading and unloading of packaged products among the different means of
transport. There are two main kinds of pallets, the Europallet and the American/
British pallet. Their standardized dimensions are described below:
• Europallet: 1200 × 800 × 144 mm (length × width × height). These are
identified by the EUR certification initials inside an oval frame, printed in a
visible place on the pallet (only for pallets made from a specific quality of wood,
thickness of boards and blocks, number and length of nails). The Europallet is
also used outside Eurozone countries. Its construction method is standardized;
the dimensions of the train carriages, containers, forklifts and storage systems
are also standardized, being based on the Europallet’s dimensions, and this also
applies to their respective storage spaces on trucks, ships and planes.
• American/Anglo–Saxon palette: 1200 × 1000 × 144 mm (length × width ×
height). Different transport conditions are involved compared to that of the
Europallet, and they have a different cost structure for alternative modes of
transport.
 Delimitation of industrial markets 281
Table 9.1 Types of pallets

Material Durability Repair/recycling Application

Wood Medium Yes/No Heavy products, accessories, food

Wood pulp Medium Yes/Yes Medium weight and low-value materials
(e.g. building materials)
Special compressed fibers Low Yes/Yes Light products
Plastic High No/Yes Closed transportation systems (in-house
transportation)
Metal High No/Yes Closed transportation systems for very
heavy loads (e.g. military materials)

The American pallet can be said to be superior in that it reduces the lifting paths by
25%, because more packages fit on it without protruding (larger area). On the other
hand, the Europallet is more appropriate for use in train carriages, for which it was in
fact designed. Based on a decision by the European Commission, trucks are also
designed to make full use of them. Three Europallets fit on a standard truck with only
two industrial ones (prevalence of Europallets in international transportation trucks),
while Europallets make better use of the principle of flexibility: Production Unit =
Inland Transport Unit = Transport Unit = Storage Unit = Sales Unit.
Table 9.1 presents the materials used to make the pallets, their durability, the ability
to be repaired or recycled, as well as examples of their applications.

• Pallet tanks: Tanks mounted on pallets for the transport of liquid and gaseous products.
• Pallet boxes: Boxes with a base in the shape of a pallet, so that they can be moved
by forklifts. They are made of wood, and mainly plastic and metal, and may have
a folding or detachable construction so that when they are empty, the space they
occupy is minimized (horizontal storage). A variation is isothermal storage and
transport pallet boxes for the transportation of sensitive products that need to be
stored/transported at low temperatures above 0°C, e.g. medicines, biotechnolo-
gical foods, industrial products, etc.
• Roll pallets: Pallets with wheels on their base for easy movement without the use
of any special machinery/equipment.
• Crates: These are many kinds of crates for transporting solid products of a
relatively large size, such as fresh fruit and bottles containing sensitive liquids (e.g.
beer, milk). They can be made of plastic, wood, paper or expanded polystyrene.
• Bags: These are made of paper, burlap, fabric, synthetic plastics, a combination of
paper and fabric or plastic, and they are involved in the management and flow of
bulk materials (bulk loads).
• Barrels: These are made of hard paper, wood, plastic or metal and are used in the
transportation of mainly liquid and viscous loads, or materials in granular form.
• Paper: Paper is used for bulk solids (sugar, flour, etc.) and in the packaging of
liquids (juices, milks, etc.). Paper packaging can be reinforced with aluminum and
plastic sheets.
• Auxiliary packaging materials, particularly stretch film which is a transparent
synthetic film, about 0.5 meters wide, for pallet wrapping, manually or auto-
matically using a special machine, together with the hoop which is a film made of
synthetic material or metal for stabilizing boxes or other objects between each
282 Delimitation of industrial markets
other and on the pallets; it is applied with special machines, which may be
portable or desktop. Tie chains, ropes, straps, cable reels, among others, are also
included in this category.

For bulk handling and to minimize handling, loading and unloading times, the fol-
lowing factors must be considered when unitizing a load:

• Product shape, size and weight.

• Size of the transport unit base.
• Self-supporting loads (supporting one packing unit on top of another).
• Ease of (re)loading from the means of transport.
• Width of corridors from the facilities it will pass through.
• Floor strength of installations it will pass through.

Generally speaking, materials handling systems are classified according to the method
applied as manual, mechanized and automated. There are several differences between
the three methods. The manual one is limited to low weight, intensity and work speed,
while it provides flexibility in movement, has low acquisition costs but also very high
operating costs. Mechanized handling can tolerate heavy loads of high intensity with
moderate management needs in relation to speed, flexibility, frequency and capacity,
while its acquisition costs are not as high as its operating costs. The fully automated
method provides high levels of handling in terms of weight, intensity, speed, frequency
and workload. While it has a high acquisition cost, it also has a low maintenance cost
but provides low flexibility of movement. Their differentiation lies mainly in flexibility,
in terms of the way they manage space. Manual materials handling is flexible but limited
in the volume of materials it can manage and the size capacity of the total work; me-
chanized handling is less flexible but manages a larger volume of materials; the fully
automated method provides greater capacity in terms of project management, but it
comes up against difficulties in terms of flexibility in the way the materials are handled.
The systems can be classified on the basis of the equipment used in them, namely:

• Conveyors: This labor-saving system permits large volumes of materials to move

as fast as possible, allowing businesses to send or receive large quantities in the
shortest amount of time with the least labor cost. They provide continuous traffic
on specific routes but with limited space coverage. There are two types of
conveyors: synchronous and asynchronous.
• Pipelines: They provide a small range of services, and are used mainly for the
transportation of liquids, gases, crude oil and refinery products. Their main feature is
the slow movement of products inside the pipeline which is compensated by the fact
that there is a flow of products on a 24/7 basis. Wider pipes have a very high capacity
and there is a very low risk of product losses and damages during transportation. While
its installation is very expensive, maintenance costs are very low and the availability of
the pipeline is restricted only by the possibility of other carriers using the facility.
• Cranes and winches: These are overhanging vertical transportation systems with
intermittent movement and limited accessibility, either in a circle around their axis
or forming a rectangle, taking advantage of the length and width of the
installation where they are housed, with relatively low installation costs, and
characterized by work of moderate intensity.
 Delimitation of industrial markets 283
• Industrial vehicles: These are wheeled vehicles for intermittent work, with the
ability to move along different routes, with a high level of accessibility in the
workspace and low acquisition costs; they are mainly industrial means of handling
low labor-intensive materials.
• Electric and manual pallet trucks.
• Warehouse equipment: This is used to preserve/maintain and store materials.
• Auxiliary equipment: This is used for the most efficient, optimal and easiest
management of materials.
• Storage and retrieval systems: They transport the product to the person (part-to
person) or they transport the person to the location of the product (person-to-
part), in order to complete the collection process.
• Robots: They can be anthropomorphic (Gripper) or general-purpose (multi-
functional) and they can be programmed to do tasks in environments that are
difficult for humans to operate in, or in 70%-automated industries.

9.6 Storage
The core of a company’s logistics system is the warehouse. A simple definition of a
warehouse could be “the space used to collect and store products”. From personal ex-
perience, we know that this space should be well organized (so that we can easily find
the product we are looking for), adequate (so that we can store the quantities we need),
clean (so that the products are maintained in good condition) and technologically well
equipped (so that we can perform the required tasks more efficiently with less effort). In
the simplest case, a warehouse can serve only one business, for example, a retail com-
pany. In this case, the warehouse space is usually located inside the business premises. It
can also serve a network of companies, operating as a distribution center, i.e. those
companies’ suppliers, e.g. a distribution center that may supply some branches of a
retail chain. In this case, the warehouse is an independent building.
A distribution center can also combine products, and consolidate shipments from
different factories which are directed to customers; it can even receive large loads from
one factory that deals with many customers’ orders and break them down into smaller
loads to be shipped to each customer. In this case, the warehouse can also function as
a coordination point and a temporary storage space for inventory. It is also very
common for a warehouse to belong to a company that provides logistics services to
third parties (such as warehousing, transportation and distribution services, etc.).
The role of the warehouse has obviously changed significantly in recent decades.
Initially, it was considered the storage space for the products used or marketed by a
company; at the same time, it did not add value to a company’s marketed products of
a company. Today, warehouses act as centers for the receipt of products (e.g. raw
materials and/or finished products) from suppliers, temporary storage spaces for these
products to support production, and/or resale/transportation of the final products
within a supply chain. In other words, the roles of warehouses and distribution centers
in today’s world add value to a supply chain in two ways: through storage, so that
products are available when needed; and through transport/distribution, so that
products can then be collected, grouped and transported to the points of sale.
An issue concerning the exact definition of a warehouse is the distinction between a
warehouse and a distribution center. Both terms are often regarded as similar in
concept, but in truth, they have different characteristics. A warehouse is a facility
284 Delimitation of industrial markets
where goods are stored for a long time, whereas a distribution center is where goods
are stored for a shorter period. The warehouse does not have high levels of daily
activity, unlike a distribution center where receipts, arrangements, storage and ship-
ments are part of employees’ daily work. Therefore, a distribution center is oriented
towards the execution of orders, i.e. the satisfaction of demand. Value-added pro-
cesses in particular are performed in a distribution center, as opposed to a warehouse
that simply offers storage services. This creates different requirements in each case,
concerning different systems and equipment. In a warehouse, investments are aimed at
maintaining the good condition and safety of the goods; in a distribution center, the
main goal of the systems is the optimization of procedures.

9.6.1 Importance of the warehouse

It is all the more clear that the warehouse occupies a key position in the business.
Some consider it – and not unjustly – the “heart” of a business; just as the heart
regulates blood flow, the warehouse which contains and sends out products regulates
their flow from their acquisition (supply) and production, to their transportation,
distribution and consumption.
The warehouse is the storage space for product stocks. These products are stored from
the moment they are produced or supplied, until their sale, consumption or use. In other
words, the warehouse is related to the stocks, the coverage of space (distance) and the
corresponding time needed to cover this distance (the place-time gap), between the pro-
ducts’ points of production and the points of sale/consumption. Even in today’s highly
interconnected world, a low percentage of small businesses do not monitor their stock
levels on a daily basis, while an even larger percentage does not even perform stock-taking
activities. This often leads to late shipments, late processing, late order execution and of
course a negative image of the company from the customers’ point of view. The ware-
house is the central point for stock control and monitoring. Keeping stocks in warehouses
close to points of sale helps towards the timely and efficient supply of the market.
Some of the key tasks in the warehouse area are also performed for the purposes of
effective planning, execution, monitoring and control of orders, such as receipt of
products in the warehouse, arrangement and rearrangement of products, labeling,
collection and monitoring of orders, loading and shipping, handling returns, stock-
taking, etc. And here lies the second important difference between the traditional and
the modern warehouse. The nature of warehouse operations was traditionally labor-
intensive (i.e. it required a lot of heavy manual labor on the part of the storekeepers
themselves, to load/unload products and collect them to complete orders), whereas
today, it requires people with special knowledge and skills who manage complex
composite tasks. It also requires people who operate machinery, tools and expensive
equipment to perform precision work. Furthermore, the special role of a warehouse
manager is a prerequisite; this person will coordinate the above-mentioned tasks that are
performed in the warehouse area, as well as the human resources and equipment
needed. Today, the nature of warehouse operations is considered information-intensive
because information transfer – stock levels, product storage locations, products’ import
and expiration dates, transactions that are being performed or will be performed, in-
coming and outgoing shipments, data concerning customers and suppliers, as well as
staff – is very important for the smooth operation of the business.
 Delimitation of industrial markets 285
Industrial production units that want to take advantage of economies of scale can
produce and store large product quantities, thereby reducing production costs.
Similarly, commercial companies can supply large product quantities by gaining access
to reduced market prices. Wholesale market pricing generally offers cost savings per
unit, which, when purchased in large quantities, exceeds the cost of storing and main-
taining materials. Similarly to production and supply savings, the better a company can
use the full abilities and capacities of transportation equipment, the more efficiently and
economically the products can be transported. Transportation costs per unit decrease as
more units are transported. The cost associated with managing and maintaining large
amounts of inventory in stockpiles should be compared to the cost of transporting large
quantities to achieve transport savings associated with reduced unit pricing. In many
supply chains, transport savings per unit exceed the cost of storing additional products.
Warehouses add value by supporting large transportation needs.
There are products whose demand (of a seasonal nature) or production (e.g. harvest
time, seasonality of production) concerns a specific period of time within a year. There
is therefore a need to store and sell these products at the appropriate time. For ex-
ample, when winter is over, a company that manufactures and distributes sports
equipment for winter sports can store its production instead of putting goods on the
market at a lower price. In this way, it will maintain stable stock levels when needed,
and therefore, maximize its profits.
Warehousing not only protects businesses from large price fluctuations but also
provides safe storage of their products. Generally speaking, when goods storage may
imply exposure to many dangers such as theft, damage, fire, etc. A warehouse provides
protection to the products from the above dangers, as well as from destruction or
damage due to heat, dust, humidity, etc. Special systems and technologies are applied
to different products depending on their nature, thereby reducing losses due to de-
terioration during storage. Plants, works of art, candles, food, medicine and cosmetics
are just a few examples of products that require special storage, e.g. refrigeration,
preservation, etc. A warehouse that offers this service keeps products at the right
temperature, preventing deterioration and changes in their color and texture. This
helps to extend the life of these products. Products stored in warehouses are usually
insured and the warehouse manager often shoulders the responsibility of maintaining
these products in good condition for the owner of the goods.
Finally, warehouses provide appropriate facilities and equipment for packaging
products and delivering them to customers. Packaging can be primary (by the piece),
secondary (in a box) and/or tertiary (as a pallet). Moreover, goods can be packed in
the warehouse in various dimensions and with a variety of packaging materials, and
they can also carry a range of information, labels, codes, etc. according to the cus-
tomers’ instructions/wishes.

9.6.2 Roles of warehouses

Warehouses comprise a critical factor in successful SCM. In today’s business environ-
ment, they can take on the following roles, as described in Table 9.2 (Ballou, 1999).

9.6.3 Types of warehouses

Warehouses can be classified into different categories (types), according to specific criteria:
 286

Table 9.2 Warehouse roles

Role Description

Production The warehouse functions as a consolidation center for the receipt of products (e.g. raw materials and/or semi-finished products)
support from the suppliers, followed by their internal distribution in the production and/or assembly lines.

Supplier 1

Production Production/
Supplier 2
support assembly line

Supplier 3
Delimitation of industrial markets

Consolidation The warehouse combines products and consolidates shipments from the various factories to the customers. The freight collection
of Loads area is where individual cargoes are grouped into larger ones in order to reduce the total transportation costs. In this case,
suppliers take advantage of the economies of scale of the warehouse owner, but the customer does not buy large enough quantities
to justify separate shipments from each supplier.

Supplier 1

Supplier 2 Consolidation Customer 1 Customer 2 Customer 3

Supplier 3
Load The warehouse receives large loads from a factory containing many orders from many customers and breaks them down into
breakdown smaller loads to be shipped to each customer. This is the exact opposite to load consolidation. Cargo quantities with low
transportation costs arrive at the warehouse and are then re-shipped in smaller quantities to customers.

Customer 1

Production/
Supplier Customer 2
assembly line

Customer 3

Order mix An example of a warehouse that performs some or even all of the above-mentioned roles is usually called a “distribution
center”. Since each factory produces only a fraction of a company’s total production output, multiple factories ship different
products to a central warehouse. The warehouse may support the production and/or assembly of a new product. Products are
then re-shipped in smaller quantities to customers.

Supplier 1
Customer 1 Customer 2 Customer 3

Supplier 2 Mix
Customer 1 Customer 2 Customer 3

Customer 4
Supplier 3 Customer 3 Customer 4
Delimitation of industrial markets 287

(Continued)
 288

Table 9.2 (Continued)

Role Description

Cross-docking The warehouse functions as a coordination point and a temporary stock location rather than as a storage point. The goods are
distributed directly and continuously to the customers.

Supplier 1 Customer 1

Supplier 2 Crossdocking Customer 2

Delimitation of industrial markets

Supplier 3 Customer 3
 Delimitation of industrial markets 289
• Based on whether or not the company has privately-owned facilities, a distinction
is made between private and public warehouses:
• Private warehouses are owned and operated by large construction/commer-
cial companies to meet their own storage needs. Privately-owned premises
offer businesses better control, lower costs and greater flexibility, especially
when demand is stable or special storage conditions are required.
• Public warehouses are a tertiary business entity that provide facilities and storage
services to business customers for a fee. Public warehouses are very useful for the
business community. Most companies are not able to maintain their own
warehouses due to the large investment capital required. Public warehouses
provide convenient facilities for easy pick-up, shipment, loading and unloading
of goods, making use of equipment that can handle heavy/bulky products. They
are usually located near terminals, railways, ports, motorways and airports.
• Warehouses store all types of products, including those that need special
management (preservation, refrigeration, flammable/chemical/other hazardous
materials). Thus, warehouses can be categorized by product type:
• General warehouses (warehouses for general goods)
• Warehouses for bulk cargo for the storage of liquid chemicals, petroleum, etc.
• Temperature-controlled warehouses (for refrigeration/preservation): These
use temperature and humidity control mechanisms. Sensitive products, such
as fruits, vegetables and frozen goods, are stored in them.
• Warehouses for household goods, for the storage of household equipment
and furniture.
• Warehouses for special products.
• Warehouses can undertake storage for any kind of goods. There are:
• Warehouses for storing raw materials, which receive products from an
external source, store and collect them, and then send them on for internal
use (on production lines)
• Warehouses for semi-finished products, similar to warehouses for raw
materials, but they are used for shipments to assembly lines.
• Warehouses for finished (final) products, which receive products from an
internal source, store and collect them, and then send them on for external use.
• Warehouse for packaging materials.

9.6.4 Principal storage tasks

Warehousing is a key Logistics function, and includes the following five work tasks:

1 Goods entry: initial receipt, form checking, unloading and placement of goods in
goods receipt area, inspection (qualitative and quantitative control), delivery,
unpacking/repacking, placement in the storage or returns area.
2 Main storage: placement at the storage point, stock level update (inventory),
issuance or update of materials files.
3 Execution of orders: issuance and receipt of collection forms, collection of ordered
290 Delimitation of industrial markets
products, product grouping per order, packaging and labeling, form checking,
updating of materials files.
4 Goods exit: loading, shipping/transportation of products.
5 Other tasks also performed in the warehouse area: cleaning/tidying up of the
premises, maintenance of equipment and machinery, and other administrative tasks,
the most important being stock-taking and management of available resources.

9.6.5 Distribution center design: Key parameters for supply chain networks
Business executives responsible for Logistics and Supply Chain Management must
respond to the following issues that are directly related with the warehouse and the
storage operations:

• Selection of the warehouse location.

• Architectural design and basic layout of the warehouse.
• Spatial planning of the warehouse layout and detailed siting.
• Philosophy behind the chosen storage system.
• Final selection of storage systems.
• Selection of inter-handling systems.
• Design of roles and responsibilities.

Each of the above issues could, on their own, form the topic of a separate book; the
main parameters involved in the design of warehouses/distribution centers will be
described briefly in the following sections (problem definition and troubleshooting
steps or options). The management (design, monitoring, execution and control) of
storage procedures constitutes the final issue. It should also be emphasized that these
decisions are either strategic or tactical. This virtually means that after they are taken,
they can only be overturned at great cost in terms of time and money for the business.
Selection of the warehouse location. The problem of selecting the location of a
warehouse lies in identifying its most advantageous geographical location, to maximize
cost reductions and provide better services in the market. This will lead to increased
business revenue and greater consumer satisfaction. The factors considered for the se-
lection are many and varied: cost of land acquisition, its government valuation,
proximity to existing or future markets, access to roads and chosen modes of transport,
the infrastructure available (industrial zones/parks), potential facilities (tele-
communications, energy, etc.), tax/development laws and existing legislation, incentives,
labor availability and labor costs. A large number of studies in the literature propose the
application of quantitative methods or mathematical models such as the center of
gravity, the scoring model, the loading method, distance, break-even point analysis, etc.
Architectural design and basic layout of the warehouse. The warehouse building’s
boundaries must be defined. Issues that need to be resolved include how much land
can be built on for the construction of the warehouse, the design of lorry and freight
routes (transit pathways), and determination of the number and location of industrial
doorways. There is also the issue of dividing the building into separate sections/spaces
based on the operational design of the warehouse. Towards this respect, the main
operating areas are as follows:

• Storage, freight, processing procedures and support services

 Delimitation of industrial markets 291
• Administrative areas, and whether or not they are discrete from other storage areas
• Production operations, packaging, repackaging and product standardization areas;
• Electromechanical support facilities for the warehouse, fire extinguishing-water
pumping station, air-conditioning and heating systems, etc.

Selection of the main warehouse areas within the boundaries of the plot is made on the
basis of construction costs as well as the application of functionality criteria and ex-
pandability, with optimal and safe support for freight vehicles. It also depends on
market demand; increasing demand usually causes demand for greater capacity, which
a company can overcome by expanding the business in an existing facility.
Spatial planning of the warehouse layout and detailed siting. This issue concerns the
location choice for each product code in the storage areas and the final layout of those
zones. In the first case, many methodologies have been proposed, the main ones being
based as follows:

• The unit load that the company uses (pallets, cartons, etc.),
• The title of the product or its code (supplier or company),
• Product movement: Fast-moving products are selected and placed near the order
picking area. Another way to do this is to allocate products based on an index for a
“number requested by a code” to the “required storage space”, and placement of
products starting from the largest quotient near the collection site, thereby achieving
placement of a larger number of fast-moving product codes near the collection area;
• Product (code) family (group): Products are grouped and positioned according to
the same dimensions, weight and individual parts, requiring the same cooling/
safety conditions (eg toxic, flammable);
• Traffic flow: When applying the FIFO (First-In-First-Out) philosophy, access to
all locations is required, especially to secure products with an expiry date for
export; in the case of LIFO (Last-In-First-Out), smaller spaces and more depth
levels are required;
• Inter-handling systems (pallet truck, counterweight forklift, reach truck, VNA
truck, etc); and
• Order picking (manual, semi-automated or fully automated).

Final determination of all storage locations based on the required storage conditions
must also be made.
Philosophy behind the chosen storage system. The business must decide, for each
product or each product group, on the management philosophy it will employ
(especially when and how to export them from the warehouse). The main philosophies
are as follows:

• First-In-First-Out (FIFO): This philosophy concerns products with a short life

cycle. In its application, the first to be imported into the warehouse is the first to
be exported. FIFO consumes its reserves starting from the oldest imports in the
warehouse. This philosophy applies especially to vulnerable products; the main
criterion for their management and export is the batch number. It is also proposed
as a useful method for series depletion.
• Last-In-First-Out (LIFO): This is used in cases where the last import that came into
the warehouse is selected as the first to be exported. It is often used as an inverse/
292 Delimitation of industrial markets
reverse depletion series. Unlike FIFO, LIFO follows the reverse sequence. It
exhausts stocks by receiving quantities for consumption from recent stock imports.
It is used for products such as shoes and clothing, electrical appliances, etc. and is
common in cases where production is made by the same company. It is also used
when the cost of manufacturing a product increases. Maintaining it increases
inventory costs, so the company tries to consume these products more quickly in
order to keep storage and maintenance costs low. This philosophy makes better use
of space and reduces movement within a warehouse. The criterion for product
management in this method is the date of their entry into the warehouse.
• First-In-Still-Here (FISH): This system describes an undesirable situation re-
sulting from LIFO’s inability to function in a particular situation: products that
were imported first and which could not be recycled remain in the warehouse
without leaving it. Inventory costs accumulate as codes remain stagnant, and they
occupy storage locations that would otherwise be available.
• First-Expired-First-Out (FEFO): This philosophy is based on FIFO, with a
stricter application: the product that expires first is the one that is exported first.
The criterion for exporting products, in this case, is based on their expiration date.

Final selection of storage systems. Choosing permanent storage systems is one of the
most basic decisions that a Logistics officer has to make. Today, the market offers a
wide range of solutions, which can be categorized into three groups: stacking, shelving
and special storage systems.
Stacking is the manual placement of products in the warehouse (next to each other
and on top of each other). A special case of stacking is overlap, where unit loads
(handling units), i.e. pallets, boxes, crates, etc., are positioned side by side or on top of
each other, forming a single block.
Shelving is the most common choice for stacking. It is classified as lightweight shelving
up to 2 and is an easy and inexpensive solution for businesses whose products have low
mobility (demand). Shelves 100 kg per level or meter, long-span shelving up to 500 kg,
and heavy-weight shelving (pallet racking) from 500 kg to 4–5 tons per level or pallet.
The first two options use perforated metal shelves that allow for easy placement and
dismantling, variable height for different loads and utilization of better space. With the
dominance of the pallet as the most basic unit load, many pallet racking options have
been manufactured and are available on the market, e.g. regular back-to-back shelves,
very narrow runways, very high shelves for pallet stacking cranes, mobile shelves, drive-
in or drive-through shelves with free entry, slide-in shelves and inclined shelves.
Finally, there are special storage systems, such as cantilever shelves for long pro-
ducts, and carousels that allow for part-to-person collection: the product moves to-
wards the employee. Storage systems are selected based on criteria such as product
accessibility (i.e. free or limited access), product placement in the warehouse, ware-
house layout, corridors, etc. The choice generally depends on these decisions. For this
reason too, storage systems are considered to be “complementary” to the inter-
handling systems that constitute the next decision.
Selection of inter-handling systems. Inter-handling refers to the activities and move-
ments of the product or material – the unit load, as discussed in the previous section –
within the business premises (and not exclusively within the warehouse). On the other
hand, product transportation is used to move products on long routes outside the business.
The choice of inter-handling system includes the selection of a series of related equipment
 Delimitation of industrial markets 293
or device components designed to work in synchrony, in order to organize the manage-
ment (movement, storage and control) of materials in the storage procedure. Almost all the
procedures that will be presented in the following sections use one or more intra-handling
systems in practice, the main two groups being pallet trucks and Clark forklifts.
The various kinds of intra-handling options are discussed below:

• Pedestrian pallet truck (electrically powered) or onboard operator, for the

placement and collection of pallets in warehouses with small height levels.
• Counterbalance forklift, which is also used to place and collect pallets in
warehouses with small height levels, offering the ability to move them around
in the surrounding area; this entails the requirement of corridors inside the
warehouse, from 3.5 m to 4.5 m width.
• Reach truck, where the driver can see in front and behind. It is suitable for
warehouses up to 12 m, it is faster than the counterbalance forklift, but it is more
expensive and requires narrower corridors (up to 2.8 m).
• Very Narrow Aisle (VNA) truck, which is suitable for high-level warehouses (it is
the only option for heights above 12 m). The pallets are mounted and collected on
both sides of the pallet rails, while the operator can be elevated in a dedicated
cabin. The VNA truck can be rotated 180 degrees, it requires runways (from 1.5 m
to 1.8 m), it is fast, but it also has a high purchase cost.

Design of roles and responsibilities. The warehouse is a ’living’ part of a business, where
many employees work, with distinct, well-defined roles and responsibilities. There are two
main roles in a warehouse: the warehouse manager and the warehouse keeper. The
warehouse keeper seeks to secure the relevant human and capital resources for the ex-
ecution of the day-to-day operations of the warehouse, to satisfy the requirements of the
various offices, departments or divisions of the business by receiving and dispatching the
products required, and finally, to design, supervise and exploit the available resources so
as to continuously produce an efficient service with low operating costs. Among ware-
house keepers’ general responsibilities, they must ensure the prompt receipt of all ma-
terials supplied by the competent committees, and that they are brought into the
warehouse or, where appropriate, delivered directly to the services where they are needed.
Warehouse staff must compile documentation of the goods (or materials) received,
arrange for the goods to be signed by the competent authorities, manage all the ware-
house materials, update the materials’ transaction records (debit-credit), keep the relevant
files of the materials updated for transactions made between warehouses and various
other services, and update the corresponding files for the billing of the supplied materials.
To conclude this section on decisions that Logistics officers are required to make, it
should be emphasized that each decision is directly related to the others: it affects and
is affected by them. The warehouse can be considered a dynamic and open system that
is affected by the environment, at the same time that it too affects it. Moreover, a
systematic approach exists in the warehouse, where each part of it is itself a subsystem
of the warehouse as a whole. We are not concerned with the high performance and
efficiency of each separate department or operational unit; we are concerned with the
coordination of the subsystems and functional parts of the warehouse, to achieve the
goals of the Logistics system, and by extension, the objectives of the business.
10 Emerging trends

Introduction to chapter 10
One of the most important technologies that have drastically affected the operations
of companies are the automatic identification and data capture (Auto-ID) technolo-
gies, which allow the quick and easy retrieval and storage of information at the same
time. These technologies include widely used technologies such as magnetic stripe,
radio frequency identification (RFID), voice and vision identification, biometrics,
smart cards, etc. In this chapter, key technologies used in automatic product identi-
fication, such as RFID and barcodes, are described, along with the use of drones and
remotely piloted vehicles. Emerging trends in the Green Supply Chain, Sustainable
Marketing and e-commerce are also discussed.

Learning objectives
After reading this chapter, you will be able to answer the following questions:

• What are the main technologies of automatic identification and data acquisition
in Warehousing and Logistics Management in general?
• How do barcode, quick response code (QRcode) technologies, and radio frequency
identification (RFID) work?
• What are the main advantages and disadvantages of these technologies?
• Which are the areas of their application and usage?

Structure
10.1 Auto-ID technologies
10.2 Modern logistics and supply chain technologies
10.3 Green Marketing and green supply chain management

10.1 Auto-ID technologies

Barcodes and Radio Frequency Identification (RFID) technology are different forms
of Automatic Identification and Data Capture (AIDC) technology.

DOI: 10.4324/9780429684883-10
 Emerging trends 295
10.1.1 Barcodes
Barcodes are a simple graphic design using parallel bars and blank spaces of variable
width they are arranged in a specific predefined sequence representing a corresponding
number, letter or symbol, and they include various data. These black and white bars
are printed straight onto product packaging. Special readers called barcode scanners
turn those bars and spaces into useful information.
The design, printing and display of barcodes on each product follows specific rules:
each black-and-white sequence called the Universal Product Code (UPC), provides re-
levant information corresponding to each individual product. Barcodes are widely used
because they streamline data entry and increase the speed and accuracy of reading and
exporting information. Barcodes are also widely accepted due to their low error rate, and
are now considered the most efficient method of data entry; they are also the most
popular method of monitoring and transmitting data, and have replaced other methods.
The way barcodes work is relatively simple. Scanners interpret barcodes’ graphically
encoded information and convert it into a sequence of numbers and letters. Quite
simply, when the scanner reads the product, it sends the information to a computer as
if it were written on a keyboard. The section below describes the most important types
of barcodes and the range of data that each of them can contain.

Barcode types
Different types of barcode templates are used for different purposes. These are called
symbologies. Each symbology is a template that defines the printed symbol and how a
device, such as a barcode scanner, reads and decodes the printed symbol. The speci-
fication of a symbology includes the coding of a message as lines and intervals, start
and end indicators, the size of the “quiet zone” required before and after the barcode,
and the calculation of a checksum (Lotlikar et al, 2013). Symbols may contain numeric
information, alphanumeric strings, or a combination of numeric and alphabet char-
acters. All three types of barcodes are considered one-dimensional (1D). Two-
dimensional (2D) barcodes are square or rectangular in shape and contain many small
dots arranged in a single pattern (Figure 10.1).
The most important barcode symbologies are presented below:

• CODE 39: This is the easiest code to use in alphanumeric barcodes, which are designed
to allow character control. It is a variable-length barcode that uses five black lines and
four white spaces to define a character. This symbology encodes 44 characters.
• CODE 93: This is a variable-length barcode encoding 47 characters. It is called
CODE 93 because each character is made up of nine elements arranged in three
bars with their adjacent spaces.

Figure 10.1 One- and two-dimensional barcodes.

296 Emerging trends
• CODE 128: This is an alphanumeric, very high-density, solid variable-length
barcode that can encode the full set of 128 ASCII characters. Each character is
represented by three bars and three positions with a total number of 11 units.
• UPC-A/UPC-E: UPC-A is a twelve-digit code created by the Uniform Code
Council (UCC), where the first six digits represent the product type and the
manufacturer’s code, while the next five digits form a unique product identifier.
The last number is a control character based on the previous 11 digits. UPC-E is a
six-digit symbol similar to UPC-A which is mainly used on small products.
• EAN8/EAN13: The European Article Numbering (EAN) system is the European
version of the UPC symbology, often referred to as an International Article
Number. It is used for products that require registration of the country of origin.
EAN8 and EAN13 are fixed-length barcodes used to encode eight or thirteen
characters. In their simplest form, the first 3 characters indicate the country of the
company that distributes the product, the next characters refer to the business and
the product, and the last character is the control digit.
• RSS-14: The RSS-14 (Reduced Space Symbology), also referred to as the GS1
DataBar, encodes the complete 14-digit EAN and UCC data identifier into a
symbol that can be scanned directly with appropriately configured laser scanners.
These are the latest types of barcodes for limited-space recognition, created by
EAN and UCC, to improve the information flow. RSS codes are mainly targeted
for supermarkets and pharmacies, where products can be very small and errors
need to be drastically reduced
• CODABAR: This is a variable-length barcode that can encode 16 data characters,
and is the most widely used form of encoding. It is mainly used with numeric data,
but it also encodes six special characters. CODABAR also uses the characters
A,B,C and D, but only as start and end characters, and not in the body of the data
message.
• INTERLEAVEAD 2 OF 5: This is a variable-length multiple-of-two high-density
numeric barcode that uses five black bars and five spaces to define a character
(two fives). Two characters are encoded in each character, one in black bars and
one in the spaces. Two of the black bars and two of the white bars are wide, while
all the others are narrow. INTERLEAVED 2 OF 5 includes a quiet zone at the
beginning, the start character, the coded data, the end character, and a quiet zone
at the end.
• DISCRETE 2 OF 5: This is a variable-length numerical symbology similar in
logic to that of INTERLEAVED 2 of 5. It differs in that data is contained only in
the bars and not in the spaces, which is why it is not as high density as that of
INTERLEAVED 2 OF 5. The use of DISCRETE 2 OF 5 is not very common.
• POSTNET: This is a symbolic representation of fixed length (5, 6, 9 or 11
characters) that uses a fixed width of bars and spaces. The information is encoded
by varying the height of the bar between the two values. POSTNET barcodes are
placed on the bottom right of envelopes or postcards and are used to expedite the
processing of postal items with automatic equipment and the provision of reduced
postage costs.
• PDF417: This is a variable, two-dimensional, stacked symbol that can store up to
2710 digits, 1850 printable ASCII characters or 1108 binary characters per
symbol. PDF417 is designed with selected error correction levels. Its high data
capacity can be useful in cases of products moving between markets.
 Emerging trends 297
• DATA MATRIX: This is a two-dimensional matrix barcode consisting of black
and white modules arranged in a square or rectangular pattern. Each data matrix
consists of two compact adjacent L-shaped contours and two others consisting of
alternating dark and less dark units. Within these limits, there are rows and
columns of cells encoding information. A Data Matrix barcode can store up to
2335 alphanumeric characters.
• MAXICODE: This is a two-dimensional symbolic grid that contains hexagonal
units (dots) arranged around a single pattern detector with three concentric circles
in a one-inch square. MAXICODE is used by UPS (United Parcel Service) in
packaging parcels for sorting and shipping labels. MAXICODE encodes two
messages, a primary message and a secondary message. The main message usually
encodes the zip code, country code and a service number category.
• QR Code: The Quick Response (QR) code is a two-dimensional linear matrix
barcode. The QR Code has 3 large squares or written signs at the corners that
define the top of the barcode. QR codes support various different types of data,
numeric, alphanumeric, bytes, etc. The QR Code is capable of encoding 7089
numbers, 4296 alphanumeric characters, and 2953 bytes, and has three levels of
built-in error detection.
• AZTEC Code: The AZTEC code is a high-density two-dimensional matrix
barcode string that can encode 3832 digits, 3067 alphanumeric characters, or
1914 bytes of data. This notation is not widely supported by open-source
software, as is the QR Code. Compared to the latter, AZTEC codes require
less space but can store more information. The symbol is built into a square grid
with a bull’s eye pattern in the center. The size of the symbol varies but it is
possible to specify the unit size of the square dot, which is the smallest element of
the symbol, and the amount of error correction. The smallest Aztec symbol is a
15-unit box that encodes up to 14 digits, with an error correction rate of 40%.

Advantages of using barcodes

The use of barcodes to identify products offers businesses a wealth of advantages and
benefits. Businesses can use barcode technology to improve accuracy, speed and ef-
ficiency without requiring significant costs (Garg, 2012). In particular, the use of
barcode technology increases accuracy as human errors are significantly reduced.
Barcodes provide a reliable way to accurately read encrypted information, while the
application of technology completely eliminates the possibility of human error as
employees can instantly locate packages and products with a high degree of precision
(Fatima and Ansari, 2017). Product information is accurate and human copying/
typing errors are eliminated.
The information collected by barcode scanning has a uniform structure. The sym-
bology is standardized, depending on the type of barcode applied, and is not only
universally accepted but also universally understood. In addition to uniformity, the
structure provides the benefit of easy adaptation to the requirements of additional
applications (e.g. cellphone apps) and the ability to operate in conjunction with other
information technologies).
The processes involved in the collection of product information, data processing
and data transmission using barcodes are not just facilitated, but significantly improve
the speed of registration and recognition of packages and products. In both industry
298 Emerging trends
and retail, product identification, checking and identification time can be accom-
plished in minutes. A typical example of the speed offered by this particular tech-
nology lies in the fact that a single employee can hit dozens or even hundreds of
products in just a few minutes. Tracking stock and product/package movements in the
various phases of the supply chain is an easy process that can be done at any moment
in time. At the same time, the speed that products move increases due to partial
elimination of manual work, the time taken to record information is limited, and
recording these details is made by direct transfer of this information with a simple scan
of the barcode.
An additional advantage of using barcodes is the fact that companies can use
technology to maintain strict and accurate inventory control. Warehouses have the
ability to scan barcodes on packages as they enter and exit the facility, thereby keeping
a record of all the packages in the warehouse (Martin, 2017). When these packages
reach the retailers, warehouse staff can scan the products as they go on the shelves and
compare these files with the barcode files that are scanned into the inventory registry
(Martin, 2017). All the above processes enable companies to control the level of in-
ventory in warehouses or internally in the business, e.g. on the supermarket shelves.
This form of control also simplifies the process of monitoring packages or products to
facilitate the detection of shortages (Evans, 2018). In addition, improving the auto-
mation facility offered by the use of barcodes allows for improvements to be made in
the quality of the business; it enhances functionality and the productive process and
improves the efficiency of the employees, who, without the use of the barcode, would
be working long hours in the management and recording of inventory (Martin, 2017).
A significant advantage of using a barcode is the reduced costs (Rahaman, 2016).
The operation of the equipment is simple in its use and this contributes significantly to
the low cost of this particular equipment (McCathie, 2004; Rahaman, 2016). The
availability of cheap equipment and their increased use have made barcodes an af-
fordable technology that can be used by any business (McCathie, 2004). Especially in
large companies, barcode technology can be significantly cheaper than other methods
of product control and inventory (Evans, 2018). Even in small businesses, the avail-
ability of free barcode applications from various sources on the Internet can sig-
nificantly contribute to the use of technology at the lowest possible cost (Evans, 2018).
Finally, after its application, the technology itself can lead to reduced company staff
costs since many employees were needed in the past to identify and manage products,
especially in large companies (Rahaman, 2016).

Disadvantages of using barcodes

Labels make it easy for barcode scanners and computers to recognize the product.
However, there are some technical drawbacks to using barcodes that can reduce the
performance of automated recognition systems (Martin, 2017). When a tag is da-
maged or does not exist on the product, it creates recognition problems. Damaged
labels make it difficult to detect a product. If the 12-digit number on the label can be
damaged to the point that it is not legible, this can lead to delays and the overall
inefficiency of the scanning and information collection process (Martin, 2017).
Environmental factors can cause alterations and problems in the identification pro-
cess, e.g. rain, dust and dirt. Another major drawback is the fact that barcodes take up
space on the product packaging. They should be printed in a place where they can be
 Emerging trends 299
easily seen and read (Martin, 2017). This means that the barcode must be in such a
position that it is aligned and can be read by special readers.
The peculiarity of the barcode format helps avoid its distortion and does not allow
changes in the case of typographical errors. An important issue that can affect stock
may arise in cases where similar products are registered during the inventory process
with the same barcode to save time; each product has, in essence, a unique barcode,
and must be scanned separately. Time-wise, although barcodes are a huge advantage,
they can also be a significant disadvantage if the barcode on the product does not
match the correct product or if the scanner is not working properly (Martin, 2017).
Finally, although the use of barcodes is now widespread, there is still the disadvantage
of cost when starting up a new business, both for the purchase and installation of the
necessary equipment and for the training of employees on how to use the equipment.

10.1.2 Radio frequency identification

RFID is an acronym for Radio Frequency Identification (RFID); product identifi-
cation is made via radio frequency, referring to a technology by which digital data
encoded in RFID tags or smart labels is identified by a reader/recorder through radio
waves (Lotlikar et al, 2013). RFID technology is a further development of barcode
technology and is applied in a similar way to how data on a tag is recognized, by a
device that stores the information in a database. To accomplish this process, RFID
technology uses radio waves to identify, locate, collect and store information about
objects bearing RFID tags or smart tags.
RFID systems consist of three parts: an RFID tag or smart tag, an RFID reader
and intermediate software. RFID tags contain an integrated circuit and an antenna,
which are used to transmit data to the RFID reader. The reader then converts the
radio waves into a more useful data format. The information collected from the tags is
then transferred to a central computer system via a communications interface, where
the data can be stored in a database and analyzed later. An important element for
interpreting the information is the intermediate software, which functions as the
communication means between the RFID reader and the information system where
the database data is stored (Figure 10.2).
Most RFID tags consist of at least two main parts. One is an antenna, which re-
ceives radio frequency (RF) waves, and the second is an integrated circuit (IC), which
ranges in size from a few bits to several kilobytes; this is used to process and store
data, as well as in the configuration and reconfiguration of radio waves received and
sent by the antenna. The tag is occasionally referred to as a transmitter, which is
attached to some kind of item or the packaging, and it contains a unique serial number
called the electronic product code (EPC). The tag also consists of a protective film that
holds the pieces together and protects them from various environmental conditions;
the kind of material used here depends on the application (Khan, Sharma and
Prabhu, 2009).
Additional features of RFID tags are obtained depending either on the type, where
the categorization is done on passive or active tags, or by the read and/or write options
in the integrated circuit built into the tag, or by the operating frequency of the RFID
system (Lotlikar et al, 2013; Parkash, Kundu and Kaur, 2012). According to the first
classification, passive tags are “powered” only by magnetic or electromagnetic waves
coming from the RFID reader. This is the only way to communicate with the RFID
300 Emerging trends

Enterprise information System

Middleware

Reader Reader
Radiowaves

Radiowaves

Tag Tag

Figure 10.2 Main parts of RFID.

reader (Lotlikar et al, 2013). The tagged object does not have a radio frequency
transmitter to generate its own radio frequency signals (Kamdar, Sharma and Nayak,
2016). Battery-free passive tags use the input signal from the RFID reader to power
the built-in integrated circuit. The passive feature and the lack of battery are two
different characteristics of the tag that are often confused (CNRFID, 2018). There are
also tags with passive battery assistance called semi-passive tags that have a built-in
rechargeable or non-rechargeable battery to power the internal circuits or connected
sensors or activators. This power source is not used to generate any kind of radio
frequency signal, as the tag is always passive.
Active tags on the other hand have their own radio frequency transmitter. They can
send radio frequency signals to the RFID reader as they receive a complete command,
and they can also operate without an external command (Kaur and Sengupta, 2016;
Parkash, Kundu and Kaur, 2012). Since generating a radio frequency signal requires a
lot of energy, active tags often have internal built-in power supply. Semi-active tags
have exactly the same properties as active ones but they remain idle until they receive a
signal from the reader that will activate them. Active tags allow transmission at any
time but this comes in a larger size and a larger cost, while battery life cannot currently
exceed 10 years (Kamdar, Sharma and Nayak, 2016). Non-active (passive) tags are the
most widely used, as they are smaller and cost less to implement.
The purpose of RFID technology is to uniquely identify tagged objects, so the least
information that the integrated chip must contain is the digital identifier that the
reader can access (CNRFID, 2018Kaur and Sengupta, 2016; Parkash, Kundu and
Kaur, 2012). If the chip has no other memory, it is known as a Read-Only chip
(CNRFID, 2018). All information about the tagged product is stored on remote in-
formation systems and can be recalled using the unique identifier. In some cases, the
unique number incorporated in the construction is not sufficient for its final
 Emerging trends 301
implementation (CNRFID, 2018). Therefore, there are chips that contain a free
memory where the end-users of the RFID system can write their own specific number.
Smart tags differ from RFID tags in that they incorporate both RFID and barcode
technologies. They are made up of a sticker that has a built-in RFID tag insert and
may also have a barcode and/or other printed information. The advantage of this tag
format is that it can be used by both RFID readers and barcode scanners, and people
can read some of the characters. Smart tags can be used in areas where the final
product may enter a product identification system that does not know the scanner
reader format. Therefore, through the combination of RFID and barcode technology,
smart tags can cover all identification cases.
The RFID reader is used to communicate with tags that can be detected within the
range of its antenna. It consists of three main parts: the control section, the high-
frequency interface and an antenna. It is usually located in a fixed position and is used
mainly to retrieve RFID tag data via radio frequencies.
The antenna is one of the key players in RFID systems. An RFID reader com-
municates with a tag through the reader’s antenna which transmits radio frequency
signals from a reading transmitter to the environment and receives a response from the
tags. The antenna is the key element used to receive and transmit the signal to and
from tags.
RFID Middleware Software is a radio frequency identification system that lies between
readers and business applications. This intermediate software has many functions and
plays an important role in the operation and management of RFID systems. It manages
RFID readers and printers, facilitates communication between these devices and business
applications, and manages, filters, collects and interprets data from RFID tags.

Advantages of using RFID

Although RFID is not expected to completely replace the widely used barcodes, the
following advantages indicate the special value of this particular technology in the
business world. RFID is an automatic recognition technology that has no visibility
restrictions (Michael and McCathie, 2005; Want, 2006). An RFID reader can scan a
tag as long as it is within the frequency range. The advantage of this feature is not only
the remote identification of the products, even if there are obstacles between the tag
and the reader, but that the information can also be collected from the tags without
the need for human intervention. Not requiring human involvement in the scanning
process makes scanning a cheaper and faster process compared to barcode technology.
RFID systems can also scan multiple objects simultaneously (Parkash, Kundu and
Kaur, 2012). This allows a variety of goods to be scanned without requiring employees
to make eye contact with each item individually. The speed and convenience provided
by this feature can be compared to the time and difficulty involved in barcode scan-
ning, as the operator must not only scan each product but also has to align the reader
in exactly the right position in order to scan successfully. RFID readers can operate
simultaneously and detect tags in milliseconds. The ease in detecting multiple tags
within the radio frequency range also eliminates human error during data collection,
since there are times (especially in the case of barcodes) when scanner users forget to
scan or they scan the wrong barcode. This highlights the importance of RFID tech-
nology in the management of large stock volumes, particularly in warehouse man-
agement (Michael and McCathie, 2005).
302 Emerging trends
RFID tags may also contain more information than a single or restricted identifier
that other identification systems carry. Tags that also allow writing (and not just
reading or recognition) allow information to be added or data to be changed. An
additional advantage of RFID technology is the ability to implant tags on objects
within plastic covers, thus enhancing the quality of the identification tag and making it
less sensitive to adverse conditions such as dust, chemicals and physical damage. The
tag also offers the ability to store large volumes of data in a single identifier. The
capacity for distributed data storage can increase system-wide fault tolerance.

Disadvantages of using RFID

Although RFID technology is quite old (it was developed in the 1970s), its high cost
limits its use in larger companies (Finch, 2018). Even when costs are reduced, RFID
systems are still more expensive to build and use than other alternative systems such as
visual barcode scanning. The software and support staff that are also needed to install
and operate RFID readers can be more expensive compared to staff employed to use
barcode scanners (Finch, 2018). However, as already mentioned, RFID systems bring
their own cost advantages, such as reduced labor costs and improved efficiency.
There are also significant issues that must be dealt with concerning scanning. Water,
static discharge or high power magnetic voltage can destroy the tags. Despite their
overall reliability, RFID systems can experience problems when scanning objects if
metal or water is present: metallic and wet surfaces tend to reflect radio waves, making
tags unfit for reading. Hence, RFID tags cannot be read well when placed on metal or
liquid objects or when these objects are located between the reader and the tag.
Malfunctions still occur when scanning multiple objects at the same time within a
range, as problems arise if tag signals collide or if two readers interfere with each other’s
signals (Finch, 2018; Want, 2006). Tag conflict occurs when there are too many tags in a
limited area. The RFID tag reader activates multiple tags at the same time, which re-
flects their signals back to the reader, a process that leads to tag collision and the RFID
reader cannot differentiate between incoming data. RFID reader conflict occurs when
the area of coverage managed by one RFID reader overlaps with another reader’s area
of coverage. This causes signal interference and multiple readings of the same tag. The
reader can also activate a tag from a product that does not belong to the company (e.g.
a clothing label that has already been sold and is now being worn by the customer).
Finally, RFID technology highlights some security issues. Unauthorized devices
may be able to read or even change data on tags without the knowledge of the person
that owns the item. Radiofrequency channel attacks can capture RFID data as it
passes through a tag to a reader, which could give the attacker access to codes, in-
formation or even personal data stored within the information system, which should
be secure and confidential.

10.2 Modern logistics and supply chain technologies

All modern logistics and supply chain technologies have one thing in common: they
are market-driven applications, not technology-driven ones, even though they are
based on advanced technology. Quite simply, they have been developed because the
companies themselves have requested their creation. These solutions mainly refer to
two functions of the logistics system: storage and transportation.
 Emerging trends 303
The storage function encompasses the continuous and real-time monitoring of
stocks, their automatic replenishment, the autonomous identification of objects/ma-
terials, as well as the optimization of daily tasks, particularly the collection of pro-
ducts, placement and routing of inter-transportation systems. The best examples of
these include automatic stock replenishment using “smart” boxes, shelves, etc. that use
sensors or cameras to calculate the number of pieces they contain and are to be used in
a production line; when the stock levels “fall” below the ordering point, they send a
signal to place a refill order. Such solutions in a wider application can dynamically
help design the processes involved in logistics planning and production systems to
cope with changes in demand, as well as changes in the internal and external business
environment. Demand through the chain can be better-predicted thanks to more so-
phisticated market signals, which translate into demand for production capacity,
storage and logistics support needs, and changes in raw materials requirements.
Mode of transportation allows company warehouses and distribution centers to
connect with stores, and more generally with points of sale. This allows for proper
planning of warehousing, transportation and distribution network processes to be
made. There are some interesting cases of companies that have introduced cellular
transport systems which include groups of autonomous vehicles that can “read” their
environment using laser scanners, infrared sensors and RFID chips to navigate au-
tonomously through storage spaces. Each one has the ability to make autonomous
decisions about movement, route selection and transit priorities, by sharing data
about its location and condition with other vehicles. In the event of problems or
differences, the team reacts on its own and resolves or addresses the problems in an
appropriate manner.
The number of solutions is in fact so large that presenting them initially requires
their classification based on specific criteria which also could be their goals:

1 Interconnectivity, where the main goal of these solutions is to ensure good

communication and cooperation of all available business resources (people,
technology and information) that exist and operate in different operational areas
of a company, as well as between member companies of a supply chain.
2 Transparency of information, where business resources retain and exchange data
and useful information.
3 Decision support, allowing information to be made available to the right
executives who need to make the right decisions quickly and redesign their
business logistics systems effectively. In particular, these executives should have
all the important information made available to them, which mainly refers to the
execution of orders and their relationship with business associates.
4 Automation, enabling the resources of a company (systems, storage means, intra-
handling, transportation and distribution) to operate autonomously, streamlining
their use and optimizing logistics processes, e.g. solutions aimed at minimizing
errors, the autonomous movement of vehicles, etc.

Table 10.1 presents an indicative list of these solutions grouped according to their
implementation goal.
Companies that have adopted these technological and business solutions have the
following common features:
304 Emerging trends
Table 10.1 Industry 4.0 technologies

Goal Description Available technological solutions

Interconnectivity Ability to communicate all • Internet-of-Things

available business resources
Information Business resources retain data
transparency and useful information
Decision support The information is available
to the appropriate
executives
Automation Business resources operate
autonomously by
optimizing logistics
processes
• Cloud computing
• Smartphones and respec-
tive apps
• Pay-per-use: software as a ser-
vice, infrastructure as a service
and platform as a service
• Automatic recognition technol-
ogies for objects (barcodes,
RFID, GR code)
• RFID technology
• Smart sensors
• Augmented reality and smart
glasses
• Real-time locating systems
• Big data analysis
• Business intelligence
• Artificial intelligence
• Preventive data analysis and si-
mulation
• Digital twins
• Robotic systems
• Cellular transport systems
• Pick-by-voice and pick-by-light
systems
• Embedded systems
• Drones

• They take full advantage of systems autonomy and their ability to perform or
support the execution of tasks that are either difficult or time-consuming for
humans.
• They provide a complete picture of the business situation, providing direct
information, and only when there is an immediate requirement for action to be
taken by employees.
• They assist executives in designing more efficient and effective processes, policies
and practices, and
• They ensure vertical (interdepartmental) and horizontal (inter-business) integration.

The solutions are many: companies need only to be acquainted with them and con-
sider their acquisition and implementation.

10.2.1 Warehouse management system (WMS)

Over the last decade, work in large distribution centers has become more complex,
while the number of products on the move is growing more and more, making the
implementation of IT solutions a one-way street. But even before that, many com-
panies had already recognized the importance of the computerized warehouse and had
already started investing in business information systems.
 Emerging trends 305
Initially, companies installed applications related to a single functional area of the
logistics system, such as materials handling, receipt and execution of orders, etc. Then,
Material Requirement Planning (MRP) systems tried to connect more than one op-
eration, such as marketing and sales, production management and inventory man-
agement. Manufacturing Resources Planning (MRP II) added more features, such as
production planning, capacity requirements planning, pricing, etc. Enterprise
Resource Planning (ERP) systems potentially had the ability to manage processes
involving all parts of the business and decision support at all levels. They also pos-
sessed natural and functional units (modules) for the management of the warehouse
and the stock, providing accurate real-time information about the inventory, and
ensuring their dissemination with the other subsystems of ERP. In practice, it has been
shown that ERP did not meet the special and increased storage requirements re-
garding the monitoring and control of warehouse operations from the moment the
goods or materials enter it until they leave. Specialized vertical systems promised to fill
this gap by providing additional automation and optimization capabilities.
The technological solution that prevailed in the market for warehouse and in-
ventory management was the specialized WMS. WMS manage all the work performed
in a warehouse or distribution center, namely: the entry of products to the warehouse,
their proper storage, inventory management, product collection, packaging proce-
dures, product processing for orders, and the management of the warehouse’s (or
distribution center’s) human resources. WMS are typically associated with tools for
automatic data recognition and input, barcodes and radiofrequency technolo-
gies (RFID).
A standard WMS manages accurate and valid information that allows the business
to minimize stocks, improve the routing and scheduling of inbound and outbound
vehicles, and to generally improve customer service levels. These are all achieved on
the one hand by increasing the efficiency of the materials handling equipment, and on
the other hand, by the availability of storage space.
Most WMS have a core trunk of activities that are accompanied by a wide range of
specialized subsystems, which are implemented based on the activities and require-
ments of the business and its industry, whose main goal is to offer greater added value
to the company’s customer. This core trunk includes:

• Receipt management that encompasses updating expected receipts, control/

identification of receipts through barcodes, creation of new tags, palletization
(or not) of packaging, etc.
• Management of loads and location arrangements, ensuring optimal storage, with
the application of Pareto’s Law (20/80 rule) designed for fast-moving pro-
ducts, etc.
• Warehouse document management, support for multiple storage systems, coding
of locations per distribution center and per specific feature (e.g. sector,
column, etc.).
• Supervision and management of multiple unit loads (packages and units of
measurement).
• Order processing, which includes order grouping, issuance of relevant reports and
monitoring their progress.
• Managing product supply based on current demand or historical sales data, by
applying appropriate mathematical forecasting models
306 Emerging trends
• Managing the collection of ordered items, which includes serial collection,
minimization of the number of routes that the picker makes, support in the
collection process for each possible sales unit (box, pallet and piece), use of RFID
equipment, etc.
• Human resource management, such as shift planning, identification of the job
requirements, workflow monitoring, etc.
• Issuance of reports and statistical data for all the above functions.

The benefits of implementing WMS include the following:

• Reduction of stock shortages by providing full inventory supervision, continuous

monitoring of the available quantity and immediate reporting of shortages below
permissible limits, allowing stock reduction to the lowest possible level and
minimizing the cost of maintaining stocks.
• Shorter product delivery cycles (shipping/handling packaging, delivery and
return).
• Reduction of labor costs and significant resource savings.
• Increasing the level of service and accuracy in the respective product deliveries.
• Limiting the element of human error (e.g. in data entry) related to the execution of
daily tasks.
• Informing the managers, through reports, about warehouse issues (e.g. stock
shortages).
• Optimizing the use of staff and equipment, which lead to increased productivity at
the lowest possible cost.
• Reduction of storage needs by the use of automated storage space management
and optimization practices, which help towards cost reduction and the full
exploitation of storage facilities.

10.2.2 Geographic information systems in logistics services

Since the 1960s when they first appeared in the USA and Canada, the first Geographic
Information Systems (GIS), which had the form of an integrated information system,
have evolved significantly as a valuable multi-tool for enhanced spatial perception and
data analysis. The use of new technologies and systems using GIS (e.g. satellites, GPS,
internet and cloud applications, RFID technologies, smart sensors, drones, etc.) is an
additional development that could be utilized to a large extent by Logistics and Supply
Chain Management, for the more efficient management of large volumes of data from
existing business information systems, as well as data related to socioeconomic issues
(humanitarian logistics, demographic data, marketing, etc.) and environmental issues
(climate change, vehicle energy management, etc.).
This can be achieved in Near-Real-Time (e.g. https://www.marinetraffic.com), as
well as real-time (e.g. http://www.mobithess.gr), as maximum use is made today of the
basic functions of GIS through interconnected networks and systems, to collect, store,
process and visualize (via maps) data that have a spatial entity (presence of in-
formation in the location defined by geographical coordinates).
The combination of continuous developments in systems of Informatics with
Augmented Reality, Artificial Intelligence, Autonomous Vehicles, as well as Internal
Warehouse Mapping and Light Detection and Ranging (LIDAR) applications lead to
 Emerging trends 307
a new and wider range of GIS applications for logistics. The development of a new
(5G) telecommunications network with a wide range of digital developments can
provide effective solutions to important problems in the day-to-day workings of
companies, organizations and even the ordinary citizen who has access to logistics-
related services (e.g. real-time geo-traceability monitoring of products via the internet,
management and optimization of routing issues, traffic-related information on a city
road network, etc.).
Moving on to a more socio-central use of GIS compared to logistics, we can include
crisis management in the event of the emergence of natural disasters, such as earthquakes,
forest fires, floods, etc. In such cases, the benefits are great, both in terms of the pre-
vention and management of these problems, but also in their resolution in the aftermath
(e.g. spatial management of the food supply chain, first aid, etc.), in order to minimize the
negative effects and, wherever possible, to eliminate the loss of human lives.

10.3 Green marketing and green supply chain management

“By 2050 we aim for zero emissions from our supply chain.” This statement received a
lot of attention when it was made by the CEO of Deutsche Post DHL, a leading global
logistics service provider. It is the practical implementation of a new supply chain
management model based on the reuse, repair, and renewal of existing materials and
products, in contrast to the linear model that prevailed in the past. It allows materials
to be used for a much longer period of time while simultaneously minimizing the use
of natural resources. Simply put, this is the growth model where all waste is reused or
recycled.
In essence, the Circular Supply Chain is the transition from a vertical “production-
consumption-disposal” model to a closed circular model where products can be dis-
assembled and reused with minimal processing. On this basis, what was previously
considered waste can be converted into raw material and reinserted back into the
supply chain.
The basic goals and principles of this new SCM model are as follows:

1 The (geographically) smaller the circle, the more profitable and efficient the supply
chain,
2 Circles have no beginning or end: the value created and maintained replaces the
added value of the corresponding linear models,
3 The speed of circular flows is of vital significance,
4 Reuse, repair and reconstruction without change of ownership is more cost-
effective, and
5 A well-functioning market significantly increases the success of a business
initiative based on the new model.

To the above, we would also add that production restructuring based on a circular
economy model, in addition to the change in strategy by companies and organizations,
presupposes cooperation between all links of a supply chain, including inter-
disciplinary links between actors operating in different business environments, in the
context of an “industrial coexistence”.
To this end, the European Commission has adopted a new, ambitious package of
measures to help businesses, local governments and consumers make the transition to
308 Emerging trends
a stronger and more cyclical economy, where resources are used more sustainably. The
proposed measures will contribute to a fuller product life cycle with greater recycling
and reuse, and are expected to bring benefits to both the environment and the
economy. The relevant plans derive maximum value and use from all available raw
materials, products and waste, promoting energy savings and reducing greenhouse gas
emissions. A key component of the circular economy model is the fact that the pro-
posals cover the full life cycle of products, from production and consumption to waste
management and the purchase of secondary raw materials.
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Index

Page numbers in italics refer to figures. Page numbers in bold refer to tables.

60/20/20 supply model 250 automated material handling 282

80:20 rule 32, 260 automatic identification and data capture
(Auto-ID) technologies 294; barcodes
accessories 8–9, 15, 266 295–299; radio frequency identification
accounts payable 58 299–302; smart tags 301
accounts receivable 57 automatic stock replenishment 303
activity-based costing (ABC) 54–55, 82, 90–91 auxiliary equipment 8, 266, 283
added-value pricing 74 available cash 57
administrative operating costs 87 average (fixed and variable) cost (ATC) 52, 52
adoption, new product 19–21, 22; curve, and average fixed cost (AFC) 51, 52
IMC mix 105; groups 20; process 20 average variable cost (AVC) 51, 52
ADR (Accord Dangereux Routier) 243–244 AZTEC Code 297
advertising 19, 22, 95, 97, 106, 108, 110, 119,
133; appeals 112–113; budget 111; B2B advertising 111
campaign, effectiveness of 114–115; B2B (business-to-business) communication
categories of 111; companies and service 131–132
providers 115–116; internet 134; media B2C (business-to-consumer)
design 114; media types, advantages/ communication 132
disadvantages of 115; message 112–113; back-office processes 209, 210–211, 215, 225
objective goals of 111; online 96, 110, 133; bags (material handling) 281
style 113; through search engines 133 bait pricing 84
Agricultural Cooperative of Zagora-Pelio, balanced scorecard 89
Greece 67 Ballou 135
air quality, service environment 189 Barber, N. 189
air transport 240 barcodes 295; advantages of 297–298;
alternating timeline, advertising media 114 barcode scanners 295; disadvantages of
American/Anglo–Saxon palette 280–281 298–299; types of 295–297
annual total cost 15, 33 barker pricing 68, 84
appeals, advertising 112–113 barrels 281
appraisal costs 53 base price 71
apps, smartphone/tablet 97, 134 basic products 7
arbitrary distribution, and IMC mix basic research 39
budget 104 behavior modeling 161
aromas, service environment 190 benchmarking 92
artistic effects, service environment 192–193 Bhatnagar 234
atmosphere, service environment 188–191 billing structures 91–92
ATP Treaty 245 biodegradability of packaging 136–137
attraction (communication strategy) 6 Bitner, M. J. 181, 183, 185–188, 186
audits 110, 222 Bloch, P. H. 193
 Index 331
Blodgett, J. G. 182 coding (communication) 98
blueprinting of service process 196, 212–213, cognitive reactions to environmental
213, 214, 215, 216; benefits of 218; design stimuli 187
215, 217–218, 217 Collaborative Planning, Forecasting and
bonus cards 121 Replenishment (CPFR) method 127
bottles 280 collective spirit of employees 163–164
boundary spanners, frontline employees as colors, service environment 190–191
152–155 combined transportation 241–243
Bowen 163 commercial advertising 111
boxes 137, 138, 280 commercial costs 87
brand differentiation, and servicescape 178 commercial discounts 81
branded demand 67, 107, 111, 273 commercial enterprises 267–268
branding 10, 111 commercialization of new products 17
break-even analysis 15, 72, 73 commercial subsidies 81
Brexit 254 common goods, demand curve for 63
brochures 130 communication 6, 19, 231; marketing 23, 24;
budget 89; advertising campaign 111; medium 98; and new product development
integrated marketing communication process 18, 19; obstacles 99–100; skills, of
102–104, 106, 119 supply chain executives 172;
Bugusu 140 see also integrated marketing
building installations 8 communication (IMC)
bullwhip effect 68, 68, 121, 275 competitive exchange rate 103–104
business analysis 15 competitive offers, pricing based on 77
business-customer conflicts 155, 156 competitors 26, 48; and market pruning
business knowledge of frontline employees pricing 78; and market testing 16–17; price,
160–161 pricing based on 76; prices, reactions to
business networks 64 changes in 86–87; pricing strategies of 66
business operations, planning of 2–4, 3 components 265
buyer–supplier relationship 122–123 conflict wars (supply chain risk) 254
consistency in product mix 10
C2B (consumer-to-business) consumer goods 6–8
communication 132 consumer packaging 139
C2C (consumer-to-consumer) containers 241–243
communication 132 continuous timeline, advertising media 114
Calderone 34 contractors 151–152
cannibalism, market 61, 80 convenience goods 6–7
cantilever shelves 292 conversion cost 87
capital goods 8 conveyors 282
cardboard-based packaging 138 corporate advertising 111
carousels 292 corporate culture 168–169
cash flow 57, 58 corridor width, warehouse 205
catalogues 130 Cost and Freight (CFR) 247
center of gravity method 199–200 cost-benefit agreements 91–92
Cheema, A. 188 cost-benefit analysis 231
Chen, J. 261 cost of disposal 87
choice goods 7 Cost of Insurance and Freight (CIF) 247
Chopra, Sunil 257 cost-plus pricing 70–72, 92
circular economy model 307–308 COTIF Convention 245
circular supply chain 307 counterbalance forklift 293
classified storage 205 coupons 84, 121, 134
cleanliness, service environment 189 Covid-19 pandemic 252–253, 256, 276
climate change 256 cranes 282
CMR Convention 245 crates 281
CODABAR 296 crisis management 88, 116, 248, 307; analysis/
CODE 39 295 evaluation/assessment of risks 260; case
CODE 93 295 studies of supply chain risks 249–253;
CODE 128 296 challenges involved in modern supply
332 Index
chains 248–249; impact/consequences of
risks 254, 257; recognition/identification of
risks 257, 260; risks 253, 254, 256–257;
sources of risk 254–256
cross-docking 242, 288
crowding 194–195
cumulative sum of the forecast error
(CFE) 42
customer-centric approach 5, 208; new
product development 13, 14, 19; service
culture 168–169
customer profitability curve 54–55, 55
customer(s) 169–170, 194–195; business-
customer conflicts 155, 156; conflicts
between 155–156; contact, human
resources categories based on 151–152, 153;
degree of contact/contribution, in service
processes 219–220; experiences, recording
of 222; identification and evaluation of
124–125; involvement in service processes
209–210, 220–221, 224–226; involvement
with product, and integrated marketing
communication 107; length of stay/
purchase motivation, and servicescape
182–183, 183; management, in service
processes 220–222; needs of 125; objections
of 125–126; participation in creation of
advertising messages 113; perceptions
about product value 49–50; and price
changes 84–85; pricing methods based on
demand 73–76; providing personalized
solutions to 162; risks experienced by 221;
of service companies 147; as sources of new
ideas 14
customer service: elements of 49–50; level 28,
35; risks 259; and stock levels 57;
see also human resources
customs duties 254
cyber-attacks 256
cycle stock 30
dangerous goods, transportation of 243–244
DATA MATRIX 297
deadlock see targeted profit pricing
decline stage, product 24–25; and integrated
marketing communication 106; and
pricing 61
decoding (communication) 98
DELL 60
Delphi method 38
demand: branded demand 67, 107, 111, 273;
curve 62, 63; derivative 8, 272–273;
elasticity of demand to price 62–63, 85,
273–274; fluctuations 68, 122, 274–276; and
integrated marketing communication 109;
law of demand 62; and pricing 62–63;
pricing methods based on 73–76; primary 8,
272; for services 146; smoothing 120, 121
demand forecasting 25–26, 37, 109, 275;
dependent 45; independent 37–44;
qualitative methods in 38–39; quantitative
methods in 39–44
demand planning 28
dependent demand 37, 37; application of
MRP algorithm 44; forecasting 45
depth of product mix 10
derivative demand 8, 272–273
Dharmadhikari 141
differentiation strategy 159, 208, 263;
identification of key components of
180–181; positioning of 178–179
digital marketing 96, 131–134
diminishing returns, law of 51
direct costs 52–53, 54
direct marketing 96, 108, 121, 128–131
direct packaging 139, 141
direct postal mail marketing 130
direct response advertising 111
direct response TV marketing 130
direct sales 131
discounts 81, 120, 121
discreet costs 53
DISCRETE 2 OF 5 296
disposable packaging 140
distribution 11, 268, 279; centers 199, 233,
283–284, 287, 290–293, 303, 304; channels
22, 23, 69, 71, 81, 106, 107–108, 121, 122,
268–271; networks 6, 7, 14, 15, 19, 24, 25,
67, 73, 94, 106; omnichannel model of 195;
risks 259; selective 7
dominance-submissiveness 184
Dominic 135
double exponential smoothing 42
dynamic pricing 82
EAN8 296
EAN13 296
early adopters 19, 78, 105
early majority 20, 105
ecolabels 29
economic crisis (2008) 250–252
economic instability 254
economic order quantity (EOQ) 33, 34
economic potential, and IMC mix budget 104
economic recession 255
economies of scale 145, 147, 230, 285
elasticity of demand to price 62–63, 85,
273–274
Electronic Data Interchange (EDI) 127
electronic marketing 96, 131–134
Electronic Points of Sale (EPOS) 127
electronic product code (EPC) 299

Ellram, L. M. 135
e-mail 130, 134
emergency products 7
emotional appeals, advertising 113
emotional reactions to environmental
stimuli 187
emotional states 184
emotion mapping 222
employee retention 167–168
employee satisfaction 148–149, 156, 162, 177
employee turnover 156
empowerment of frontline employees 161–163
entering goods 265
enterprise resource planning (ERP)
systems 305
environmental legislation 256
environmentally-friendly packaging 136–137
environmentally-friendly products 28–29
environmental product declaration (EPD) 29
environmental psychology 183, 185
e-servicescape 195
Euclidean distance 201, 202
Europallet 280, 281
European Agreement concerning the
International Carriage of Dangerous
Goods by Road 243–244
European Article Numbering (EAN)
system 296
European ecolabel 29
every day low price (EDLP) 74
excitement-relaxation 184
existing line, addition of product to 12
existing product, improvement of 12
expert panel consensus 38–39
exponentially weighted moving average
(EWMA) 41
external environment of service companies
193–194
external failure costs 53
external risks 257
facilitating goods/services 266
failure modes and effects analysis
(FMEA) 260
Fan, Y. 257
Farlex 36
fashion products, lifespan of 26
FCL (full container load) 242
feedback: customer 125, 197; to employees
166, 167; from frontline staff 197
feedback (communication) 99
FIFO (First-In-First-Out) 291
financial risks for customers 221
First-Expired-First-Out (FEFO) 292
First-In-Still-Here (FISH) 292
First Party Logistics (1PL) 233
fixed assets 58
Index 333
fixed mechanical equipment 8
fixed-period ordering 31
fixed price agreements 91
fixed-quantity ordering 31
flexible dead point pricing 75
flow types, warehouse 203, 204, 205
forecast error 42
foreign/own capital ratio 59
for-profit service providers 146
Forrester, J. 121
foundation goods 265–266
Fourth-Party Logistics (4PL) 233–234
free on board (FOB), transportation 246
free on board (FOB) pricing 81
freight centers 242
freight transport 238, 245
frontline (front-desk) employees 148, 150,
182, 210; appearance and behavior of 194;
balancing between efficiency and
effectiveness 156–157; as boundary
spanners 152–155; collective work spirit
development 163–164; critical role of
150–151; focus on 169–170; retention 168;
selection of 154, 158–160; skills,
development of 160, 161; sources of conflict
155–156; strengthening of 161–163; support
systems 164–165; technical knowledge and
innate tendencies of 159; training 154,
160–161, 162, 163, 168; see also human
resources
front-office processes 210, 211, 215
FTL (full truckload) 242
fuel prices 254–255
full/complete (perfect) competition, and
pricing 64
functionality, service environment 191–192
game theory 65
general demand advertising 111
general expenses see indirect costs
geographical location, pricing based on 81–82
geographic information systems (GIS)
306–307
glass packaging 138
globalization 229, 256
goods transfer/transportation packaging 140
good value pricing 74
government/public buyers of industrial
goods 271
Gracia 140
great idea, advertising 112
green marketing 307–308
green supply chain management 307–308
group packaging 140
growth/development stage, product 23; and
integrated marketing communication 106;
and pricing 61
334 Index
growth stock 31
Guirong 141
Hague-Visby Rules 245
heat map 260, 261
Hellstrom 141
Hermann, A. 190
heterogeneity of services 5, 145–146, 169
heterogeneous products 7
high-contact services 147, 178, 180, 213,
226–227
high-low pricing 74
hiring of frontline staff 154, 158–159
Ho, W. 257
Hoecht 231
holding/storage cost 33
homogeneous products 7
Hoon 237
human resources 147–148; categories of
151–152, 153; cognitive/scientific objectives
of supply chain executives 172; critical role
of frontline employees 150–151; employee
retention 167–168; evaluation and
rewarding 165–167; impact on dimensions
of perceived service 150; management
157–168, 158, 170–172; marketing manager
and logistics manager 171–172; planning
158; selection and staffing 158–160; and
service-profit chain 148–150; staff training
and strengthening 160–164; support
systems for provision of services 164–165;
see also frontline (front-desk) employees
hybrid unit prices, agreements on 91
IATA (International Air Transport
Association) regulations 245
idea for new product development: evaluation
15; generation 13–14; screening 15
immigration 255
impulse buy products 7
incentives 108; sales promotions 96, 118–122;
for sale staff 128; for service sector
employees 167
INCOTERMS 245–247
independent demand 37–38, 37
indirect advertising 111
indirect costs 52, 53, 54
indirect packaging 139–140
indivisibility of services 5, 144–145, 207
industrial buyers 267; classification of 267;
commercial enterprises 267–268; definition
of 267; distribution channels 268–271;
government/public buyers 271; institutional
buyers 271
industrial goods 8–9; classification of
264–266, 264; intermediaries for
270–271, 270
industrial (B2B) markets 262; and consumer
markets, difference between 263; demand
fluctuations 274–276; derivative demand
272–273; distribution centers 283, 284,
290–293; elasticity of demand to price
273–274; industrial marketing 262–264;
materials handling 279–283; seller–buyer
relationships in 277–279, 277; supply
elasticity 276–277; warehouse(s) 283–293
industrial services 266
industrial vehicles 283
influencers 152
infomercials 130
information and communication system
failures 256
inhomogeneity of services 5, 145–146
initial cost 87
innovation 89; and new product introduction
22; and outsourcing 9, 230, 231
innovative products 12; life cycle of 25–26, 26;
tipping points in current sales of 27;
uncertainty and sales volume 26
innovators see neoterists/innovators
installations 265–266
institutional buyers of industrial goods 271
intangibility of services 5, 144, 174
intangible goods 5
intangible services 147
integrated management of new product
development process 17–19
integrated marketing communication (IMC)
94–96; activities 95–96; adoption curve 105;
advertising 95, 110–116; analysis of existing
situation of communications mix 100;
availability of budget resources 106;
communication process 98–100, 99; within
a constantly changing environment 96–98;
degree of customer involvement with the
product 107; direct marketing 96, 108, 121,
128–131; electronic/digital marketing 96,
131–134; marketing strategy 100; mix
104–109, 110–134; mix budget 102–104;
monitoring, control and evaluation of
109–110; objective goals 101–102;
outcomes, hierarchical escalation of 102;
personal sales 122–128; plan
implementation, stages in 101; and product
life cycle 105–106; public relations 95,
116–118; push and pull strategies 107–109,
108; sales promotions 96, 118–122, 119;
within supply chain context 94; target
group 100–101; target market 106
interactive/social skills of frontline
employees 161
inter-handling systems 292–293
INTERLEAVEAD 2 OF 5 296
intermediaries 70, 269; for consumer products

269–270, 270; discounts and subsidies 81;
incentives to 96; for industrial products
270–271, 270
intermodal transport 241
internal benchmarking 92
internal failure costs 53
internal reactions to environmental stimuli
187–188
internal risks 256–257
International Article Number 296
international transportation 245–247
internet 96, 97, 113, 119, 133, 225; advertising
110, 133–134; penetration of 131, 132; and
public relations 116
introduction stage, new product 22–23; and
integrated marketing communication 106,
108; and pricing 61
introductory price dealing 79
inventory 29–30; ABC analysis 32–33, 32, 33;
control, and barcodes 298; economic order
quantity 33, 34; just-in-time philosophy
34–35; lean production philosophy 34–35;
periodic monitoring systems 31; perpetual
monitoring systems 31; and product cost
57; risks 258–259; stock acquisition policy
31–32; stock-related costs 33–34; types of
30–31; vendor management inventory 122;
zero-level inventory 36
ISO 14020 (2000) standard 29
isolateds 152
Japan earthquake/tsunami (2011) 249–250
job advertisements 159
Judd, V. 151
just-in-time (JIT) philosophy 34–35, 60, 250,
265, 268
Kamran-Disfani, O. 193
Kaplan, Robert 89
keiretsu 278
key account management 127
Kyratzoglou, M. K. 257
labeling, product 10–11, 138, 298
laggards see slow movers/laggards
Lalonde, B. 49
Lambert, D. M. 135
late majority 29, 105
Lawler 163
law of demand 62
layout, warehouse 202–203, 204, 205
LCL (less container load) 242
leadership: service leadership 169; skills, of
logistics executives 172
leaflets 130
lean production philosophy 34–35
Index 335
learn-do-feel model 107
learning curve 55–56, 56
length of product mix 9–10
Lessard, D. 254
Levitt, T. 49
LIFO (Last-In-First-Out) 291–292
lighting, service environment 191
load breakdown 287
load consolidation 286
load distance method 201–202
location, service environment 193–194, 198;
center of gravity method 199–200; load
distance method 201–202; selection of
198–199, 199, 200
logistics 148; automation 303, 304; during
crises 250–252; decision support 303, 304;
efficiency, influence of packaging on 136;
executives, knowledge/skills of 172;
Fourth-Party Logistics (4PL) 233–234;
information transparency 303, 304;
interconnectivity 303, 304; management
27–28, 28; modern 302–307; outsourcing
228; reverse 135; risk management 257;
service providers, types of 231–233;
services, pricing of 87–92; Third-Party
Logistics (3PL) 228–231, 233, 234, 250;
see also warehouse(s)
logistics manager 171–172
Loureiro 140
Lovelock, C. 167
low-contact services 147, 226
low cost product 12
LTL (less truckload) 242
Madzharov, A. 190
Mahaffie 141
Malindretos 88
management fee 92
manual material handling 282
manufacturing resources planning (MRP
II) 305
marginal cost 52
marginal economic analysis 74–76, 75
maritime transport 239–240
marketing manager 171–172, 207
market leader’s price, pricing based on 76
market penetration pricing 22, 61, 67, 78–79
market price, pricing based on 77
market pruning pricing 22, 61, 77–78
market research 38, 115–116, 235
market segmentation 97, 105, 129
market shape/form, and pricing 63–66
market testing 16–17
Marsh 140
mass media 95, 105, 115, 117
material goods 5
336 Index
materials handling 279–283
materials requirement planning (MRP) 44,
45, 305
maturity stage, product 23–24; and integrated
marketing communication 106; and
pricing 61
MAXICODE 297
maximum stock level 30
McIvor 227
mean absolute deviation (MAD) 42, 43
mean absolute percentage error (MAPE)
42, 43
mean percentage error (MPE) 44
mean squared error (MSE) 42, 43
measurable costs 53
mechanized material handling 282
media design, advertising 114
megacities 255
Mehrabian, A. 183
message, advertising 112–113
metal packaging 138
method of consent see Delphi method
mixed-materials packaging 139
modifiers 152
monopolies: and legal constraints 69; and
pricing 65–66, 69; and pricing targets
59–60; redistribution of consumer surplus
to 69, 70
monopolistic competition, and pricing
64–65, 66
Montreal Convention 245
motivation: for employees 154, 166–167;
purchase motivation of customers, and
servicescape 182–183, 183
multi-functional teams 18
multimodal transport 241
multi-use packaging 140
music, service environment 189
Nägele, N. 193
Nayga 140
nearest open storage location 205
negotiation skills of supply chain
executives 172
neoterists/innovators 19, 77, 105
new line product 12
new no-demand products 7
new product development process 13;
adoption process/strategies 19–21, 20;
business analysis 15; commercialization 17;
development costs 12; idea evaluation 15;
idea generation 13–14; idea screening
14–15; integrated management of 17–19;
market testing 16–17; product development
16; stages of 11–17; see also product life
cycle
Nilsson 141
no-demand goods 7–8
noise (communication) 100
noise, service environment 189–190
non-profit service providers 146
Norton, David 89
objective goals method 104
obsolete stock 31
oligopolistic market: and legal constraints 69;
and pricing 65, 69
omnichannel model of product
distribution 195
one-dimensional barcodes 295, 295
online advertising 96, 110, 133
online service environment 195, 198
open-book contract 92
operations management and marketing,
interconnection between 207–209
optimal order quantity 33, 275
original equipment manufacturers
(OEMs) 268
outsourcing 9, 14, 58, 170, 227–228;
assessment officer 237; benefits of 230, 231;
categories of 231–232; contract 236;
defining needs/objectives 235; evaluation
and performance monitoring 236–237;
evaluation criteria 235, 236; Fourth-Party
Logistics (4PL) 233–234; logistics service
providers, types of 231–233; partner
selection 235; procedure 234–237; project
team creation 234–235; Request For
Proposal (RFP) document 235; Third-
Party Logistics (3PL) 228–231, 233, 234
overcrowding 194–195
overlap 292
packaging, product 10–11, 281–282, 285;
boxes 137, 138; challenges 140–142;
classification of 138–140; communication
function of 137–138; definition of 134–135;
environmental impact of 141; goals and
objectives of 137–138; influence on
efficiency of logistics 136; for promotion
134–142; type/level 139, 139; waste 141
pallet boxes 281
pallets 280–281, 281, 292
pallet tanks 281
pandemics 252–253, 255–256
paper-based packaging 138, 281
Pareto’s law 32, 205, 260
partial/mixed outsourcing 233
partnerships 123, 273, 278
Patrick, V. M. 188
PDF417 296
pedestrian pallet truck 293

percent of sales method 103
periodic inventory monitoring systems 31
Periodic Technical Inspection 244
perishability of services 5, 146
perpetual inventory monitoring systems 31
Perreault, W. D. Jr 120
personality tests 160
personalization approach to service
processes 226
personal sales 96, 108, 122–124, 129;
environment 122; process 124–126, 124;
strategic planning for sales team
126–128, 126
person-role conflicts 155, 156
physical evidence see servicescape
physical risks for customers 221
physiological reactions to environmental
stimuli 187–188
pipeline inventory 31
pipeline transport 240, 282
plastics packaging 138
political/social unrest 254
population aging 255
population growth 255
portable gadget marketing 134
POSTNET 296
Prajogo, D. I. 261
predatory pricing 94
preferred employer, businesses as 159
prevention costs 53
price-adjustment strategies 80–81; discounts
and subsidies 81; dynamic pricing 82;
pricing based on geographical location
81–82; promotion pricing 83–84; yield or
revenue management 83
price discounts 120, 121
pricing 46, 47–48, 123; changes in basic price
level 84–85; and customer perceptions
about product value 49–50; decisions 48;
definition of 87; and demand 62–63; factors
affecting 49–69; legal constraints 69; of
logistics services 87–92; and marketing mix
60–61; market penetration pricing 22, 61,
67, 78–79; market pruning pricing 22, 61,
77–78; and market shape/form 63–66; of
new products 22, 77–79; objectives 59–60;
predatory 94; and product cost 50–59; and
product life cycle 61; reactions to changes
in competitors’ prices 86–87; strategies, for
product mix 79–80; strategies, of
competitors 66; structures 91–92; within
supply chain context 47; and supply chain
factors 67–69
pricing methods 70; based on competition
76–77; based on cost 70–73; based on
demand 73–76
primary demand 8
Index 337
primary packaging 139, 141
prime cost 87
private service providers 146
private warehouses 289
Probability-Impact table 260
procedural support for frontline
employees 165
processed materials/products 8–9, 265
product bundles, pricing of 80
product cost: activity-based costing 54–55;
available cash and accounts receivable 57;
customer profitability curve 54–55, 55; and
fixed assets 58; foreign/own capital ratio 59;
inventory 57; learning curve 55–56, 56; and
pricing 50–59; short-term obligations 58;
and supply chain management 56
product harvest/bleeding 25, 27
production cost, definition of 87
production line approach to service processes
224, 226, 227
production planning 28
production process, and servicescape 179
product life cycle 21, 25; decline stage 24–25,
61, 106; development of environmentally
friendly products 28–29; growth/
development stage 23, 61, 106; and IMC
mix 105–106; introduction into the market
22–23, 61, 106, 108; logistics issues 27–28;
marketing and sales issues 25–27; maturity
stage 23–24, 61, 106; and pricing 61; stages
of 21–25, 21; tipping points in current sales
of innovative products 27; uncertainty and
sales volume during innovative product life
cycle 26
product mix 9–10, 79–80
product(s) 2; branding 10; definition of 4–5;
demand forecasting 37–45; design and
operations planning 2–4, 3; high value/
status 60, 61, 79; image 112, 120; industrial
8–9, 264–266, 264; inventory management
29–36; nature, classification based on 5–6;
new product development process 11–21;
packaging and labeling of 10–11, 134–142;
pricing strategies for new products 77–79;
testing 120; value, customer perceptions
about 49–50; willingness to purchase,
classification based on 6–9
profit margin pricing 70–72
promotion, product 22, 103, 227; investment
in 79; product packaging for 134–142;
see also integrated marketing
communication (IMC)
promotional subsidies 81
promotion pricing 83–84
psychological risks for customers 221
publicity 95, 117–118
public relations 95, 116–118, 129
338 Index
public service providers 146
public warehouses 289
pulsed timeline, advertising media 114
push and pull strategies, integrated marketing
communication 107–109, 108
Qing 141
qualitative methods in demand forecasting
38–39
quality costs 53
quality failures 149–150
quantitative methods in demand forecasting
39–44
quantity discounts 81, 121
Quick Response (QR) code 297
radio frequency identification (RFID)
299–301; active tags 300; advantages of
301–302; disadvantages of 302; parts of
299, 300; passive tags 299–300
rail transport 239
random storage 205
rational/informational appeals,
advertising 113
raw materials 8–9, 15, 265
reach truck 293
receiver (communication) 98
rectilinear distance 201, 202
recyclability of packaging 136–137
regular no-demand products 7–8
relocation of product 12
remuneration: sales staff 121, 128; service
sector employees 167
reputation pricing 76
Request For Proposal (RFP) document 235
reserved storage 205
response (communication) 99
retail advertising 111
retail businesses 67–68, 135
retail packaging 140
retention, employee 167–168
return on investment 59
reusable packaging 140, 142
revenue management 83
reverse demand pricing 76
reverse logistics 135
rewards 163, 166–167
rewards programs 121, 127, 128
RFID Middleware software 301
RFID reader 301, 302
Riganakos 141
risk(s) 253, 254, 258–259; analysis/evaluation/
assessment of 260; classification of
256–257; definition of 253; impact/
consequences of 254, 257; management
257, 259, 261; recognition/identification of
257, 260; sources of 254–256; strategies for
management of 261; vs. uncertainty 253;
ways of dealing with 258–259
Road Technical Inspection 244
road transport 239
robots 283
role-playing technique 161
roll pallets 281
Rotterdam Rules 245
RSS-14 (Reduced Space Symbology) 296
Rundh 135
Russell J. A. 183, 184, 187
safety stock 30–31, 37
Saghir 134, 135
sales costs 87
sales data, historical 37
sales forecasting 126–127
sales promotions 96, 118–122; advantages of
119–120; definition of 118; disadvantages
of 120; effect, patterns of 120;
techniques 119
sales-related pricing targets 59
sales staff 105, 127–128; design 126;
evaluation of 128; organization of 127;
promotions aimed at 121; remuneration/
incentives 128; training 128
sales takeoffs 26
sales targets 119, 123, 127
satisfaction-dissatisfaction 184
Scarcelli, J. M. 189
search engines, advertising through 133
seasonal discounts 81
seasonal stock 31
secondary demand see derivative demand
secondary packaging 139–140
Second Party Logistics (2PL) 233
selective demand advertising 111
selective distribution 7
self-service 181, 192, 211, 224–226
seller–buyer relationships in industrial
markets 277–279, 277
sensitivity analysis 15
service failures 162, 166, 222
service guarantees 221
service leadership 169
service processes 165, 206, 209; blueprint
design 215, 217–218, 217; blueprinting of
196, 212–213, 213, 214, 215, 216; customer
management in 220–222; definition of
206–207; degree of customer contact/
contribution 219–220; design 206–207,
218–227; execution of online order at a
physical store 223; general strategic
approaches for 222–227; interconnection
between operations management and
marketing 207–209; key components of
209–211; objective of 219; outsourcing
 Index 339
227–237; personalization approach 226; single-use packaging 140
production line approach 224, 226, 227; slow movers/laggards 20, 105
self-service approach 224–226; separating small metal containers 280
high- and low-contact functions 226–227; smart tags 301
types of 218–220; variety and volume per smell, service environment 190
unit of provided services 220 Smith 230
service-profit chain 148–150, 149, 156, 169 socialization of participants, and servicescape
services 4–5, 9, 88, 143; challenges faced by 179–180
frontline employees 152–157; social media 14, 97, 118, 124, 134
characteristics of 5, 144–146; classification Sodhi, Manmohan 257
of 146–147; corporate culture 168–169; Sohal, A. S. 261
delivery, components of 148; focus on spatial planning, service environment
customers and frontline staff 169–170; 191–192
indivisibility of 5, 144–145, 207; industrial special products 7
266; inhomogeneity (heterogeneity) of 5, special storage systems 292
145–146, 169; intangibility of 5, 144, 174; sponsorship 95–96, 118
integration of 6; perishability of 5, 146; stacking 292
provision, and human resources 147–152, steel packaging 138
157–168, 158; quality of 145; supply chain, Stevenson, M. 257
and human resources management Stewart 138
170–172; typology of 181–182; Stimulus-Organism-Response (SOR) model
see also servicescape 183–185, 184
servicescape 173, 174–177, 175, 176; ambient stock see inventory
factors 188–191; Bitner’s model 185–188, Stock, J. R. 135
186; blueprinting of service delivery process stock acquisition policy 31–32
196; clarification of roles of attendees 196; stock-related costs 33–34
communication of corporate image/brand stock-shortage cost 33
178–179; cross-functional collaborations stock supply cost 33
197–198; and customer’s length of stay/ storage, product 258, 283, 303;
purchase motivation 182–183, 183; see also warehouse(s)
determination of strategic requirements strategic alliances 273–274, 276, 278–279
196; employees 194; e-servicescape 195; sub-products, pricing of 80
exterior storefront atmospherics 193–194; subsidies 81
facilitation of production process 179; suppliers 35, 77, 122–123, 250, 268, 278
identification of key components of supplies 9, 258
differentiation strategy 180–181; Supply Chain Operations Reference (SCOR)
improvement opportunities, identification/ model 89–90
evaluation of 197; location 198–202; model supply elasticity 276–277
of affect 185; other customers 194–195; supply planning 28
positioning of differentiation strategy support services (back-office) employees 148
178–179; signs, symbols and artistic effects support systems for provision of services
192–193; socialization of participants 164–165
179–180; spatial planning and functionality surroundings, store 193–194
191–192; Stimulus-Organism-Response symbologies, barcode 295–297
(SOR) model 183–185, 184; strategic roles symbols, service environment 192–193
of 178–181; types of 181–183, 181; systematic development of new products 18
updation and modernization of 197;
warehouse layout 202–203, 204, 205 tangible services 147
services marketing triangle 148, 157, 169 target audience, for integrated marketing
services offered (pricing structure) 91 communication 100–101
shelving 292 targeted cost pricing 76
short-term obligations 58 targeted profit pricing 72–73
signage, service environment 192–193 target market, and integrated marketing
Simchi-Levi, D. 257 communication 106
simple exponential smoothing 41, 41 Taylor 57
simple moving average 39–40, 40 teamwork 163–164
Singh 30 technical support for frontline employees 165
340 Index
technical training for frontline employees 161
telemarketing 130–131
temperature, service environment 188
temperature-controlled warehouses 289
terminals (transportation) 242, 254
tertiary packaging 140
Third-Party Logistics (3PL) 228–229, 233,
234, 250; advantages of outsourcing to
229–230, 232; disadvantages of outsourcing
to 230–231; evaluation criteria of 236
timeline, advertising media 114
time-series models 39–42
TIR Convention 245
top management executives, commitment
of 18
total/complete outsourcing 233
total (fixed and variable) cost (TC) 51, 51, 54
total fixed cost (TFC) 51, 51
Total Quality Management (TQM) 260
total variable cost (TVC) 51, 51
trade agreements 123
trade fairs 121
training, frontline staff 154, 160–161, 162,
163, 168
transmitter (communication) 98
transportation 238–239, 279; combined
241–243; costs 81–82, 285; of dangerous
goods 243–244; international 245–247;
means of 239–240; planning 28; risks 259
transport systems 280
trend products, lifespan of 26
triple exponential smoothing 42
Trott 231
Trump, Donald 254
two-dimensional barcodes 295, 295
type I ecolabels 29
type II ecolabels 29
type III ecolabels 29
unique selling proposition (USP) 112
unit load (materials handling) 280–283
unit prices 91
Universal Product Code (UPC) 295
UPC-A 296
UPC-E 296
urbanization 255
users (industrial buyers) 267
value-added services 35–36
value/price ratio 12, 22, 24, 61, 66
Vassiliadis, C. G. 257
Veblen goods, demand curve for 62, 63
vendor management inventory (VMI) 122
vendors 127, 128
Verma 30
vertical integration 266, 278
Very Narrow Aisle (VNA) truck 293
Wakefield, K. L. 182
walk-through audits 222
warehouse keeper 293
warehouse management system (WMS)
304–306
warehouse manager 284, 285, 293
warehouse(s) 242; architectural design of
290–291; definition of 283–284; equipment
283; importance of 284–285; layout
202–203, 204, 205, 290–291; location 290;
risks 258–259; roles and responsibilities of
employees 293; roles of 283, 285, 286–288;
selection of inter-handling systems
292–293; selection of storage systems 292;
spatial planning 291; storage system
philosophy 291–292; storage tasks of
289–290; types of 285, 289
Waters, D. 261
wear and tear see perishability of services
weighted moving average 40–41, 40
wholesale packaging 140
width of product mix 9
willingness to purchase, classification of
products based on 6–9
willing to pay (WTP) 50
Wilson 230
winches 282
Wirtz, J. 167
Yi, Zhixian 38
yield management 83, 146
YouTube 97
zero-level inventory 36
Zinszer, P. 49
zonal pricing 83