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A channel member, also known as an intermediary, is a company that works in a network with other companies to help move products from manufacturers to final consumers. Channel members perform a variety of important tasks that collectively create value for the consumer. Marketing systems and supply chain management are critical to creating value.
Manufacturers or producers along with their intermediary channel partners work in a system to move products and services to consumers. There are four major system types: a vertical marketing system, a horizontal marketing system, a multichannel marketing system, and an omnichannel marketing system. We’ll explore each of these systems next.
IN CONTEXT
A vertical marketing system (VMS) is a system in which companies in the marketing channel work together in a coordinated, collaborative, and customer-centric way. Unlike conventional systems, vertical marketing systems are less concerned with their profit margins and have a laser-like focus on working together to deliver value to consumers.
A VMS is unique in that all members of the marketing channel work as one unified group. Producers, wholesalers, and distributors share the common goal of creating and delivering value to consumers. In contrast, a conventional marketing system is one in which each intermediary works as a distinct company, each trying to maximize profits at the expense of other channel members. VMS has grown in popularity over the conventional system because it results in fewer channel conflicts and increased customer value.
There are structural differences between the conventional marketing system and the vertical marketing system. In the conventional model, the manufacturer sells to wholesalers, who then sell to retailers, who then sell to consumers. In the vertical marketing system, channel members are working together as strategic partners to distribute products to consumers.
There are three types of vertical marketing systems: corporate, administered, and contractual.
In a corporate VMS, one member of the distribution channel owns the other members.
EXAMPLE
Walmart manufactures its own private label brand of beauty and health products under the name Equate. Walmart not only controls manufacturing products under the brand but also owns and operates a wholesaler that distributes Equate-branded products to Walmart stores worldwide. Walmart reduces risk by owning and thus controlling the various channel members in its VMS. The corporate VMS approach allows for a unified system of creating and delivering customer value.In an administered VMS, there is no ownership of channel members. However, there is one member who is large and powerful enough to coordinate and manage the distribution activities of other channels' members. For example, Procter & Gamble manufactures 65 brands in over 10 product categories. Given its size and power, it requires a high level of cooperation among wholesalers and retailers.
In a contractual VMS, there are independent companies that have joined together by contract for a mutually beneficial purpose. Each company operates independently of the others but integrates its activities to achieve its goals. An example of a contractual VMS is a franchise organization, such as Chipotle or McDonald’s, in which the companies contract with a wholesaler to distribute products to the franchisees.
In a horizontal marketing system, unrelated companies partner to offer products and services in a shared space. For example, J.Crew and New Balance have partnered together for the last decade to sell a unique line of New Balance-branded sneakers that can only be found on J.Crew’s website. In a horizontal system, companies partner to leverage the value they create for customers in a collaborative way.
A multichannel distribution system is where a single company sets up multiple distribution channels to reach customers.
EXAMPLE
Nike has brick-and-mortar stores across major cities. Customers can visit the store, try on shoes, and apparel, and make a purchase. In addition to physical stores, Nike also distributes its shoes and apparel through its online store Nike.com, through e-tailers like Amazon.com, and through other brick-and-mortar stores like Kohl’s and Foot Locker.An omnichannel marketing system is a multichannel approach whereby companies give consumers a variety of ways to purchase, receive, and return products.
IN CONTEXT
In addition to purchasing products online and in-store, Dick’s Sporting Goods offers customers a variety of options for receiving a product. Consumers can buy online and pick up in-store. They can also buy online from one of the store’s kiosks and have it delivered to their home or some other location. Omnichannel marketing systems are designed to offer consumers a seamless buying experience, which further creates and delivers value.
A supply chain is the entire process of distribution from acquiring the raw materials needed to make products to delivering final goods to consumers. Companies with high-performing supply chains recognize that it starts with a customer-centered mindset. All activities must be managed with the end goal of creating and delivering value to the target consumer.
IN CONTEXT
Supply chain management (SCM) is the process of managing all the members and activities from the procurement and transformation of raw materials into finished goods through their distribution to targeted consumers.
Marketing plays an integral role in the management of the supply chain. Marketing entails creating and delivering products that meet the needs of customers all while building relationships through customer engagement. Companies ensure that they deliver on their value proposition to consumers through the features and benefits of the product itself. Ensuring fulfillment of a company’s value proposition starts with working with the right suppliers who provide the materials and ingredients to help companies fulfill their promise.
For example, Dave’s Killer Bread (DKB) has positioned itself as the maker of “the best bread you’ve ever tasted, power-packed with organic whole grain nutrition.” The promise to consumers starts with selecting suppliers who are certified organic and who can consistently deliver high-quality ingredients. DKB’s promise to consumers starts as far back as the grains selected by DKB’s suppliers.
Supply chain management has five major functions. These include purchasing, operations, logistics, resource management, and information workflow. Good supply chains perform these functions in a way that meets the wants and needs of final consumers efficiently.
Purchasing is the process of buying materials needed to manufacture products. These materials are purchased from suppliers, who must be able to deliver them in accordance with the manufacturer’s timeline. Therefore, the manufacturer’s companies and suppliers must communicate and coordinate to ensure timely delivery of materials.
EXAMPLE
Ben & Jerry’s ice cream flavor Mint Chocolate Chance has cream, skim milk, sugar, egg yolks, white flour, cocoa powder, soybean oil, and vanilla extract, among other ingredients. Ben and Jerry’s must forecast the number of ingredients it needs to purchase so that they match the demand for this flavor. The company, in turn, assesses things like the total number of orders and inventory turnover for its Mint Chocolate Chance product to help forecast the quantity of ingredients it will need from suppliers.Operations is everything a company does on a day-to-day basis to run a company. Before a company purchases the necessary materials and begins production, it must forecast demand for its products. Forecasting involves anticipating or projecting how many units of a product will be sold during a given period. Accurate forecasting must align with inventory management and production schedules to ensure that the company is operationally positioned to manufacture the right amount of product to meet the needs of consumers.
Logistics is a function that involves the coordination of all supply chain activities, such as warehousing, inventory management, and transportation. Companies along the supply chain must communicate effectively to ensure that products reach consumers in a timely and efficient way in the precise form that the consumer expects.
EXAMPLE
For example, when consumers eat McDonald’s French fries, they expect the fries to taste a certain way. Suppliers and intermediaries along the channel work together to ensure that those expectations are met. Good logistical management helps ensure this.Resource management is the planning, organizing, and controlling of resources. Resources include the labor, raw materials, and technology required to move products from their raw material phase to finished goods available for consumption. Effective supply chain management requires the right allocation of these resources to the right supply chain activities to optimize the entire system.
Information workflow is a supply chain management function that relates to what and how information moves between members of the supply chain. If information does not flow effectively or communication is poor, the entire process can suffer as a result of disruptions, delays, and mistakes. Employing a systematic approach to sharing information across the supply chain ensures that the right companies have the right data to make the right decisions at the right time.
IN CONTEXT
As companies strive to deliver the right products to the right customers at the right time, they are faced with the competing interest of protecting the environment in which they operate. Sustainability is a company’s effort to reduce its impact on the environment as products move from source procurement through production through distribution to final consumers. Companies that practice sustainability balance their goal of speedy delivery with a commitment to reducing their carbon footprint. While traditional marketing channels focus on speed and cost, a sustainable channel also factors in goals aimed at mitigating the harm the supply chain causes to both humans and the environment.
Sustainable sourcing is the process of considering suppliers’ social, ethical, and environmental performance. The benefits of sourcing sustainably are improved reputation, brand protection, and an opportunity to attract new consumers and reach new markets. When a company claims it sources sustainably, it means that it is both transparent and ethical regarding the raw materials it uses in its products. It is not only transparent and ethical in its sourcing of materials but also environmentally conscious about its manufacturing process.
The shoe company Allbirds has sought to use natural instead of petroleum-based synthetic materials, which is what a majority of footwear is made from. By 2025, it aims for 75 percent of its shoes to be sustainably sourced using both natural and recycled raw materials.
Source: THIS TUTORIAL HAS BEEN ADAPTED FROM OPEN STAX’S PRINCIPLES OF MARKETING COURSE. ACCESS FOR FREE AT https://openstax.org/details/books/principles-marketing. LICENSE: CREATIVE COMMONS ATTRIBUTION 4.0 INTERNATIONAL.
