MKTG 229 Revision - Summary Routes to Market PDF

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!1 MKTG 229 Routes to Market Objective: Getting the right (FOR CONSUMERS) product, in the right condition, and the right quantity, to the right person, in the right place, at the right time and at an acceptable cost and profitably. Primary production (extraction) Secondary production (manufacturing,...

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MKTG 229 Routes to Market

Objective: Getting the right (FOR CONSUMERS) product, in the right condition, and the right quantity, to the right person, in the right place, at the right time – and at an acceptable cost – and profitably. Primary production (extraction) —> Secondary production (manufacturing, assembly) —> Tertiary production (transport, advertising, warehousing, selling) From raw material (primary) to finished goods (secondary) to goods available and marketed (tertiary) and of value to consumers Marketing – creating value so that you can capture value (Kotler) •

“The customer’s perceived evaluation of the difference between all the benefits and all the costs of a marketing offer relative to those of a competing offer” (Kotler and Armstrong 2016, 37

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Managing an equation of value in the minds of the targets

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The equation of what consumers get minus what they give

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An equation between perceived quality and perceived price

Value increases through the chain – adding value Value should also be created for each participant Milk - farmer - processor - Morrisons (buys at 63p, sells at £1)/Sainsburys (buys at 78p, sells at £1) Customers are actually prepared to pay more for the milk to support British dairy farmers (Morrisons) Destroying value - products perish - can be stolen - “shrinkage” - product may not be available on shelves - consumers may not ‘understand' the product - processes (those the consumer doesn’t see) may be inefficient - example - Sylvester Stallone Warburton’s ad Patterns of demand •

1/‘Base flow’ – never changes much

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2/‘Wave flow’ – does change, but we can anticipate when it will rise and drop (often holiday or season related) –

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NB may still not be able to predict precise day or precise store

3/‘Surge flow’ – we can not anticipate (fashion or fad goods)

Forecasting further in advance = less accurate

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MKTG 229 Routes to Market

Availability problem - Aggregate vs particular demand - demand will be on exactly which day? - for exactly which product? (marketing textbooks, shoes,…) - demand will be in which town and in which store? (pumpkins) Marketing activity influences demand - own promotional activity - other marketing communications - competitors activities - might shift demand between times/places Using inventory to manage demand - can address difficulty of forecasting - can be used to address wave flow demand - where will it be held? and by whom? - what are the costs of holding it? (warehousing costs, insurance, shrinkage, perishability) - could we use the money better in other ways? “There is thus a cost imperative to making sure that logistics is carried out effectively and efficiently, through the most appropriate allocation of resources along the supply chain.” Fernie & Sparks 2004 p.2

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Traditional view = EFFECTIVE and EFFICIENT

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Described as the ‘TOTAL’ approach to RTM

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MKTG 229 Routes to Market

Four Ts in International Trade - Transaction costs - Tariff and non-tariff costs - Transport costs - Time costs

International trade increases the number of goods that domestic consumers can choose from, decreases the cost of those goods through increased competition, and allows domestic industries to ship their products abroad. While all of these seem beneficial, free trade isn't widely accepted as completely beneficial to all parties. Tariff - tax. It adds to the cost of imported goods and is one of several trade policies that a country can enact. Why are tariffs used - protecting domestic employment - the possibility of increased competition from imported goods can threaten domestic industries. These domestic companies may fire workers or shift production abroad to cut costs, which means higher unemployment and a less happy electorate. The unemployment argument often shifts to domestic industries complaining about cheap foreign labor, and how poor working conditions and lack of regulation allow foreign companies to produce goods more cheaply - protecting consumers - A government may impose a tariff on products that it feels could endanger its population. For example, South Korea may place a tariff on imported beef from the United States if it thinks that the goods could be tainted with disease. - infant industries - The government of a developing economy will levy tariffs on imported goods in industries in which it wants to foster growth. This increases the prices of imported goods and creates a domestic market for domestically produced goods, while protecting those

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MKTG 229 Routes to Market industries from being forced out by more competitive pricing. It decreases unemployment and allows developing countries to shift from agricultural products to finished goods. national security - Barriers are also employed by developed countries to protect certain industries that are deemed strategically important, such as those supporting national security. Defense industries are often viewed as vital to state interests, and often enjoy significant levels of protection. For example, while both Western Europe and the United States are industrialized, both are very protective of defense-oriented companies. retaliation - Countries may also set tariffs as a retaliation technique if they think that a trading partner has not played by the rules. For example, if France believes that the United States has allowed its wine producers to call its domestically produced sparkling wines "Champagne" (a name specific to the Champagne region of France) for too long, it may levy a tariff on imported meat from the United States. If the U.S. agrees to crack down on the improper labeling, France is likely to stop its retaliation. Retaliation can also be employed if a trading partner goes against the government's foreign policy objectives.

Types of tariffs and trade barriers - specific tariffs - A fixed fee levied on one unit of an imported good is referred to as a specific tariff. This tariff can vary according to the type of good imported. For example, a country could levy a $15 tariff on each pair of shoes imported, but levy a $300 tariff on each computer imported. - ad valorem tariffs - The phrase ad valorem is Latin for "according to value", and this type of tariff is levied on a good based on a percentage of that good's value. An example of an ad valorem tariff would be a 15% tariff levied by Japan on U.S. automobiles. The 15% is a price increase on the value of the automobile, so a $10,000 vehicle now costs $11,500 to Japanese consumers. This price increase protects domestic producers from being undercut, but also keeps prices artificially high for Japanese car shoppers. Non-tariff barriers - licenses - A license is granted to a business by the government, and allows the business to import a certain type of good into the country. For example, there could be a restriction on imported cheese, and licenses would be granted to certain companies allowing them to act as importers. This creates a restriction on competition, and increases prices faced by consumers. - import quotas - An import quota is a restriction placed on the amount of a particular good that can be imported. This sort of barrier is often associated with the issuance of licenses. For example, a country may place a quota on the volume of imported citrus fruit that is allowed. - voluntary export restraints - This type of trade barrier is "voluntary" in that it is created by the exporting country rather than the importing one. A voluntary export restraint is usually levied at the behest of the importing country, and could be accompanied by a reciprocal VER. For example, Brazil could place a VER on the exportation of sugar to Canada, based on a request by Canada. Canada could then place a VER on the exportation of coal to Brazil. This increases the price of both coal and sugar, but protects the domestic industries. - local content requirement - Instead of placing a quota on the number of goods that can be imported, the government can require that a certain percentage of a good be made domestically. The restriction can be a percentage of the good itself, or a percentage of the value of the good. For example, a restriction on the import of computers might say that 25% of the pieces used to make the computer are made domestically, or can say that 15% of the value of the good must come from domestically produced components.

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MKTG 229 Routes to Market

Who benefits from tariffs? The benefits of tariffs are uneven. Because a tariff is a tax, the government will see increased revenue as imports enter the domestic market. Domestic industries also benefit from a reduction in competition, since import prices are artificially inflated. Unfortunately for consumers - both individual consumers and businesses - higher import prices mean higher prices for goods. If the price of steel is inflated due to tariffs, individual consumers pay more for products using steel, and businesses pay more for steel that they use to make goods. In short, tariffs and trade barriers tend to be pro-producer and anti-consumer. The effect of tariffs and trade barriers on businesses, consumers and the government shifts over time. In the short run, higher prices for goods can reduce consumption by individual consumers and by businesses. During this time period, businesses will profit and the government will see an increase in revenue from duties. In the long term, businesses may see a decline in efficiency due to a lack of competition, and may also see a reduction in profits due to the emergence of substitutes for their products. For the government, the long-term effect of subsidies is an increase in the demand for public services, since increased prices, especially in foodstuffs, leave less disposable income.

Costs to manufacture a cotton vest in Asia and United States - US spends more on Labor and is overall much more expensive, Asia’s labor is less expensive, but they have to implement shipping and duties costs - international trade relates to lower labour costs - especially in the ‘secondary sector’ - clothing and durables Containerisation - first order benefits - cost reduction to carriers and shippers, reduced transit times, increased reliability of shipments - second order benefits - improvements in logistics, lower inventory levels and cost - third order benefits - lower consumer costs, improved or new products

- transport costs - lower freight rates, lower insurance rates, minimal load unit - inventory costs - lower storage costs, lower packaging and packaging costs, faster inventory turnover

- service level - time reliability, higher frequency Mass, standardized transportation in the food sector: •

Reduced shipping times = can ship perishable items

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Use of ‘reefers’ = range of items and perishables –

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Both make items available at lower price, so to more consumers and in higher quantities

Temperature control can mean ‘production’ is continued or delayed during transport (‘sleepy bananas’) –

Reduces the need for absolute match of time of harvest and time product is needed in the shop

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MKTG 229 Routes to Market

Shelf life of selected perishable food products:

- apples - 90 - 240 days, no optimal temperature - bananas - 7 - 28 days, 13 degrees - eggs - 180 days, 1 degree - when there is reliable cheap transport, goods may be transported just for cheaper processing Scottish langoustines, Tesco’s ‘local' beef

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‘transporting air’ is very expensive you can rent container space by full or part load the expensive ‘last mile’ and the expensive ‘first mile’

LEAD TIMES •

1. time to market: the speed at bringing a business opportunity to market; –

Eg developing a different smart phone. A totally new product eg hybrid car. A new ready meal or garment (eg following celebrity coverage). Developing a strawberry with better shelf features.

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2. time to serve: the speed at meeting a customer's order; – Eg from Tesco placing an order to receiving that product, from a consumer ordering a car to being able to pick it up

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3. time to react: the speed at adjusting output to volatile responses in demand. –

Eg For Benetton realising purple is selling better than green to them having the right balance in store, from having an accurate weather prediction to having right quantity of ice cream in store

Just-In-Time (JIT) - an inventory strategy companies employ to increase efficiency and decrease waste by receiving goods only as they are needed in the production process, thereby reducing inventory costs. This method requires that producers are able to accurately forecast demand. - JIT is efficient and LEAN route to market 1990s •

JIT therefore is certainly Efficient and LEAN

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1990s - increasing calls for chains to be EFFECTIVE and AGILE

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Agility is about moving quickly –

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Reduce supply times and improve speed of information capture

Requires – strong relationships (trust) and careful co-ordination –

Innovative and integrated information systems

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Combination is referred to as LEAGILE

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Emphasis on competitive advantage through TIME as well as COST – – –

Time to market (NPD) Time to react (respond to changes in demand) Time to serve (respond to customer/consumer order)

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MKTG 229 Routes to Market

Efficient Consumer Response (ECR) “ECR comprises a number of collaborative strategies and operating practices between retailers and suppliers that focus on fulfilling consumer needs better, faster and at less cost” (ECR Europe 1998) •

Focus on EFFICIENT or CONTINUOUS replenishment –

Minimises stockholding and improves responsiveness to retailer needs

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Marks the move from a ‘push’ to a ‘pull’ oriented RTM – Demand-driven and consistent with JIT strategies

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Marketing is key in terms of demand timing and intra-organisational collaboration – – –

Optimise promotions and NPD timing with retailers Focus on perfect assortment and Category Management Has evolved into Collaborative Planning, Forecasting and Replenishment (CPFR)

ECR and Transport/Distribution •

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Many retailers established Primary Distribution Centres (facilitates cross-docking) and product collections –

Leads to factory-gate pricing negotiations (risk to manufacturer)

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Increases retailer power

Direct Store Delivery –

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Either by the manufacturer, collected by the retailer or via a 3rd party

Transport pooling –

Increasingly manufacturer and retailers use 3rd party transport companies

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Can link with other retailers for more efficient distribution

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Also better for their carbon footprint – PR potential

Cross-docking and EDI (Electronic Data Interchange) •

Cross-docking – – – – –

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Products are delivered into a warehouse from the manufacturer and transported straight onto a retailer or 3rd party lorry for store delivery Requires co-ordination between lorries arriving and departing Particularly relevant for fresh/perishable stock Minimises stock held in warehouse and associated costs Requires investment in warehousing technology (Bar codes / RFID)

Electronic Data Interchange (EDI) – – –

Refers to the integration of supplier and retailer IS to automate processes Requires high levels of collaboration See Zentes et al (2012) for P&G – Walmart example

Quick Response - QR •

Increasingly used in the fashion industry

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MKTG 229 Routes to Market – –

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Retailers place multiple orders per ‘season’ vs one – 14 months out Enables production and supply to be adjusted with real time demand

Characteristics – Responsive and flexible – – –

Matching product variety and volume to real-time customer and consumer demand Smaller, more frequent deliveries – internally and to customer

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Increase amount of cross-docking

Reduce inventory by improving speed of product flows Reliant on Electronic Data Interchange (EDI) with retail customers

Responsive RTM - the Zara example •

Traditional Fashion Industry –

Extremely cyclical (seasonal) market

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Short lifecycles & low predictability

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Highly volatile and impulse driven – ‘Surge Flow’ demand

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Retailers place orders 14 months out – locked in

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End of season – markdown remaining stock – sometimes upto 75%

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1985 estimated US fashion industry lost $25 billion due to both mark downs and lost sales • i.e. too much inventory of unwanted items and not enough of the fast movers

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Some diversify to mitigate risk •

segmented or geographical e.g. Arcadia / H&M

Zara - 30 000 near carbon copies of big fashion names designs - locally targeted design - e.g. Madonna’s 3 weeks of European concerts in 2001, people were wearing knock-offs of her 1st performance outfit - limits outsourcing, making most of its catwalk copies in-house and ensuring higher quality control - if it uses cheap labour, it uses poorer European countries rather than developing countries - clothes hit stores within 3 weeks of the designing (industry average 6 months) - fashion usually sold in 4 seasons, but Zara’s 2x a week delivery makes it into 104 new seasons - nothing is warehoused for more than 72 hours - clothes are ironed in advance and packed on hangers, with security and price tags affixed, saving store prime selling time - records are kept of any clothes tried on but not bought as well as cash records - Zara is visited on average 6x more than its competitors - uses no advertising (word of mouth)

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Aims = speed up inventory turnover and reduce mark-downs Copy big name fashion = ready made demand without marketing Vertical integration & local sourcing = minimise supply risks Clothes take 3-4 weeks from design - store Change range every few weeks (vs traditional 4 seasons)

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MKTG 229 Routes to Market

- Customers buy immediately - Customers buy more frequently (and visit more often) - Pre-season inventory = 15-20% total vs norm of 40-60% - Global DC – nothing in stock longer than 72 hours - Stock delivered ready-merchandised

- The change in strategy was supported by huge investment in information technology & hightech logistics centre

- Different type of business risk! -

Not supportive of advertising! Clothes are reported to be poor quality Part of our ‘Disposable Society’ Great consumer insight BUT……

types of supply chains - lean, agile, postponement LEAN SUPPLY CHAIN Lean primarily refers to elimination of waste and is the basic philosophy that originated as part of Toyota Production Systems, with its emphasis on the elimination of waste (muda). Therefore, this philosophy is based on reducing the cost by eliminating activities that do not directly add any value. Cost can be reduced in two ways: (1) by identifying and eliminating the wasteful activities that don’t add any value and (2) by enhancing the efficiency of a required activity so that the throughput of the process can be increased. A lot of s...