49473 INTERNATIONAL LOGISTICS SEMINAR WEEK 2: CORE COMPONENTS OF LOGISTICS - WHY DO CHANNELS OF DISTRIBUTION DEVELOP? FRIDAY 14 TH MARCH 2014

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1 49473 INTERNATIONAL LOGISTICS SEMINAR WEEK 2: CORE COMPONENTS OF LOGISTICS - WHY DO CHANNELS OF DISTRIBUTION DEVELOP? FRIDAY 14 TH MARCH 2014 Dr. PO-LIN, LAI

2 AGENDA Introduction Modes of Transportation Channels of Distribution Conclusions

3 A. INTRODUCTION Exciting period for international trade But What are the main entities in logistics? And How do different channels of distribution develop?

4 B. MODE OF TRANSPORTATION Key part of channel selection is modal choice Essential three elements 1.!The landward journey to port or airport 2.!The main driver leg International Air Transport Ocean Shipping 3.!The landward leg from port/airport to destination

5 INTERNATIONAL AIR TRANSPORT The airplane has had a dramatic impact on international distribution in that world-wide time distances have shrunk, sometimes enormously e.g. 30 days to under 1 Advantages fast transit, (with airport delays), reduced packaging, reduced stocking points; Disadvantages expensive, security hurdles, airport delays

6 SEA FREIGHT Advantages Disadvantages Cost Economies Bulk goods Large Packaged Consignments Flexibility Availability Speed Voyage time Turnaround time Need for Double Handling Delay Problems Damage

7 ROAD FREIGHT Quick Service if coordinated with ferry Complete loads & single origin/destination mode (competitive cost wise) Reduced double handling Fewer transit shocks Also, invariably linked to Air, Sea and Road modes for pick from supplier and final delivery to customer

8 RAIL FREIGHT Advantages Disadvantages Relatively cost effective Double-handling Larger weight restrictions than road New container systems reduce need for double handling Limited rail heads Slow Unreliability

9 CONTAINER SYSTEM Can be considered as a separate specialised transport mode Containerisation makes possible the intermodal system (uncomplicated movement of goods from one mode to another)

10 CONTAINER SYSTEM Advantages Disadvantages Enable load consolidation Handling cost reduction Lower insurance Quicker dock turnaround All-round delivery faster Through transit possible Special infrastructure Poor transport integration (now improved) Limited transfer points Return of empties Containers costly Leaky containers

11 MODE DETERMINATION Numerous factors as discussed: Important drivers include: Distance Cargo type Full or Part Load Unit Size Urgency Value Regularity

12 MODE DETERMINATION Size Of Order/ Load 100T 20T Pallet Parcel Road Road/Rail Rail/Sea Sea Road Road Road/Rail Rail/Sea Road Road Road/Rail Air/Sea Post/ Road Post/ Road/Air Post/ Road/Air Post/Air Source Rushton, A Cranfield University (unpublished) in Handbook of Logistics and Distribution Management (2000) Short Medium Long Very Long Delivery Distance

13 CASE STUDIES DB Schenker launched Trans Eurasia Express from China to Germany in February 2009 as a new alternative channel (currently most Asia Europe shipment by ship or air - only 2% by rail) Distance 10,000km Time less than 20 days (sea days) Frequency twice a week Cost considerably cheaper than air (around 25% less) CO2 Emissions 95% lower than air Reliability -? (Fujitsu Siemens Computers trial successful Sep 08)

14 CASE STUDY 1 Fujitsu Siemens Computers trial successful Sep 08 Train of 50 containers transporting high end IT products manufactured in China for Europe Start Xiangtang To Hamburg Actual journey took 17 days After Hamburg parts sent to a Distribution Centre in Worms

15 CASE STUDY 2 BMW - Rail Transport from Germany to China - successful trial - Sep 11 Train of 40 containers transporting automotive parts in Europe for China Start Leipzig Wahren Transshipment Terminal To Shenyang, China Transit time 23 days (half the time of sea transport!) Distance 11,000km!

16 CASE STUDY UPDATE New Southern Route being trialled (south of Mongolia, through Kazakhstan, Russia, Belarus and Poland.) Container train from Chongqing, China to Duisburg, Germany Took just 16 days (10,300km)

17 C. CHANNELS OF DISTRIBUTION 1. Alternative Channels 2. Why do Channels Develop 3. Channel Structure 4. Channel Choice 5. Channel Design

18 CHANNELS OF DISTRIBUTION Lecture focuses on the logistics channel which handles the physical movement of goods Can be defined as: A collection of organisation units either internal or external to the manufacturer, which performs the functions involved in product marketing Lambert, D. M. (1978) The Distribution Channel Decision pp1-2 Marketing functions are any function involved in or supporting the movement of product from manufacture to market

19 DIRECT OR INDIRECT Structure determined by functions organisations are capable of performing Channel structure fundamentally affects 1.! Control over the performance of functions 2.! The speed of delivery & communications 3.! Operational costs Direct greater control, higher costs (vol required) Indirect less control less revenue per unit

20 ALTERNATIVE CHANNELS CONSUMER GOODS (TRANSPORTATION, STORAGE & MIDDLEMEN NOT INDICATED) Manufacturer Manufacturer Manufacturer Manufacturer Manufacturer Sales Agent/ Broker Manufacturer s Branch Mail Order/ Own Store/ Retailer Wholesaler Retailer Wholesaler Retailer Wholesaler Retailer Consumer Consumer Consumer Consumer Consumer Lambert D & Stock J (1993) Strategic Logistics Management pp 73

21 ALTERNATIVE CHANNELS INDUSTRIAL GOODS (TRANSPORTATION, STORAGE & MIDDLEMEN NOT INDICATED) Manufacturer Manufacturer Manufacturer Manufacturer Agent or Broker Agent/ Broker Industrial Distributor Industrial Distributor Industrial User Industrial User Industrial User Industrial User Lambert D & Stock J (1993) Strategic Logistics Management pp 74

22 WHY DO CHANNELS DEVELOP? 1.! Intermediaries emerge as they increase the efficiency of the exchange process by adding time, place and possession utility 2.! Intermediaries enable the adjustment of the discrepancy of assortments by performing the functions of sorting and assorting 3.! Marketing agents form channel arrangements to make possible the routinisation of transactions 4.! Channels facilitate the searching process by consumers Alderson W, (1954) Factors Governing the Development of Marketing Channels

23 1.! EFFICIENCY OF THE EXCHANGE PROCESS Ratio of advantage - 2 Bread Bread Meat Clothes Meat Market Clothes Drinks Dairy Drinks Dairy Ten Transactions Five Transactions Alderson W, (1954) Factors Governing the Development of Marketing Channels

24 2.DISCREPANCY OF ASSORTMENT & SORTING The assortment of goods and services held by the producer and demanded by the consumer often differ Channel Intermediaries: Sorting Out Accumulating Allocation Breaking Bulk Assorting Building up assortment of products

25 3. ROUTINISATION OF TRANSACTIONS The cost of distribution can be minimised if transactions are routine Channel arrangements can remain in tact as marketing agencies wish to avoid the disruption costs of seeking an alternative channel

26 4. SEARCHING COSTS The use of an intermediary can reduce the searching costs Selling Costs (fewer market contacts required) Transportation Costs (fewer but larger shipments) Inventory Carrying Costs (intermediary ownership) Storage Costs Order Processing Costs Accounts Receivable/Bad Debts (intermediary ownership) Customer Service Costs

27 CHANNEL STRUCTURE Author s disagree about factors that influence channel structure Function of logistics systems product life cycle size of firm etc. Bucklin economic relationships between distribution echelons Channel determined by consumers who choose channel offers best satisfaction at minimal cost Based on concepts of postponement and speculation Bucklin, L. P. (1966) A Theory of Distribution Channel Structure; Institute of Business and Economic Research, University of California

28 POSTPONEMENT AND SPECULATION Postponement Speculation Costs reduced by postponing Opposite of postponement 1.! Configuration of product 1.! Placement of large orders 2.! Postponing inventory location 2.! Economies of large scale production Moves differentiation nearer to the consumer where demand is more easily forecast 3.! A reduction of uncertainty

29 ADDITIONAL INFLUENCING FACTORS Channel structure choice can also be influenced by: Technological, cultural social, political factors Physical Factors geography, size and density of market, location of production areas Local regulations Social and behavioural variables

30 CHANNEL CHOICE Evidence that channels used are not designed but evolve over time McVey P, (1960) Are channels of distribution what the textbooks say?, Journal of Marketing 24, no. 1 January This channel has always been used Hit and miss.. Trial and error just happened over time More alternatives and consumer demands more designed decision making

31 CHANNEL DESIGN PROCESS 1.! Establish Channel Objectives 2.! Formulate a Channel Structure 3.! Determine Channel Structure Alternatives 4.! Evaluate Channel Structure Alternatives 5.! Select Channel Structure 6.! Determine Alternatives for Individual Channel Members 7.! Evaluate and Select Individual Channel Members 8.! Measure and Evaluate Channel Performance 9.! Evaluate Channel Alternatives when Performance Objectives are not Met Lambert D & Stock J (1993) Strategic Logistics Management pp 88

32 CHANNEL DESIGN CONSIDERATIONS Market Coverage Product Characteristics Customer Service Objectives Profitability Lambert D & Stock J (1993) Strategic Logistics Management pp (Plus) Information Feedback Competitive Characteristics Company Resources

33 THIRD PARTY OR OWN ACCOUNT For most of international transport 3 rd parties used There are a number of alternatives Dedicated or exclusive distribution operations Multi-user (shared) distribution operation Specialist distribution operations (Christian Salvesen) Regional/National multi-client distribution Transit Operation Joint Venture Occasional Use

34 COSTS AND SERVICE The main consideration in determining the mode of movement is the need to balance costs with service There are significant trade-offs to be made in comparing different logistics factors and transport modes Two principal factor categories Operational Factors Customer Factors

35 OPERATIONAL FACTORS Basic Infrastructure Trade Barriers (customs duty, import quotas) Export controls and Licences Law and Taxation Financial Institutions and Services Economic Conditions Communications Systems Culture Climate

36 CUSTOMER FACTORS Service Level Delivery point constraints After-sales service needs Credit Rating Terms of sale preference Order size Customer importance Product knowledge

37 CHANNEL CHOICE Firstly, a good understanding of the key financial issues from the myriad of alternatives Main factors include: Types of Payment Open account, draft, letter of credit, cash in advance Taxes and Duties Import tax, value added tax, quota payments Transport Costs Associated Transport Charges Port fees, bunker adjustment fees, fuel charges Other Charges

38 INCOTERMS It is important to be aware that there are range of methods of doing business in international transport It is essential that the buyer and seller are aware on which terms trade has been agreed Different terms mean different responsibilities for both the organisation and the payment of the transport element of the order Known as Incoterms

39 IDENTIFYING INFLUENTIAL ATTRIBUTES IN FREIGHT ROUTE/MODE CHOICE DECISIONS Cullinane, K and Toy, N (2000) Transportation Research Part E, 36 (2000) They surveyed the Stated Preference in freight route/mode choice in the Western European freight market in existing freight route / mode choice literature Content analysis revealed a high level of agreement 1 Cost/Price/Rate 2 Speed 3 Transit Time Reliability 4 Characteristics of the Goods 5 Service (unspecified) Today emission levels can be added as an influential attribute

40 CASE STUDY Nestle Produce pasta under the Buitoni brand It is made from hard Durum wheat only available in the Puglie region of Italy (now in Italy dry pasta can only be made from Durum wheat) Buitoni is the leading dry pasta brand in the UK (7x the size of nearest brand rival Problems in supplying UK supermarkets who wanted reliable deliveries but at competitive prices

41 CASE STUDY Alternatives 1. By road and rail across Europe (expensive, faster and more reliable) 2. By road and sea around the Mediterranean and up the Atlantic coast (cheaper, slower and less reliable) Threat of de-listing if not able to develop workable solution

42 ! D. CONCLUSIONS Exciting times for International Trade Suppliers and Customers have to be clear about trade terms Modal Choice Channel Determination Highly Dynamic

43 READING Cullinane, K and Toy, N. (2000) Identifying Influential Attributes in Freight Route/Mode Choice Decisions: A Content Analysis Transportation Research Part E Vol. 36, pp DB Schenker Press Releases (2011): Freight Train from China Arrives in Duisburg after Travelling 10,300km information/ transport logistics/ train from china.html DB Schenker Begins Rail Transports from Leipzig to a Production Site in China press information/transport logistics/ dbschenker chinazug.html