AN EVALUATIDN OF ALTERNATWE CHANNELS 0F DESTRIBUTION: . AN EFFI‘CiENCY MODEL Dissertation for ‘zhe'Degree of Ph. D. ‘ * MECHIGAN STATEUNWERSITY ‘ MARY AgHéGBY ' ‘ 1975 ' W’ h. llllllllllll 31293 1] jfllj Bllllllllllll 1.5:! g :3» I .33“: six-31:7}: '1 Risa). ~1 This is to certify that the thesis entitled AN EVALUATION OF ALTERNATIVE CHANNELS OF DISTRIBUTION: AN EFFICIENCY MODEL presented by Mary A. Higby has been accepted towards fulfillment of the requirements for Ph.D. Business degree in , IL7LW, Major professor Date July 22, 1976 0-7639 y BINDING HOAG & SONS’ BLDOK BNI DDERY S:P:lll§P0flT. ”SHEA: ‘ _w,_j DA“ V) 0f ch reach marke more of ti the ( Phys and of h and c051 Char funr int. Phy ABSTRACT AN EVALUATION OF ALTERNATIVE CHANNELS OF DISTRIBUTION: AN EFFICIENCY MODEL BY Mary A. Higby Business firms are dependent upon the effective use of channels of distribution through which products flow to reach the ultimate consumer. Distribution channels and marketing institutions are continually changing to become more productive and efficient. Therefore, the objective of the research is to develop a methodology for analyzing the efficiency of alternative channels of distribution. A theoretical efficiency model for evaluating the physical distribution aspects of the marketing functions and flows is designed and tested. The marketing functions of buying, selling, transportation, storage, market finance and risk-bearing provide the basis for identifying the costs of the channel and its individual members. The channel flows of physical movement, goods ownership and funds provide further information for ascertaining the interrelationships of accounting, finance, marketing and physical distribution on channel management. for d. channl weigh‘ ratio contr for d ing f combi are: some only funct 3Ctiy tOtal Cont: the a cash Mary A. Higby The model assumes fixed demand and constant sales for distribution channels in the consumer goods sector. The channel efficiency dimensions of product value, product weight, product cubic volume and channel member turnover ratios are considered. In determining channel efficiency, contribution margins and discounted cash flows are developed for different product characteristics, turnovers and market- ing functions as they apply to different channel structure combinations. The major findings and conclusions of the research are: l. The more direct channel of distribution is, in some cases, more efficient than the indirect channel when only the physical distribution aspects of the marketing functions are considered. 2. The duplication of the physical distribution activities of the marketing functions serves to increase the total costs incurred by the channel and decrease its total contribution margin and discounted cash flows. 3. Channel product characteristics primarily affect the asset commitment to storage and transportation. The channel member turnover ratios affect operating costs and cash flows of alternative channel structures. 4. The analysis of different product characteris- tics indicates that the least channel structure flexibility exists . and hiq flexibi high we must b tive c margin ind ivi 0f ev. disco butio model markr Mary A. Higby exists in channels with products of low value, low weight and high cubic volume. Conversely, the greatest channel flexibility exists in channels with products of high value, high weight and low cubic volume. 5. Contribution margins and discounted cash flows must be considered in evaluating the efficiency of alterna- tive channel arrangements. Total channel contribution margins and discounted cash flows may be positive while individual members have negative contributions and flows. 6. The channel efficiency model provides a method of evaluating the possible cost, contribution margin and discounted cash flow implications of alternative distri- bution channels for both new and existing products. The model identifies the range of channel structure and marketing function options which may be analyzed. AN EVALUATION OF ALTERNATIVE CHANNELS OF DISTRIBUTION: AN EFFICIENCY MODEL BY 30 Mary A? Higby A DISSERTATION Submitted to Michigan State University in partial fulfillment of the requirements for the degree of DOCTOR OF PHILOSOPHY Department of Marketing and Transportation Administration 1976 (9 Copyright by MARY ANNA HIGBY 1976 ii To: My Family iii the con and sui recogr Smykaf and D and E infl the area Sig! Obs Eng “ti it ACKNOWLEDGMENTS The contributions of many individuals influenced the completion of this dissertation. Their assistance and support were sincerely appreciated. The dissertation committee deserves special recognition. The committee consisted of Dr. Edward W. Smykay, Professor of Marketing and Transportation; Dr. W. J. E. Crissy, Professor of Marketing and Transportation; and Dr. Harold M. Sollenberger, Professor of Accounting and Finance. Dr. Smykay, as committee chairman, was a vital influence through all phases of the research and throughout the doctoral program. His knowledge and understanding of areas of marketing and physical distribution had a significant impact on the completed research. Dr. Crissy provided valuable insights and critical observations during all phases of the research. His encouragement and guidance were most helpful. Dr. Sollenberger helped to solve many problems which arose in bridging the areas of accounting, finance, marketing and physical distribution. His ideas and comments influenced the direction of the research. iv complet Williai Mr. Wi‘ opment disser throng contii and tl and c: broth Numerous friends and colleagues also aided the completion of this work. Mr. Roger P. Williams and Mr. William R. Parker deserve recognition for their efforts. Mr. Williams, programming expertise facilitated the devel- 0pment of the computer model required to complete the dissertation. Mr. Parker's comments and cooperation throughout the research were most valuable. My family deserves special mention for their continued love and understanding throughout the research and the doctoral program. I am thankful for the confidence and constant encouragement of my mother; sister, Sara; and brothers, Clare and Elmore. LIST 01 LIST 0] Chap te: I. II. III. TABLE OF CONTENTS LIST OF TABLES . . . . . . . . . . . . . . . . . . LIST OF FIGURES . . . . . . . . . . . . . . . . . . Chapter I. INTRODUCTION . . . . . . . . . . . . . . . Background of Problem . . . . . . . . . . Sc0pe of Problem . . . . . . . . . . . . Problem Statement . . . . . . . . . . . . Distribution Channels and Marketing Functions . . . . . . . . . . . . . Distribution Channels and Financial Methods . . . . . . . . . . . . . . Limitations . . . . . .'. . . . . . . . . Order of Presentation . . . . . . . . . . II. REVIEW OF LITERATURE . . . . . . . . . . . Approaches to Channel Efficiency . . The Functional Approach . . . . . The Flow Approach . . . . . . . . The Economic Structure Approach . . The Channel Models Approach . . . . The Measurement and Control Approach Approaches to Channel Financial Management . . . . . . . . . . . . . . The Accounting Information System Approach . . . . . . . . . . . . . The Capital Budge ing A proach . . . Concluding Comments . . . . . . . . . . . III 0 RESEARCH DESIGN 0 O O O O O C O O C O O O 0 Overview . . . . . . . . . . . . . . . . Description of the Channel Structure Methodology . . . . . . . . . . . Channel Structures . . . . . . Marketing Functions and Flows . . . Developing the Distribution Channel Model vi Page viii xi \IO‘H H 10 10 11 15 15 16 23 3O 40 43 44 54 64 64 65 67 69 76 Chapter IV. BIBLIoc Chapter The Input System . . . . . . . . The Operating System . . . . . . The Operating Expense Routine The Cash Flow Routine . . . . The Capital Budgeting Routine The Output System . . . . . . . Operating Expense Report . . . . Income Statement and Balance Sheet Capital Budgeting Analysis Report . Concluding Comments . . . . . . . . . . IV. RESEARCH FINDINGS . . . . . . . . . . . . Overview . . . . . . . . . . . . . . Experimental Model Parameters . . . . . Channel Structure Efficiency . . . Product Characteristic Variables . Channel Efficiency Comparisons . . Elements of Channel Structure Efficiency Turnover . . . . . . . . . . . . . . Transportation Function . . . . . . . Channel Length . . . . . . . . . . . Turnover and Transportation Function Turnover and Channel Length . . . . . Transportation Function and Channel Length . . . . . . . . . . . . . . Turnover, Transportation Function and Channel Length . . . . . . . . . . Concluding Comments . . . . . . . . . . . V. SUMMARY, CONCLUSIONS AND RECOMMENDATIONS . Conclusions and Implications . . . . . . Channel Structures . . . . . . . . . Channel Marketing Functions . . . . . Channel Product Characteristics and Channel Member Turnover Ratios . . Channel Financial Management . . . . Channel Efficiency Model Applications Limitations and Suggested Future Research BIBLIOGRAPHY . . . . . . . . . . . . . . . . . . . vii Page 78 78 79 85 86 86 86 87 87 89 91 91 92 96 96 102 108 109 109 112 112 119 119 122 125 128 129 129 130 130 132 132 133 135 Table 2-1. 4-1. 4-2. 4-6. 4~7 4-8 M 4‘11 4-1: LIST OF TABLES An Outline of Comparative Marketing Issues, Functions and Flows . . . . . . . . . . . . Product Characteristics . . . . . . . . . . Channel Member Turnover Ratios . . . . . . . Channel Structure Totals: Product Value $1, Product Weight 2 Pounds, and Product Cubic Volume 2 Cubic Feet . . . . . . . . . . . . Channel Structure Totals: Product Value $1, Product Weight 2 Pounds, Product Cubic Volume .5 Cubic Feet . . . . . . . . . . . . Channel Structure Totals: Product Value $5, Product Weight 10 Pounds, and Product Cubic Volume 2 Cubic Feet . . . . . . . . . . . . Channel Structure Totals: Product Value $5, Product Weight 10 Pounds, and Product Cubic Volume .5 Cubic Feet . . . . . . . . . . . . Channel Efficiency Comparisons: All Marketing Functions Performed . . . . . . . Channel Efficiency Comparisons: Shift Transportation Function to Consumer . . . . Channel Efficiency Comparisons: Transpor- tatiOn FunCtion By-PaSS o o o o o o o o o 0 Channel Efficiency Comparisons: Channel Structure Alternatives . . . . . . . . . . . Channel Efficiency Percentage Change Comparisons: Increase Turnover in M-W-R-C Channe l O O O O O I O O O O I O O O O O O 0 viii Page 28 94 96 97 99 100 101 103 104 105 107 110 Table Table 4-12 0 4-18 0 4-190 4-200 4-210 Channel Efficiency Percentage Change Comparisons: Shift Transportation Function to Consumer in M-W—R—C Channel . Channel Efficiency Percentage Change Comparisons: Transportation Function BY“PaSS in M-W-R-C Channel 0 o o o o o o 0 Channel Efficiency Percentage Change Comparisons: Shift Transportation Function to Consumer and Transportation Function By-Pass in M-W-R—C Channel . . . Channel Efficiency Percentage Change Comparisons: Reduce Channel Length . . . Channel Efficiency Percentage Change Comparisons: Increase Turnover and Shift Transportation Function to Consumer in the M-W-R-C Channel -. . . . . . . . . . . Channel Efficiency Percentage Change Comparisons: Increase Turnover and Transportation Function By-Pass in M-W-R-C Channel . . . . . . . . . . . . . Channel Efficiency Percentage Change Comparisons: Increase Turnover, Shift Transportation Function to Consumer and Transportation Function By-Pass in M-W-R-C Channel . . . . . . . . . . . . . . . . . Channel Efficiency Percentage Change Comparisons: Increase Turnover and Reduce Channel Length . . . . . . . . . . Channel Efficiency Percentage Change Comparisons: Shift Transportation Function to Consumer and Reduce Channel Length . . . . . . . . . . . . . . . . . . Channel Efficiency Percentage Change Comparisons: Transportation Function By-Pass and Reduce Channel Length . . . . ix Page 110 111 113 114 115 117 118 120 121 123 Table 4-22. 4-23. Table 4-22. 4-23. Page Channel Efficiency Percentage Change Comparisons: Increase Turnover, Shift Transportation Function to Consumer and Reduce Channel Length . . . . . . . . . . . 124 Channel Efficiency Percentage Change Comparisons: Increase Turnover, Transportation Function By-Pass and Reduce Channel Length . . . . . . . . . . . 126 Figure 2-1. 3-1. 3-2. 3-3. 3-4. 3-5 3-6 3-7 4-1 Figure 3-5. 3-6. 3-7. 4-1. LIST OF FIGURES Straight—Line Chart of Channels for a Consumer Good . . . . . . . . . . . . Basic Distribution Channel Structures Marketing Function Variables . . ... . Marketing Functions in a Manufacturer- Consumer Channel . . . . . . . . . . . Marketing Functions in a Manufacturer- Wholesaler-Retailer-Consumer Channel . Matrix of Marketing Functions . . . . Channel Alternatives . . . . . . . . . Income Statement for Channel Memberj . Channel Alternatives Considered . . . xi Page 25 68 69 71 72 74 75 88 93 distribi in the 1 century product channel PIOduct distrib this pr dePEHde Produc, tiOnal to P011 ment i1 Charms; firm ft States CHAPTER I INTRODUCTION Background of Problem The relationship between manufacturing and distribution has been of increasing concern to individuals in the United States since the beginning of the twentieth century. As production of agricultural and manufactured products expanded after 1900, it became evident that the channel of distribution was an important link between production and consumption. The problems associated with distribution have encouraged investigation and analysis of this problem. The success of today's business firm is largely dependent upon the effective use of channels through which products flow to reach the ultimate consumer. The institu- tional mechanisms that move goods from points of production to points of consumption must be a major concern of manage- ment in the marketing of products for consumer use. The channels utilized are an important policy decision for the firm for they influence every marketing decision. Revzan states: "The channel is the managerial battlefield in which mar of each b D bution ch areas of channels hypothesj a result have beei rather tj marketin Plexitie field of function has Fla: with Che Various author. the tllfai: channel tional the ins channel tyPe O f which marketing strategy and marketing tactic activities of each business unit either succeed or fail."1 Despite the recoqnized importance of the distri- bution channel, the channel "is one of the least managed "2 The scholarly study of marketing areas of marketing. channels is relatively limited. McCammon and Little hypothesize that this neglect of the study of channels is a result of these basic reasons: First, marketing scholars have been primarily interested in the theory of the firm rather than its relationship to other enterprises. Second, marketing channels have not been studied due to the com- plexities involved. Third, although early studies in the field of marketing were concerned with institutions and functions, the managerial approach adopted in the 19503 has placed less emphasis on channel systems.3 Marketing channels and trade channels are synonymous with channels of distribution. They have been defined in various ways depending upon the purpose or preference of the author. A conventional definition is: "The course taken in the transfer of title to a product constitutes its trade channel."“ Most authors recognize the following defini- tional constraints in identifying a specific channel. In the instance of a manufacturer selling to a wholesaler, the channel is defined to include the manufacturer, a specific type of wholesaler, the customer of the wholesaler and the ultimate sells dll manuf act‘ the manu consists This thf typ for gen mer ret ful decisi< The ma liter. A Spe setvE Plexi sa1e: Prod. Who ultimate consumer. In the case where the manufacturer sells directly to retailers, the channel consists of a manufacturer and a particular type of retailer. Where the manufacturer markets directly to users, the channel consists of the manufacturer and specific types of users. This thinking is exemplified in the following statement: type and number of outlets are primarily problems for the manufacturer. They rarely arise for the general wholesalers, who specialize by class of merchandise, sell primarily to independent retailers, and typically attempt to sell their full line to each retail account.5 The manufacturer must make three basic channel decisions: 1. Select the marketing channel(s) to be employed. 2. Choose the intermediaries to be used and develop appropriate distribution policies regarding them. 3. Devise information and control mechanisms to insure that planned and actual performance coincide.6 The manufacturer orientation of much of the existing channel literature disregards the nature of interfirm relationships. A specific wholesaler, for example, might simultaneously serve 10 to 15 different types of retailers. The com- plexities of the channel are either overlooked or omitted. The channel of distribution, as viewed by the whole- saler. is composed of one wholesaler who handles competing products made by several manufacturers and sells to many different retailers. This approach is supported by McVey who suggests that the middleman is not a hired link in the channel Ms own‘ oriente< today. One poi the thi cha tow Alderso as orga marketi fiable marketj among c sYStem in the defini: tion 1: 0f dis~ SeqUEn flows 1 “Oh i. Organi Combin channel but rather an independent market with customers of his own. Both the manufacturer-oriented and the wholesaler- oriented approaches are critical problems in distribution today. Breyer states: One must examine the channel from a total channel point of view--not just the manufacturer's, or the wholesaler's, or the retailer's. Without this commitment to the study and management of channels as a whole, little progress can be made toward the optimizing of distribution.8 Alderson suggests that distribution systems may be viewed as organized behavior systems.9 Ridgeway argues that the marketing channel is an organizational system with identi- fiable behavior patterns.10 Vaile, Grether and Cox use the marketing flow concept to depict the interrelationships among channel members.11 Breyer describes a notational system for analyzing the movement flows through agencies in the channel of distribution.12 These developments indicate that a more encompassing definition of the interactions of the channel of distribu- tion is required. Vaile, Grether and Cox state: "A channel of distribution may be thought of as a combination and sequence of activities through which one or more marketing "13 Cox and Schutte further refine this defini- flows move. tion in stating that a channel of distribution is: "An organized network of agencies and institutions which in combination, perform all the activities required to link producer the marl channel: that the charactc for the when th The phy marketi reSpons various channel manage} 0f the fach . imProv Pre33u in the nels C ProduC ViGUa] markEt Comps: producers with users and users with producers to accomplish the marketing task."l“ Other major issues in the management of marketing channels are evident. Businessmen have tended to assume that these types of channel structures exist: (1) The characteristics of the product determine the best channel for the product; (2) The channel of distribution stops when the buyer takes possession of the product; and (3) The physical movement of the product is viewed as the only marketing task performed by the channel.15 No one is responsible for the management of the channel. Although various aspects of marketing management related to the channel are handled by the purchasing agent, the sales manager, the warehouse manager and so on, the position of the manager of the channel of distribution is vacant. Marketing channels and institutions are continually faced with the twin and many times conflicting pressures to improve channel services and to reduce channel costs. These pressures result in both changes in channel composition and in the relative importance of alternative channels. Chan- nels of distribution are constantly changing to become more productive and efficient. Under normal conditions indi- vidual firms in a channel will make minor revisions in marketing practices so that they can maintain their competitive position without significantly altering their existing policies or practices. afirm' existin relatic when sn betweer grow wl the rej change struct change eXpect U‘IAWNI—I' ThESe and f 0f ma Major changes in marketing practices may threaten a firm's or channel's existence. These changes disrupt existing patterns of competition and alter cost-price relationships. Innovations in distribution patterns occur when small ventures take advantage of the attractive spread between cost and expected revenues. New firms and channels grow while the higher priced channels lose volume due to the reluctance of the established institutions to make changes. Despite the reluctance to change, the distributive structure for consumer goods is expected to undergo major changes. Trends suggest that the following changes can be expected to accelerate and intensify: . Rapid growth of vertical marketing systems. . Intensification of intertype competition. . Increasing polarity of retail trade. . Acceleration of institutional life cycles. . The emergence of the free form corporation as a major competitive reality in distribution. . The expansion of nonstore retailing.16 0‘ ()1wa!“ These trends will have a major impact upon the managerial and financial strategies which must be implemented by firms in evaluating current and future distribution channels. Scope of Problem The process of exchange arising from the development of marketing channels creates possession utility as well as time and place utility. In economic analysis price equilibr understa' recognit and poss factors volume a profits. moved t] Channel financi strateg Regard]. beyond difque distriy The rel prq an< th. d thee distri Since equilibrium assumes that exchange is costless. An understanding of trade channels must begin with the recognition of the costs involved in creating time, place and possession utility. In evaluating channels of distribution two important factors which affect channel decisions are potential sales volume and costs involved since both influence anticipated profits. Other factors are the physical unit of product moved through the channel and the dollar spread of the channel for a specific time. Marketing cost analysis and financial analysis can also be valuable aids in making many strategic marketing decisions in channel management. Regardless of the method used, the analysis should extend beyond the boundary of the manufacturer and should be diffused throughout the entire length of the channel of distribution. As Weigand states: I The ability and willingness of wholesalers and retailers to buy, sell, stock and deliver the product of the manufacturer has a significant and obvious effect on the profit of every firm that is involved in the transaction.17 Problem Statement The purpose of the research is to design and test a theoretical efficiency model for evaluating the physical distribution aspects of alternative channels of distribution. Since different channels exhibit different cost behavior due ‘1‘ to thn of ma effic varia funct chanr provi relal ment mode dlih Prcm fun “PK: etc) ris 0f to the number of channel members utilized and the number of marketing functions performed, the development of the efficiency model requires the identification of relevant variables for measuring the costs of specific marketing functions performed by different channel members. The channel flows of physical movement, ownership, and funds provide further information for ascertaining the inter- relationships of marketing and finance on channel manage- ment. The research problem requires the development of a model for determining how the functions, flows and resultant costs for physical distribution activities influence the entire channel as well as individual channel members. After developing the model, function and flow relationships will be varied to determine the financial impact of different channel structures. Distribution Channels and Marketing Functions Early writers in the field of marketing identified discrete functions to logically explain the marketing process. Through time other scholars have modified the functional framework of marketing. The commonly agreed upon functions are: buying, selling, tranSportation, storage, standardization and grading, market finance, risk-bearing and market information and research. Each of the marketing functions represents a major economic activi‘ produc interm tageou certai perfor tional evalua t0 tot funct: proce: Breye: separ of di analy of CW inv01 to pk SequE funds funct ace“I These each 0f d: activity which must be performed in the marketing of a product. All of the functions must be performed by the intermediaries in the channel. However, it may be advan- tageous for some members of the channel to perform only certain functions while other intermediaries or institutions perform other functions. It is suggested that: "The func- tional approach to marketing provides a framework for the evaluation of alternative channel structures with respect to total channel capacity."1° Activities associated with each of the marketing functions may be identified when the flows in the marketing process are considered. The flows approach suggested by Breyer19 and Vaile, Grether and Cox20 provides for the separation of activities and agencies within the channel of distribution. Three flows aid in distribution channel analysis: (1) The physical flow of goods, (2) the flow of ownership, and (3) the flow of funds. The flow of goods involves the performance of the marketing functions related to physical exchange. The ownership flow indicates the sequence in which agencies exchange legal title. The funds flow involves the performance of the market finance function. It also shows the sequence by which agencies accumulate and bring capital into the marketing process. These flows facilitate the identification of the role of each of the intermediaries and institutions in the channel of distribution.21 Distr Analy firm form aries desii the e there some repr anal alte the mEdi can ture Wit} Phy 0f the 10 Distribution Channels and Financial AnaIysis In considering marketing channels the manufacturing firm must determine which marketing functions it will per- form and which functions it will shift to other intermedi- aries or institutions. The extent to which the manufacturer desires to perform the marketing functions will influence the channel(s) it uses in marketing its products. Although there are many factors which influence channel decisions, some authors have suggested that financial considerations represent the most important one.22 The manufacturer should analyze both the financial capability of intermediaries in alternative channel structures to perform the functions and the resultant profitability of his products for the inter- mediaries in alternative channel structures. This analysis can reveal the channel(s) which will provide the manufac- turer with a competitive advantage over other manufacturers with competing products.23 Limitations The limitations of the study are: 1. The research is limited to the efficiency of physical distribution activities in alternative channels of distribution. Further research is required to develop the demand creation aspects of the model. ‘ model wh to analy analytic constant the metl account: were se.‘ account literat Structi the goa PIOflts market incorn maximi: market objEQt distrj 11 2. The study develops a theoretical efficiency model which utilizes published data and specific assumptions to analyze and evaluate different channel systems. The analytic framework assumes one product, fixed demand and constant sales. Empirical tests are required to validate the methodology. 3. The research may be limited by the specific accounting and financial methods employed. The methods were selected, however, after thoroughly reviewing the accounting, finance, marketing and physical distribution literature. 4. The development of the research and the con- struction of the model is based upon the assumption that the goal of the firm is to control costs while maximizing profits. For firms that seek to maximize gross sales, market share or some other measure, the assumption may be incorrect. If these firms desire to control costs and maximize efficiency, the methodology may be beneficial. Order of Presentation Chapter II is a review of the accounting, finance, marketing and physical distribution literature related to an efficiency analysis of channels of distribution. The objective of this chapter is to determine how channels of distribution have been analyzed and to identify those factors theoreti to deter be utili efficiei model a: value, ‘ in acco practic varying differe and die Channej reSear 12 factors which are relevant to the development of the theoretical efficiency model. This review will also serve to determine the method of financial analysis which should be utilized to analyze and evaluate channel efficiency. Chapter III describes the design of the theoretical efficiency model. The parameters and the assumptions of the model are explained. The efficiency model allows product value, weight, cubic volume and turnover to be altered in accordance with specific channel, firm, or industry practices. Chapter IV presents the output of the model with varying function and flow relationships. It presents the differences which result when traditional costing techniques and discounted cash flow analysis are utilized to evaluate channels of distribution. Summary statements and recommendations for further research are presented in Chapter V. "UO - H we: cut: ww- Channe and thn Market Channe in Mar and So Market \ Inc., the T( 63. Chapter I--Footnotes 1David A. Revzan, Wholesaling in Marketing Organization (New York: John WIley and Sons, Inc., 1961), p. 155. 2Reavis Cox and Thomas F. Schutte, "A Look at Channel Management," in Marketing Involvement in Society and the Economy, ed. Philip McDonald (Chicago: American 9 Marketing Association, 1969), p. 105. 3Bert C. McCammon and Robert W. Little, "Marketing Channels: Analytical Systems and Approaches," in Science in Marketing, ed. George Schwartz (New York: John W1Iey and’Sons, Inc., 1965), pp. 321-322. “Theodore N. Beckman and William R. Davidson, Marketing (New York: The Ronald Press, 1962), p. 44. 5M. P. Brown, w. B. England and J. B. Matthews, Jr., Problems in Marketing (New York: McGraw-Hill Book Co., Inc., 1961), p. 44. 6McCammon and Little, p. 3S4. 7Phillip McVey, "Are Channels of Distribution What the Textbooks Say?" Journal of Marketing 28 (January 1960): 63. 8Ralph F. Breyer cited by Cox and Schutte, p. 102. 9Wroe Alderson, "Factors Governing the Development of Marketing Channels," in MarketiggChannels for Manu- factured Products, ed. Richard D. Clewett (Homewood, 111.: RIchard D. Irwin, Inc., 1957), P. 30. l°Va1entine F. Ridgeway, "Administration of Manufacturer-Dealer Systems," Administrative Science Quarterly 1 (March 1957): 464-483. llRoland S. Vaile, E. T. Grether and Reavis Cox, Marketing in the American Economy (New York: The Ronald Press, 1952), pp. 121-133. 13 'Stru: in Th; Stanl 1964) Insti Chan: ed. 1 l967j The 1 York in ( lWir Fine \ Fine 14 12Ralph F. Breyer, "Some Observations in the 'Structural' Formation and the Growth of Marketing Channels," in Theory in Marketing, eds. Reavis Cox, Wroe Alderson and Stanley J. Shapiro (Homewood, 111.: Richard D. Irwin, Inc., 1964). pp. 163-173. 13Vaile, Grether and Cox, p. 121. ll'Cox and Schutte, p. 100. lsMcCammon and Little, p. 382. 16William R. Davidson, "Changes in Distributive Institutions," Journal of Marketing 34 (January 1970): 7. 17Robert E. Weigand, "The Accountant and Marketing Channels," in The Marketi_g Channel: A Conceptual _Viewpoint, ed. Bruce Mallen (New York: John Wiley and Sons, Inc., 1967). p. 230. 18Donald J. Bowersox, Logistical Management (New York: The MacMillan Co., 1974), p. 45. 19Ralph F. Breyer, The Marketigg Institution (New York: McGraw-Hill Book Co., Inc., 19347, pp. 102-115. 2°Vaile, Grether and Cox, pp. 121-133. 21Cox and Schutte, p. 104. 22Eugene J. Lambert, Jr., "Financial Considerations in Choosing a Marketing Channel," MSU Business Topics 14 (Winter 1966): 17- -26, and Michael Schiff and’Martin Mellman, Financial Management_ of the Marketing Function (New York: Financial Executive Research Foundation, I962), pp. 135- 147. 23Weigand, pp. 234-235. research distribi model re the Chdl Section The sec div ide 9991‘ De CHAPTER II REVIEW OF LITERATURE The purpose of this chapter is to present the research underlying the conceptual base of the model of distribution channel efficiency. The development of the model requires a review of both the channel efficiency and the channel financial management literature. The first section of this chapter will focus on channel efficiency. The second section will examine channel financial management. Approaches to Channel Efficiency The existing channel of distribution literature is divided into five different, distinct yet interrelated approaches to the study of channel efficiency: (1) the functional approach, (2) the flow approach, (3) the economic structure approach, (4) the quantitative model approach, and (5) the measurement and control approach. Each of these approaches analyzes various aspects of the relationships and interrelationships which occur within the channel structure . 15 The F1 proce: for m. the f The f the g (5) a the d risk, impor the ; tende in tr the 1 Perfe Weld "tha- inat elim Perf mark Stan mark 16 The Functional Approach Shaw observed the efficiency of the marketing process in 1912.1 In explaining the emerging tendency for manufacturers to go around middlemen, he identified the functions performed by successive channel middlemen. The functions were: (1) sharing the risk, (2) transporting the goods, (3) financing the Operations, (4) selling, and (5) assembling, assorting and reshipping. Shaw noted that the development of functional middlemen who would assume risk, transport goods or finance operations diminished the importance of existing middlemen for these functions. Hence, the performance of specific functions by some middlemen tended to modify the existing channels of distribution in the early 19003. In 1917 Weld expanded the definition and clarified the functions of marketing.2 Since the functions were performed by producers and consumers as well as middlemen, Weld referred to them as marketing functions. Weld stated ”that the cost of marketing might be reduced by the 'elim— ination of middlemen' . . . [but] this does not mean the elimination of marketing functions--which still have to be performed.”3 He further noted that the classification of marketing functions was fundamental to the study and under- standing of marketing. All services performed in the marketing process were classified as marketing functions. The serv B) assu w) sell related as the T expenses costs, a risk fUl ciated ‘ deterio The fin Accordi caPital The reg grading quanti1 Princi] (2) ge‘ tranSp. Of 900 functi Specia tatiOr 17 The services he included were: (1) assembling, (2) storing, (3) assumption of risk, (4) financing, (5) rearrangement, (6) selling, and (7) transportation. Weld described the assembly function as all services related to buying. The storing function was broadly viewed as the holding of stocks of goods at convenient points. The expenses associated with the storing function were storage costs, storage space and interest on capital employed. The risk function was defined to include all the risks asso- ciated with price fluctuation, destruction by fire, deterioration in quality, style change and financial risks. The financing function was viewed as the most important. According to Weld the finance function also contained a capital commitment with the associated interest charges. The rearrangement function was described as the storing, grading and breaking up of large quantities into small quantities. The selling function was seen as having two principal parts: (1) creating of demand for goods, and (2) getting the goods into the hands of purchasers. The transportation function was noted as being the movement of goods from one place to another. Weld observed that much of the transportation function was performed by railroads and other transportation specialists. At that time a large portion of the transpor- tation function provided by merchandise middlemen was the deliver However the de? home, i the co the ma mance. functi formir shoule have 1 ande marke two 11 funct Were 0f t‘. deve iden EXC} the the 18 delivery of goods from the middleman to the customer. However, there was a growing tendency for stores to reduce the delivery expense by encouraging customers to carry goods home, which shifted part of the transportation function to the consumer.“ In 1920 Cherington emphasized the need for analyzing the marketing agencies separate from their actual perfor- mance.5 He was the first to stress that the marketing function should be analyzed rather than the agencies per- forming the function. Cherington stated that attention should be centered "not upon the forms of devices which have been develOped and which must be regarded as temporary and external features, but rather upon the functions of marketing as the permanent elements of marketing."6 In his discussion of functions Cherington identified two major groups: merchandising functions and auxiliary functions. The functions identified within the two groups were similar to those identified by Weld, but his discussion of the functions focused on retail management problems. Incorporating the grouping of functions approach developed by Shaw, Weld and Cherington, Clark in 1922 identified three major functions: (1) the functions of exchange, (2) the functions of physical supply, and (3) the auxiliary or facilitating functions.7 He reiterated the advantages of the functional approach: any ”'5 QOBMH-”U_- ('1' integ of tt belie he er 0f ce tran: be re dist serv thre tiOn emPh aSse Pers that cou1 mant Cou] 9x15 19 So important are these functions to the marketing process that the best approach to many of the problems involved in marketing-- the object is to understand general marketing processes used in marketing particular products-- is an understanding of these essential services. Such knowledge enables one to understand why middlemen exist, why marketing is costly, why certain marketing institutions and devices have developed, and often furnishes the best approach to the solution of specific marketing problems.8 In 1927 White proposed a systematic method of integrating the marketing functions into the management of the marketing effort.9 To dispel the prevailing belief that marketing was only advertising and selling, he emphasized that marketing was not just broadcasting of commodities but also included their reception and transmission. White stressed that manufacturers would be required to consider the other activities, since the distribution of any product required a series of defined services or functions. He categorized the functions into three classes: (1) functions of concentration, (2) func- tions of dispersion, and (3) facilitating functions. White emphasized that the concentration functions including assembling and grading could be as important as the dis— persion functions of demand creation. He also stressed that the organization and control of the marketing effort could lead to reduced costs and added profits. Hence, manufacturers were cautioned to investigate whether they could perform the marketing functions as efficiently as existing middlemen. imp tha prc The and of fy: de: a 1 re Fri ke di ga as di di Tl 20 Clark and Weld in 1932 further described the importance of the marketing system11° They suggested that three processes were required in the marketing process: concentration, equilization and dispersion. These processes required the marketing system to collect and adjust the scattered farm supply to the distant demands of manufacturers and consumers. In 1950 McGarry developed a new method of classi- 11 He felt that the previously fying marketing functions. described functions were somewhat mechanistic. He proposed a new classification of functions which would focus on the relationship of the marketing system to its environment. From this viewpoint McGarry defined the functions of mar- keting as: (1) the contractual function, (2) the merchan- dising function, (3) the pricing function, (4) the propa- ganda function, (5) the physical distribution function, and (6) the termination function. Although the six functions as he defined them, cut vertically through the channels of distribution, their narrow concise definitions confine the distribution process to physical exchange and legal exchange. The importance of the finance function in the marketing process is omitted. Alderson observed in 1950 that the fundamental marketing functions of sorting and searching are facilitated by the existence of marketing channels.12 The sorting pr an so gr SL' Al d. 21 process applied to both the breaking down of collections and the building-up of collections. Sorting included: sorting out, the separation of goods into homogeneous groups; accumulation, the building-up of homogeneous supplies; allocation, the division of homogeneous supply; and assorting, the recombination of heterogeneous supplies to meet patterns of.demand. The searching function is required to overcome imperfect market conditions. The successful completion of the searching process leads to the sorting function. The need for efficiency in searching and sorting results in the development of specialists. According to Alderson, channels of distribution have‘ developed to facilitate both the searching and sorting processes.13 Staudt prOposed a list of marketing management functions in 1958.1“ He identified the marketing functions which must be performed within the firm to include: the market delineation function, the purchase motivation function, the product adjustment function, the physical distribution function, the communications function, the transaction function and the post transaction function. Staudt suggested that these functions must be analyzed to evaluate the operating efficiency of the individual firm. Bucklin,in constructing a general theory to describe and predict channel structures, proposed a new marketing fu pe fc cl tl Ir 22 functions classification method in 1960.15 The marketing functions identified were: transit, inventory, search, persuasion, and production. The identified functions focus on specific activities performed by firms in the channel. This approach appears to emphasize firms rather than functions as suggested by Cherington, Clark and others. In addition his functional listing omits the finance and risk functions inherent in the marketing process. The marketing functions which must be performed to preserve the economic vitality of the channel are the macro-oriented functions described by Shaw, Weld, Cherington, While, Clark, McGarry, Alderson and Bucklin. In contrast the functions which must be performed to preserve the firm are the micro-oriented functions developed by Staudt. Several authors have modified, refined and in a few cases enlarged the list of marketing functions first identified by Shaw. At present the generally accepted marketing functions include: the exchange functions of buying and selling; the physical supply functions of transportation and storage; and the facilitating functions of standardization, market finance, risk-bearing and market information and research. Furthermore, Shaw, Weld, Chering- ton, Clark and others have emphasized the need for the analysis of the marketing functions in order to aid in the understanding of the marketing process. Dommermuth 23 and Anderson argue that the functional channel system approach provides great value "in generating new ideas about the dynamics of channel structure, efficiency and profitability."16 The Flow Approach In 1934 Breyer introduced the concept of marketing flows.17 He defined marketing as "the work relating to the flow of goods from the time and place of the conclusion of production to the time and place of the initiation of con— "1° In recognizing marketing functions or tasks, sumption. Breyer observed that the marketing tasks were varied in different channel structures. He further noted that the "variations in sequence and continuity of marketing func- tions exert considerable influence upon the amount of resistance or burden the marketing institution must overcome."19 To analyze the interactions of the marketing forces, Breyer developed the market flow concept. Channels of distribution were viewed as analogous to electric circuits with flows moving in two directions. According to Breyer, the flows of orders triggered the flows of goods and pay- ments. Hence, the flows of orders and payments moved in one direction while the flow of goods moved in the opposite direction. 24 The flow concept was expanded by Vaile, Grether and Cox.20 To indicate the continuous processes of marketing, a channel of distribution was defined as "the combination and sequence of agencies through which one or more marketing flows move."21 The flow concept in their view included more than physical movement. Each market flow represented a series of movements from one agency in the channel to another. The marketing flows are presented in Figure 2-1. The flows indicate: Passage of rights and responsibilities of owner- ship and the burdens of financing and risking to successive agencies; transmital of impulses to buy or sell; the arrangement of successive transactions; the accumulation and distribution of market information; transfers of instructions as to what shall be made; and payment for the goods and services provided.22 The flows of physical possession, ownership and negotiation typically move from consumer to manufacturer. The flows of information, financing and risking may move in either direction. Fisk modified the flow approach in 1967.23 The channel of distribution was.viewed as a transaction channel with a symbiotic relationship between the market forces of supply and demand. The flow of transactions contained the movement of information, goods, ownership, money and risks through the channel. The flows in the channel are initiated by each transaction. The elements of each transaction are: communication, ownership, financing, physical distribution F1911: SourCe: 25 Manufacturer * l l ,- 1 fl r A O o ' Common Cafr1er u A l )j ‘1 T: IHT lfl' ( {Broker l 4 3 1 l a : Wholesaler 1 + 7 V j J. .‘ l Condract Carrier: L _ A j \. g i t i Subjobber ] + e i J /‘ + , [— Subjébber'b Trucfi ] _ \. ‘ , _ v \§ 4 i 7 [ Retailer I ' l 4 t _ _/ /' A} , o 7 [ Parcel Delivery Serfiice ] ‘ J \ K. h . lL, I ' I: ( Colléction [Agency 1 ' V j V. ¥ 7 e i A i i [ Consumer I - ‘- -+ Flow of Ownership + ----- Flow of Payment ----* Physical Flow of Product ‘+--~* Flow of Negotiation Figure 2-1. Straight-Line Chart of Channels for a Consumer Good. Source: Roland S. Vaile, E. T. Grether and Reavis Cox, Marketing in the American Economy (New York: The Ronald Press, 1952), p. 128. 26 and risk. Utilizing the separation of flows concept, Fisk described the behavior of various channel systems. In 1969 Cox and Schutte proposed the flow approach as a method for identifying the many interrelated flows of the channel.2“ The component flows of the channel were described as the physical flows of goods, the flow of ownership or control, the flow of information and the flow of money. They indicated that the flow concept "makes it possible to determine the precise role of each agency or facility in the channel of distribution."25 If failures in specific channel member performance occurred, it could be observed. The authors describing the flow approach commonly agree upon the flows of goods, ownership and money. Other recognized flows are an expansion of the flow concept developed by Breyer. Regardless of the flows identified, it is generally accepted that the separation of flows concept allows one to determine the agencies performing activities in the channel system. Hence, this analysis provides the basis for examining channel relationships. Comparison of the functional and flow approaches. Jaffee compared the two approaches.26 In response to specific questions on how goods and services are exchanged in a given system, he noted the marketing functions and the flows that occur as goods are moved from producer to COllSl issul marl oi: ace of of pa] ch. a? fc ti 27 consumer. Jaffee's outline for comparing marketing issues, functions and flows is presented in Table 2-1. The table shows the relationship between the marketing functional and flow approaches. The performance of a marketing function specifies the marketing flow that occurs in the channel of distribution. The joint analysis of functions and flows provides for the identification of the activity performed and the sequence of agencies participating in the flow as required to achieve the channel objective. Authors advocating either the functional or flow approach to channel structure analysis recognized the need for time, place and possession utility. Breyer stressed the importance of time, space and cost elements in mar- keting.27 He stated that "marketing consumes time" and the more time consumed the greater the cost.2° According to Breyer the space element was seen as a major hindrance to the marketing effort because it affects the performance of all marketing effort. The interaction of time and space impact on the costs incurred by members of the channel in performing the marketing process. Alderson observed that nothing has utility in the exchange process "unless it is present at the right place «29 and time for use. He suggested that the analysis of trade channel(s) must recognize the costs associated with 128 Table 2-1. An Outline of Comparative Marketing Issues, Functions and Flowsa Comparative Marketing Issues Comparative Marketing Functions Comparative b Marketing Flows What goods and services are exchanged, and in what quantities? How are goods and services exchanged? Functions of Exchange 1. Buying 2. Selling Contacting Pricing Merchandising Terminating Ownership 1. Transfer of title 2. Transfer of rights or authority 3. Transfer of control How are goods and services physically transferred from seller to buyer? Functions of Physical Supply 1. Transportation 2. Storage Physical Distribution Physical possession 1. Collecting 2. Sorting 3. Dispersing How do producers and marketing agencies gain knowledge of consumer demand? How do producers and marketing agencies disseminate promotional information to consumers? Market information Prepaganda Communication 1. Logistical 2. Problem solving 3. Persuasive How are goods and services paid for by consumers? How are goods and services paid for by marketing institutions? What are the functions of financing and payment in facilitating the movement of goods and services? Financing and Payment Financing and Payment How are the risks of ownership, physical possession and financing passed on to successive agencies? Hedging Pooling uncertainty Risking aEugene D. Jaffee, "A Flow-Approach to the Comparative Study of Marketing Systems," in Comparative Management and Marketing, ed. Jean Boddewyn (Glenview, Ill.: Scott,_Foresman, and Co., 1969), p. 163. bIt should be noted that the functions of Exchange, Contacting, etc. are performed by those marketing agencies that take part in Ownership Flows. Similarly, the same analogy applies for the other functions and flows. creating t in the mar involved 1' further a1 reduced 1 stated th in promot ponement of risk t reduces r quantitie l POStpOne Shifting Wither. the extr BUCklin Speculat and move at the t to IEdu reduCeS tiOns, reducin PrinciP 29 creating time, place and possession utility. Efficiency in the marketing process is dependent upon the steps involved in changing form, identity and place. Alderson further argued that the various marketing costs could be reduced if the principle of postponement was applied. He stated that "the most general method which can be applied in promoting efficiency of a marketing system is the post- Ponement of differentiation."3° Postponement reduces costs of risk by moving differentiation closer to demand and reduces physical distribution costs by movement of large quantities. Bucklin expanded on the postponement principle.31 Postponement in the distribution channel is a method of shifting the risk of ownership from one institution to another. However, the postponement principle applied to the extreme would eliminate the creation of inventories. Bucklin argued that the converse of postponement was speculation. Speculation requires "that changes in form and movement of goods to forward inventories should be made at the earliest possible time in the marketing flow in order "32 Speculation to reduce the costs of the marketing system. reduces costs by utilizing economies of scale at plant loca- tions, by permitting large quantities to be ordered and by reducing stock outs. The combined postponement-speculation principle implies: "A speculative inventory will appear at Ira. 30 each point in the distribution channel whenever its costs are less than the net savings to both buyer and seller for postponement."33 Thus, the combined principle focuses on minimum total channel costs for performing marketing functions, rather than individual function or agency COStS . The Economic Structure Approach “ Coase,35 Mallen,36 and Bucklin37 have Stigler,3 analyzed the economic structure of marketing channels, but the existing theory of channel structures is limited. In 1951 in analyzing vertical disintegration, Stigler explained that a manufacturing firm performing a series of distinct operations will have varying average cost functions for each operation or functional activity. The patterns of the average cost curves show increasing returns to scale, decreasing returns to scale and the typical U-shaped cost curve. Since more than one functional activity is required to produce the output of the firm, the individual average cost curves for performance of all functional activities include all three cost patterns. The average cost curve for performing all of the functions will be the summation of the individual cost curves. The firm will attempt to produce at the level of output where marginal cost equals marginal revenue. This will occur at the lowest point on the average cost curve or to the left re 5P wh fi du ec ma fl 31 of that point. When the firm produces at this level of output, some functions could be performed more economically at different output levels. Thus, in a competitive industry the firm of a certain size will delegate the increasing returns to scale functional activities to other firms specializing in these activities. Specialists such as wholesalers or retailers provide external economies to the firm. Lower unit costs can be achieved by the Specialist due to geographical dispersion of the market and different economies of scale. Specialization yields low average and marginal costs and improves the competitive position of the firm. As industry begins to decline, Stigler hypothesizes that the vertical integration relationships will begin to disintegrate. With vertical disintegration the functions performed by specialists will be reabsorbed by the firm. However, if output expanded or technology changes, the function may also be reabsorbed by the firm. The special- ist(s) will attempt to maintain their integrated position by adjusting to the requirements of the firm. Coase developed an explanation for institutional change which is similar to that develOped by Stigler. Coase suggests that the firm will perform a functional activity if the cost of performing that activity is less than the prevailing market price; but, outside suppliers W! 4 ,% fi- _ ___.__ shou unit eval ext: ext arr fur the C0 un 56 PG de cc DC 32 should be used if they can perform the function at a lower unit cost. He argues that businessmen should constantly evaluate the advantages to be accrued from internal or external function performance. Coase, like Stigler, uses external economies to explain interfirm alignments. Mallen expanded the explanation of institutional arrangements develOped by Stigler. In extending the functional spin-off concept, Mallen noted the impact of the U- and L-shape cost curve. In the case of the U-shaped cost curve, the manufacturer will delegate the function until the economies of performing the function are the same as producing it. However, when the economies of performing the function decrease due to a rising cost curve, the manufacturer will again delegate the function to the middleman specialist. With the L-shaped or falling cost curve, channel costs fall and volume increases. Carried to the extreme, increased volume resulting from falling costs and prices, the middleman specialist industry would expand. Bucklin utilizes marketing functions to analyze vertical channel relationships. His channel theory develops a method of determining the optimum channel structure given demand, cost and competitive factors. Existing channel costs are compared with normative channel costs. The normative channel is "the channel that would exist if 33 all institutions in the extant channel and all potential entrants, were fully adopted to current economic condi- "3° Bucklin, unlike Stigler, examined six complex tions. environments: perfect competition, pure competition, monopolistic competition caused by spatial differentiation, monopolistic competition caused by product differentiation and oligopoly. Furthermore, he observed that changing technology and/or consumer demand alter(s) a channel mem- ber's costs of performing individual functions which may in turn lead to altered interfirm alignments. Exogenous changes result in a continuous evolution of the normative channel. In explaining channel innovation and evolution, the impact of costs, demand and technology cannot be minimized. Heflebower observed that the spread between costs and expected revenue gave rise to chain stores and mail-order distributors.39 In describing the wheel of retailing, McNair‘° and Hollander"1 hypothesized that innovative retailers challenge existing competitors with low prices due to low margins and then later trade up, which provides an opportunity for new low margin operations. McCammon noted that changes in the status qgo altered cost-price relationships and threatened institutional arrangements."2 Davidson stated that "in the long—run, the nature of chan- nels is determined from the 'bottom up' rather than from Lh~r_-h_-# “ . -—‘_ the ' dSll com hes the reg dis of to C01 St Be 34 the top down.“3 Guiltinam emphasized that "channels evolve as new functional activity alignments become necessary, . . . such changes result from market determined forces-- competitors' actions and the changing mix of services "I“: desired by consumers. Davidson has further observed that "conventional marketing systems are being rapidly replaced by vertically organized systems as the dominant "“5 Moyer argues that in the era distribution mechanism. of vertical marketing systems "it is increasingly realistic to see the channel of distribution as a unit of competition.“6 The Channel Models Approach Both mathematical and simulation models of distribution channels have been deve10ped. The mathematical models require precise mathematical equations to analyze and evaluate channel relationships. They offer the potential of optimal channel design as well as an indication of the impact of channel design modification. The simulation models require a mathematical description of logical channel relationships. Simulations are beneficial in evaluating different channel alternatives but they do not identify the optimal channel design. Mathematical models. Mathematical models of channel structures have been developed by Balderston,"7 Artle and Berglund,"8 Baligh and Richartz,"9 and Naert.5° Bale flex wit' hel cor ane wa. Th to Ba 86 35 Balderston developed a model to analyze the communication flows in a channel structure. He first generated a channel with no intermediaries. The total cost of the direct chan- nel for communication was TC==qSC, where q was the constant communication cost per link, 8 was the number of suppliers and C was the number of customers. When an intermediary was introduced into the channel structure TC==q(S+C). The middleman in this structure extracts profits equal to SC-(S+C). Given the economic profit of the middleman, Balderston hypothesized that middlemen would enter the channel structure until the economic profit was elim- inated. The optimal number of wholesalers was expressed as We = SC/S+C. According to Balderston, the optimum structure of the market may not stabilize at the Optimum point for "(a) the shape of the function relating to the wholesaler group's economic profits to the number of wholesalers and (b) the shape and position of the relation between the entrant's market share and the number of wholesalers."51 Modifications to the model were suggested: partial seg- mentation of the network, variable costs of communication links and multiple products. Balderston concluded that the channel communication model became more complex as each modification was considered. 36 Artle and Berg developed a quantitative model for determining the lowest cost channel structure for selling costs. They assumed fixed distances between manufacturers and retailers in a town, a single product, fixed distances between retailers in a town. Given these assumptions they compare the costs and profits of three distribution systems: direct distribution, distribution through one wholesaler and distribution through two wholesalers in order to determine the optimal system. Baligh and Richartz extended the communications channel model develOped by Balderston. They observed that the elementary problem facing the firm is the choice of channel through which to buy or sell product. Given cer- tain optimum control variables, they stated the general form of functional channel relationships. Utilizing specific channel structures, Baligh and Richartz developed mathe- matical formulas to analyze channel choice. The conceptual model developed by Baligh and Richartz was expanded by Naert. He modified the commu— nication function to include consumer advertising. He observed that product mark-up was passive when producer sales were maximized; however, mark-up was active when producer profit was maximized. The quantitative model discussed above illustrates the complexities of the channel system. The models require dditi by the to th' regui Witt the per tra fir ca; 385 des Whe 37 additional research before they can be operationalized by the channel manager. Balderston presented another mathematical approach to the channel efficiency design problem."‘2 This approach requires identifying and fixing: l. The initial commodity array and the final array; 2. The definition of sets of business entities (manufacturers, wholesalers with stocks, etc.) involved in necessary activities; 3. The specification of sequences in which various sets of entities will be linked together; 4. The specification of activities which will be examined.53 With the elements fixed, he considered a set of firms in the channel (81, 52, ... Sn) and a set of functions to be performed in the channel (F1, F2, ... Fn). Within a matrix framework, channel alternatives were defined in terms of firms and functions. The set of firms have given functional capacities (E1, E2, ... En). Each channel activity A1 has associated with it an unknown level of activity xi and a net revenue ci. Thus, Balderston hypothesized that the channel design problem could be formulated as a linear program where: Max V cx IA Bl subject to Ax and x 2 0 Accor line. and turt app: to t be an re re IE fa of ex mo 38 According to Balderston, the basic problems with the linear programming approach are the scale of Operation and the independence of the adjustment technology. He further observed that his channel intermediaries model approach and his linear programming approach appear not to resolve: how much marketing service; and of what kinds, is it desirable for the channel system to deliver to the ultimate users of the products it handles, and how do the quantities and qualities of such service affect the amount of commodity output which will pass through the channel.5 Simulation models. Channel simulation models have been develOped by Forrester,55 Balderston and Hoggart56 and Amstutz.57 Forrester's investigation of channel systems revealed that an uneconomic utilization of resources resulted when firms in the channel were analyzed separately rather than collectively. In simulating various parts of a firm's marketing channel, Forrester condemned the manu- facturer's view of channels. He stressed that: the task of management is to interrelate the flows of information, materials, manpower, money and capital equipment so as to achieve a higher standard of living, stability of employment, profits to the owners and rewards apprOpriate to the success of managers.5° Balderston and Hoggart develOped a simulation model of the West Coast lumber industry. The simulation model expanded upon Balderston's intermediary channel selection model discussed previously. Their simulation model was 39 designed to analyze the affect of market information, decentralized marketing decisions and institutional factors on economic forces. The model focused on lumber manufacturers, wholesalers and retail lumberyards. In- putting retailer's demand and manufacturer's supply, the simulation model analyzes the activities of channel whole- salers. Four levels of unit message costs and two methods of order satisfaction were considered. Amstutz's simulation model of a distribution channel system includes both internal and external factors. The internal environment consists of the manufacturer, whole- saler and retailer. The external environment consists of: changes due to research and technological advances; govern- mental regulations and demand; and the consumer sector. The model was designed to assess the effects of changes in marketing strategy.” To determine this impact a consumer behavior simulation is developed using demographic data. The output of the consumer behavior model is the input to the retailer simulation. Likewise, the output of the retailer simulation is the input to the wholesaler simulation and so forth. The Amstutz model is unique because it focuses on consumer behavior as an input to channel demand and it considers external factors impacting on the channel system. However, an extensive data base is required to ihit mode we T_h_e ha: illde de he 40 initialize the parameters. Despite the richness of the model, the computer time and storage requirements have prevented its application. The Measurement and Control Approach The measurement of marketing costs and efficiencies has received substantial attention. A multitude of both macro-oriented and micro-oriented approaches have been developed. Macro-oriented gpproaches. In the first compre- hensive study, Stewart and Dewhurst analyzed the distri- bution costs for 1929.59 Working with census figures on purchases and sales and other data, they traced the flow of commodities in the United States from the original source through distribution channels to the ultimate consumer. Total marketing costs in 1929 were estimated to be $38.5 billion for sales of $65 billion. Stewart and Dewhurst concluded that every dollar spent for tangible goods required $0.59 for marketing activities. In 1955 Barger analyzed wholesale and retail data to determine the productivity of distribution from 1869 to 1949.60 His study revealed that productivity in dis- tribution increased about 1 percent per year during this time period. In addition, he found that in 1929 wholesaling and retailing accounted for only $0.35 to $0.36 Of the consumer's dollar. 41 Cox and others studied the value added by distribution in 1947.61 Their analysis revealed that distribution accounted for $0.31 of the final value of consumer goods. It is worthy to note, however, that of the 18 industries studied, distribution costs for whole- saling, retailing, transportation and advertising had wide ranges. Recently, Bucklin investigated the value added by the distributive trades using national income data.62 After develOping a distributive trade cost ratio, he analyzed data from 1929 to 1965. Bucklin concluded from his study that the performance of the distributive sector was related to the relationships between changes in the trade cost and "the character of competition in the trade sector, the expanding role of the sector and the disparate trends in wholesaling and retailing."63 Beckman indicated that output was not an adequate measure of performance for the business firm, since there was considerable duplication involved.6“ He proposed that the value added approach provided a better measure of the contribution of specific sectors of the economy. He stated that the advantages of this approach were: 1. It is the best reasonably absolute measure of the value created in the process of whatever part of the economy is being measured. 2. Value added is the best reasonable available relative measure of value created that can be used for proper and fairly accurate comparison with anything else similarly measured. W35 of to C0 de 42 3. Use of the concept will help view costs in their proper perspective. 4. Application of the value added concept to any part of the economy would necessarily result in improved public relations.65 Beckman further stated that the value added approach was a prerequisite for measuring productivity in all sectors of the economy. Micro-oriented approaches. Two major contributions to the channel of distribution literature were studies conducted by Cox and Goodman66 and Breyer.67 Both studies developed techniques for analyzing the efficiency of the marketing channel. Cox and Goodman developed measures for determining the marketing activities required to move build- ing materials from the point of extraction through marketing channels to the building site. They measured the number of days, the dollar-days of investment, the number of places where the building material was handled, the number of ton- miles of transportation, the number of owning and nonowning business entities and the number of transactions. From these measures Cox and Goodman were able to determine the areas where the channel for building materials could become efficient. Breyer's study focused on the specific operations of the marketing channel in an attempt to understand and control the processes. Using the systematic method, he sought to develop quantitative methods for measuring the 43 overall performance of the market channel system and its subsystems. In developing a tool for evaluating effi- ciencies, Breyer considered the objectives of the channel, the activities required, the allocation of activities within the channel and methods for controlling the channel's opera- tion. The cost analyses employed in Breyer's system were those utilized by the individual firms. In addition to the firm costs Breyer also identified a nexus cost which he defined as the total cost incurred by wholesalers and retailers to maintain contact with each other. In reviewing Breyer's techniques McCammon and Little observed that they can be used "to determine expenses incurred to perform specific functions but also to isolate cost-volume rela- tionships and to prepare channel operating budgets."68 Approaches to Channel Financial Management Many factors influence channel decisions; however, financial considerations represent one of the most important factors. Two important forms Of market control are depen- dent upon financial data.69 The first is the efficient allocation of marketing effort. The second involves a comparison of planned and actual performance. The two major financial approaches for managerial decision making and marketing control are: (l) the accounting information system approach and (2) the capital budgeting approach. Althoug decisic structi The Ace Approae are cu' accoun and in exchan forman data f accoun assign Costs, measul ritorj finane crucié diStr; Costir and M: metho 44 Although both approaches emphasize the managerial financial decisions of the firm, these decisions impact on channel structure efficiency. The Accounting Information System Approach Three types of accounting information systems are currently utilized.7° The first is the traditional accounting reporting system which generates balance sheets and income statements required for stockholders, securities exchanges and government agencies. The second is the per- formance accounting system which matches cost and revenue data for performance centers. The third is contribution accounting or segmental analysis. This accounting system assigns function costs to the segment which incurred these costs. The segmental analysis approach can be used to measure the profitability of products, customers, ter- ritories, channels of distribution and/or salesmen. The financial information required to evaluate segments is crucial in market decision-making and control. Contribution accounting was develOped from distribution cost analysis. The need for distribution costing procedures was recognized in the 19203. Heckert and Miner advanced the approach.71 They suggested three methods of analyzing distribution costs: 45 1. By the nature of cost item or object of expenditure. 2. By the function or function Operation performed. 3. By the manner in which distribution effort is applied (i.e., by territories, customers, or other segment of the business).72 One of the major limitations of the traditional distribution cost analysis was the breakdown of natural accounts into functional accounts and then assignment to segments. Since the process was not continuous, Lewis and Erickson Observed that the reallocation of aggregate costs results in loss of accuracy in determining both cost varia- tion and their source.73 In addition, the traditional approach allocated semi-direct and indirect costs to segments to determine net profit. Opposition to the net profit approach recommends the contribution approach for it measures only those costs incurred by the segment. With the contribution accounting or segmental analysis approach, the costs associated with a particular function or activitiy must be analyzed. Marketing costs have been classified by Lewis as being incurred for two functions: obtaining demand and servicing demand.7“ Obtaining demand costs are incurred for advertising, personal selling, sales promotion merchandising and pricing alternatives. Servicing demand costs are incurred for warehousing, inventory, transportation and order processing and handling. 46 Horngren notes that the order getting and order filling costs (obtaining demand and servicing demand costs) may be viewed as input.75 He emphasizes that the effective— ness of these costs influence the quantity and quality of sales volume or the output. The input-output approach suggests that marketing may be viewed as a system. The system's view enables the marketing manager to examine the relationship between and among marketing activities and functions. Hence, it provides a method of planning and controlling efforts and expenditures for marketing activ- ities that can be utilized to maximize the efficiency and effectiveness of the marketing effort of the channel member and the channel structure. Lewis and Erickson stress that the planning system for managing the obtaining and servicing demand functions requires consideration of the internal factors of the firm as well as the external factorsinfluencing the firm's activities.76 The firm is constrained by its internal operating policies and procedures. In addition, the firm must Operate within the context of its external environment. Planning for individual activities must proceed from knowl- edge of the state of the economy and the industry in which the firm operates. Both internal and external factors influence the planning and determination of the firm's obtaining and servicing demand efforts. These efforts 47 must be examined in view of the opportunity by product, customer and territory. Since these segments are the fundamental control units for the firm, they form the major source of variance for both the inputs and the outputs. Several authors advocate the contribution or segmental analysis approach. Rayburn stresses that efforts should be devoted to developing and applying marketing cost concepts as marketing costs increase relative to total expenditures.77 Crissy, Fischer and Mossman emphasize that many firms do not realize that their marketing costs have increased at a growing rate because these costs are buried in selling and administrative overhead or revenue deduc- tions.7a Feder states that marketing management must develOp a systematic method of making and assessing market- ing budget decisions rather than intuitively appropriating funds geographically on the basis of relative population, previous wholesale movement and/or relative size of each retail market.79 The American Accounting Association suggests that the sheer magnitude of marketing expenditures provides the incentive for firms to consider marketing cost revenue analysis.°° The incentive for profit maximization should lead firms to investigate: (l) the system's view of marketing, (2) segmental profitability, (3) capital budget- ing, (4) sales policies, and (5) pricing decisions. 48 In considering marketing channels, a firm must determine which functions it will perform and which func- tions it will shift to other intermediaries or institutions. The extent to which the firm desires to do the marketing functions will influence the channel structure. Weigland stresses that the manufacturer should analyze both the financial capability of intermediaries in alternative structures to perform the functions and the resultant profitability of his products for the intermediaries in alternative channel structures.81 He concludes that this analysis will reveal the channel(s) which will provide the manufacturer with a competitive advantage over other manu- facturers with competing products. The contribution or segmental analysis approach provides the basis for the function and intermediary analysis. The Capital Budgeting Approach The application of capital budgeting to marketing expenditures has been prOposed by many authors. In 1951 Dean argued that research on new products, development Of dependable distribution channel(s) and advertising with cumulative effect were the marketing decisions which should be included within the capital budget.°2 He stated that expenditures for these marketing activities required several years to return their cash outlay. Howard suggested that 49' many marketing outlays should be treated as investments for "at least part of their return is in some time distant to the current year."83 Dean presented a more detailed analysis for applying capital budgeting to advertising expenditures and budgeting.°“ He argues that capital budgeting provides a mechanism for evaluating the time lag of promotional investments against expected benefits. Twedt recommends the application of capital budgeting or return on investment as a method of evaluating the effectiveness of marketing research.85 Grabner and Robeson stress that the total cost model in physical distribution should be expanded to a total profit model.86 In evaluating physical distribution systems, they maintain that the timing of required investments should be evaluated as should costs and revenues associated with specific distribution systems. Schiff and Mellman note that capital budgeting procedures provide a method of evaluating the profitability of new markets.87 Schiff and Schiff emphasize that incremental revenue and cost analysis is not sufficient for evaluating marketing decision3.°° They suggest that the return on assets managed approach is neces- sary because it considers the working capital required for investments in accounts receivable and inventory. The relevant financial and marketing information can be developed by product, market and area. 50 Kotler also stresses the need for evaluating the capital budgeting implications of strategic marketing decisions.89 He indicates that both product-market deci- sions and channel of distribution decisions have a major impact on the marketing effort. Kotler developed an input- output model which calculated three financial measures: internal rate Of return, present value of after-tax cash flow and sales and market share needed to achieve 10 percent ROI after taxes. His model was designed to determine and evaluate alternative marketing strategies. Winer developed a market-decision model based on the return on investment concept using discounted cash flows.90 His Profit-Oriented Decision (PROD) model was designed to assist the marketing manager in making decisions about new products, channels and pricing. The PROD system can be used to evaluate the contribution of marketing decisions by: 1. Determining the cost to the firm for capital to be invested in marketing projects which will be evaluated incrementally. 2. Reducing all the outcomes of the alternative decisions to a series of cash flows. . Discounting future cash flows to the present. 4. Comparing the presented discounted value of future cash flows to required investments. 5. Selecting the alternative that gives the highest ratio of present values.91 This system provides a method of reducing complex marketing decisions to one dimension that is compatible with the objective of the firm. 51 Lambert argues that the process of comparing the financial alternatives of different channel structures should be based on the capital budgeting process.92 He indicates that a company must have some marketing channel, for it cannot operate without the distribution of its product. In evaluating new channels, the firm must consider the alternative rates of return. Lambert contends that distribution channels should be regarded as investments. In finance literature, capital budgeting is proposed as a method of evaluating both short- and long- range capital outlays. It provides a method of measuring the potential profit of investments. More specifically, the capital budgeting process is a way of comparing the cost of an investment with the anticipated return and the cost of capital. It has received increasing attention in recent years, for as Horngren states the profitability of business decisions depends upon: "(1) future net increase in cash inflows or net savings in cash outflows and (2) required investment."93 Capital budgets are required for both short- and long-range expenditures.9“ Financial plans for new assets and for new programs are required if management desires to plan and control. Typically long-range capital budgets are developed for future investments in divisions, product lines or processes. However, short-range capital budgets are needed to meet operating and financing requirements. 52 Although there are several different models for capital budgeting decisions, discounted cash flow is considered to be conceptually superior.95 The advantages to management of discounted cash flow analysis are: (1) it recognizes the time value of money and (2) it recognizes that cash inflow and outflow are more relevant in decision- making than net income. Dean suggests that discounted cash flow analysis is better for determining the productivity of capital than other financial measures because: 1. It is economically realistic in confining the analysis to cash flows and forgetting about book allocations. 2. It forces guided thinking about the whole life of the project, and concentration on the life time earnings. 3. It weights the time pattern of the investment outlays and the cash earnings, so as to reflect real and important differences in the value of near and distant cash flows. 4. It reflects accurately and without ambiguity the timing of tax savings. 5. It permits simple allowances for risks and uncertainties and can be adapted readily to increasing risk allowances over time. 6. It is strictly comparable to cost-of—capital. correctly measured, so that decisions can be made quickly and safely by comparing rate of return and the value of money to the firm.96 The present value method is generally considered theoret- ically superior to other discounted cash flow methods.97 It assumes a reinvestment rate which is the same as the required rate of return to the firm which is equal to the discount factor. The present value method is "the maximum amount a firm could pay for the opportunity of making an investment without being financially worse off."98 53 Cash flows rather than costs provide the basis for capital budgeting decisions.99 With discounted cash flow analysis, the timing of receipts and disbursements of cash is crucial. Alternative projects are compared by analyzing the estimated cash flows for the project life at specific discount rates. Difficulties in evaluating projects are related to risk and uncertainty. For the risk associated with a single investment Hillier proposed calculating the expected values and variance of net present value from the cash flow dis- 0 tributions.1° With the portfolio approach, Markowitz 1 suggests variance as a measure of risk.1° Hertz has recommended that key input factors for reducing management's uncertainty in investment are: market size, selling price, market growth rate, share of market, investment required, residual value of investment, operating costs, fixed costs 2 and useful life of facilities.‘° He stresses that simula- tions incorporating these factors can increase decision- maker efficiency, since relevant information can be easily evaluated. Hertz further argues that good investment policy requires: 1. The determination Of risk profiles for all investments. 2. The use of a discounting measure for assessing the merit of an investment proposal. 3. The establishment of alternative screening rules for investment policies. 4. The determination of risk boundaries for the alternative policies.103 54 Welter identifies many of the advantages and disadvantages associated with discounted cash flow “ He suggests that it is a powerful tool analysis.1° for making investment decisions if a company—wide approach is adopted. The two major processes of discounted cash flow analysis are determining the appropriate discount rate and calculating the discounted cash flows. The former must be determined by top management in view of corporate growth and profit Objectives. The latter must be conducted by relevant functional departments in order to facilitate the estimation and interpretation of future cash flows and associated risks. ConcludingComments The channel efficiency and channel financial management literature provides the conceptual base for the distribution channel efficiency model. The functional flow, economic structure, quantitative models and measure- ment and control approaches to channel efficiency provide the nucleus for identifying and analyzing the various relationships and interrelationships which occur in channels of distribution. The analysis of the activities associated with the marketing functions and flows serve as the basis for develOping the financial data required for planning and controlling channel financial management. They assist in 55 identifying the costs required for marketing distribution cost analysis, segmental analysis and discounted cash flow analysis. The channel efficiency model developed in Chapter III utilizes the channel efficiency and channel financial management approaches reviewed in this chapter. Chapter II—-Footnotes 1Arch W. Shaw, "Some Problems in Market Distribution," Quarterly Journal of Economics 26 (August 1912): 703-765. 2L. D. H. Weld, "Marketing Functions and Mercantile Organization," American Economic Review 7 (June 1917): 306- 318. 31bid., p. 306. “Ibid., p. 316. 5Paul T. Cherington, Elemggts of Marketing (New York: The Macmillan Co., 1920). PP. 40-56. 5Ibid., p. 56. 7Fred E. Clark, Principles of Marketing (New York: The Macmillan Co., 1922), pp. 10111. °Fred E. Clark, Principles of Marketing (New York: The Macmillan Co., 1932), p. 11. 9Percival White, Scientific Marketing Management: Its Principles and Methods TNew York: Harper & Brothers Publishers, 1927), pp. 64-76. 1°Fred E. Clark and L. D. H. Weld, Marketin Agricultural Products (New York: The Macm1 an Co., 1932): pp. 13-15. llEdmund D. McGarry, "Some Functions of Marketing Reconsidered," in Theory in Marketing, eds. Reavis Cox and Wroe Alderson (Homewood, Ill.:e Richard D. Irwin, Inc., 1950), pp. 263-275. 12Wroe Alderson, "Factors Governing the DevelOpment of Marketing Channels," in Marketing Channels for Manu- factured_Prgducts, ed. Richard M. Clewett (Homewood,Ill.: RiOhard D. Irwin, Inc., 1954), pp. 15-16. '3Ibid., p. 16. 56 57 1''Thomas A. Staudt, "The Managerial Functions of Marketing," in Managerial Marketing: Perspectives and Viewpoints, eds. Eugene J.Relley and William Lazer (Homewood, I11.: Richard D. Irwin, Inc., 1958), pp. 156-164. lsLouis P. Bucklin, "The Economic Structure of Channels of Distribution," in Marketing: A Maturing Discipline, ed. Martin T. Bell—(Chicago: American Marketing Association, 1960), pp. 379-381. 16William P. Dommermuth and R. Clifton Anderson, "Distributive Systems--Firms, Functions and Efficiencies," MSU Business Topics 17 (Spring 1969): 51. l7Ralph F. Breyer, The Marketing Institution (New York: McGraw-Hill Book Co., Inc., 1934), pp. 3-115. 1°Ibid., p. 4. l91bid., p. 25. 2°Roland S. Vaile, E. T. Grether and Reavis Cox, Marketin in the American Economy (New York: The Ronald 21Ibid., p. 124. ZZIbid., p. 121. 23George Fisk, Marketing Systems: An Introductory Analysis (New York: Harper & Row Publishers, 1967), pp. 214-412. 2"Reavis Cox and Thomas F. Schutte, ”A Look at Channel Management," in Marketing Involvement in Society and the Economy, ed. Philip McDonald (ChiCago: AmerICan Marketing Association, 1969), pp. 104-105. 25Ibid., p. 104. 26Eugene D. Jaffee, "A Flow-Approach to the Compara- tive Study of Marketing Systems," in Comparative Management and Marketing, ed. Jean Boddewyn (Glenview, 111.: Scott, Foresman, and Co., 1969), pp. 160—170. 2"Breyer, pp. 115-180. 2°Ibid., p. 116. 58 29Wroe Alderson, Marketing_Behavior and Executive Action (Homewood, Ill.: Richard D. Irwin, Inc., 1957), p. 212. 3°Ibid., p. 424. 31Louis P. Bucklin, "Postponement, Speculation and the Structure of Distribution Channels," Journal of Market- ing Research 2 (February 1965): 26-31. T 32Ibid., p. 27. 33Ibid., p. 28. 3"George J. Stigler, "The Division of Labor Is Limited by the Extent of the Market," Journal of Political Economy 59 (June 1951): 185-193. 35R. H. Coase, "The Nature of the Firm," Economica, New Series 4 (November 1937): 386-405. 36Bruce Mallen, "Functional Spin-Off: A Key to Anticipatiing Change in Distribution Structure, Journal of Marketing 37 (July 1973): 18-25. 37Bucklin, "The Economic Structure," pp. 379-385. 3°Ibid., pp. 380-381. 39Richard B. Heflebower, "Mass Distribution: A Phase of Bilateral OligOpoly or of Competition," American Economic Review 47 (May 1957): 274. I”Malcolm P. McNair, "Significant Trends and Developments in the Postwar Period," in Competitive Distribution in a Free High-Level Economy and Its Implications for the University, ed. Alber€:§. Smith (Pittsburgh: University of Pittsburgh Press, 1958), pp. 17-18. “‘Stanley C. Hollander, "The Wheel of Retailing," Journal of Marketing 24 (July 1960): 37-42. “23ert C. McCammon, Jr., "Alternative Explanations of Institutional Change and Channel Evolution," in Toward Scientific Marketing, ed. Stephen A. Greyser (Chicago: American Marketing Association, 1963). P. 477. “3Wi11iam R. Davidson, "Distribution Breakthrough," in Plotting Marketing Strategy, ed. Lee Adler (New York: Simon and Schuster, 1967), p. 283. 59 ““Joseph P. Guiltinan, "Planned and Evolutionary Changes in Distribution Channels," Journal of Retailing 50 (Summer 1974): 85. “5Wi11iam R. Davidson, "Changes in Distributive Institutions," Journal of Marketing 34 (January 1970): 7. “6M. S. Moyer, "Toward More Responsive Marketing Channels," Journal of Retailing 51 (Spring 1975): 19. “7Frederick C. Balderston, "Communication Networks in Intermediate Markets," Management Science 4 (January 1958): 154-171. “aRoland Artle and Sture Berglund, "A Note on Manufacturers' Choice of Distribution Channel," Management Science 5 (July 1959): 460-471. “9He1my H. Baligh and Leon E. Richartz, Vertical Marketing Structures (Boston: Allyn and Bacon, Inc., 1967). s°Phi11ippe A. Naert, "Optimizing Consumer Adver- tising, Intermediary Advertising and Markup in a Vertical Market Structure," Management Science 18 (December 1971): 90-101. 51Balderston, p. 163. 52Frederick C. Balderston, "Design of Marketing Channels," in Theory in Marketing, eds. Reavis Cox, Wroe Alderson and Stanley J. Shapiro (Homewood, Ill.: Richard D. Irwin, Inc., 1964), pp. 163-175. 53Ibid., p. 166. 5“Ibid., p. 170. 55Jay W. Forrester, "Industrial Dynamics," Harvard Business Review 36 (July-August 1958): 37-66. 56Frederick C. Balderston and Austin C. Hoggart, Simulation of Market Processes (Berkeley, Calif.: Institute of Business and Economic Research, University of California, 1962). 57Arnold E. Amstutz, Computer Simulation of Com- petitive Market Response (Cambridge, Mass.: M.I.T. Press, 1967). 60 58Forrester, p. 38. 59Paul W. Stewart and J. Frederick Dewhurst, Does Distribution Cost Too Much? (New York: The Twentieth Century Fund, 1939). 6°Harold Barger, Distribution's Place in the American Economy (Princeton, N.J.: Princeton University Press, 1955). 61Reavis Cox, Charles S. Goodman and Thomas C. Fischandler, Distribution in a High-Level Economy (Englewood Cliffs, N.J.: Prentice-Hall, Inc., 1955). 62Louis P. Bucklin, Competition and Evolution in the Distributive Trades (Englewood Cliffs, N.J.: PrentiCe-Hail, Inc., 1972). 63Ibid., p. 300. 5“Theodore N. Beckman, "The Value Added Concept as a Measurement of Output," Advanced Management 22 (April 1957): 6-9. 65Ibid., p. 7. 66Reavis Cox and Charles S. Goodman, "Marketing of Housebuilding Materials," Journal of Marketinng (July 1956): 36-61. 6"Ralph F. Breyer, Quantitative Systemic Analysis and Control: Study No. l--Channe1 and Channel Group Costing (Philadelphia: Ralph F. Breyer, 1949). 68Bert C. McCammon, Jr. and Robert W. Little, "Marketing Channels: Analytical Systems and Approaches," in Science in Marketing, ed. George Schwartz (New York: John Wiley and Sons, 1965), p. 361. 59V. H. Kirpalani and Stanley J. Shapiro, "Financial Dimensions of Marketing Management," Journal of Marketing 37 (July 1973): 45-47. 7°Ibid., pp. 40-41. 71J. Brooks Heckert and Robert B. Miner, Distribution Costs (New York: The Ronald Press, 1953). 7ZIbid., p. 17. 61 73Richard J. Lewis and Leo G. Erickson, "Distribution Costing: An Overview," paper presented at the Ohio State Physical Distribution Seminar, April 1972, p. 6. 7“Richard J. Lewis, A Logistical Information System for Marketing Analysis (Cincinnati: South-Western Publishing Co., 1970): pp. 11-13. 75Charles T. Horngren, Accounting for Management Control: An Introduction (Englewood Cliffs, N.J.: Prentice-Hall, Inc., 1964), pp. 238-239. 76Lewis and Erickson, pp. 10-14. 77L. Gayle Rayburn, "Analysis of Current Marketing Cost Methods," The CPA Journal 63 (November 1973): 985-991. 78W. J. E. Crissy, Paul Fischer and Frank H. Mossman, "Segmental Analysis: Key to Marketing Profitability," MSU Business T0pics 21 (Spring 1973): 42-49. 79Richard A. Fetter, "How to Measure Marketing Performances," Harvard Business Review 43 (May-June 1965): 133. a°"Report by the Committee on Cost and Profitability Analysis for Marketing," Accounting Review, Supplement to Vol. 47 (1972): 578-579. 81Robert E. Weigland, "The Accountant and Marketing Channels," in The Marketing Channel: A Conceptual Viewpoint, ed. Bruce E. Mallen (New York: John Wiley & Sons, Inc., 1967). PP. 234-235. 82Joel Dean, Managerial Economics (Englewood Cliffs, N.J.: Prentice-Hall, Inc., 1951), pp. 554-555. 83John Howard, Marketing Management: Analysis and Planning (Homewood, Ill.: Richard D. Irwin, Inc., 1963), ““Joel Dean, "Does Advertising Belong in the Capital Budget?" Journal of Marketing 30 (October 1966): 15-21. °5Dik Warren Twedt, "What Is the 'Return on Invest- ment' in Marketing Research?" Journal of Marketing 30 (January 1966): 62-63. 62 86John R. Grabner, Jr. and James F. Robeson, "Distribution System Analysis: A Problem in Capital Budgeting," in Business Logistics--Policies and Decisions, eds. David McConaughy and C. Joseph Clawson (Los Angeles: Research Institute for Business and Economics, University of Southern California, 1968), pp. 143-156. 87Michael Schiff and Martin Mellman, Financial Management of the Marketing Function (New York: Financial Executives Researchj Foundat1on, 1962), pp. 49- 51. °°J. s. Schiff and Michael Schiff, "New Sales Management Tool: ROAM," Harvard Business Review 45 (July-August 1967): 59-66. 89Philip Kotler, "Corporate Models: Better Marketing Plans," Harvard Business Review 48 (July-August 1970): 146- 149. 9°Leon Winer, "A Profit Oriented Decision System," Journal of Marketing 30 (April 1966): 30-44. 91Ibid., p. 44. 92Eugene W. Lambert, Jr., "Financial Considerations in Choosing a Marketing Channel," MSU Business Topics 14 (Winter 1966): 17-26. 93Horngren, p. 357. 9"Financial Analysis to Guide Capital Expenditure Decisions, Research Report No. 43 (New York: Nat1onal Association of Accountants, 1967), pp. 30-36. 95Charles T. Horngren, Cost Accounting: A Managerial Emphasis (Englewood Cliffs, N.J.: Prentice-Ha11,Inc., 2 ' pp. 454-462. 96Dean, "Does Advertising Belong," p. 20. 97James H. Lorie and Leonard J. Savage, "Three Problems in Rationing Capital," Journal of Business 23 (October 1955): 229-239; and James C. Van Horne, F1nancia1 Management and Policy (Englewood Cliffs, N.J.: Prentice- Hall, Inc., 1974), pp. 81-82. 9°Harold Bierman, Jr. and Seymour Smidt, The Capital Budgetin Decision (New York: Macmillan Publishing Co., Inc., 19 5 , p. 30. 63 99Return on Capital as a Guide to Managerial Decisions, Research Report No. 35 (New York: National Association of Accountants, 1959). pP. 62-64. 1“Frederick S. Hillier, "The Derivation of Probabilistic Information for the Evaluation of Risky Investments," Management Science 9 (April 1963): B-443- B-457. 1“H. M. Markowitz, Portfolio Selection: Efficient Diversification of Investments (New York: John Wiley & Sons, Inc., 1959). 10”David B. Hertz, "Risk Analysis in Capital Investments," Harvard Business Review 42 (January-February 1964): 95-106. 103David B. Hertz, "Investment Policies that Pay Off," Harvard Business Review 46 (January-February 1968): 108. 1°"Paul Welter, "Put Policy First in DCF Analysis, " Harvard Business Review 48 (January-February 1970): 141- 148. CHAPTER III RESEARCH DESIGN Overview The research design is devoted to developing a theoretical efficiency model for evaluating the physical distribution aspects of alternative channels. The theo- retical relationships underlying the model are based on typical costs, margins and other factors commonly associated with channel structures in the consumer goods industries. The purpose of the research is to develop a method of inte- grating industry practices, analytical tools and financial analysis in the context of alternative channel structures so that relative channel efficiency can be evaluated. The topic of the research has been introduced and the relevant research has been reviewed. In this chapter the design of the efficiency model will be formulated. The order of development is: (1) To describe the methodology used to determine and explain the channel structures rele- vant to the analysis; (2) To identify the physical distri- bution activities performed in the channel in the context of marketing functions and flows: (3) To describe the 64 65 general model features: and (4) To develOp the model and its component parts. Description of the Channel Structure Methodology The definition of distribution channel serves to emphasize the dimensions of the research and the importance for an analytical framework. A channel of distribution is defined as a manufacturer and various middlemen who perform marketing functions necessary to move goods from the point of production to the point of consumption. The critical elements of the channel are the marketing functions per- formed, the institutions and the sequence of institutions. The marketing functions performed by channel members facilitate the movement of goods from production to consumption. The channel institutions are autonomous, decision-making entities that perform marketing functions within the channel structure. The sequence of institutions specifies how the channel entities and marketing functions are linked together. The notational framework developed by Breyer for describing channel structure configuration is integral to the analysis.1 The framework, as advanced by Balderston2 3 and Bucklin, provides the basis for simplifying complex channel structures so that mathematical analysis may be 66 used. Balderston suggested that a matrix approach to linear programming could be used in analyzing and designing distri- bution channels. His model was designed to determine the channel alternative which would maximize channel revenue within operational constraints. Balderston did not provide a definition of parameters or an application of his model. But he did emphasize that "the assignment of functional effort to particular levels in the channel system requires consideration of many combinatorial alternatives and costs associated with each one."“ In contrast, the methodology develOped here is concerned with identifying and describing the costs and revenues associated with alternative channel structures. For this reason the linear programming approach proposed by Balderston will not be used. The method of developing the cost and resultant revenue relationships of different channels is adapted from an approach developed by Bucklin for classifying channel structures.5 Within the institutional structure of the channel there are two dimensions, sequence or level of institution and function. This structure is defined as: I==ij,k where j==1 to h levels and k==1 to w functions; I is a matrix with h rows and w columns. The h row represents the maximum num- ber of levels performing any of the w functions. Then ij,k denotes the vector or set of institutions Operating on the 67 kth function. Similarly, ij k constitutes the set of I institutions existing on the jth level of each function. h The resulting cost for the jt level or institution per- h forming the kt function is denoted by cj k' The vector I notation for the channel would be: Each element in the vector measures the number of activities th function. in the k The matrix approach identifies alternative institu- tional sequences and marketing functions in channel struc- tures. The notation provides a methodology for describing or classifying all possible channels of distribution within the domain of institutional levels and marketing functions. Channel Structures When the described classification system is combined with specified channel descriptors such as channel linkages and functions, channel costs can be identified and described. For purposes of the research, the channel institutional sequences will be the manufacturer-consumer channel (M-C), the manufacturer-retailer-consumer channel (M-R-C), the :manufacturer-wholesaler-consumer channel (M-W-C) and the manufacturer-wholesaler-retailer-consumer channel (M-W-R-C). 68 The tree diagram shown in Figure 3-1 illustrates the basic channel configurations. M C R C w #C w R—C Figure 3-1. Basic Distribution Channel Structures. In the M-C channel, a product moves directly from the manufacturer to the consumer. Many existing direct-selling companies employ this channel arrangement to distribute small consumer durables and nondurables. The M-R-C channel provides the retailer as an interface between the manufacturer and the consumer. In this position, the retailer must adjust his assortment from a manufacturer to meet consumer demand. During the past three decades, the M-W-C channel has evolved to accommodate changes in channel requirements. These channels emerged due to channel jumping which resulted from the pressures of scrambled merchandising.‘ The M-W-R-C channel provides for two adjustments in quantity and assortment between the manufacturer and the consumer. This indirect channel frequencly increases the time required for a product to move from the first to the last channel link. 69 Marketing Functions and Flows The marketing functions are the second channel descriptors used in the research. The functional approach to marketing provides a framework for evaluating the physical distribution activities within the scope of alternative channel structures. The marketing functions of: buying, selling, transportation, storage, standardi- zation and grading, market finance, risk-bearing and market information and research provide the basis for the analysis. Figure 3-2 specifies the cost functions which are used for developing the physical distribution costs associated with each marketing function. -E:* H Marketing Function Cost Function Buying f(volume of purchase) Selling f(volume of sale) Transportation f(shipping weight) Storage f(cube, throughput, ' order cycle, time) Market finance f(interest rate, time) Risk bearing f(obsolescence, damage, disaster, pilferage, insurance, bad debt) 1 A Figure 3-2. Marketing Function Variables 70 The costs'for both the buying and selling functions are determined from the number of transactions or the volume. The transportation function costs are dependent upon the weight and cubic volume of the product. The transportation costs are also influenced by the mode of transport required by the next channel member. The storage function costs are affected by the throughput, order cycle, cubic volume and space costs. The standardization and grading function costs are reflected in the handling costs inherent in the storage function, therefore, these costs will not be treated as a separate cost function. The costs associated with the market finance function are influenced by interest rates and time. The risk-bearing function costs are directly dependent upon obsolescence, damage, pilferage and bad debt. The market information and research function costs will be eliminated from the analysis due to their minimal impact on physical distribution efficiency. The flow relationships of ownership, physical Inovement and money will be analyzed in the context of the identified functions. The ownership flows can be traced in the buying and selling functions. The physical movement iflows occur in the transportation, storage and standardiza- ‘tion and grading functions. The fund or money flow results iifter the buying and selling functions and are traced in the market finance and risk-bearing functions. 71 The number of channel members that perform each of the identified marketing functions will influence the total Operating expenses incurred by a particular channel. Each of the six functions must be performed at least once in every channel, however, each of the six functions may be performed by several channel members. The six marketing functions in a M-C channel are shown in Figure 3.3. r WW % I- l _ J J J . . , market risk buymg [sell1ng] [transportation] storage] [f1 “ancil bearingj I CONSUMER Figure 3-3. Marketing Functions Performed in a Manufacturer-Consumer Channel . This figure indicates that each function is performed once in the most direct channel or a total of six functions per- formed in total. The vector notation fOr the M-C channel is I = 1,1,1,l,1,l. Figure 3-4 shows the six functions performed the maximum number of times in the M-W-R-C channel. 72 ll . I I . I . market IISK se111ng buying [transportation.I IstorageI [financeI [bearing] MANUFACTURER I [J WHOLESALER J] market risk .elling .uying [IransportationI [storage] finance] [bearing] J I RETAILER markete riSkg Figure 3-4. CONSUMER stora e risk 9 bearing Marketing Functions Performed in a Manufacturer-Wholesaler- Retailer-Consumer Channel. 73 With a duplication of the functions performed, the most indirect channel may have each function performed three or four times which results in a maximum of twenty times that the six functions are performed by the entire channel. The vector notation for the M-W-R-C channel is I==3,3,3,4,3,4. The function matrix presented in Figure 3.5 illus- trates the possible duplication of marketing functions. It rank arrays the maximum number of times a specific marketing function may be performed in the M-C, M-R-C, M-W-C, and M-W-R-C channel. This figure reaffirms the results of Figures 3-3 and 3-4. When the distribution channel linkages (Figure 3-1) and the function matrix (Figure 3-5) are merged, the number of channel alternatives increases from four in Figure 3-1 to 34 in Figure 3-6. The possible combination of identified marketing functions and distribution channel structures are illustrated in this Figure 3-6. It describes the activities and relationships basic to building the channel efficiency model, for it identifies the function and channel structure arrangements. 74 Marketing Functions Sequence Channel Links Manufacturer Wholesaler Retailer a Consumer Buying (B) Selling (S) Transportation (T) Storage (St) Market finance (Mf) Risk bearing (Rb) aA11 consumer costs considered imputed costs. (4) B3,“) B2.(4) 32,3,(4) S1 s1,3 S1,2 S1,2,3 T1,(4) T1.3.(4) T1,2,(4) T1,2,3,(4) St1.(4) St1,3.(4) St1.2.0:) St1.2.3.”) “f1. (4) ”f1,3,(4) M‘1.2.un_ Mf1.2.3.m Rb Rb 1.0:) 1.3(4) Rb1.2.”) Rb1.2.3.“) 1 2 4 A —v -4+-——_J CD 4:. 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I¢L4>+a Figure 3-5. Matrix of Marketing Functions. 75 Manufacturer-Consumer Channels "0.8.T.St.nf.Rb.C ”0.8.0.8t.nf.nb.c “n.s.r.5t,n,nb,c M 0.8.0.8t.n.nb,c Manufacturer-Retailet-Consumer Channels Manufacturer-Wholesaler-Consumer Channels Hu 5 T St Mf Rb “a s 1 St Mf Rb C u w c ' ' ' ' ' ' ' ' ' I ' ' U'S,T,St,M£,Rbp B'S'T’St'Mf'Rb' "u,s,T,St,u£,nb,Rs,s,n.5t,M£,Rb,C MU,S,T,St,Mf,Rb,wB,S,0,St,Mf,Rb,C “fl,S,T,St,Mf,Rb,RB,S,T,St,U,Rb,c MD,S,T,St,Mf,Rb,wB,S,T,St,D,Rb,c nn'S'T'St'Hf'Rb'RB'S' ”IStI D'Rb'c Hn'S'T'St'Mf'Rb'WBIS' D'St' D'Rb'c “n.5,TTc,St,u£,nb,Rs,s,u,St,Mf,Rb,C “u ,S,TTC,St,Mf,Rb,"B,S,U,St,Mf,Rb,c Mn 3 1 St at Rb RB s a St 0 Rb C “u s r St Mf Rh "3 s u s Rb C ' ’ TC, ' ’ ' ' ' ’ ’ ' ' I ' Tc, ' l ' ' ' ' t'n' ' Manufacturer-Wholesaler-Retailer Channels "U,S,T,St,Mf,Rb,wB,S,T,St,Mf,Rb,RB,S,T,St,Mf,Rb,C Mfl,S,T,St,Mf,Rb,wB,S,T,St,Mf,Rb,RB,S,D,St,Mf,Rb,C W “fl,S,T,St,Mf,Rb, B,S,T,St,Mf,Rb,RB,S,T,St,fl,Rb,c “0.8.7.5t.nf.ab. B.S.T.St.nf.nb.Ra.S.n.8t.n.ab.° “0.5.TTR.St.M£.nb."a.s.u.s:.u£.n.“a.s.r.5t.nt.ab.c "u.S.TTR.St.M£.Rb."B.S.n.8t.Mf.U.RB.S.U.St.Mf.Rb.C ‘W MnIs'TTRIStIHfIRb' B's! “IStIMfIRb'RB'sIT'StI D'RbIC Vi ”0.5.T .St.M£.Rb, 8.8.n.6t.M£.Rb.RB.S.n.St.n.Rb.C TR Hfl,S,T,St,Mf,Rb,wB,S,TTC,St,Mf,Rb,RB,S,U,St,Mf,Rb,C "n.s.w.5t.uf.nb."8.5.r .St.M£.Rb.RB.S.n.5t.n.nb.° TC RB C B,S,fl,St,Mf,Rb, ,S,T,St,Mf,Rb, C “n.s.w.sc.uf.nb. HD,S,T,St,Mf,Rb, B,S,D,St,Mf,Rb,RB,S,U,St,Mf,Rb, "0.8.T.8t.nf.ab. 8.8.0.8:.Mf.nb.RB.S.r.5t.u.ab.c ‘l I: It 18 “n.S.T.St.n£.ab. 3.8.n.5t.nf.nb.na.5.u.St.u.Rb.c ‘1 HU'S'T'St'Mf'Rb' B,S,T,St, U'Rb'RBys,Tpst'prRbpc "n.8.r.8t.u£.ab. 8.8.T.St.u.ab.“n.8.n.5t.nf.ab.° ”0.8.1.5t.u£.nb. B.S.T.St.u.nb.RB.S.T.st.n.nb.° "BISITISt'nflab' BISITISt' n'RbIRB's' DIStI anbIC B - buying function St - storage function selling function Mf - market finance function T - transportation function Rb - risk bearing function T - transportation function to consumer TTR - transportation function to retailer u - function not performed Figure 3-6. Channel Alternatives. 76 Developing the Distribution Channel Model The main concern in developing and evaluating a heuristic model for distribution channels is the prOper selection of the various activities and components that can be combined to form existing and feasible channel structures. The relationships identified in Figure 3-6 provide the basis for developing the algorithms to be modeled. Within the model the function and flow relation- ships are combined with various channel structures. From these combinations, comparisons of the relative efficiency of a channel structure or alternative channel structures can be made. Relative channel efficiency is influenced by physical product and financial characteristics. The model considers product value, product weight, product cubic volume as well as turnover ratios for different channel members. For purposes of evaluating channel efficiency, the model assumes fixed and constant demand for all channel members for a one-year period. The view of a channel implicit in this assumption is that the channel is responsible for delivering a product with specific char- acteristics. Thus, the channel is not viewed as a primary determinant of demand for a product, but as a conveyor of product in an adequate manner. This approach to channel analysis is supported in the literature by Balderson,7 77 Alderson and Martin,8 Bucklin9 and McCammon and Little.1° It implies that demand is relatively inelastic to small changes in short-run channel performance. The costs of various marketing functions are calculated for a manufacturer and aggregated for all subsequent channel members with the exception of the consumer where costs are considered imputed costs. This assumption specifies that the number of wholesalers and retailers remains fixed for the period of the analysis. It further requires that their geographic location is fixed for the purpose of the research. The timing mechanism in the model is activated by the Operating expense routine. It provides the period cash flows necessary to initiate the capital budgeting routine. This routine and the operating expense routine are dis- cussed in the Operating System. Events within the model are developed for each reporting period during the year. For the purpose of the research, reports are generated every four weeks which assumes a thirteen month year. Although the model is theoretical, trade practices prevailing in the consumer goods industries provide the basis fOr modeling the channel relationships. The research employs channel statistics compiled by Robert Morris Associates, Dun & Bradstreet, National Retail Merchants Association, Groceries Manufacturers Association and Cornell University. 78 The model is divided into three subsystems: Input System, Operating System and Output System. The remainder of this chapter is devoted to describing these systems. The Input System The Input System is the method by which all external data is inputed into the model. The identified channel structures and their associated marketing function parameters provide the basic input data. The product char- acteristics provide additional input. Changing the values associated with the marketing functions and the product and financial variables in the model provides the basis by which the efficiency(ies) of the alternative channel(s) are analyzed. To clarify the discussion of this system, the specific input data will be discussed in conjunction with the relevant routines in the Operating System. The Operating System The model is designed to evaluate the flow of ownership, physical movement and money through a channel structure utilizing the distribution activities associated with the identified marketing functions. Each of the channel structures: manufacturer-consumer, manufacturer- retailer-consumer, manufacturer-wholesaler-consumer and 79 manufacturer-wholesaler-retailer-consumer is analyzed within the Operating and financial routines of this system. The Operating Expense Routine The distribution activities related to the identified marketing functions initiate this routine. The Operating Expense Routine is composed of: 1. The Storage Function Subroutine 2. The Transportation Function Subroutine 3. The Buying Function Subroutine 4. The Selling Function Subroutine 5. The Market Finance Function Subroutine 6. The Risk-Bearing Function Subroutine. The Storage Function Subroutine. The purpose of this subroutine is to determine the affect of the inventory component on channel costs given specific product charac- teristics and channel linkage turnover ratios. The storage function considers the inventory carrying costs as well as the building and operating costs for distribution centers, warehouses and retail outlets.11 The inventory carrying costs for a specific channel member are generated from the average inventory investment and the cost of capital. For the reporting period this is stated as: 80 STOCI. = (D—m‘E-Aii) : 2 - SHTDB : 13 3 TRNOV. J where: STOCIj = inventory carrying cost DOLSALj = dollar sales TRNOVj = turnover SHTDB = interest for short-term loan 13 = number of reporting periods in year j = channel member For purposes of the research, it is assumed that all inventory investments are financed by outside institutions rather than from working capital. The prevailing lending rates of 10 percent for short- and intermediate-term financing are used. The building and operating costs incurred by a channel member are developed from inventory space require- :ments and annual sales. Gross square foot needs of a channel linkage are affected by dollar sales, product ‘value, product weight, product cubic volume, turnover :ratios, stacking dimensions and space utilization effi- ciency. All of the inputed variables impact on annual Space requirements. The building and Operating costs for 'the reporting period are: 81 CNCST. BDOCT. = ° GRFTS. + DOLSAL. - PCSOC. % 13 J 10 J J 3 where: BDOCTj = building and Operating costs CNCSTj = construction costs per square foot GRFTSj = gross square foot requirements PCSOC = percentage of dollar sales for Operating COStS . The Transportation Function Subroutine. The basis for determining the transportation costs for a channel mem- ber is product weight, product cubic volume, as well as the subsequent link in the channel structure. If a manufacturer is transporting product to a wholesaler, the movement is by rail. The costs incurred each period are: TOCRRj = NORRCj ° RCCSCj + MLSCRj ° CTPRMj where: TOCRRj = total rail cost NORRCj = number of rail cars RCCSCj = railcar cost component MLSCRj = number of rail miles CTPRMj = cost per rail mile. {The total number of rail cars required is determined by 'the cubic dimensions and weight limitations of a rail car «and.the weight and volume characteristics of the product. 82 If a wholesaler is transporting product to a retailer, the movement is by truck. The period costs for truck transportation are: CSTRSj = (NOTRCj ° AMPTRj) ' CSPTMj where: CSTRSj = total truck cost NOTRCj = number of trucks AMPTRj = average number of miles per truck CSPTMj = cost per truck mile. Truck cubic volume and weight limitations interact with the product characteristics of weight and cubic volume to calculate the number of trucks required. If any channel member is transporting a product to a consumer, parcel post costs are generated. For pur- posesof the research either a M-C linkage or a W-C linkage assumes fourth zone rates where a R-C linkage assumes a first zone rate. In the M-C linkage all units are trans- ported via parcel post; however, in the W-C and R-C linkages it is assumed that only half of the units are sent parcel post. The linear relationship for parcel post rates is: First zone--CNTRCj ((WGTPD - 2.0) ° .065 + .79) ° NOUN Fourth zone--CNTRCj ((WGTPD - 2.0) - .10 + .91) - NOUN 83 where: parcel post costs CNTRCj product weight WGTPD NOUN = number of units. The Buying Function Subroutine. The buying costs incurred by a channel member for purchasing products are dependent upon the quantity purchased per four week period as determined by channel turnover ratios. The cost assessed is dependent upon the mode of transport utilized for it is assumed that only rail- and truck-load quantities are pur- chased. The fixed buying cost per movement unit (BCPMUj) is multiplied by the number of transport movements to a channel member (j). The total buying cost for that channel member is expressed as BCNTCj. The buying costs represent only the transaction activity. The consumer buying costs are not considered. The Selling Function Subroutine. Like the buying (costs, the selling costs of a channel member for selling products to any channel member but the consumer are depen- oaaeo acetone .uoaaoo a noose: uooooua .a» oo~u> uooooua .ueouoe ounuoouum Hoadqau .nlv Gandh 98 margins of at least one channel member in 29 of the 39 channels is negative. The contribution margins in the M-C and four of the M-R-C channels are positive. In all other channels negative contribution margins prevail. Another dimension is revealed in this table. In the 1-4-13 turnover M-W-R-C channel with the transportation by-pass, the contribution margin is positive ($611,111) , but the discounted cash flow is negative (-$l,185,700). The contribution margins and discounted cash flows for a product with the $l/2/ .5 characteristics are presented in Table 4-4. All channel structures have positive contri- bution margins, but three channels have at least one channel member with a negative contribution margin. This occurs in the 1-4-13 turnover M-R-C, M—W-C and M-W-R-C channels with the transportation by-pass of the channel member just prior to the consumer. Similarly, discounted cash flows for these Channel members are negative. Table 4-5 indicates the contribution margins and discounted cash flows for a product with the $5/10/2 characteristics. All contribution margins and discounted cash flows are positive in these channel structures. In Table 4-6 the contribution margins and discounted c3ash flows for a product with the $5/10/.5 characteristics aJ’S‘e presented. 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The least efficient channel is the channel with the lowest contribution margin and the lowest discounted cash flow. Conversely, the most efficient channel is the channel with the highest contribution margin and discounted cash flow. Table 4-7 reveals that the least efficient channel for all product characteristics is the 1-4-13 turnover M-W-R-C channel. The most efficient channels are the 4-26-52 turnover M-W-C channel for $1/2/2, the 4-26-52 turnover M-R-C channel for $1/2/.5 and the 4-26-52 turnover M-C channel for $5/10/2 and $5/10/.5. Table 4-8 presents the least and most efficient channel structures when the transportation function is shifted to the consumer by the prior channel link. The channel structure with the lowest contribution margin and discounted cash flow value is the 1-4-13 turnover M-W-R-C channel for all product characteristics. The most efficient channel for all product characteristics is the 4-26-52 turnover M-C channel. The least and most efficient channels when the transportation function by-pass option is incorporated are presented in Table 4-9. The least efficient channel .1()3 .n¢.u8.um.e.m.=z oom.oeo.am aoe.aoo.mm «mutanv o oak.eme.me em~.ooo.om nauvua o.om.u=.um.e.m.mm.az.uz.um.e.m.o:.am.uz.um.a.m.=z m.\oH\m» uuoauuHuouoouuno uuoooua Q s h t Q t oom.~eo.am ae~.meo.mm «muonue O am e: am a m =2 omm.o~m.ne meo.m~a.mv ma-vaa o.om.uz.um.e.m.mm.nm.u=.um.a.m.o3.am.uz.um.e.m.=z «\oa\m» neoauaauouuuuuao nooooua oom.maa.o~ anv.om~.o~ «muowuv o.nm.uz.um.a.m.mm.nm.uz.um.e.m.=: ~oe.oo~.ea oe~.nam.ma manque o.ax.uz.um.e.m.mm.au.ux.um.e.m.mz.nm.u=.um.a.m.=: m.\u\aw .uoauoauououuaao pontoon ooo.moe.me «mm.mme.ee «muoenv u.n¢.oz.um.a.m.ox.au.uz.um.e.m.=z omo.aea.oau ~oa.moe.om- naueua o.o¢.uz.um.a.m.mx.nm.uz.um.e.m.ms.am.uz.um.a.m.=x ~\~\H» .uuauoauuuoouoao uooooua A3 A3 A3 A3 weapon eunuoshum H2325 2.6.: .38 Sous: 2..on :26 50nd: uo>osune coussoomwo sowusnanusou ceucsoomwo soausnauusoo aeoaoaouu and: aeoauauum apnea cola—Ounce msowuosfi 06.3933. Add 3.33.3980 Usawoauuu Hon—:93 .54 0.33. .1()4 -s-~ 0 am a: an a m =2 oom.vo~.vm moe.aon.mm «muoauv Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q ode.onm.ve om~.oaa.am manque u an e: am a m or no u: on e m a: on u: no a m a: m.\oH\m» .ooauuauouoouueo uoaooua Q Q zQqu QmQ oom.maa.vm eo~.me~.em «muoaue 0 am a n :2 Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q omm.mam.mv meo.om~.om maneua o am um an a m or am u: so a m as am um um e m =2 «\oaxm» .moauoauouoauuao uooooua Q Q Q“ Q Q Q ooo.moo.am ewe.omo.om ~muo~uv u on u: m a m a: Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q m.\~\a» «aoauuauououuuau uosooua Q Q Q Q Q Q oom.eao.am oea.oeo.om amuowuv 0 am m: on a m a: . s a a a o a s o s a e s a s o a o s ooo.eao.~a: Noe.oao.eau manque u on u: no a m as on u: an a m a: an u: no a m at «\«\H» “ooauuauouoounao uoooouo a. 3. .8 .3 332 33033 853.8 dream sumo sauna: area» sumo sauna: umbosuse coucsooueo sodasnauusoo coussoouwo sceusbeuucoo oaoaoauum uaoz unowowuufl umflflq e Hoasmsoo ou sowuossm sauusuuommodua uuarm uncanwndmsoo avengeduuu Hossdgu .muv sands 1(35 QQQQQQQQQQ o a u: an a m as am um on use oao.m~o.mm ooo.amo.eo ~m-p~uv .m.=: as Q Q Q QpH-Q Q Q Q QHmQ Q Qm Q Q zQqu .HeQmQ omo.mma.me www.mem.~m mauvue o am e: um m an a u: a m 3 am u :2 m.\oa\mm "moauoauouomuuao uooooud as Q Q Q Q Q Q Q Q Q U Q Q Q ooe.meo.mm mme.omm.ao «muonuv o a or am a m as am or m a m a: Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q g Q Q ome.~aa.ee oas.emo.am naueua o am a: um a m on a u: so a m a: am as um a m =2 ~\oa\m» uuoaunauouoeuaao uoooouo me Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q u Q Q Q oe~.moa.oa mae.emm.o~ emuoaue o as or am a o no a e: am a m a: nu u: m e m a: Q Q Q Q Q Q Q Q Q Q a Q Q Q Q Q Q Q Q U ~oe.mae.~ ova.o~m.m manque o a a: no a m or am u: an a m a: on u: m a m =2 m.\~\e» ”noauoeuouoouuao uooooua . e a a o s . o s a s UH. a s ooe.ooa.ea noo.eoa.ma «muoauv o a u: no a m am am u: so a m a: Q Q Q Q Q Q Q Q Q Q U.“ Q Q Q Q Q Q Q Q ooo.nem.oau vam.eme.eeu mane-” o a u: on e m am am or am a m as am a: um a m as ~\~\~m .ooauoauouonuuao uooooua A3 A3 3v «3 0351“ ousuufluum deg 26.: .33 cannot 26.8 £03 593: “3.6.53. 6.55532. sodas.“ H.500 moussoomdo sowusfl" uusoo unaaoauuu and: ueoauauum apnea aaam|>m sedans—5m noduuuuommseue u asonwusmaoo muse.“ owuum H0538 .mlv 0.318 106 for the product characteristics $1/2/2 and $1/2/.5 is the 1-4-13 turnover M-W-R-C channel with the wholesaler providing the transportation function to the consumer. The least efficient channel for the product characteristics $5/10/2 and $5/10/.5 is the 1-4-13 turnover M-W-R-C channel with the manufacturer providing the transportation function to the retailer. The most efficient channel for the product characteristics $l/2/2 is the 4-26-52 turnover M-R-C channel with the manufacturer providing transportation to the consumer. The most efficient channel for the product characteristics $l/2/.5 is the M-W-R-C channel with the manufacturer providing the transportation function to the retailer. The most efficient channel for the product characteristics $5/10/2 and $5/10/.5 is the 4-26-52 turn- over M-W-C channel with the manufacturer providing the transportation function to the consumer. This table shows that a channel structure may be both the least efficient and the most efficient depending upon the product characteristics. Specifically, the M-W-R-C channel structure with the manufacturer providing the transportation function to the retailer is the least efficient for the product characteristics $l/2/.5 and the most efficient for $5/lO/2 and $5/10/.5. Table 4-10 identifies the least and most efficient channels when all 13 channel structures are considered. 1()7 Q Q Q Q Q Q Q Q Q Q2 Q Q oao.m~o.mm moo.amo.ao _ «muoaue o_= u: no a m ms an as am a m a: Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q oae.eme.me om~.ooo.om mane-” 0 am u: so a m mm on as am a m as am u: no a m a: m.\oe\m» "noauuauouomuuao uooooua Q Q Q Q Q Q Q Q Q Q8 Q Q oov.meo.mm mme.omm.ao amuowue o a u: no a m as am e: um a m :2 Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q omm.o~m.~v mvo.m~o.mv maueua 0 am u: pm a m or am or pm a m m: as e: no a m =2 ~\oa\mm "moaunauououumao uooooua Q Q Q Q Q Q ooo.mom.am e~v.emm.om «mnouue 0 am e: pm a m :2 Q Q Q Q Q Q Q Q Q Q08 Q Q Q Q Q Q Q Q m.\~\ee “aoauuauouomuanu acetone Q Q Q Q Q Q oom.eam.am oea.omo.om ~m-p~-e 0 am u: so a m :2 Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q ooo.mvo.onu NeH5232... manque 0 nm or um a m or an u: an e m ms an u: an a m a: ~\~\H» .moaumauouonuaao uosooua Awe Ame Ame Ame moaned «nouoouum Hoddaao urban redo semen: dream snob swans: uo>osu99 coussoomeo sofiusnauusoo Ufluosoomwo s0wusnfluusou uooaoaoum and: _ ueuaoauum outed nu>wuesuouad ousuosuum Hossuno ”msomwusmaou hocowoauum Housman .oauv anode 108 The 1-4-13 turnover M-W-R-C channel with all functions performed is the least efficient channel for the product characteristics $l/2/2, $5/10/2 and $5/10/.5. The 1-4-13 turnover M-W-R-C channel with the transportation by-pass of the retailer is the least efficient channel for $l/2/.5. The most efficient channel for product characteristics $l/2/2 and $1/2/.5 is the 4-26-52 turnover M-C channel with the tranSportation function shifted to the consumer. The most efficient channel for the product characteristics $5/10/2 and $5/10/.5 is the 4-26-52 turnover M-W-C channel with the manufacturer providing the transportation to the consumer 0 Elements of Channel Structure Efficiency Elements influencing channel structure efficiency will be presented in this section. The major concern is: ”How does turnover, function performance and channel length affect contribution margins and discounted cash flows of specific channels?" For comparative purposes the low efficiency M-W-R-C channel with all functions performed will be used. Comparisons will be made between this channel arrangement and all others to indicate changes in efficiency when turnover, functions performed and channel length are varied. 109 TUIDOVGI‘ Table 4-11 presents the percentage increase in efficiency when turnover ratios are increased in the M-W-R-C channel with all functions performed. The increase in contribution margins ranges from 1.48% for product characteristics $5/10/.5 to 92.5% for product characteristics $l/2/2. The increase in discounted cash flows range from 2.89% for $5/10/.5 to 91.56% for $1/2/2. Transportation Function The increase in contribution margins and discounted cash flows when the transportation function is shifted to the consumer by the retailer in the M-W-R-C channel is shown in Table 4-12. The percentage increase in contribution margins varies from 2.46% for the product characteristics $5/10/.5 to 1049.01% for the product characteristics $1/2/2. The percentage increase in discounted cash flows ranges from 2.49% for $5/10/.15 to 691.73% for $l/2/2. Table 4-13 presents the percentage change in the contribution margins and discounted cash flows when the transportation function by-passes a channel member in the M-W-R-C channel. The change in contribution margins varies from -63.71% in the 1-4-13 turnover M-W-R-C channel for $1/2/.5 to +605.93% in the 4-26-52 turnover M-W-R-C channel for $1/2/2. Similarly, the discounted cash flows range from -78.57% for $l/2/.5 to 460.26% for $l/2/2. 110 .asOHu nasu coussooeeo use «samuaa sodasnuuucoo new one nmsousu nnv scenes some mv.n ov.u 1 om.~ ov.~ = me.~ mm.~ m.\oa\m» em.~ om.~ ~o.~ mm.~ mm.~ oo.~ «\oaxm» em.mo ma.am we.ma om.~m o~.ooa ~o.oua m.\~\em ne.eoo Ho.meoa m~.oma ma.mo~ ~M.om me.vo mxaxam “as Arc Rev .av .av .ov mowunuuouusuenu unavoum moods redo demon: diode ammo queue: aspen auau campus coussouneo nodusbauusoo coussooaaa sodasnauusoo coussoomaa sewusnauusoo ea oocuao . ea oeaaao a ea oeoaeo . ea «mango a as «macro . as season . «m-o~ue ouunaum nHIVIH moduem Heboousa Aessnau aaodoaao ouxuzux ea uoaoucoo 0» doauoeom coauquuoomeaua uuaam .eeouauaoaoo oocaao ooauooouoa soooaoauuu Hosanna .«H-v canes .n30Hu some noussooewc use undouds sceusneuusoo saw one bosons» nae wounds 00mm He.e o~.m oo.~ oe.a = ~o.o ee.m m.\oH\m» em.aa oo.o e~.n ma.a oo.e om.e «\oaxm» «v.oe «v.om mm.oa eo.~e ma.am mm.oe m.\~\a» om.ao mm.~a «H.55 vo.oo o~.no om.no uxuxe» lac ... lac ... 1.5 1.. noeu-au-uoauuau uooooaa DHO>O§ 03% ...—098.55. 03862 aabg mudgg «muouuv o» «muon-v ~m-o~-v 6» «muoauv wanna-” on wanna-" mauv-a none on neuvua manque none 6» oaunaua ma-vua none on nauvua axon» sumo noun sauna: groan auuo scum campus cacao redo scum sauna: clussooena nodusnauucou noussoouun sowusnauusoo usussoomao sewunnuuusoo ea oeaaao . ea ooouau a ea unease a ea oedaau a :4 ooaqau a ea cognac a saossdnu vialsnx ed usbosnsa eeaouusu «moo-«usglou ouodno eueuseouem anecdouuuu Hosanna .HHIC Dania lill .monu ammo nouczoouflc can nawmuda cowusnauunou now one smaounu mne nuance mama ah.oa om.oa NH.HA em.oa wo.ma oo.aa onmnznz [ mH.m mo.m m~.m ea.m em.m ~m.m unanznz [ ”on Unmn3nz m.\oH\mw "moflun«uououumnu auscoum mm.HH mm.HH om.HH me.- m~.ea om.ma UnMnan [ Hm m mu m Hm m mm.m ne.e Hm.e Unmnznz no» onmnznz «\oa\mm "moaumfluuuoauuno uosvoum mm.mmn mH.mmn mo.Hmn mo.mmn hm.mnn Hu.mon Utmnxn: [ mm.ma 0m.ma mm.m~ He.Hm om.me HH.mm Unmnznz [ no» UnmnSnz m.\~\a» ”undamauouoauuno posooum om.em ma.mma mo.Hm He.bm ~m.nv em.am Unansnz .[ o~.ooe mm.mom mv.oaa cm.e~H mm.me ha.em Unansnz [ «on Unmnznz ~\~\H» ”undamauououucno uoauoum a .3 .3 A3 :0 So mwuzuoauum H0530 naoam Sumo sauna: «scam snou sauna: «soak sumo :«mudx coucnoomwo :oHuanuucoo coucnoouua :owunnauucou uoucaoouao cowusnauucou ca mononu a ca «mango v :w wmcmso a :w mononu a ca omcdso a c« omcdno a Nmnowne mmnmanw manena nofiuam uo>ocusa Hancuno «Hoacusu Unngnz cw mmnmnwm cowuocsm coauuuuomwcwua uncouwudmaou omcuzo omuvaouuom uncoaowuuu Hosanna .mane manna 112 Table 4-14 presents the percentage increase in the M-W-R-C channel when the transportation function is shifted to the consumer and the transportation function by-passes the wholesaler; The increase in contribution margins ranges from 5.54% in the 4-26-52 turnover M-W-R-C channel for $5/10/.5 to 1654.95% in the 4-26-52 turnover M-W—R-C channel for $1/2/2. The discounted cash flows increase from 5.62% for $5/10/.5 to 1159.98% for $1/2/2. Channel Length Table 4—15 shows the percentage change in contri- bution margins and discounted cash flows when the M-W—R-C channel is shortened to the M-R—C, M-W-C and M-C channel. The change in contribution margins varies from -52.90% in the 4-26-52 turnover M-C channel for $l/2/.5 to 927.94% in the 4-26-52 turnover M-W-C channel for $1/2/2. The discounted cash flows vary from -51.65% for $l/2/.5 to 704.85% for $1/2/2. Turnover and Transportation Function The percentage increase in efficiency when the turnover ratios are increased and the transportation function is shifted to the consumer in the M-W—R-C channel is presented in Table 4-16. The contribution margin increases vary from 3.97% for $5/lO/.5 to 188.24% for $1/2/.5. Similarly, the discounted cash flow increases range from 5.46% for $5/10/.5 to 250.16% for $1/2/.5. 113 .m3oau ammo cousdoonao 0cm mswmuwa cOwusnwuucoo How one canons» mne madame 00mm $6 3;... 86 «0.... 86 :6 93:3 36 8.0 2.6 36 SK 8.6 «\onw hm.~oa m~.00H mo.mma om.maa oa.mo~ mm.ema m.\~\am mm.amau mm.emoa eh.oo~ me.m~m ha.moa om.oHH N\~\Hw 2; A3 .5 A5 A3 A5 . moauuduuuoflndnu uoauoum nsoah ammo cfloud: nsoah nmuo sauna: msoam sumo sauna: couscooman couusnauusou couscoomwo nodusnwuucoo couccoonan soaucnauucou cw omcmso a ca omcuno a c« cognac a cu umcmcu a ca moccno 0 ca omcuno a «mno~ne mannann nnnena mOfiufld H¢>OG§ HOGEU cowuuuuomnsuua use uoaSmsoo ou coHuosch coauuuuommsmua uuwnm «Hossdso Uantnz cu unamnhm coauossm uncomwummaoo mucuso oudusuouam ausouoaumu Hossusu .eHne canoe .msonu sumo oousaoonao one «sounds sowuanwuucoo you one nocounu nne nuance Gums 1LL4 mv.o mm.v em.m vu.o j oH.oH mo.m . V on: eo.v om.e so.m mm.e nn.o oe.o onzn: mm.q Hm.m mo.» mm.v om.HH no.5 . onun: "on onmnsnz m.\oa\mo unannouuououuufiu unavoum ms.m em.o mo.HH na.m oo.o~ om.ms on: cm.m ha.m am.o no.0 vv.a vo.m onznz ao.m mm.v mm.» mo.m um.ma me.m onmnz .oo onmnsnz «\oa\mw "nonunauooouuuno uoaooum mo.amn om.~mn m¢.mvn em.hvn hm.san on.w«n on: om.aa ~o.aa Hm.em oo.m~ va.oa pv.~o onznz me.m~ ma.- mm.oe mo.on m~.~m Hm.oo onmn: ”on Un¢n3n8 m.\~\a» ”nosouauouoouuao ooaooum mm.~mv mm.mao «n.5ma nH.mmH om.oma mm.mma .onx mm.vop vm.sum banana ~o.o- ma.~da om.~aa onsn: «o.hom om.aeh mo.oo~ ~o.opa «n.5o oo.mo onmnz "on onmnxnz ~\~\H» .moaumauououuuso uooooua “av Adv Awe .09 Avg Avg ouauonuum Hosadno «soda saco ahead: «scam sumo sauna: «scam gmoo sauna: 89:500me :0." 05nd HucOU ”ougOOmfiQ COM 09nd Hub—OD ”flagoomwa GOH 0H5.“ HucOU as oucuno . an «mango a an ooanso a as oocuno . as «mango a an mmauao ; amnonne o~nm~n~ manvna NOAH; N0>8Hg H6520 \— I n {I unumcoq Hoscdnu convex unsonuudmaoo omsdsu omuvcoouom >osowoauum Hoscdnu .mane OHAIB ILLS .ntoau aneo uoussoonao use ncdmuea sowucnduusoo you one canons» mne moanea oome mv.~a mm.m oe.m mm.n _ on.m mn.o m.\oH\mm ~a.aa om.m mm.m mm.a mm.oa no.5 «\oaxm» oa.om« a~.mma oo.mHH an.moa am.on~ m«.oma m.\«\a» mm.mvs mm.om~ He.mn~ mo.mm~ ma.a~a om.ana «\uxam Row any «co .ao .au .09 nouunauouoeuenu uocooum nkflbg QHODOGHPH IHO>OCHPH ukflbgg GNO>§ .8085 amnoana 0» «mnoanv «mnoanv oo amnowna mannana o» gunmana nnnana some on nanvna mane-” scum cu omnnanu nanena noun a» nanena ntoam cueo _Ioum awoke! «roam seen Bonn cause: «scam neeo Baum camuez moussoouwo couucnauusoo noucaoonua soaucnduusoo nousdooewo cowuanduusoo aa omaaao o aa omaaao a aa omaaao . as omaaao . as omaaao a aa omaaao a afloaaaao onanxn: oau an uoasncoo o» noduocch coaueuuomuceua uudam use nopocusa onecuuan unsoaauegloo omseao omeusoouem hosedowuuu dungeon .odne dunes 116 Table 4-l7 presents the percentage change in the M—W—R-C channel efficiency when the turnover ratio is in- creased and the transportation function by-pass is used. The contribution margins range from -24.59% in $l/2/.5 M-W-R-C channel with transportation by-passing the wholesaler to 285.63% in the $1/2/2 M-W-ReC channel with transportation.by- passing the wholesaler. The discounted cash flows vary from -20.58% in the $1/2/.5 M-W-R—C channel with transportation by-passing the retailer to +235.41% in the $l/2/2 M—W-R-C channel with transportation by-passing the wholesaler. The table indicates that the percentage change in contribution margins and discounted cash flows for the product characteristics $1/2/.5 result in a shift of the most negative percentages. The M-W-R-C channel with the transportation function by-passing the wholesaler has the most negative contribution margin, but the M-W-R-C channel with the transportation function by-passing the retailer has the most negative discounted cash flows. Table 4-18 presents the percentage change in the M-W—R-C channel with all functions performed when turnover is increased, the transportation function by-pass is used and the transportation function of the link prior to the consumer is shifted to the consumer. The change in contri- bution margins varies from -49.41% for $l/2/.S to 404.14% for $1/2/2. The change in discounted cash flows ranges from -48.87% for $1/2/.5 to 340.73% for $l/2/2. 117 .msoau smeo uo»csooenu use acnanea canussnnucoo now one canons» nne nausea come he.HN He.oa «m.ma aH.NH oe.oa oe.ea onmnunz ea.ma mm.o oe.m Ho.e ho.oa mo.m Unmnxnz [ no» onmnsnz m.\oa\mm "mon»mnno»oenesu »osuonm mm.e~ mm.aa am.ma mo.ea mm.a~ no.5a onmnznz ell Nb.ma om.oa o~.h m~.o oo.on a>.w Unansnz no» Unmnzlz «\onxmm "monomnaoooauaao uoauoua hm.nm om.m om.o~n ma.m~n oe.HH H~.o Unanznz all oo.om mo.m ao.m~n am.e~n ha.m~ ho.m unanznz [ no» unmnsnz m.\~\nw "monunnuoooauaco uoauoua mn.oa hm.aoa oo.mm Hm.moa ma.Ho mo.em unmnunz hn.oma oo.mma He.mm~ mo.mm~ mo.moa oh.ooa Unmnxnu no» onmnznz N\N\am uuon»nnno»oeneso »osuonm E .5 a a: 5 :5 onsuosuom Hoaaeco anubocnpa onubocnsa nne>osnsa eno>ocncs nnu>ocnpa nno>ocnsa wmnonne 0» «mnomne Nmnoune 0» «mnoune onnnanw 0» ounmann nanena sonu 0» manena manenu scum 0» ownnana nanena Bonn 0» manena eson seeo Bonn snanez eson smeo Bonn snanex msoam sueu Bonn snanez uo»ssoouno can»ssnn»cou uouccoouno can»scnn»coo uo»ssoonnn co«»ssnn»cou an oasesu a an easeso o s« oaseso a an oasesu a an oaseso a an oaseso a eHoccesU onmn3n: an nuemnam conuossh cow»e»nomucena use no>ocnca oneonocH "unconnemaoo oasecu 0ae»coonom aocodonuum Hocsesu .hane manna 118 .naoau ceeo uo»ssooenu use msaanea son»ssnn»soo now one canons» mne ounces meme 8.3 3.3 $6 3... 3.2 $.m 931m» oa.e~ «m.ma mm.mu mo.ea oo.ma no.ha «\oa\mm oaqhun mm.m~n ho.oen He.men ne.mmn oH.mmn m.\n\aw modes 2.8a 2.6% 3.3.. 3&3 2.an «Rh» .3 .3 .3 .3 .3 .3 mon»enno»oeneso oosuonm enu>osnpa ene>osnsa ene>osnsa one>osnsa enu>osnsa one>osnsa monowne 0» mmnoune wmnowne 0» «mnoNne omnmnnm 0» ownmann manena aonu 0» manena nunena sonu 0» ounmann nanena Bonn 0» nnnena eonm seeu aonu snanez urban seeo Bonn snanez «soak ceeo sonu snanez uoussouens so«»ssnn»soo uo»ssoounn canoesnn»sou uo»ssooo«a sonuecnnusoo as omaeao a an umaaao a an omaeso a an omaaao a an omaeao » as omaeao . use nasonsoo o» son»ossh sow»e»nomnsena »unsm .ne>osnsa oneonosn Hussecu Unmnznz sq neemnhm san»ossh so«»e»nomesena unsounnemaoo easesu oae»soonom hosononuuu Hosseso .oane oases 119 Turnover and Channel Length The percentage change in contribution margins and discounted cash flows of the M-W—R—C channel when turnover is increased and channel length is reduced is presented in Table 4-19. The change in contribution margins vary from -46.84% in the M-C channel for $1/2/.5 to +158.36% in the M-W-C channel for $l/2/2. The discounted cash flows range from -42.67% for $1/2/.5 to +151.00% for $l/2/2. Transportation Function and Channel Length The percentage increase in contribution margins and discounted cash flows when the number of institutions in the M-W-R-C channel is reduced and the transportation function is shifted to the consumer by the link prior to the consumer is presented in Table 4-20. This table compares the M-W-R-C channel with all functions performed with the M-R-C, M-W-C and M-C channel when the transportation function of the link subsequent to the consumer is shifted to the consumer. The percentage increase in contribution margins ranges from 5.97% in the 4-26-52 turnover M—R-C channel for product characteristics $5/lO/.5 to 2714.01% for the 4-26-52 turn- over M-C channel for $l/2/2. The percentage increase in discounted cash flows varies from 7.42% in the 4-26-52 turnover M-W-C channel for $S/10/.5 to 2085.79% in the 4-26-52 turnover M-C channel for $1/2/2. 120 .ezodu seeo uo»ssoonnu use nsnanes son»ssnn»soo now one amaouau mne mosses come me.on ee.on em.m ne.o mm.on v~.on on: ne.en «H.on _ no.5 «n.o no.~n mm.m onxnx «H.ms oo.m em.e eo.m Ho.en .m.m onen: no» onensnz m.\onxm» “monounnouoeuaco ooaeoum mm.en o~.an mo... em.m mv.o~ mm.ms on: HH.mn mo.nn .m.m no.5 ms.mn mm.na onsn: am... am... mn.m ne.o no.5. ne.on onan: no» onansn: ~\o.\mm "monounuouoauano uoaeoue _mm.mn mm.m~n ao.~en am.ovn an.mn nn.o~n on: qumen om.mm mn.~v ~o.mn mo.ons me.om onznz ne.mmn m~.mm ~e.mv ee.em m~.o~n am.me onmnz .ou onansn: m.\~\nm "monomnuouoaueao uoaeoum mo.nnn mm.onn oa.aon mm.oo~ m..~m. om.mm. on: oo.nm. on.amn m..me~ vm..o~ no.mm. ma.men onsn: .H.nvn m~.man mm...~ hm.m- mo.m~H no.e~n onanz . no» onenznz «xnxn» ”monounuoooauaco uoaeoue .3 .3 .3 .3 .3 .3 8308.3 8538 «3.70:2 uufl>0cug uH0>O§ uufl>0¢g MHO>O§ DHO>SHPH mmnomne ou amnonnv «mnoane 0» amnounv onnnnna 0» onnmnnu nnnann scan on mnnenn nnnenn acne 0» onnnnnu nnnenn scum 0» manenn urban ceeo Bonn snanez nsoah caeo Bonn snanez nzoah smeo Bonn snanex uo»ssoonno sod»ssnn»soo uo»ssooe«o sod»ssnn»sou uo»ssoon«o so«»ssnn»soo as omaago a an omaaso . as omaaso a as omaeao « as omaaso s an omaeso . ”asceanemsoo oaseso oae»soonem hosonowuua Hesseso .mane oases es»asoq Hessesu ensues use no>osnsa oeeonosn 112]. .eroau seeo uo»ssooesu use essanefi so«»sssn»sou now one canons» nne ceases come pm.~s an.ss ma.ms oa.us ~n.n~ so.os on: om.a m... ~v.m ms.a mm.m ma.m onsnz «a.e nm.m mo.os 50.. om.vs ao.m onan: .oo onansnz m.\os\ma unusuasuouoammao soaeoua ae.as on.ms sn.ms aa.ms mn.n« mm.o~ on: ms.m ao.m mm.m sm.m ma.~s ms.~s onzn: n~.m om.o nm.os o~.m oe.os as.ss onanz ”as onansn: «\osxm» unusuasuaooaueao ooaeonm as.~vs ma.mns an.oas mm.mos ma.amn an.oa~ on: sm.oss so.st an.oas ms.mms no.oo~ so.~s~ onznz am.mos nm.mos no.oes ms.n~s ma.~m~ ms.oms onanz “as onansnz m.\n\sa .aosoasuouoaueao uoaeoaa ma.mmo~ so.asea vm.smm om.moo mo.ao~ nu.smu on: mo.soms mm.oems sm.mmm sm.mnv an.aas an.ams onsn: mm.m.~s am.omns mn.onn so.sam ov.mvs n~.~ms one.: .0» onensn: «xaxs» ..osuasuouuamumw‘uoaeosa .3 .3 .3 .3 .3 .3 censusoenuo sesaeso agese aaao asmua: geese aaeo asmua: «gash aoeo asmua: uo»ssooeso so«»sssn»sou uo»saouess sasucssn»soo u0»ssoouwo so«»sssn»sou as omaaao s as omaaao o as amaaao . as omaaao a as omaaao s as omaaao a announe ounnsnu nsnans ecs»es ne>osnsa Hesseso aumaos Hessesu oosuou use nosfiesoo o» cos»ossh sos»e»nommsen9 »ussm "esoasnemaoo easesu oae»seonem mosesosuun «assesu .oune oases 122 Table 4-21 presents the percentage change in the M-W-R-C channel when the transportation function by-pass is initiated by the manufacturer, and the number of channel members is decreased. The change in contribution margins ranges from -33.l9% in the 4-26-52 turnover M-R-C channel for $1/2/.5 to 835.51% in the 4-26-52 turnover M-R-C channel for $1/2/2. The change in discounted cash flows varies from -33.01% in the 4-26-52 turnover M-W—C channel to +642.68% in the 4-26-52 turnover M-R-C channel. The table also indi- cates that the low extremes for the product characteristics $1/2/.5 switch when comparing the contribution margins and the discounted cash flows. Turnover, Transportation Function and Channel Length The percentage increase in channel efficiency when the M-W-R-C channel with all functions performed is altered to the M-R-C, M-W-C or M-C channel with the transportation function of the link prior to the consumer shifted to the consumer and with increased channel turnover ratios is presented in Table 4-22. The increase in contribution margins varies from 7.54% in the M-R-C channel for $5/10/.5 to 611.30% in the M-C channel for $l/2/2. The increase in discounted cash flows ranges from 10.53% in the M-R-C channel for $5/lO/.5 to 554.42% in the M-C channel for $l/2/2. 123 .nsodm smeo uo»ssooesu use essanea so«»sssn»soo now one casons» nne nausea come em.os sm.ma om.os n~.oH j, as.os es.os Unsnz mo.ms no.es oo.os om.ms no.m~ me.os unmn: [ no» onmnsnz m.\os\m» “aosumsuauoauaao soaeoum mm.ms sh.ms om.os mo.os ms.mu me.s~ onznx rIIIL No.5s ms.os hm.o~ oo.os ms.o~ Hm.mm unenx [ no» onensnz «\os\ma umosoasuosoaueao soauosa Ho.mmn sm.smn eo.omn as.mNn es.HNn am.hsn unanz [ se.smn as.mmn o~.o~n am.mmn mn.msn oe.nn onmn: I no» unmnsnx m.\~\sm nnos»esno»oenesu »osuonm -.eoo me.oeh e~.enH mo.oas ms.moa aonuas 013nz Pull oo.~eo sm.mnm sa.asn em.nnm no.nms Ho.oes Olen! [ u 0» onmn3n2 ~\~\s» unusuasuouoauaao uoaeoua .3 .3 .3 .3 .3 .3 ens»ossn»m Hesseso esoam sneu essanez exoah ceeo essane: naoam cmeo essanex uoussoouso sow»essn»sou uo»ssoonso sasusssn»soo uoussoomso sas»scsn»soo ss easeso a ss oaseco r s« easesu a sa oasesu a ss oasesu a cs oaseso a nononne omnmsna manena usuasoq Hessesu oosuom use mnemnhm so«»os:m sas»e»nommsena mow»em no>osnse Hessesu unconsnemsoo oasesu uae»seonom hosososuum Hesseso . .Hmne oases .1224 .25.: seeo uo»s:ooesu use essanefl sas»:ssn»soo now one canons» nne ceases. come em.n~ ms.ns a«.os em.«s ne.n~ oo.as on: an.as om.ns . «o.ss an.m oo.ms o~.~s onsnx mm.as mm.ss nm.os em.n ne.ss os.ss onanx .ou onansnz m.\os\m» unusuasuoooeueao soaeoue ao.m~ ms.s~ ~m.ms «o.ms aa.a~ nm.o~ on: om.s~ mm.os ma.~s s~.ss ms.ms ao.ms onxn: ee.o~ s«.as pa.ss mm.m sm.ms mn.ns onan: u 0» Unmntlx «\os\m» “moss-sueooeneco ooouonm ns.son mo.ne~ os.aas mu.oos «m.mmn sa.~a~ on: ve.~sm ao.mnu no.5ms om.ses ne.mm~ so.~s~ onzn: so.am~ no.mn~ as.mvs as.ons ma.om~ o«.ns~ onan: .os onanxn: n.\u\s» .aosuassuooasaao uoaeoua ~v..a~ m~.aa~ ~a.vmm om.sso sm.oo~ on.na~ on: as.es~ on.~nu mn.o~e ns.noe ne.mms m~.o«« onxn: no.mms -.msa ma.mon oa.ona sv.nms mm.so« onanx .oa onensn: «xmxs» “nosumsaouoaueao uoaeoua L1 .3 .3 .3 .3 .3 .3 , 33033 senses“. ...—0.562 ...—Chang ONCE Dag ONCE unobsndh. «mnoanv o» «mnoane «mnoanv on amnasnv ounmsnn 0» manmsnn nsnans none on nsnans nsnans nous 0» ounnsnu nsnvns case as msnans azose auao nous asmua: aeosu a-ao nous asmua: axes» aaao nous asmsaz uo»ssoousa so«»sssn»soo ue»ss50e«s s3»s.._ss n»sou 33503.3 confine". as omaaao a as omaaao a as omaaao . as omaaao s as omaaao a as omaaao . es»aso.s Hosseso ensues use nosesoo o» sos»oss£ sos»e»nomesen.s. uuscm .ne>osne.s. oeeenosH ”usoesnemaoo easeso casseonom mesonosuuu sesseso .nnne oases. 125 Table 4-23 presents the percentage change in contribution margins and discounted cash flows when the M-W-R-C channel with all functions performed is changed to a M-R—C or M-W-C channel with the transportation func- tion by-pass of either the wholesaler or retailer and with increased channel member turnover ratios. The change in contribution margins varies from -24.59% in the M-R-C channel for $l/2/.5 to +246.32% in the M-R—C channel for $1/2/2. The change in the discounted cash flows range from -20.58% in the M-W-C channel for $1/2/.5 to 224.19% in the M-R-C channel for $1/2/2. This table also indicates that the channel structure extremes for contribution margin and discounted cash flows change for the product characteristics $1/2/.5. Concluding Comments The research reveals that both the total contribution margin and the discounted cash flows of a distribution channel must be evaluated in order to determine the total efficiency of alternative channels of distribution. It further indicates that the number of channel institutions, the market functions performed by each channel member, the product characteristics and the channel member turnover ratios impact on total channel efficiency. The difference between the contribution margin and the discounted cash flow values for indirect, low turnover channels versus direct, 1J26 .monm ammo coucooonso can unsouns casuansuucoo sou wuq nuaounu mnv madame «0mm oN.nN vo.s~ om.ma ~v.>u mv.v~ Ho.o~ mutt: hm.m~ as.o~ mm.ms oh.ms ov.o~ m>.ms vial: [ "0.... Utmszlz m.\os\mm unusuasuouoauaao uosvoum mm.am Hm.m~ mh.s~ Ho.om vm.mu hm.v~ Dist: [ m~.Hm us.v~ ma.a~ mv.ms do.0m vh.m~ Utmux [It sou oumazu: «\oa\mm ”mosunsuouoouusu uuovoum hm.h~ om.h mm.o~u ma.n~n ov.ss No.0: Uuzuz rIIIL om.0m mw.m mo.mau mm.vnu as.m~ hw.n clan: [ so» oumlznx m.\~\s» ..aosuasuouoasaau uuauoua mm.mms am.mvs om.~a~ om.onm mm.nua no.v~s Dian: I'll ma.m¢~ oh.sms ma.v~u ~m.ov~ mm.nvs «H.o¢a Oman: Q [ sou Ulmuzuz ~\~\s» .aosuasuuuoauaao seasons .3 .3 .3 .3 .3 .3 onsuoauum .3585 uuo>ocupa usabocupa r nuo>ocupa uua>ocuna au0>ocuna nuu>ocusa «muoanv on «mumnuv um|o~uv on «mum~nv omlmanu 0» oNInHIN nsnvua scan 0» mnnvua «Alena Bonn on ouumsun nsnwus scan on manque urban nauu Bonn csmuu: u3on sumo sown :suuu: «team smuu aosu sauna! couscouaso :Osuonsuucoo noucsoonso casusnsuucou couscouuso cosponssucou as umaaao a as omaaau . as «mango . as omaagu a as omaaau a as amaaao a aauuaos Hoccmso condom new nmumlhm casuuuuommcuua ano>ocusa onuosoca uncomsuamaou omumno omnucoosom hocososuum Hosanna .mwuv manna 127 high turnover channels points to the importance of channel financial management (Tables 4-3 through 4-6). The analysis of different product characteristics indicates that the least channel structure flexibility exists in channels with products of low value, low weight and high cubic volume (Table 4-3). Conversely, the greatest channel flexibility exists in channels with products of high value, high weight and low cubic volume (Table 4-6). Comparisons of channel structure efficiency 'h reveal that the least efficient channel for most product characteristic combinations analyzed is the low turnover, M-W-R-C channel with all marketing functions performed by each link. The most efficient channel, depending upon product characteristics,is the high turnover M-W—C channel with the transportation by-pass or the M-C channel with the transportation function shifted to the consumer. Changes in the relative efficiencies of any channel structure depend upon: (1) the turnover of each channel member and the chan- nel as a whole, (2) the performance of the transportation function by channel members, and (3) the specific links in any one channel as related to channel length (Tables 4-11 through 4-23). Further implications and conclusions of the research are discussed in Chapter V. CHAPTER V SUMMARY, CONCLUSIONS AND RECOMMENDATIONS The importance of channels of distribution in marketing management was emphasized in Chapter I. In that chapter the point was made that one measure of the relative success of the business firm in a competitive environment is dependent upon the strategic planning and management of distribution channels. It was also indicated that there was a need for developing a method of evaluating the efficiency of alternative channels of distribution. Chapter II covered the approaches to analyzing channel efficiency and channel financial management. The existing approaches for evaluating channel efficiency pro- vided the basis for developing the distribution channel efficiency model presented in Chapter III. The analysis of marketing functions and flows in alternative channels of distribution provided the information required to develop the marketing and distribution functional costs and cash flows for the channel as a whole and for each channel member independently. 128 129 Conclusions and Implications The conclusions and implications of the research are developed from the findings presented in Chapter IV. The implications of the study are divided into five areas: (1) channel structures, (2) channel marketing functions, (3) channel product characteristics and channel member turnover ratios, (4) channel financial management, and (5) channel efficiency model applications. Channel Structures The channel efficiency model provides the basis for evaluating the efficiency potential of alternative channels of distribution. With regard to the physical distribution aspects of marketing channels, the research indicates that in some cases the more direct channels are more efficient than the indirect channels. This conclusion contradicts the frequently expressed view that direct chan- nels are always the most costly method of achieving market acceptance. However, the study shows that the business firm must consider not only the implications of the number of links in the channel arrangement but also the marketing functions performed, the product characteristics and the channel member turnover ratios. 130 Channel Marketing Functions The marketing functions performed by each link in the channel influence the contribution margins and discounted cash flows of the channel as a whole and each of its members. This study focused on channel efficiency as indicated by costs, contribution margins and discounted cash flows. Channel effectiveneSs in terms of market expo- sure and demand creation are not considered. As defined in this study, the duplication of the physical distribution aspects of the marketing functions by all members of the channel structure serves to increase the total costs in- curred by the channel and decrease the total contribution margin and discounted cash flows of the channel. The shifting of these functions to other channel members appears to provide an acceptable alternative to existing channel structures by eliminating functional duplication based on efficiency concepts. Channel Product Characteristics and Channel Member Turnover Ratios The product characteristics of value, weight and cubic volume and the channel member turnover ratios influ- ence channel structure analysis and evaluation. The product characteristics impact primarily upon asset commitment to storage and transportation. Channel member turnover ratios impact upon the financial commitment to alternative channel 131 structures. These turnover ratios affect operating costs and cash flows. Hence, both the product and turnover dimensions impact on alternative channel decisions. As indicated in the findings in Chapter IV, the low value, low weight and high cubic volume product has fewer viable channel alternatives than does the high value, high weight and low cubic volume product when only the physical distribution aspects of the channel are considered. With fixed demand, high value and weight impact on channel costs by reducing the total number of units flowing through the channel. The reduction in units sold decreases the buying, selling, storage and transportation costs. Conversely, high product cubic volume increases the transportation and storage costs. High product turnover also increases the number of viable channel options. That is, high channel member turnover reduces channel COStS due to lower storage related costs. The two aspects of the storage function costs which decrease due to high turnover are the inventory carrying costs and the warehousing space costs. Furthermore, high turnover decreases the range between the contribution margin and the discounted cash flow values. 132 Channel Financial Management The study utilizes discounted cash flow analysis to evaluate the short-run Operational aspects of channel management, however, these decisions have long-run financial impact on the channel and its members. The research indi- cates that the channel structure arrangements, marketing functions performed and product characteristics influence total channel efficiency. In addition, the study shows that the contribution margins and discounted cash flows of channels must be considered in evaluating the efficiency of alternative structural arrangements. Although the total channel may have a positive cantribution margin and dis- counted cash flow, individual members have negative con- tributions and flows. Such links serve to reduce the efficiency of the total channel. The management of the financial implications of the channel through a channel leader or a vertical integration approach appears to provide advantages to all channel members. Channel Efficiency Model Applications The channel efficiency model provides a method of evaluating the possible costs, contribution margin and discounted cash flow implications of alternative channels. Such evaluations are important for both new and existing products. Channel alternatives for new products may utilize existing compatible channels if the new product 133 is similar to existing products. However, if the new product is incompatible with existing channel arrangements, other channels must be considered. The efficiency model provides the nucleus for analyzing other alternatives. With existing products, firms may desire to evaluate existing channels if product sales have expanded or new applications have been identified. In addition, product channel profitability may be evaluated as competitive fac- tors change. Such evaluations may be either part of short- range planning or limited to long-range planning. The channel efficiency model provides the basis for identifying the range of channel structures and functional options which may be considered in the analysis of channels for either new or existing products. Limitations and Suggested Future Research The study has focused on the demand satisfaction aspects of alternative channels of distribution. The contribution margin and discounted cash flow analysis indicate the residual funds available to the channel and each channel member for demand creation and profit. Additional research is required to evaluate the demand creation aspects of channel structures and the interaction of the demand dimensions of channel efficiency. The model assumes fixed demand for all channel structures. When this 134 assumption is relaxed, further research will be required in order to determine the different demand patterns which could occur due to the utilization of different channel arrangements. The necessary spatial relationships for all channel members in any channel are assumed in the channel efficiency model. Geographic aspects of channel efficiency have been analyzed with linear programming, simulation and heuristics. Since the channel model is based on theoretical relationships, additional research and model refinement may be required before the model can be applied in planning and evaluating efficiency in specific channels of specific industries. The model was developed for application in the consumer sector. It may be necessary to modify the theoretical efficiency variables in order to apply the model to other industry sectors. BIBLIOGRAPHY BIBLIOGRAPHY Books Alderson, Wroe. Marketing Behavior and Execppive Action. Homewood, Ill.: Richard D. Irwin, 1957. Amstutz, Arnold E. 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