NOTES ON THE INTERACTIVE EXERCISE

Overview of Interactive Exercise on Channel Efficiency

The objective of this exercise is to show a graphical example that indicates how adding a wholesale level can, in fact, reduce total transaction costs in a channel of distribution. The exercise contains a hypothetical example, assuming that there are 50 manufacturers and 800 retailers in a channel system. The total transaction cost in a channel system with no wholesale level is computed and compared to the total transaction costs in channels that contain one and two wholesalers, respectively.

Concept Review

Middlemen exist in order to rectify market discrepancies and to perform certain key functions.

A discrepancy of quantity is the difference between the quantity of products it is economical for a producer to make and the quantity final users or consumers normally want.

A discrepancy of assortment is the difference between the lines a typical producer makes and the assortment final consumers or users want.

Among the important channel functions are regrouping activities-- adjusting the quantities and/or assortments of products handled at each level in a channel of distribution. These activities include:

  • accumulating: collecting products from many small producers.
  • bulkbreaking: dividing larger quantities into smaller quantities as products get closer to the final market.
  • sorting: separating products into grades and qualities desired by different target markets.
  • assorting: putting together a variety of products to give a target market what it wants.

Using the Exercise

Initial Screen

  1. The exercise begins with a graphic example of the relationships that would result if each manufacturer distributed directly to every retailer.

A.The instructor can use this screen to emphasize how complex a channel system can be, even if it involves only two levels.

  1. When ready, the instructor can click on the “Next” button to proceed to the next screen.

Next Screen

  1. This screenspecifies that there are 12 deliveries per year from each manufacturer to each of the retailers in the channel at a cost of $40 per transaction over and above the cost of the merchandise distributed.

A.So, with no wholesalers present, the number of transactions is computed as: [number of manufacturers (50) X number of retailers (800) X 12].

  1. The total cost of transactions in the channel is simply the number of transactions X $40.
  2. The instructor can ask students to supply the appropriate numbers to place in the boxes on the left hand side (from top to bottom: 50, 800, 12 and $40, respectively).
  3. When they are filled in, the bar chart on the right hand side of the screen is produced automatically, and the total cost appears: $19.2 million.
  4. When ready, the instructor can click on the “Next” button to proceed to the next screen.

Next Screen

  1. This screen shows what happens when a wholesale level is added to the channel. All manufacturers deal with the wholesaler, and the wholesaler sells to all the retailers.

A.The instructor should emphasize that even though there is now an additional level to the channel, the channel is actually more efficient and the number of transactions is reduced.

  1. When ready, the instructor can click on the “Next” button to proceed to the next screen.

Next Screen

  1. This screen presents the computation of the total cost of transactions for the channel system, now that the wholesaler has been added.

A.The total number of transactions is computed as: [(number of manufacturers X 12) + (number of retailers X 12)]. So, the total number of transactions goes downsignificantly in the system as a whole.

  1. As before, the total cost of transactions in the channel is simply the number of transactions X $40.
  2. The instructor can ask students to supply the appropriate numbers to place in the boxes on the left hand side (from top to bottom: 50, 1, 800, 12 and $40, respectively).
  3. The bar chart on the right hand side of the screen is produced automatically, and the total cost appears: $408,000. This cost is significantly lower than the baseline of $19.2 million shown by the dotted line in the chart.
  4. The instructor should emphasize that the cost reduction is due to the decrease in the number of channel transactions.
  5. When ready, the instructor can click on the “Next” button to proceed to the next screen.

Next Screen

  1. This screen explains the possible cost differences between the channel containing the wholesaler and the channel with no wholesalers.

A.When the wholesaler is added, manufacturer-to-wholesaler costs per transaction will likely increase due to, among other things, higher volume purchases.

  1. Wholesaler-to-retailer transaction costs are also higher than in the manufacturer-to-retailer channel due to the additional functions performed by wholesalers, such as breaking bulk, accumulating, etc.
  2. When ready, the instructor can click on the “Next” button to proceed to the next screen.

Next Screen

  1. The instructor can ask the students to supply numbers representing significant increases in cost for both the manufacturer-to-wholesaler transactions and the wholesaler-to-retailer transactions.

A.Even a 100-fold increase in manufacturer-to-wholesaler transaction cost and a 10-fold increase in wholesaler-to-retailer transaction cost will still provide a more cost-efficient channel than the original channel with no wholesaler.

  1. The key point for the instructor to stress is that the addition of the wholesaler increases channel efficiency by reducing the total number of transactions required and by lowering the total cost of channel operations.
  2. When ready, the instructor can click on the “Next” button to proceed to the next screen.

Next Screen

  1. This screen shows what happens when the channel adds another wholesaler.

A.Each manufacturer deals with each wholesaler, but the wholesalers split the retail market, with each wholesaler serving 400 retailers.

  1. When ready, the instructor can click on the “Next” button to proceed to the next screen.

Final Screen

  1. This screen shows that even though the number of manufacturer-to-wholesaler transactions increases, there can still be cost advantages over the initial scenario in which there were no wholesalers.

A.As before, the instructor can engage the students in experimenting with different costs for both the manufacturer-to-wholesaler transactions and the wholesaler-to-retailer transactions.

  1. When ready, the instructor can click on the “Exit” button to end the exercise.

This exercise gives the instructor an opportunity to show students that adding middlemen doesn’t necessarily increase the costs of purchasing a product. As such, the exercise builds on the information that is presented in Chapter 11 of the text about the functionsof middlemen and their role in reducing discrepancies and separations.

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