Vertical and horizontal marketing system what are the features. Vertical and horizontal marketing distribution systems. Traditional distribution system

- this is an approach to marketing, when a unified system of product sales functions, consisting of a manufacturer, sellers who buy goods in bulk and retail trading companies that sell products to the end customer.

In such a system, only one of the participants owns the ownership of all funds circulating in the system. And the whole system is the shortest and most direct sales channel for products. The one of the participants who owns the working capital is usually the organizer, ensures the cooperation of other organizations and can give them special privileges.

Vertical and horizontal marketing differ mainly in the way of finding the most convenient way to sell a product. Vertical marketing is focused on a vertical niche and implies a distribution system that is dependent on the main organization.

Benefits of vertical marketing

Centralized distribution channel management system.
Ample opportunities for the sale of goods with similar characteristics.
The main responsibility rests with the organizer, and the rest of the participants act as hired workers.
The shortest possible chain from the seller to the consumer.

The history of vertical marketing

Vertical marketing as a way of organizing product sales was first used by an American company that was engaged in the production of IBM - electronic computers. The goal of the reorganization of the marketing approach was to quickly find customers interested in purchasing equipment, as well as adapt your product to those areas in which it could be in demand. The approach gained wide popularity, and in the 40s this organization not only had a wide staff of specialists with knowledge of the application of their technology, but also organized courses and seminars, teaching specialists of other companies how to use computers correctly and talking about their advantages. ...

Modern approach to marketing

Currently, an integrated approach is being used, which organically combines technologies of both vertical and horizontal marketing. The modern model involves the participation in the marketing process of a group of marketing managers who are under the control of the leaders of the organizations.

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Pharmaceutical Firms' Distribution Policy

Development of distribution channels

In the past, distribution channels were made up of independent companies, each with their own goals. Such a distribution channel is called a conventional distribution channel, in which companies sought to optimize their purchasing and distribution policies at the expense of companies at the upper and lower levels of the channel.

Conventional distribution channels have been replaced by vertical marketing systems in which the channel's activities are controlled or significantly influenced by one of the participants in the distribution channel - a manufacturer, reseller or retailer. A vertical marketing system is an organization of distribution channels in which all participants coordinate their actions in order to optimize the distribution process.

Vertical marketing systems have a number of advantages over conventional distribution channels:

Vertical marketing systems

Vertical marketing systems vary by level of organization.

Corporate vertical marketing system- sections of the distribution channel belong to one organization. Thus, the production and distribution functions are controlled by one company.

Administrative vertical marketing system is a less formalized organization in which each member of the distribution channel has sufficient power to influence other members of the channel. The most powerful company in the administrative vertical marketing system is called the “channel captain” and is responsible for providing a favorable operating environment for the entire system.

Negotiated vertical marketing system is an intermediate link between corporate and administrative systems. The participants in the distribution channel are linked by contractual relationships that determine their mutual obligations.

In the US pharmaceutical sector, there are many examples of vertical, integrated systems between manufacturers and disease state management companies that distribute drugs.

Table. Examples of vertical integration between pharmaceutical manufacturers and disease management companies, 1996

Pharmaceutical manufacturer	Integration type	Disease Management Company
Bristol-Myers Squibb	contractual relationship	Caremark
Caremark	investment	Technology Assesment Group
Eli lilly	acquisition	Integrated Disease Management / PCS
Merck	acquisition	Medco Containment Services
Smithkline beecham	acquisition	Diversified Pharmaceutical Services
Pfizer Inc.	contractual relationship	Value Health Inc.
Zeneca	acquisition	Salick health care

In Germany, an example of vertical integration is one of the largest generic manufacturers, Merckle KG (Ratiopharm), which owns the largest wholesaler Gehe AG.

Horizontal marketing system

A horizontal marketing system is formed by two or more autonomous companies located at the same channel level and joining forces to share marketing opportunities. Sometimes even competing companies can collaborate on specific drugs and drug groups.

The development of horizontal marketing systems is influenced by the following factors:

For example, SmithKline Beecham signed an agreement with Bristol-Myers Squibb to jointly promote the new Avandia drug in the United States. The drug "Avandia" (rosiglitazone maleate) is used to treat patients with type II diabetes mellitus and belongs to a new class of drugs - thiazolidinediones. The mechanism of action of the drug differs from that of the already known oral hypoglycemic agents. Avandia is the first oral drug from the group of so-called insulin sensitizers that increase the sensitivity of target cells to insulin. Members of the US Food and Drug Administration (FDA) Endocrinological and Metabolic Drugs Review Committee have supported the use of Avandia for the treatment of type II diabetes mellitus patients, both as monotherapy and in combination with metformin, which is sold in USA by Bristol-Myers Squibb under the brand name Glucophage. The collaboration between SmithKline Beecham and Bristol-Myers Squibb should accelerate the introduction of Avandia in the United States, where about 15 million people have type II diabetes mellitus, which is approximately 90% of all patients with diabetes mellitus. The extensive experience of Bristol-Myers Squibb in the use of Glucophage and the emerging need of doctors for an additional drug for the treatment of patients with type II diabetes mellitus of the new generation contributed to the combined efforts of SmithKline Beecham and Bristol-Myers Squibb to achieve a successful withdrawal Avandia in the USA.

Retail wheel

The retail wheel is an evolutionary process that follows a standard pattern: a new retailer with low operating costs attracts consumers with low prices and a limited range of services Over time, the retailer adds new services to increase the attractiveness of its retail outlets. As a result, prices rise, which creates a niche for cheaper competitors. They are gradually becoming more expensive and are being supplanted by other retail stores that sell at discounted prices.

Rice. 1. Wheel of retail
(Source: V.S. Prikhodko, SmithKline Beecham OOO Ukraine, Marketing and merchandising at the point of sale // Pharmacist. - 1997. - No. 10)

After choosing the structure of distribution channels, the company faces the task of building a distribution system for goods that will be able to efficiently deliver goods to consumers.

The company faces two opposite challenges:

The mission of the company management is to achieve efficient customer service while avoiding excessive costs of distribution and storage of goods.

When determining the amount of stock, it is necessary to find a balance between the costs of maintaining the inventory with the costs of lost sales.

Reserves are subdivided into:

The costs associated with the formation, availability, storage and maintenance of stocks are divided into two categories:

Transportation and procurement costs- these are the costs associated with the organization of orders for pharmaceutical raw materials and finished products and their implementation

Transportation and procurement costs include:

Transportation and procurement stocks are fixed costs that do not depend on the size of the order.

The costs of forming and storing stocks consist of:

The costs of forming and storing inventory are variable costs, the amount of which depends on the size of the order. The larger the inventory, the greater the amount of these costs and expenses, and vice versa.

The company's task is to determine the main parameters of inventory management:

Point of order- the lower limit of the order, at which it is necessary to organize the next purchase order. The level of current stocks at the time of ordering must be sufficient to ensure the uninterrupted operation of the enterprise for the next batch of raw materials (materials, goods, etc.) to arrive at the warehouse, while the safety stocks remain unchanged.

Period between orders (order interval)- the time interval between the placing of two successive orders for the supply of products, the order of which has approached the point of order.

Delivery interval- the time interval between the placement of two consecutive deliveries.

Optimal delivery lot (optimal order size)- the volume of the batch shipped by the supplier and providing the buyer with the minimum amount of transport and procurement costs and the costs of forming and storing stocks.

Calculation of the optimal delivery lot (optimal order size) allows you to calculate the optimal balance between the costs of maintaining inventory with the costs of lost sales and is carried out according to the formula for economical order markup:

Q opt = SQRT (2 * S * Y / (I * C)) = SQRT (2 * S * Y / H)

where
SQRT - Square Root
Qopt - optimal delivery lot (optimal order size)

Y - the cost of one order or the amount of transport and procurement costs when implementing one order
С - the cost of one commodity unit
I - the cost of maintaining a commodity stock as a percentage of C (the cost of one commodity unit)
H = IC - storage of a unit of a resource (product) in a billing period (quarter, year)

This formula is effective when the inventory can be replenished immediately, which in most cases is not possible. Therefore, it is necessary to determine the point of order taking into account the demand for the product and the indicator of insurance (additional) stocks.

Based on the optimal delivery schedule (optimal order size), you can calculate the optimal frequency of orders:

Topt = N / (S / Qopt)

Topt - optimal frequency of orders
N - the number of segments in the billing period (quarter, year)
S is the volume of sales in commodity units for a certain period of time (quarter, year, etc.) or the total demand for a resource (product) used as a stock for a specific period (quarter, year, etc.)

Literature

Mnushko Z.N., Dikhtyareva N.M., Management and Marketing in Pharmacy.- Kharkov: UkrFA, 1999.
William Tindall, Marketing to managed care pharmacy: think local, think partnership, think outcomes, think disease state management, Journal of Pharmaceutical Marketing & Management, Pharmaceutical Product Press, Vol. 10, 2/3, 1996.
Cooperation of the two leaders // Pharmacy Weekly.- K .: NPP Morion.- 1999.- № 17.
Denis Oleinikov. Inventory management in the pharmaceutical business.- K .: NPP Morion.- 1999.- No. 33.
Peter Doyle. Management, strategy and tactics. St. Petersburg, 1999.
Prikhodko V.S. Marketing and merchandising at the point of sale // Pharmacist. - 1997. - No. 10.

One of the most significant developments in recent years has been the emergence of vertical marketing systems that challenge traditional distribution channels. A typical traditional distribution channel consists of an independent manufacturer, one or more wholesalers, and one or more retailers. Each channel member is a separate enterprise striving to secure the maximum possible profits, even to the detriment of the maximum profit of the system as a whole. None of the channel members has full or sufficiently complete control over the activities of the rest of the participants.

In contrast, a vertical marketing system (VMS) consists of a manufacturer, one or more wholesalers, and one or more retailers acting as a single system. In this case, one of the channel members either owns the others, or grants them trade privileges, or has the power to ensure their full cooperation. The dominant force in a vertical marketing system can be either the manufacturer, the wholesaler or the retailer. The Navy emerged as a means of controlling channel behavior and preventing conflicts between individual channel members pursuing their own goals. Vertical marketing systems are economical in terms of their size, have great bargaining power, and avoid duplication of effort. The Navy has become the dominant form of distribution in consumer marketing, where it already covers 64% of the total market.

Within the corporate Navy, all successive stages of production and distribution are solely owned. Such a system is based on the use of a direct marketing channel and implies that the tour operator has a widely branched out sales network of its own, including branches, representative offices or representatives in various regions, contributing to a faster and more efficient delivery of the tourist product to the end consumer. As a rule, the creation of corporate naval forces is within the power of only very large companies, since their maintenance requires significant efforts and costs.

Contractual IUDs imply the construction of a sales channel based on contractual relations between parties independent from each other. This type of Naval Forces is perhaps the most common in the domestic tourism business. Organization of sales on the principles of contractual CPA allows its participants to use their advantages most effectively and thereby achieve good commercial results while reducing the overall level of costs for maintaining the sales channel. In the practice of using contractual IUDs, three main types can be distinguished: an agency agreement, an exclusive agency agreement, and a license agreement.

The types of contractual IUD differ from each other in the degree of dependence of the agent on the manufacturing enterprise and, as a consequence, in the ability to manage and control the distribution channel.

An agency agreement is the most common form of contractual CPA. Relationships within the framework of an agency agreement are based on a number of mutual obligations between the tour operator (principal) and the travel agent.

The process of establishing and maintaining a relationship between a tour operator and a travel agent is generally as follows:

- public offer of the tour operator;
- conclusion of an agreement (agency agreement) between the tour operator and the travel agent;
- Sending by the tour operator of offers (price lists) and advertising materials;
- an application from a travel agency for booking a tourist product;
- confirmation of the application by the tour operator and invoicing;
- payment of the invoice by the travel agent and transfer of the tourist's documents to the tour operator (in the case of issuing exit visas to the country of temporary stay).

Depending on the nature of tourist operations, agency agreements have a different content. They can be as detailed as possible when it comes to a one-time or short-term transaction, and can also relate only to the basic, fundamental conditions if the contract is concluded for a long period (general agency agreement). In the latter case, the specification of commercial terms occurs either on the basis of annexes to the agreement (for example, annual protocols), or on the basis of current correspondence.

Typical conditions under an agency agreement include:

- obligations to provide a tourist product;
- conditions for booking tourist services (methods, terms, procedure, amount of information);
- conditions of service for tourists, documents of service, the procedure for providing preferential services;
- price policy;
- systems of mutual settlements and payments;
- the nature and procedure of the commission;
- confidentiality;
- a responsibility;
- the procedure for consideration and satisfaction of claims.

The essential terms of agency agreements are also determined by the obligations on the part of the agent and the principal.

The important responsibilities of an agent are:

- reasonable diligence;
- honest information of the principal about potential clients;
- the planned volume of sales at agreed prices;
- all-round support for the image of the principal;
- compliance with the established price level and the pricing policy of the principal;
- reasonable application of discounts permitted by the principal;
- observance of the confidentiality of information transmitted by the principal;
- timely reporting to the principal in the prescribed form;
- immediate informing of the principal about the difficulties, claims and complaints of the clients.

Principal responsibilities:

- agent training;
- determination of the territory for the agent in which the agent has exclusive rights (if such are accepted in the agreement);
- the procedure for providing information and advertising materials.

The central articles of the agreement are the size, conditions and terms of payment of commissions. The size of the commission is from 2 to 12%.

Commissions can be paid to an agent in several ways:

1) within the specified period after the transfer of the client's funds to the principal;
2) deducted from the cost of the tour immediately before sending the money to the principal;
3) a system of offsetting, an accumulative scheme, etc.

A license agreement (franchising) is a form of contractual IUDs.

Franchise (from the English franchise - the right to vote) - the right to sell services on behalf of a specific company on the basis of a signed license agreement. The main difference between franchising and other contractual systems is that it is usually based on either unique services, business practices, or a trademark, patent, or copyright. Franchise systems are most common in catering organizations (eg McDonalds) or accommodation (eg Holiday Inn), where they are called chains (chains). In tourism, the most striking example is the construction of the navy by the German company TIL. The agreement between the franchisor (rightholder) and the franchisee (recipient) usually provides for:

- the franchisee's use of the franchisor's trademark;
- application by the franchisee of the franchisor's technology and service standard;
- application of methods and systems of management, up to accounting;
- use of personnel training methods developed by the franchisor, including internships at the franchisor's enterprises;
- inclusion of the franchisee in the general advertising and marketing system of the franchisor.

Franchising contributes to the effective activities of both copyright holders and rights users. The latter merge into an already functioning system, while maintaining formal independence. Hotels gain access to a chain-owned centralized booking system that guides their customers, takes on advertising costs. Large international chains are creating centralized supply companies, training centers, furniture and equipment manufacturing and repair firms. Well-known hotel chains have formed and maintain certain rules and standards of service, which ensure the originality and uniqueness of the style of all the enterprises that are part of them.

Franchise systems in the hotel industry are international in nature. Thus, the hotel chains of the American companies "Holiday Inn" and "Sheraton" are located in more than 50 countries of the world.

Controlled Naval Forces are another type of vertical marketing systems. Controlled IUDs are systems where one of the channel participants takes a dominant position. The coordination of a number of successive stages in the movement of a product on its way to the consumer is carried out not on the basis of common ownership to one owner, but due to the size and power of one of its participants. An example of such an IUD is the activities of companies such as Thomas Cook or American Express.

Building a sales channel according to the principle of a vertical marketing system is not the only possible one. One of the phenomena inherent in distribution channels in tourism is the willingness of two or more firms to join forces to jointly exploit marketing opportunities. Such joint cooperation can be carried out both on a permanent and temporary basis. Building a sales channel on this principle is called a horizontal marketing system.

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