EVOLVING DISTRIBUTION CHANNELS LED BY THE INFORMATION ...

EVOLVING DISTRIBUTION CHANNELS LED BY THE INFORMATION TECHNOLOGY: A CASE OF JAPAN Masayoshi Maruyama Graduate School of Business Administration, Kobe University Abstract The grocery channel in Japan has been evolving from the conventional selective channel to the newly segmented channel. In its course, there is a tendency of shortening of distribution channels. Three factors affect this change. Firstly, the product proliferation has increased retailers' inventory cost, which caused retailers to place orders frequently in a small-lot size. Secondly, retailers tried to reform the logistics: the establishment of joint delivery system, the consolidation of business flow, and the shift of marketing task up to the wholesale level. Thirdly, the development of information technology gives rise to a strategic shift, from speculation to postponement, from scale to scope, and from push to pull. Recent channel environments and the strategic shift bring about a fundamental change in distribution channels. In the condition of speculative inventory and anticipated mass production, manufacturers preferred a selective channel to an open channel because of relaxing price competition between manufacturers. In the condition of postponed inventory and separate production to order, however, there is an incentive for channel integration not only from the aspect of logistics, but also from the aspect of channel communication. Introduction In the 1960s, the Japanese distribution system was characterized as a large number of very small neighborhood shops, which accounted for about 70% of all retail outlets, with a multi level wholesale structure linking them to the manufacturers. However, the structure has been changing rapidly in recent years. The Census of Commerce in 1997 reported that the number of wholesale establishments decreased by 8.8% during 1994 and 1997. Remarkably the sales of intermediate wholesaler decreased by 25% during the same period. The W-W ratio, which is the proportion of intra-trade among intermediate wholesalers compared with the direct sales from wholesalers to retailers, has decreased from 73.67% to 56.11% for consumer goods during 1982 and 1994. In food and beverages, the ratio decreased drastically from 38.95% to 18.07%. It is the evidence of bypassing intermediate wholesalers in business flow. Recent trends of the wide use of information network system of EDI and POS system and the strategic alliance between a large retail firm and a manufacturer such as ECR and QR system have a great impact on the distribution channel in Japan. In this paper, with comparing the 1960s model with the 1990s model of distribution channels, the characteristics of evolving Japanese distribution channels are described. Evolving Distribution Channels Conventional Channel We begin by describing the evolution of grocery channel, which can be shown in Figure 1. Conventional channel shows the structure after a growth of grocery chains and GMS (general merchandising stores) since 1960s. Manufacturers administered the

segmented channel. Transaction between a manufacturer and a wholesaler is characterized as a selective channel. Each retailer deals with many limited-line wholesalers. The transaction between a retailer and a wholesaler is characterized as an open channel. Each wholesaler is a sales agent of manufacturer and whose basic functions are the market coverage of each product and the aggregation of local demand in retail level. Newly Segmented Channel Newly segmented channel shows the structure initiated by the Convenience Stores, which has been come into wide use by GMS. Manufacturers and/or primary wholesalers ship their products to the joint distribution center, or Madoguchi Donya (a representative wholesaler) specified by each retail firm. The product assortment carried out so far in the retail level is shifted up to the wholesale level. The transaction in wholesaling level is characterized as an open channel. Each retailer deals with its consolidated agents, which is characterized as a selective channel. Each wholesaler is a buying agent of retailer and whose basic functions are the product assortment and the information transmission of local demand to the manufacturers. Changes in Channel Environment The Japanese grocery channel has been changing from the conventional one to the newly segmented one. It is of interest to examine why it changed. To this end, firstly we will examine the channel environment affecting this change. Product Proliferation The first fundamental factor is the product proliferation during the past two decades. In response to the diversification of consumer needs, there has been an increase in the number of newly introduced products including retailers' private label products. It provides a wider variety of goods for consumers. But it reduced the average lifetime of products, increased the inventory cost of retailers, and made it difficult for retailers to predict each demand of products (as for the U.S, see Messinger and Narasimhan [1995]). Reform of Logistics Faced with increasing inventory costs and the limited floor space per retail outlet, retailers in Japan try to place orders frequently in a small-lot size. The just-intime (JIT) inventory system is an important feature of Japanese transaction. This system, however, has a side effect. Dealing with many limited-line wholesalers, it increases transportation costs, the job of store-receiving and inspection at the retail outlets. Retail companies such as Ito-Yokado, Seven-Eleven Japan, and Daiei have implemented a reform of logistics in order to reduce such costs. The reform of logistics consists of three elements. Firstly, joint delivery system is established. Distributors no longer deliver products directly to retail outlets. Instead, they deliver to regional distribution centers, or Madoguchi Donya, where products are collected for each store and jointly loaded onto trucks for delivery to the stores. Secondly, consolidation of business flow is established. Suppliers are limited to some specified agents and mutually beneficial long-term contractual relationships are established. Thirdly, several jobs at the retail outlets are shifted up to the wholesale level. Information Technology and Strategic Shift The growth of information technology is the third factor, which provided a shift of distribution strategies. (1) From Speculation to Postponement The retailer's POS system, permitting instant updating of its inventory position, made the item-by-item control system (Tanpin Kanri) possible, which provides a technological basis of the JIT inventory management. To address the demand uncertainty caused by the product proliferation, retailers shift the inventory

management from speculation to postponement by using POS system. In order to reduce the risks of either out-of-stock or unsold products, retailers and suppliers are working together to bring an effective partnership through something called as ECR supply chain. (2) From Scale to Scope Bar-cording and electronic data interchange have made it possible to exchange information in a disaggregate level. They move an emphasis from scale to scope. Faster product development and increasingly flexible manufacturing system, quick response program, and JIT inventory management system accord to this change. All of which bring about a shift of distribution channel suitable for scope. (3) From Push to Pull Conventional channel strategies are the pursuit of scale-merit by anticipated mass production, push-selling strategy of speculative inventory through manufacturer's administered channel, and the risk sharing by using several business practices of rebates and returning unsold products. On the other hand, newly segmented channel is related with different elements of strategies. That is, the pursuit of economies of scope by implementing the production to order, pull-strategy based on the postponement of inventory investment, and the emphasis on information sharing among retailers and suppliers. Fundamental Change: Main Hypothesis The recent channel environments give rise to a fundamental change. In order to show it, a dichotomy is helpful in defining the classification according to the distribution channels (conventional channel or newly segmented channel), and the strategies (speculation or postponement). As shown in Figure 2 there are six types. Type 1 shows the speculative inventory system under the conventional channel. Type 5 and 6 show the postponed inventory system under the integrated channel, where the continuous circle in type 5 shows a vertical ownership integration, and the broken circle in type 6 shows a channel partnerships between a retailer and a wholesaler. Our main hypothesis is that the production and distribution system of type 1 has evolved into the integrated system of type 5 and type 6. Propositions and Implications In this section, a theoretical analysis of the main hypothesis is summarized (see Maruyama [1998]). We suppose a vertical market structure of two manufacturers, two wholesalers, and two retailers dealing with two differentiated products. We will consider a three-stage game of imperfect information about demand condition. Firstly, manufacturers choose shipping prices. Secondly, wholesalers choose wholesale prices, and finally retailers choose retail prices. The equilibrium concept is a sub-game perfect Nash equilibrium. In the speculative inventory system (type 1 and type 2), retailers place orders before the realization of actual demand. However, in the postponed inventory system (type 3 to type 6), retailers place orders after the realization of actual demand. We can derive the following propositions and implications. Proposition 1 Comparing the expected profits of type 1 and type 2, if there is a keen competition between manufacturers (that is, cross-price-effect is relatively large), then the manufacturer's profit of type 1 is larger than that of type 2. This result provides the reasons why manufacturers administered their selective channels in the condition of speculative inventory and anticipated mass production system. Proposition 2 Comparing the expected profits of type 1 and type 3, the expected profit of type 3 is larger than or equal to that of type 1 for any agent. That is, under the selective channel, postponed inventory management is Pareto superior to speculation.

Proposition 3 Comparing retailer's expected profits of type 3 and type 4, the retailer's expected profit of type 3 is larger than that of type 4. The newly segmented channel may have a merit for retailer from the aspect of logistics, but it has a demerit for retailer from the aspect of business flow. This result shows that information sharing among channel members in itself is not beneficial for retailers, and it provides an incentive for channel integration. Proposition 4 Comparing the expected profits of type 3 and type 5, integrated channel with postponed inventory (type 5) is beneficial for both manufacturers and retailers. Proposition 5 Channel integration can be arranged in various ways. In addition to a vertical ownership integration (type 5), it involves establishing channel partnerships (type 6). The maximum channel profit can be attained by any type of integrated channel. The channel integration of type 5 can be seen in the recent case of Seven-Eleven Japan. The coordinated channel of type 6 can be seen in the case of Ryoshoku Corporation affiliated to Mitsubishi Group. Ryoshoku is a national wholesaler of processed foods which has established a network of regional distribution centers. It established the channel partnerships with several food supers such as Sotetsu-Rosen and York-Benimaru, where long-term contractual relationships are established for mutually benefits. Figure 1: Evolving Distribution Channels M W1 W2 R C

Conventional Channel

Newly Segmented Channel

Figure 2:Classification of Channels Speculative Inventory

Postponed inventory

Integrated Channel

Type 1

Type 3

Notes

(Selective, Open) _Information Structure _=[0, 0, 0]

Structure (Selective, Open) _Information Structure _= [1, 1, 0]

(1) Channel Structure: (Selective, Open) means that an upstream selective channel and a downstream open channel. (2) Information Structure: __= [_1, _2, _3], where _i=1 means that the agent i has information about consumers' demand condition, and _i=0 means that the agent i does not have information about consumers' demand condition. _retailer is indexed by i=1, wholesaler is indexed by i=2, manufacture is indexed by i=3.

Type 2

Type 4

Type 5

_Channel Structure

_Channel

Structure (Open, Selective) _Information Structure _= [0, 0, 0]

_Channel

_Channel

Structure (Open, Selective) _Information Structure _= [1, 1, 1]

_Integrated

Type 6 Channel

_Information Structure

_= [1, 1, 1]

_Coordinated

Channel

_Information Structure

_= [1, 1, 1]

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