Part Two: Channel Design



Children’s Tylenol Meltaways

Distribution Strategy Report

Presented By:

Shruthi Prahalada

Elizabeth Smith

Montisha Spriggs

Ryan Stevens

August 25, 2005

Each piece of the marketing mix is an integral part of a company, yet distribution can make or break a company and its product. We believe that a strong distribution plan backed by in-depth research can put us in a place where we can easily succeed at selling the Children’s Tylenol Meltaways. We developed a distribution strategy that fulfills each and every one of our objectives in a cost-effective manner. By distinguishing the true need for the channel decisions, setting objectives and tasks, and exploring and evaluating the various options, we are able to select the best setup for us and have designed a channel that benefits the firm, the members, and the target market alike. From the channel structure and through a rigorous selection process, the members can be chosen for their ability to fulfill the required distribution tasks at the highest level of efficiency.

As with all elements of the marketing mix, it is imperative to know the target market and to take every aspect of it into account. Knowing such things as who is in charge of the buying, when they buy, and where they buy, as well as studying the density of the target market within the region has allowed the firm to bring Children’s Tylenol Meltaways to the customer in a way that is convenient and cost-effective to both the customer and the firm.

Part One: Distribution Strategy

One of the first steps in developing a distribution plan is to create a distribution strategy according to the firm’s objectives, the role of distribution within the marketing mix, the general channel design, selecting and evaluating members, and managing the channel.

Our main objective with the Children’s Tylenol Meltaways product is to provide a medicine that children are more willing to take, and are even eager to take. We aim to make the product available to our target market, the parents, where it is convenient to them. The distribution plan must get the product to the customer in a manner that is efficient to the members while keeping our costs and our members’ costs at a minimum. Another consideration other than convenience to the target market can be the perishability of the Meltaways. However, in the case of Children’s Tylenol Meltaways, perishability is not an issue due to the fact that the expiration is usually about 24 months after production. Distribution plays an important role in satisfying our marketing objectives since it provides a high level of convenience and cost-effectiveness, both critical factors in the success of a product and the firm.

Distribution plays a relatively large role in the marketing mix for Children’s Tylenol Meltaways in that the produce must be available where the target market exists. It is crucial to be affordable and available in all instances, whether it’s to try it out, simply to have it on hand in case of an emergency, or purchase it in an emergency situation, in order to satisfy the target market’s want. Gaining a sustainable competitive advantage with this product solely based on distribution will be difficult, since our competitors’ channels are much like those that we currently use for our other products. Since our channels for Meltaways will vary little from the channels we use for our other products, our competitors’ use of channels will be similar to those we will use for the Meltaways. In the same sense, the use of similar channels means that there really is little vulnerability of competitors since there is parity within distribution. There is the least amount of parity among one of the other “P’s” of the marketing mix, product. Our product is highly differentiated from other children’s medicines in that it’s not a pill and it’s not a liquid, but rather it melts in the child’s mouth as they suck on it. As for price and promotion, though they vary at times, they are typically the same or similar among competitors’ products. As a result, although distribution is important to our marketing mix for Children’s Tylenol Meltaways, competitive advantage among the non-vulnerable competitors can’t really be obtained simply through distribution.

The product needs to be positioned in various types of retailers in order to be made available to the target market. In addition, the channel must be designed with members in mind, and the relationships with members should be strong. The product will need to be placed in various drug stores (CVS, RiteAid, Walgreens), supermarkets (SuperFresh, Acme), convenience stores (7-Eleven, Wawa), national stores (Target, K-Mart, Walmart), and club stores (BJ’s, Sam’s club). In addition to placement in specific stores, a generous amount of premium, eye-catching shelf space will be purchased to make the Meltaways more visible and accessible to the customer. Design also takes into account the closeness of the relationships with the retailers that will be carrying the product. The firm will make sure that the retailers place trust in the firm and the firm’s product to ensure member cooperation.

Selection of channel members occurs in various ways and with assistance from various sources. Trade resources and research by our sales force, or even member inquiries can lead to the selection of a channel member. Trade resources can be studied for information regarding potential members, as well as other research performed by our internal sales force. If a potential member inquires about our firm, it shows that they are interested in the firm and thus clearly willing to cooperate and work with the firm. We will also capitalize on the relationships that we have with members we currently use for our other products, including each of the various retail stores, since there is already an established trust and commitment. Some new members could also arise, such as those who may be dependent on our product, and if there aren’t any members that could be dependent on us, we can seek members that would find our assistance and product beneficial. Based on the members’ sales history, their customer base with our target market, and location, we can select members for our product that suit our needs.

Once members are selected, they will continually be evaluated to ensure that they are performing to our standards. Each member will be rated based on how well they do their tasks for our Children’s Tylenol Meltaways within the channel. Such tasks include maintaining inventory, customer service, their reputation among the target market, their level of market coverage, and how well they cooperate. The periodic evaluations will be performed through assigning values to the tasks and giving a rating based on the value awarded. In addition, we will hold advisory councils composed of representatives from each of the members. The advisory councils perform the duty of reviewing and discussing performance in the channel and possibly making suggestions for the firm to increase effectiveness and efficiency. By evaluating the channel members regularly, we can ensure that our customers are receiving the greatest quality product and customer service, and we can also ensure that the members are content with their relationship with us as a manufacturer. Evaluations are a tool that we will utilize to uphold a high quality distribution channel for Children’s Tylenol Meltaways.

Part Two: Designing the Channel

Step 1: Recognize the Need

In this particular case, the impetus for designing a marketing channel is the introduction of a new product line for the Pediatric Tylenol franchise. We will be introducing Children's Tylenol Meltaways, a revolutionary analgesic that is placed on the tongue and simply melts in the child's mouth. With the intense competition in the over-the-counter analgesic market, this new product launch will not be unlike all the others, and will require careful consideration of the distribution channels in order to achieve maximum exposure at the retail level. That being said, the following outline will provide insight into just how we plan to execute the distribution channel strategy.

Step 2: Set and Coordinate Distribution Objectives

The objectives for the introduction of Children’s Tylenol Meltaways are directly in line with our long-term company goals and strategies. Our company’s commitment to satisfying the customer’s need for convenient and great tasting children’s analgesics will be satisfied while maintaining the superior level of safety and efficacy that Johnson & Johnson is so renowned for. Our proposed distribution strategy will also comply with the company’s financial objectives. The channel design will allow us to maintain gross profits in the target range of 75-80% while still being able to keep prices reasonable at the retail level. This is critical since our product appeals to a wide variety of consumers and our intentions are to fulfill the needs of people from many different income levels. Lastly, our company goal of obtaining intensive, wide distribution for all products will be achieved via this distribution channel. We are aiming to achieve 70% or greater ACV by month three. This means that we would like to see our product available in 70% of our retailers, 90 days after the product launches. By six months, our company objective is typically to reach around 80% ACV. As you will see in our strategy, the design lends itself to strategically coordinated, widespread distribution.

Step 3: Specify Distribution Tasks

The two main levels of our distribution channel encompass contracted warehousing facilities and various retail outlets. As ancillary agencies, the sole task of the warehouse facilities is to provide a location for storage of finished goods after production but prior to shipment to our retail outlets. These companies will be hand selected and monetarily compensated by McNeil Pharmaceuticals and will operate in strict accordance with all policies and standard operating procedures of our company. It is also critical that the warehousing companies provide their services within the guidelines of the government agencies that monitor the distribution and sale of pharmaceutical products. Their extensive experience in the industry allows us to be confident that they can fulfill their critical channel role without any complications.

The second level of our distribution channel, our retail outlets, is essential to the success of our business. Their primary role is to provide us the means for reaching our vast and diverse customer base. However, they must also provide us access to their individually owned and operated warehousing facilities so that we can transport finished goods from our warehouses to theirs. From that point, we require that retailers maintain sufficient inventory of our products to respond expeditiously to unexpected fluctuations in demand. After all, our business is to be able to provide medications whenever and wherever they are needed, so forecasting and inventory management is critical.

Moreover, our retailers must abide by our company procedures in regards to national promotions and product placement within the shelf displays. For example, this new product launch is expected to have such a high sales potential, that we are requiring retailers to present it at “Tab,” which essentially means it will get the most shelf space and retailer-sponsored advertising.

Step 4: Develop Alternative Channel Structures

As was mentioned earlier, our distribution channel structure will contain two intermediate levels, contracted warehousing facilities and retail outlets. A simplified, graphical representation of the channel can be seen below:

The distribution intensity at the various levels will directly reflect the company’s need to fulfill its goal of reaching the mass markets of consumers. At the contracted warehousing level, intensity will be selective, with our company carefully selecting facilities based on their geographic location throughout the United States. The goal here is to secure facilities that are strategically located in close proximity to our major retail customers. This will allow for a decrease in both cost and time associated with transportation of finished goods to our retailers.

Distribution at the retail level will be much more intensive, a necessity for reaching such a vast group of consumers. Our retail outlets include everything from drug stores, to grocery stores, club accounts like Costco, Sam’s Club, and BJ’s, and national retailers like Target, K-Mart, and Wal-Mart. With such a variety of retail outlets, each having multiple facilities throughout the country, we feel that it is critical that our distribution at this level be intensive in order to capitalize on the immense market coverage at our disposal.

Step 5: Evaluate Relevant Variables Affecting Channel Structure

In designing our distribution channel, we made sure to take into consideration all of the relevant variables so that we were confident that our structure would satisfy all aspects of our situation. When considering the market variables affecting our channel structure design, we took into account geography, size, density, and behavior. In regards to geography, as was previously stated; the national presence of our retailers necessitates the national location of our contracted warehousing facilities. This will ensure timely distribution of our finished goods. Furthermore, the sheer size and density of our consumer market has required us to strive for intensive distribution. Our behavior analysis of our target market was thorough and enabled us to clearly define who is buying, when they are buying, where they are buying, and how they are buying. The detailed analysis of these questions is presented later in the target market analysis.

Since our Children’s Tylenol Meltaway product is new to our product line, it was imperative to consider the impact of any product specific variables on our channel structure. While bulk/weight, perishability, unit value, and the non-technical nature of the product were not an issue, the degree of standardization and newness had to be considered. Due to the fact that the FDA and other government agencies monitor the manufacturing and sale of our products, it is critical that our channel structure have clearly defined rule and regulations for handling the product. Therefore, we have to provide comprehensive training to our warehousing facilities and retailers to ensure they act in accordance with those regulations. Moreover, the simple fact that our product is new to the market requires that the retailers be prepared to handle a rapidly increasing demand that will result from the preliminary advertising blitz. Consumers will be willing and ready to purchase the product and it’s critical that our channel include members that are poised to handle such situations.

The final variables to consider when designing the channel involve our own company and our intermediaries. Since we are already such a well-established company, we do not foresee any issues in getting support from our channel members. Our size, financial capacity, and proven track record of management expertise allow us to drive situations and create mutually beneficial relationships with our channel members. At the same time however, we must always be evaluating the actual need for longer distribution channels. In this particular case, evaluations showed an overwhelming need to maintain our past channel strategies that had been so successful for previous product launches. The extensive availability of intermediaries allows us even more exposure to consumers and the essential functions they perform certainly warrant the costs of doing business with them. Consequently, we decided that including the additional levels in the channel was a necessity.

Step 6: Choose the Best Channel Structure

The last step in our strategic process is to actually choose the best channel structure to meet our company’s objectives. To do this, we used the “Characteristics of Goods & Parallel Systems” Approach. This method takes into consideration a variety of product variables, like replacement rate, gross margin, adjustment, time of consumption, and searching time to determine the level of intensity required to achieve maximum exposure and sales. Our ratings for each product variable and our corresponding solution were as follows:

• Replacement Rate – High

• Gross Margin – High

• Adjustment – Low

• Time of Consumption – Low

• Searching Time – Low

Conclusion: “Red” (Convenience) Product

Part Three: Selecting Channel Members

Johnson & Johnson is known throughout the world for manufacturing pharmaceutical products, including over-the-counter medications. One of its biggest sellers are the Tylenol brand products, which include the new Children’s Tylenol Meltaways. Since Johnson & Johnson is such a large corporation and is well known for making safe and dependable products, consumers from all parts of the country buy Johnson & Johnson products to satisfy their different needs.

In order to get Children’s Tylenol Meltaways to the masses, Johnson & Johnson has to develop multiple ways of distributing its product. Using different channel members is the best way of distributing the Meltaways. Channel members are companies or individual people that take title and negotiate, and include manufacturers, wholesalers, retailers, and consumers. Johnson & Johnson has different avenues that it can pursue in order to find the right channel members. Since the Children’s Meltaways are a highly intensive product, meaning that the target market covers a broad range of consumers, it is not that necessary to be very thorough on the selection of members. Methods of finding a channel member include the field sales organization, trade sources, reseller inquiries, customers, advertising, trade shows, and other sources such as the Chamber of Commerce, direct mail, and the internet.

Since Johnson & Johnson is such a pharmaceutical giant it is unnecessary for them to take any of these routes. Not only are there drug stores like CVS or Walgreens, but there are pharmacies in almost every grocery store, retail outlet, and big club accounts like the Acme, Weiss, Target, Wal-Mart, BJs, and Costco. After manufacturing a new product like the Children’s Tylenol Meltaways, Johnson & Johnson ships them to the different drug stores, retail outlets, and big club accounts and these stores will have shelf space allotted for these products. It is important to keep the consumer in mind when selecting channel members. By distributing Children’s Meltaways all over the United States through retailers, the product is accessible to the people that want the product without leaving their neighborhood.

Before a company like Johnson & Johnson selects a channel member there are certain criteria that the retailer must encompass. The list of criteria includes credit and financial condition, sales strength, product lines, reputation, market coverage, sales performance, management succession and ability, attitude, and size. Retailers that cover most if not all of the criteria are Wal-Mart, CVS, and Costco.

Wal-Mart is the world’s largest retailer, with over $200 billion in annual sales. The company has facilities in such countries as the United States, Mexico, Canada, and the United Kingdom.  Millions of customers know the Wal-Mart name and shop there each week. Even though Wal-Mart can fulfill each of the criteria, there are a few key reasons why they should be a channel member. They are a great candidate for a channel member because their credit and financial condition is the best in the country. They are known especially in this country for the quality in their sales strength. Wal-Mart hires friendly staff that greets each customer at the door, the employees are willing to help any customer out if he or she has a question, and the company works hard to provide customers with a highly satisfactory shopping experience.

The next criterion is product lines. Manufacturers like J&J try to consider four aspects of the intermediary’s product lines: competitive products, compatible products, complementary products, and quality of lines carried. In the case of Wal-Mart they have many manufacturers that come to them, asking Wal-Mart to carry their product. Therefore, it does carry products that are in direct competition with Tylenol’s products, like the Children Meltaways. But, since they carry the whole line of Tylenol products they carry products that are compatible with the Meltaways. Also, Wal-Mart carries other OTC products from Merck and Astra Zeneca. Even though these companies are J&J’s competitors, the company can feel good that the products made by these manufacturers are also good quality and they will not be associated with inferior lines.

A third reason they should be a channel member is because of market coverage. Market coverage is the adequacy of the intermediary to cover the geographical territory that the manufacturer would like to reach. There are Wal-Marts in almost every city in this country, and in some places there are more than two. There are even Wal-Marts overseas, so if a product is found in Wal-Mart it is accessible to the maximum number of consumers. Since Children’s Meltaways are a highly intensive product J&J does not have to worry about overlapping.

CVS is an example of a drugstore, and even though they carry products like makeup, magazines, and food they exist mainly for health care purposes. The pharmacists not only fill prescriptions, but they also have an extensive OTC line. CVS can be found all over the country and their mission is to make the customer at ease in the store. CVS is a good candidate for a channel member because of their reputation. CVS stands for Consumer Value Stores, which is a good indication that they are there to serve the customers. As a manufacturer it is important that J&J find channel members that care about the consumers because that means that their sales are high and if J&J develops a good relationship with CVS then the sales staff at the stores may be willing to direct customers to a J&J product like the Meltaways.

Lastly, a big–account retailer such as Costco is a good company that Johnson & Johnson should consider just for the matter of size. Size is a criteria because some manufacturers believe that the larger the organization and sales volume, the higher the sales of the manufacturer’s products. Companies like Costco sell products in bulk and consumers walk away with two or three of the same product for a lower price. In order to shop at these stores one must be a member, so customers are loyal shoppers at Costco.

After the criteria is applied to the different channel members manufacturers must find ways of securing the channel members. There are four main ways that a company like J&J can secure a channel member: good profitable product lines, advertising and promotional support, management assistance, and fair dealing policies and friendly relationships. It is important for J&J to show that Children’s Meltaways will be a profitable product. Attractive advertisements must be placed in trade magazines, and should tell retailers what the product is, how it is different from other products, and how it can increase the retailers’ overall sales and profits.

Retailers are also looking for companies that will help in promotion of the product. The point-of purchase advertising method should be used in stores to elicit customers to buy a product. Sample packets at the front of a drug store or in the OTC aisle at a grocery store should be set up. Staff at the given store could also hand out packets with just two Meltaways inside. This will give customers a chance to ask questions about the product and maybe give them an incentive to buy it. Coupons should also be placed in the weekly circular, the mail, or at the store itself. Having the ability to buy the product at a lower price or buying one and getting one free is a method of getting customers at least intrigued about a product. A bulletin next to the Meltaways can provide customers about focus group data, results from taste tests, and overall customer satisfaction.

Although management assistance is a good way to secure a channel member, in the case of Tylenol’s Meltaways, fair dealing and friendly relationships are a more important element. It is essential to not be devoid of the “human element.” The more trust and genuine interest is established between the manufacturer and retailer the more willing the retailer is to promote new and old products intensively. Even though Johnson & Johnson is an established company, we can develop a series or brochures about why it is good for retailers to become channel members, acting as a friendly reminder of the rewards that a channel member will get by doing business with us.

Part Four: Target Market Analysis

In our business, it is all about the customer, and who they are must be the first component established. The potential customer has to be narrowed down to a certain target market. A market is a group of people who have a need, the purchasing power, and the desire and authority to spend money on goods, services, and ideas. A target market is the specific group of consumers on whose needs and wants a company focuses its efforts. In this case, the identifiable target market will have a need for Children’s Tylenol Meltaways. The needs and wants of this market are the most fundamental aspect affecting the design of this channel, and thus it is a market-driven channel.

Markets are complex entities that cannot be approached from a general stance. They should be broken down into segments that are deemed most profitable to pursue. These segments, or better yet market variables, can help identify prospects; primarily focusing on geography, size, density and behavior.

Market Geography

The geographical extent of the market and where it is located can influence consumers’ needs and product usage – a common, understandable marketing concept. However, when considering channel structure, how the product will be distributed geographically becomes the primary concern. The channel structure must be able to serve the market. The goal is to have it served effectively and efficiently, which can only be accomplished if there is an appropriate amount of market coverage. Furthermore, the channel must be flexible enough to take on modifications if the geography changes.

There are numerous ways to evaluate the market geography of a product. With Children’s Tylenol Meltaways, the key word is children. Most likely households with young children age six and older need to be sought out and researched. There are many places where populations have a majority of children so those areas will get most of the focus. However, it cannot be narrowed down to just children. Another consideration to point out is the buying power of the parents, the ones that will make the actual purchase. Although the marketing campaigns will have to appeal to the children so that they are eager to take the product and in turn urge their parents to buy it, significant time must also be spent selling the parents on the idea that their children need this particular product. This can be accomplished by capitalizing on the strong brand image of J&J paired with the expectation that administering this new Meltaway product is both quick and easy.

Another area to focus on is the financial situation of the people in the target market. If the majority of people in a given area do not have the disposable income to spend on a novelty type medication, then they are going to be more likely to purchase a competitor’s product or a private label store brand product. Also, even climate can impact the purchasing of our product. One of the uses of Children’s Tylenol Meltaways is to temporarily relieve minor aches and pains due to the common cold or flu. Automatically you think seasonal and more specifically, the winter months. While cold weather does not specifically cause colds, frequently varying temperatures can make the body more susceptible to illness. Therefore, it would be beneficial to target geographical areas that experience such weather patterns.

Market Size

Market size is the number of buyers or potential buyers of a product or service in a given market. Our number of buyers will affect the relative cost of our relationship with our intermediaries. As our number of buyers increase, our cost per unit of Children’s Tylenol Meltaways will decrease. The reduction in production and distribution costs on our end will be able to be passed on to the consumer, thus making our price point more attractive.

Market Density

One of our main objectives is to achieve a high level of customer access at a low cost. The market in which we operate is incredibly dense, both from a consumer prospective and an intermediary prospective. Our strategy is aimed at achieving efficient congestion, thus decreasing our transportation and communication costs and allowing us to pass those savings on to our customers.

Market Behavior

Market behavior pertains to the when, where, why and who buys. The answer to these determines the relevancy of the chosen channel design strategy.

• When the market buys?

Timing is everything. Children’s Tylenol Meltaways is a product whose time usage is not limited by season, days, or months. It is not specifically for cold and flu. This may not be a product of need such as food and shelter but to have relief from pain, especially in children is just as important. The claims that Tylenol makes are for temporary relief of multiple minor illnesses which is unpredictable in the final user. It is necessary to realize that time usage of a product shapes production; and in this case, usage can be very flexible and not restricted. Thus, our retailers must be poised to react at all times and that is why we have structured our channel to allow for sufficient inventories in the warehousing facilities.

• Where the market buys?

Location of where the end user will purchase Children’s Tylenol Meltaways is in accordance to where other over the counter drugs are sold. These primary locations include drug stores, club stores, grocery stores, and “mom and pop” convenience establishments. Our intensive distribution is aimed at accommodating the variety of retail outlets.

• How the market buys?

Children’s Tylenol Meltaways is a product that can be bought and stored (room temperature) until the indicated expiration date on bottom panel. Any sort of pharmaceutical should not be bought and stored in large quantities when it is for personal consumption. This is a purchase that may be bought for precaution - just to have on hand and when necessary/emergencies. It can also be bought out of mere curiosity as a trial run to see if the children would like it; sort of playing into the concept that a “spoon full of sugar makes the medicine go down.” The Meltaways concept of easy application and exciting flavors fits this model well. Most likely, it is bought on an as-needed basis, whereby parents visit the retailer to get the product only when their child is sick.

In addition, our product is basically self-service and requires little or no effort to arrive at the buying decision. Also, consumers are typically buying in small quantities, focusing only on what is required to treat a particular bout of sickness as opposed to stocking up for future illnesses. These factors are critical because they help our retailers understand how to place the product within the store and how to design different purchasing promotions.

• Who buys?

Although this is a product for children; they do not have the authority or the money to buy it. While they are the consumer, inn regards to purchasing it, their guardian(s) act as the customer. However, the children are solely responsible for persuading the purchase; and therefore play an integral part in the decision making process. The purchase of Children’s Tylenol Meltaways is based on a few elements such as the child’s age, their likes and dislikes in terms of flavor and novelty, and their symptoms.

While medicine is not something that the majority of children enjoy taking, Children’s Tylenol Meltaways is in a form that can be easily administered (melts in the child’s mouth) and comes in several great flavors (Grape Punch, Wacky Watermelon, and Bubblegum Burst). Ultimately, these attractive characteristics will aid in the children’s persuasion of parents and encourage the actual purchase of our product.

Part Five: Conclusions

We are confident that by taking into consideration all of the essential elements of building a distribution channel, we have developed a distribution strategy that will satisfy our firm’s overall objectives while at the same time forming a mutually beneficial business relationship with our channel members. Our company understands that building the channel is only the beginning, and that maintaining it is even more important. As a result, we have prepared ourselves for any obstacles that may arise; however, we remain steadfast that this structure will serve our business, our members’ businesses, and our consumers well.

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Manufacturer

Contracted Warehouses

Retailers

Consumers

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