Vertical Marketing System

The term vertical marketing system (VMS) is adopted to encompass all cooperative relationships designed to facilitate either selling or delivery of products in a timely manner. There are a variety of different VMS arrangements.

A distinguishing feature of a VMS is that combined performance of the participants typically exceeds or is broader than each would achieve on an individual basis. For example when a retailer shares detailed cash register sales information with a manufacturer. The data may substantially reduce the need to forecast. Likewise, two firms working together may be able to eliminate the need for intermediate warehousing. The synergistic potential of a VMS builds upon effective boundary spanning. While degrees of leadership occur in all forms of channel organization, the alternative VMS arrangements represent structures in which a need for coordinated performance is openly acknowledged.

The Business Rationale for a VMS:

The driving force behind development of a VMS is elusively simple – increased competitiveness and capability to accommodate market change. The business environment is becoming increasingly conducive for marketers to exploit joint competence to gain and maintain competitive advantage. Firms that aggressively establish VMS arrangements are seeking to leverage their joint competencies.

The anatomy of a channel system builds upon three interrelated propositions. First, the business arrangements must constitute a relationship far more formalized and comprehensive than is usual when products or services are bought or sold. In the traditional purchasing situation, outsourcing is a make versus buy decision guided primarily by cost consideration. In contrast, the VMS is positioned as a business arrangement wherein involved parties seek to benefit from the synergism of working together. In such synergism typically described as a win-win situation, two organizations work out the complexity of meshing operations to enhance joint capability. It is important to understand that a VMS is in fact a super or extended organization that develops clearly specified roles, rules, and expectations. Long standing VMS arrangements possess a unique culture.

Second firms that enter into a VMS arrangement appropriately focus on developing long term relationship as contrasted to single transactions Parties engaged in a VMS are expected to view their channel involvement as a relationship focused on long term benefits. Many VMS arrangements are long term running from five to ten years. The involved parties perform their specialized roles in a highly integrated manner as they seek to achieve mutually identified objective. In some situations, the VMS is formed by formal contract. In a surprising number of arrangements, the working relationship is one of convenience. This is particularly true in alliances and administered channel arrangements. Firms in these formal arrangements often work out complex relationships that guide performance over extended time without the benefit of contracts. A common characteristic of a VMS is its behavioral context. The traditional adversarial mode of doing business is replaced with a cooperative mode, one based on gaining competitive advantage by virtue of allying with other organizations.

Finally, A high degree of perceived dependence in the relationship should stimulate cooperation. Firms participating in a VMS typically feel a dependence and responsibility toward one another that intensifies with time. They are in reality partners that benefit from one another’s prosperity. The relationship of parties in an alliance is falling short of marriage – more like living together. A philosophy of trust in a highly dependent situation has no room for adversarial actions or tactics. Leaders of the combined effort must focus on end user or final customer satisfaction and loyalty. Few areas of business operations require the level of cooperation typical of a VMS. Although the theory of cooperation is less developed than other theories of behavior, an understanding of the basic nature of cooperation is important so that VMS arrangements and the way they work can be understood.