channel strategy

CHANNEL STRATEGY

Learning Objectives

Learning Objectives

The internal and external factors affecting the decision of marketer to opt distributors

Learning Objectives

The internal and external factors affecting the decision of marketer to opt distributors

The services required of distributors

Learning Objectives

The internal and external factors affecting the decision of marketer to opt distributors

The services required of distributors

Circumstances that dictate the marketer to use manufacturers’ agent in place of own sales force

Learning Objectives

The internal and external factors affecting the decision of marketer to opt distributors

The services required of distributors

Circumstances that dictate the marketer to use manufacturers’ agent in place of own sales force

Steps an industrial marketer should adopt to ensure effectiveness of indirect channels

Distribution Channel

Direct Channel (Short)

Indirect Channel (Long)

Distribution Channel

Distribution is the process of moving goods from producer to ultimate customer

Direct Channel (Short)

Indirect Channel (Long)

Distribution Channel

Distribution is the process of moving goods from producer to ultimate customer

Distribution Channel is sequence of marketing institutions, including intermediaries, that facilitates transactions between producers and final users

Direct Channel (Short)

Indirect Channel (Long)

Distribution Channel

Distribution is the process of moving goods from producer to ultimate customer

Distribution Channel is sequence of marketing institutions, including intermediaries, that facilitates transactions between producers and final users

There are two types of ChannelsDirect Channel (Short)

Indirect Channel (Long)

A Short Direct Channel

A Short Direct Channel

Manufacturer

Business Buyer

Direct Sale

A Short Direct Channel

Manufacturer

Business Buyer

Direct Sale

Maintaining Inventory

Delivering Goods

Providing information to customers

Promotion

Credit

A Longer, More Indirect Channel

A Longer, More Indirect ChannelManufacturer

Manufacturer’s Agent

Industrial Distributor

Business Buyer

A Longer, More Indirect ChannelManufacturer

Maintaining Inventory

Delivering Goods

Providing information to customers

Credit

Manufacturer’s Agent

Industrial Distributor

Business Buyer

CHANNELS

CHANNELS

Catering to several segments requires different distribution channel for each segment

CHANNELS

Catering to several segments requires different distribution channel for each segment

Ex.: VARs - Value Added Resellers by IBM for small customers while handling its own channel for large business houses

CHANNELS

Catering to several segments requires different distribution channel for each segment

Ex.: VARs - Value Added Resellers by IBM for small customers while handling its own channel for large business houses

Channel Audit - Reappraisal of the existing approach to distribution. Ex.: Ingersoll-Rand shifted from Direct Selling to Distributors after auditing

WHY USE DISTRIBUTORS?

WHY USE DISTRIBUTORS?TRANSACTION COSTS - When a company has lot of small orders the transaction costs (contact costs, orde-filling costs, expediting costs) can increase significantly. By having distributor who can buy in large quantities, manufacturer can reduce transaction costs per sales rupee.

WHY USE DISTRIBUTORS?TRANSACTION COSTS - When a company has lot of small orders the transaction costs (contact costs, orde-filling costs, expediting costs) can increase significantly. By having distributor who can buy in large quantities, manufacturer can reduce transaction costs per sales rupee.

INVENTORY COSTS - These are property taxes, insurance, storage costs, interest on capital invested. These costs can be reduced by dumping into distributor’s place.

WHY USE DISTRIBUTORS?TRANSACTION COSTS - When a company has lot of small orders the transaction costs (contact costs, orde-filling costs, expediting costs) can increase significantly. By having distributor who can buy in large quantities, manufacturer can reduce transaction costs per sales rupee.

INVENTORY COSTS - These are property taxes, insurance, storage costs, interest on capital invested. These costs can be reduced by dumping into distributor’s place.

LIMITED FINANCES - Even large corporations struggle to fund the nation-wide network. Companies opt for own network when the product is highly advanced and technical by nature which would be risky if responsibility is passed on to distributor

NARROW PRODUCT LINE: In case of a narrow product line, Direct selling would not give high return per sales call. The smarter way is to have Distributor who has broader range of products to get higher returns per sales call.

NARROW PRODUCT LINE: In case of a narrow product line, Direct selling would not give high return per sales call. The smarter way is to have Distributor who has broader range of products to get higher returns per sales call.

PROXIMITY: Distributors/intermediaries offer local representation. Distributors are in position to understand customer needs and wants, credit rating, offer faster delivery, service and individual attention.

NARROW PRODUCT LINE: In case of a narrow product line, Direct selling would not give high return per sales call. The smarter way is to have Distributor who has broader range of products to get higher returns per sales call.

PROXIMITY: Distributors/intermediaries offer local representation. Distributors are in position to understand customer needs and wants, credit rating, offer faster delivery, service and individual attention.

OPPORTUNITY COSTS: Incremental gain forgone by not pursuing a higher yielding alternative.

TYPES OF INTERMEDIARIES

MERCHANT INTERMEDIARIES

FULL-SERVICE WHOLESALERS

AGENT INTERMEDIARIES

STOCKING DELIVERY

CREDIT PROMOTION

TYPES OF INTERMEDIARIES

MERCHANT INTERMEDIARIES

TYPES OF INTERMEDIARIES

MERCHANT INTERMEDIARIES

SINGLE - LINE WHOLESALERS

SPECIALITY WHOLESALERS

LIMITED-FUNCTION WHOLESALERS

CASH-AND-CARRY WHOLESALERS

DROP SHIPPER OR DESK JOBBER

TRUCK JOBBER

MAIL ORDER DISTRIBUTOR

CO-OPERATIVES

TYPES OF INTERMEDIARIES

MERCHANT INTERMEDIARIES

SINGLE - LINE WHOLESALERS

SPECIALITY WHOLESALERS

LIMITED-FUNCTION WHOLESALERS

CASH-AND-CARRY WHOLESALERS

DROP SHIPPER OR DESK JOBBER

TRUCK JOBBER

MAIL ORDER DISTRIBUTOR

CO-OPERATIVES

Industrial fasteners or chemicals

TYPES OF INTERMEDIARIES

MERCHANT INTERMEDIARIES

SINGLE - LINE WHOLESALERS

SPECIALITY WHOLESALERS

LIMITED-FUNCTION WHOLESALERS

CASH-AND-CARRY WHOLESALERS

DROP SHIPPER OR DESK JOBBER

TRUCK JOBBER

MAIL ORDER DISTRIBUTOR

CO-OPERATIVES

Industrial fasteners or chemicals

Industrial Paints

TYPES OF INTERMEDIARIES

AGENT INTERMEDIARIES

TYPES OF INTERMEDIARIES

AGENT INTERMEDIARIES

COMMISSION AGENTS - Commodities

MANUFACTURERS’ AGENTS - Sales force

BROKERS - Used Machinery

AUCTION COMPANIES

SIZE OF THE DISTRIBUTORTop 50 Others

Average sales/firm (millions) $157.5 $2.1

No. of locations per firm 15 2

Employees/firm 400 13

Employees/location 27 6.5

Percent of total sales 31.1% 68.9%

Sales per employee (thousands) $384.2 $165.1

Sales per location $10.8 $1.8

MAJOR CHANNELSIndustrial Product Manufacturer

Manufacturer’s Agent Manufacturer’s Sales Branch

Industrial Distributor

End Customers

20.4% 18.2%

8.6% 9.6%

48.7%

3.6% 16.8%

12.7%

74.1%

INDUSTRIAL DISTRIBUTORS

INDUSTRIAL DISTRIBUTORS

They contact customers, provide delivery, may do assembling or finishing of products, repair service, credit, assortment area

INDUSTRIAL DISTRIBUTORS

They contact customers, provide delivery, may do assembling or finishing of products, repair service, credit, assortment area

They take title (ownership) so can set their own prices, maintain adequate stocks and can carry competing brands too

INDUSTRIAL DISTRIBUTORS

They contact customers, provide delivery, may do assembling or finishing of products, repair service, credit, assortment area

They take title (ownership) so can set their own prices, maintain adequate stocks and can carry competing brands too

Distributor’s outside salespeople are called “Order Getters”

INDUSTRIAL DISTRIBUTORS

They contact customers, provide delivery, may do assembling or finishing of products, repair service, credit, assortment area

They take title (ownership) so can set their own prices, maintain adequate stocks and can carry competing brands too

Distributor’s outside salespeople are called “Order Getters”

Distributor’s inside salespeople are called “Order Takers”

INDUSTRIAL DISTRIBUTORS

They contact customers, provide delivery, may do assembling or finishing of products, repair service, credit, assortment area

They take title (ownership) so can set their own prices, maintain adequate stocks and can carry competing brands too

Distributor’s outside salespeople are called “Order Getters”

Distributor’s inside salespeople are called “Order Takers”

Distributors stock usually MROs like Mechanics’ tools, accessories, cutting tools, abrasives, bearings, power equipment etc...

INDUSTRIAL DISTRIBUTORS

General Line Distributors

Specialists

Combination House

Mill Supply Houses or Supermarkets of industry

abrasives, cutting tools etc.

SALES AGENTS

SALES AGENTS

They do not take title (ownership) so they cannot set price

SALES AGENTS

They do not take title (ownership) so they cannot set price

Several Advantages of using sales agents

SALES AGENTS

They do not take title (ownership) so they cannot set price

Several Advantages of using sales agents

• Predictable, stable sales cost - Straight commission of 3% - 20% depending on the type of product complexity (technically)

SALES AGENTS

They do not take title (ownership) so they cannot set price

Several Advantages of using sales agents

• Predictable, stable sales cost - Straight commission of 3% - 20% depending on the type of product complexity (technically)

• More aggressive representation

SALES AGENTS

They do not take title (ownership) so they cannot set price

Several Advantages of using sales agents

• Predictable, stable sales cost - Straight commission of 3% - 20% depending on the type of product complexity (technically)

• More aggressive representation

• Synergy in complementary lines

SALES AGENTS

They do not take title (ownership) so they cannot set price

Several Advantages of using sales agents

• Predictable, stable sales cost - Straight commission of 3% - 20% depending on the type of product complexity (technically)

• More aggressive representation

• Synergy in complementary lines

• Minimal training

SALES AGENTS

They do not take title (ownership) so they cannot set price

Several Advantages of using sales agents

• Predictable, stable sales cost - Straight commission of 3% - 20% depending on the type of product complexity (technically)

• More aggressive representation

• Synergy in complementary lines

• Minimal training

• Instant Marketing

SALES AGENTS

SALES AGENTS

Several Disadvantages of using sales agents

SALES AGENTS

Several Disadvantages of using sales agents

• Loss of control

SALES AGENTS

Several Disadvantages of using sales agents

• Loss of control

• Partial attention

SALES AGENTS

Several Disadvantages of using sales agents

• Loss of control

• Partial attention

• Circumventing the agent

LOGISTICS

LOGISTICS

MATERIALS MANAGEMENT

PHYSICAL DISTRIBUTION

LOGISTICS SYSTEM

SUPPLIERS

• Raw materials• Components• Sub-assemblies• MRO Supplies

Work in Progress

Finished Goods & Parts

Inventory

CUSTOMERS

• OEM• Distributors & Agents• End Users• Government

Materials Management Physical Distribution

Manufacturing Supply Service Customer Service

TOTAL COST APPROACH

TOTAL COST APPROACHLogistics cost involves cost of

TOTAL COST APPROACHLogistics cost involves cost of

• planning the logistics system

TOTAL COST APPROACHLogistics cost involves cost of

• planning the logistics system

• transporting the materials

TOTAL COST APPROACHLogistics cost involves cost of

• planning the logistics system

• transporting the materials

• receiving, inspection, storage of supplies

TOTAL COST APPROACHLogistics cost involves cost of

• planning the logistics system

• transporting the materials

• receiving, inspection, storage of supplies

• managing inventory

TOTAL COST APPROACHLogistics cost involves cost of

• planning the logistics system

• transporting the materials

• receiving, inspection, storage of supplies

• managing inventory

• processing customer orders

TOTAL COST APPROACHLogistics cost involves cost of

• planning the logistics system

• transporting the materials

• receiving, inspection, storage of supplies

• managing inventory

• processing customer orders

• packaging

TOTAL COST APPROACHLogistics cost involves cost of

• planning the logistics system

• transporting the materials

• receiving, inspection, storage of supplies

• managing inventory

• processing customer orders

• packaging

• maintaining warehouses and providing customer service.

TOTAL COST APPROACHLogistics cost involves cost of

• planning the logistics system

• transporting the materials

• receiving, inspection, storage of supplies

• managing inventory

• processing customer orders

• packaging

• maintaining warehouses and providing customer service.

Though these cost functions cannot be directly related to final product but consumes lot of money. Hence firms evaluate logistics systems according to the total logistics costs expended for any given sales revenue.

Interrelationships of Logistics Functions

Distribution Planning

Inventory Management

Order Processing

Receiving

Inbound Transportation

PackagingIn-plant

Warehousing ShippingOutbound

TransportationOutbound

Transportation

CustomerService

SUB-OPTIMIZATION

SUB-OPTIMIZATIONIt is a situation where one department’s objective or function is optimized without consider the effects on the optimization of other departments’.

SUB-OPTIMIZATIONIt is a situation where one department’s objective or function is optimized without consider the effects on the optimization of other departments’.

Ex.: Trying to minimize the levels of inventory to optimize the inventory costs might lead to

SUB-OPTIMIZATIONIt is a situation where one department’s objective or function is optimized without consider the effects on the optimization of other departments’.

Ex.: Trying to minimize the levels of inventory to optimize the inventory costs might lead to

• Stockouts

SUB-OPTIMIZATIONIt is a situation where one department’s objective or function is optimized without consider the effects on the optimization of other departments’.

Ex.: Trying to minimize the levels of inventory to optimize the inventory costs might lead to

• Stockouts

• Lost sales

SUB-OPTIMIZATIONIt is a situation where one department’s objective or function is optimized without consider the effects on the optimization of other departments’.

Ex.: Trying to minimize the levels of inventory to optimize the inventory costs might lead to

• Stockouts

• Lost sales

• Time consuming backorders

SUB-OPTIMIZATIONIt is a situation where one department’s objective or function is optimized without consider the effects on the optimization of other departments’.

Ex.: Trying to minimize the levels of inventory to optimize the inventory costs might lead to

• Stockouts

• Lost sales

• Time consuming backorders

• Use of expensive premium transportation medium

SUB-OPTIMIZATIONIt is a situation where one department’s objective or function is optimized without consider the effects on the optimization of other departments’.

Ex.: Trying to minimize the levels of inventory to optimize the inventory costs might lead to

• Stockouts

• Lost sales

• Time consuming backorders

• Use of expensive premium transportation medium

• Development of bad reputation

SUB-OPTIMIZATIONIt is a situation where one department’s objective or function is optimized without consider the effects on the optimization of other departments’.

Ex.: Trying to minimize the levels of inventory to optimize the inventory costs might lead to

• Stockouts

• Lost sales

• Time consuming backorders

• Use of expensive premium transportation medium

• Development of bad reputation

• Even lost customers forever

COST TRADE-OFFS

COST TRADE-OFFS

CUSTOMER SERVICE

CUSTOMER SERVICE

• Customer service is the group of utilities or benefits the customer expects and supplier delivers in logistics. The level of customer service is measured in terms of

CUSTOMER SERVICE

• Customer service is the group of utilities or benefits the customer expects and supplier delivers in logistics. The level of customer service is measured in terms of

★ Lead time (order cycle time)

CUSTOMER SERVICE

• Customer service is the group of utilities or benefits the customer expects and supplier delivers in logistics. The level of customer service is measured in terms of

★ Lead time (order cycle time)

★ Lead time or order cycle time consistency

CUSTOMER SERVICE

• Customer service is the group of utilities or benefits the customer expects and supplier delivers in logistics. The level of customer service is measured in terms of

★ Lead time (order cycle time)

★ Lead time or order cycle time consistency

★ Order accuracy

CUSTOMER SERVICE

• Customer service is the group of utilities or benefits the customer expects and supplier delivers in logistics. The level of customer service is measured in terms of

★ Lead time (order cycle time)

★ Lead time or order cycle time consistency

★ Order accuracy

★ Order completeness

CUSTOMER SERVICE

• Customer service is the group of utilities or benefits the customer expects and supplier delivers in logistics. The level of customer service is measured in terms of

★ Lead time (order cycle time)

★ Lead time or order cycle time consistency

★ Order accuracy

★ Order completeness

★ Order condition

ASSESSING CUSTOMER SERVICE

ASSESSING CUSTOMER SERVICE

• SEGMENTATION - Customer service elements varies according to industry, market segments and individual customers. For some technical advice is more important while for others discounts and after-sales service is more important

ASSESSING CUSTOMER SERVICE

• SEGMENTATION - Customer service elements varies according to industry, market segments and individual customers. For some technical advice is more important while for others discounts and after-sales service is more important

• PATRONAGE - State of being regular customer

ASSESSING CUSTOMER SERVICE

• SEGMENTATION - Customer service elements varies according to industry, market segments and individual customers. For some technical advice is more important while for others discounts and after-sales service is more important

• PATRONAGE - State of being regular customer

• CUSTOMER PERCEPTION - Customer perception about service and not supplier’s preconception should form the basis. For a 72 hrs lead time of a particular item, do not send it in 48 hrs lead time.

ASSESSING CUSTOMER SERVICE

• SEGMENTATION - Customer service elements varies according to industry, market segments and individual customers. For some technical advice is more important while for others discounts and after-sales service is more important

• PATRONAGE - State of being regular customer

• CUSTOMER PERCEPTION - Customer perception about service and not supplier’s preconception should form the basis. For a 72 hrs lead time of a particular item, do not send it in 48 hrs lead time.

• PROFIT IMPACT - How much should be spent on improving customer service?

ASSESSING CUSTOMER SERVICE

• SEGMENTATION - Customer service elements varies according to industry, market segments and individual customers. For some technical advice is more important while for others discounts and after-sales service is more important

• PATRONAGE - State of being regular customer

• CUSTOMER PERCEPTION - Customer perception about service and not supplier’s preconception should form the basis. For a 72 hrs lead time of a particular item, do not send it in 48 hrs lead time.

• PROFIT IMPACT - How much should be spent on improving customer service?

• COMPETITIVE ADVANTAGE - Boeing and Alitalia case..

PROFIT IMPACTCost for improved service

Sales gained fromimproved service

Dol

lars

($

lacs

)

Overall Service Performance80% 90%