designing channel systems

SDM- Ch 12 Tata McGraw Hill Publishing 1

Chapter 12

Designing Channel Systems


Learning Objectives• Understanding customer needs to define

channel objectives• Channel design factors, components, issues,

steps and process• Method of evaluating various channel

alternatives• How channel partners are: selected, trained and

kept motivated• Principles of vertical integration and electronic

channels

Channel design factors….


Channel Design Factors• Product mix and nature of the product• Width and depth of market / outlet coverage

planned• Long term commitments to channel partners• Level of customer service planned• Cost affordable on the channel system• Channel control requirements of the company

Steps….


Channel Design Steps

• Define customer needs• Clarify channel objectives• Look at alternative systems which can

meet these objectives• Estimate cost of operating the channel

system• Evaluate available alternatives• Finalise the ‘ideal’ system

Customer needs….


Customer Needs• Lot size – most convenient pack size which

the consumer can buy at a time• Waiting time – time elapsed between the

desire to buy the product and the time when he can actually buy it – should be almost zero

• Variety – choice of products, brands, packs• Place utility – choice of buying where he

wants. For a consumer product it has to be at a location closest to his residence

Components …


Channel Design Components

• Revenue generation or the commercial part

• Physical delivery of the goods or services – the logistics part

• The ‘service’ part to take care of after-sales support

• Each part of the system is likely to be handled by a different entity.

Design issues….


Channel Design Issues

• Activities required and who will perform• Activities relationship to service levels• Number of channel members required

and the relationship between categories• Roles, responsibilities, remuneration

and appraisal of performance of channel members


Channel Design Process

Segmentation

Development

Focus

Positioning

Similar to any other marketing task


Segmentation

• Putting customers in similar clusters based on their needs– Doctors who prescribe medicines– Chemists who dispense medicines– Hospitals and nursing homes who use them

• Each segment has a different need to be serviced by the channel

• Gives an idea to the sales manager as to the kind of channel members he should be planning for.


Positioning

• Defines the channel element required to service each of the segments– The sales manager decides the channel partner

who is ‘ideal’ to meet the expectations of the segments.

– The number of each category of intermediary is also decided based on the number of customers to be serviced in each segment.

– The service objectives and flows for each channel partner are also frozen


Focus

• It may not be possible to meet the needs of all segments – cost and practicality considerations (the managerial talent available for instance)

• The sales manager has to firmly decide which of the segments he will service

• The competitive scenario also helps in this decision


Development • At this stage the channel system is being put in

place to achieve the objectives• Select the best of the alternatives

– Comparison with the most successful competitor could be a good benchmark

• Channel partners of competitors may be willing to share best practices of their principals

• For modifying an existing channel, the gap between the ideal and the existing is to be identified for remedial action.


Channel Objectives• Defines what the channel system is supposed

to do to support customer service.• Customer needs could include:

– Lot size convenience– Minimum waiting time– Variety and assortment– Place utility

• The product characteristics and the market profile also impact the objectives.

• Competition could also affect the objectives


Channel Alternatives

• Are planned after deciding the customer segments to be serviced and the levels of service– Business intermediaries currently available like

C&FAs, distributors, dealers, agents wholesalers and retailers.

– The number and type of intermediaries required– Developing new channel types– Roles of each channel member


Evaluation of Major Alternatives

Cost of operations

Ability to manageand control

Adaptability

Range and volumeto be handled

Criteria for evaluation


Evaluation Critieria• Cost:

– If existing sales force can be expanded cost effectively, this is the best alternative

– Cost of alternatives at different volumes can only be estimated for comparison

– System with the lowest cost is preferred• Adaptability – the channel should be flexible to

handle different types of markets and changes in the market conditions

• Volume and range to be handled – Capable even when business grows or expands


Evaluation Criteria

• Ability to manage and control:• Distribution network being an extended arm of

the company, the channel partners have some obligations

• Operating guidelines specify these rules• The channel system should help the company

enforce these rules fairly to all channel partners• Some of the operating rules are……

• Company trains channel personnel and provides proper product literature


Selecting Channel Partners

• Getting good channel partners is a difficult part of doing business

• Some of the methods employed to select channel partners are:– Sales people identify prospects and talk to them– Press advertising (industrial goods)– Existing channel partners can give good

references– Competitors’ channel members for reference, not

poaching


Selection Criteria

• Qualitative: willingness, confidence in company products, willingness to abide by company rules, building company image, innovativeness etc

• Quantitative: financial status, infrastructure, location, present businesses, customer relationships, market standing etc


Training Channel Members

• Starts from the time of recruitment• Channel member owner and his staff• Market views channel member as part of the

company – he has to behave in a like manner – hence training assumes significance

• Training could be on the job field training or classroom training

• Training is an ongoing process.

Subjects…..


Subjects for Training

• Field training on how the markets are to be worked to achieve sales, collect payments and ensure the right kind of merchandising

• Class room training on company products, competition and how to tackle it to gain market shares

• Special meetings for new product launches• Submitting reports and maintaining records• Statutory compliance


Subjects for Training

• Care of company products• Technical specifications and answering FAQs

of customers• For technical and industrial products –

recognition of specs, installation procedure, repair and maintenance and effective demonstrations

• Servicing of automobiles and other engineering products

Motivation….


Motivating Channel Members

• Ambitious volume and growth targets – continuous motivation required to achieve

• Motivation includes:– Capacity building programs– Training– Promotions support– Marketing research support – Working with company personnel– Incentives “power”……


“Power” of Motivation

• Reward – positive support• Coercion- threat of punitive action• Referent – positive effects of association• Legitimate – enforcing a contract• Expert – support of special knowledge• Support – additional benefits for performers• Competition – pitting against peers

French & Raven


Channel Members Evaluation

• Effectiveness of the distribution channel determines the success of the company

• Company would like its channel partners to perform at the highest standards possible

• Need to constantly evaluate performance on sales targets, coverage, productivity, inventory holdings, attending to servicing requests etc

Role of ROI…..


ROI as a Measure

• Leading FMCG companies feel that an ROI of 30% for a distributor is healthy and is a fair indication that he is performing well.– If the ROI is more, additional tasks are given– If the ROI is less, the company may provide

additional support• Post evaluation tasks include counseling,

retraining and motivating. In extreme cases it may result in termination.


Performance Evaluation

• On pre-agreed tasks only. No surprises.• Specific targets on periodical basis are set.

– Targets on volume and outlet productivity could be for a week or a month

– Targets relating to increasing market shares or total outlet coverage could be for 6 months

– Different weightages could be given for each of the parameters for evaluation

• The performance appraisal is open and transparent

Modifying a network..


Steps for Modifying Networks• Service level desired and willing to deliver• Activities required to deliver service level, who

will do it and at what cost• Derive ideal channel structure and compare

with existing to know gaps by evaluating based on standard parameters relating to effectiveness and efficiency

• Action to bridge the gaps and put modified channel system into place

• Define key performance indicators


Channel Comparison Factors Efficiency

Effectiveness

Scalability

Flexibility

Consistency

Reliability

Integrity


Non-store Retailing

• Selling door-to-door• Vending machines• Tele-shopping networks• Selling through catalogs• Other forms of direct selling• Electronic channels

Electronic channels…


Retailing on the Internet• Unlimited assortment• Items may not be on hold • No product touch or feel• More information makes the customer a better

shopper• Comparison shopping possible• Consumer has to plan purchases ahead• No need to handle cash – payment can be on-line• Shopping is 24X7

Vertical integration….


Vertical Integration• This means owning the channel. The

company does the work of production, branding and distribution.

• Downstream integration means the producer of the goods also does the distribution – Eureka Forbes, Bata


Vertical Integration• Upstream integration means the seller

also produces the goods – private labels of modern retailers.

• If the organization does the work of production, branding and distribution, it is said to be vertically integrated.

• Vertical Integration provides better control over the distribution function

Outsourcing..


Outsourcing Distribution • Is the most prevalent situation as:

– The ‘reach’ is better– The cost may be lower– The company can exploit the ‘core competence’ of its

channel partners, which is distribution• Vertical integration is a choice which will become

long term and cannot be easily changed once the resources have been committed.

• However, direct distribution (owning the channel) is still the best solution for ‘intensive’ distribution.


Key Learnings• The nature of distribution channels required in

different situations is based on a number of factors• Channel design takes into account all the service

deliverables required by customers • Intensity of distribution determines the number of

intermediaries required• Distribution can be in-house (vertical integration) or

out-sourced • Channel design alternatives are assessed primarily

on effectiveness and efficiency


Key Learnings• Channel alternatives are evaluated on cost, ability to

control, adaptability and capability to handle range and volume.

• Training of channel partners can be in the class room or on the job and is a continuous process

• Motivating channel partners can be done using different ‘power’ equations

• There are different formats of non-store retailing like catalogues, internet etc

• Electronic channels are used to sell products to consumers directly

designing channel systems

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