Design of Information Channel Design of Information Channel Components: A Practical Components: A Practical ExampleExample

Extracted from: “Channel Selection for New Industrial Products,” by Rangan, Menezes, Maier

Distribution Channel StrategySpring Semester: E 266 February 2000L. P. Bucklin

The Channel Design ProblemThe Channel Design Problem

• Determine the optimal channel for a new industrial product when EU have limited experience with the product

• How should alternative channels be defined?

• How should the selection be made among the alternatives?

• How should one distinguish between the information and logistic needs to shape the design?

Functions-Service DeliveryFunctions-Service Delivery

• Functions may be seen as logistic or information activities related to the services that they perform

• Consumer service levels required for each of these functions are set forth as the collective determinants of channel design

Impact of High Service Level Impact of High Service Level upon Channel Typeupon Channel Type

Type of Service Channel with High Service• Lot Size Indirect• Assortment Indirect• Availability Indirect• Complexity of Product Handling In-Direct?• Quality Assurance Direct• Product Information Direct• Customization Direct• Complexity of After-Sale Service In?-Direct?

Implementation StepsImplementation Steps

• Measurement of service requirements– Weighting management and EU views– Identify multiple respondents

Lead users Management experts

– Issue of correlation due to common viewpoint• Development of scales for each service factor

– Potential bias in judgments Will EU weight service needs higher than appropriate? Will managers have any hidden agendas that might

affect preferences?

ApplicationApplication

• How does one rate the different service needs in identifying a superior channel?

• Note differences between new product and mature channel service demand– Service needs declined across the board– Strong learning effects about channel services

• Determination of the channel options– Limited to existing institutional framework?– Any hybrid systems possible?

Mean End-User RatingsMean End-User Ratings

• Lot Size .50 .32• Assortment .67 .46• Availability .67 .50• Special Handling .11 .02• Product Information .70 .56• Quality Assurance .84 .38• Customization .96 .51• After-Sale Service .72 .45

Channel Service & Rating New Mature

Evaluation of ApproachEvaluation of Approach

• Following the decision logic, the design decision was derived from apparent assumption that all channels could provide the necessary services

• Channel cost became the determining factor• The major contribution from the survey was

identification of the initial need of both a high level of information and logistics

• This led to the combination channel employed

Interactions Between Information and Interactions Between Information and Logistic ServicesLogistic Services

HybridDirect

CommercialWarehouse

PureIndirectChannel

HybridBroker

Drop-ship

PureDirect

ChannelEU Information

Needs

EU-LogisticalNeeds

High

High

Low

Low

Pure channel: same logistic and information structureHybrid channel: different logistic and information structure

From CL2B-Design Concepts

Design GeneralizationsDesign Generalizations

• The need to deliver complex information diminishes the potential for a contribution from information intermediaries in the channel

• Changes in information requirements may occur overtime as a product matures and the end user becomes more knowledgeable

• The long run information channel may be different from the short run

• The ease of being able to shift from short to long term ideal may affect the short term selection

Governance IssuesGovernance Issues

• Once channels are established, change from one design to another may be expected to diminish cooperation at launch of the initial channel and to engender conflict at point of change

• These conflicts may be more significant in a non-integrated system, but internal conflict within the integrated system will still be present

Determining Channel CostsDetermining Channel Costs

• How should potential costs for the commercial segment of each channel type be estimated?– Comparisons with extant channels– Engineering estimates—what is the impact of scale?

• Can cost estimates be protected from bias held by the decision makers? Use of consultants?

• How should costs be linked to the level of service by the end user?

• How does one control for costs incurred by partner firms in the channel? (A governance issue.)