Download - Designing Channel System
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Learning Objectives
Understanding customer needs to definechannel objectives
Channel design factors, components, issues,steps and process
Method ofevaluating various channelalternatives
How channel partners are: selected, trained
and kept motivated Principles ofvertical integration and
electronic channels
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Designing Channel Systems
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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 ofcustomer service planned
Cost affordable on the channel system
Channel control requirements of the company
Steps.
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Channel Design Steps
Define customer needs
Clarify channel objectives
Look at alternative systems which canmeet these objectives
Estimate cost of operating the channel
system Evaluate available alternatives
Finalise the ideal system
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Customer Needs
Lot size most convenient pack size whichthe consumer can buy at a time
Waiting time time elapsed between thedesire 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 hewants. For a consumer product it has to be ata location closest to his residence
Components
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Channel Design Components
Revenue generation or the commercialpart
Physical delivery of the goods orservices the logistics part
The service part to take care of after-
sales support Each part of the system is likely to behandled by a different entity.
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Channel Design Issues
Activities required and who will perform
Activities relationship to service levels
Numberof channel members required
and the relationship between categories
Roles, responsibilities, remuneration
and appraisal of performance of
channel members
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Channel Design Process
Segmentation
Development
Focus
Positioning
Similar to any other marketing task
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Segmentation
Putting customers in similar clusters based ontheir 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 thekind of channel members he should beplanning for.
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Positioning
Defines the channel element required to
service each of the segments
The sales manager decides the channel partnerwho is ideal to meet the expectations of the
segments.
The number of each category of intermediary is
also decided based on the number of customersto be serviced in each segment.
The service objectives and flows for each channel
partner are also frozen
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Focus
It may not be possible to meet theneeds of all segments cost and
practicality considerations (themanagerial talent available for instance)
The sales manager has to firmly decidewhich of the segments he will service
The competitive scenario also helps inthis decision
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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 competitorcould be a good benchmark
Channel partners of competitors may bewilling to share best practices of their
principals For modifying an existing channel, the gapbetween the ideal and the existing is to beidentified for remedial action.
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Channel Objectives
Defines what the channel system is supposedto 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
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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
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Evaluation of Major
AlternativesCost of operations
Ability to manageand control
Adaptability
Range and volumeto be handled
Criteria for evaluation
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Evaluation Critieria Cost:
If existing sales force can be expanded costeffectively, this is the best alternative
Cost of alternatives at different volumes can onlybe estimated for comparison
System with the lowest cost is preferred
Adaptability the channel should be flexibleto handle different types of markets andchangesin the market conditions
Volume and range to be handled Capableeven when business grows or expands
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Evaluation Criteria
Ability to manage and control: Distribution network being an extended arm of
the company, the channel partners have someobligations
Operating guidelines specify these rules
The channel system should help the companyenforce these rules fairly to all channel partners
Some of the operating rules are
Company trains channel personnel andprovides proper product literature
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Selecting Channel Partners
Getting good channel partners is a difficultpart of doing business
Some of the methods employed to selectchannel partners are: Sales people identify prospects and talk to them
Press advertising (Industrial goods)
Existing channel partners can give goodreferences
Competitors channel members for reference, notpoaching
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Selection Criteria
Qualitative:1. Willingness
2. Confidence in company products
3. Willingness to abide by company rules
4. Building company image
5. Innovativeness etc
Quantitative:1. Financial Status
2. Infrastructure3. Location
4. Present business
5. Customer relationships
6. Market standing etc
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Training Channel Members
Starts from the time of recruitment
Channel memberowner and his staff
Market views channel member as part of thecompany 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.
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Subjects for Training
Field training on how the markets are to beworked to achieve sales, collect paymentsand ensure the right kind of merchandising
Class room training on company products,competition and how to tackle it to gainmarket shares
Special meetings fornew product launches Submitting reports and maintaining records
Statutory compliance
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Subjects for Training
Care of company products
Technical specifications and answering
FAQs of customers For technical and industrial products
recognition of specifications, installationprocedure, repair and maintenance andeffective demonstrations
Servicing engineering products
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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
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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
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Channel Members Evaluation
Effectiveness of the distribution channel
determines the success of the company
Company would like its channel partners toperform at the highest standards possible
Need to constantly evaluate performance on
sales targets, coverage, productivity,
inventory holdings, attending to servicingrequests etc
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ROI as a Measure
Leading FMCG Companies feel that an ROI
of 25-30% 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 itmay result in termination.
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Performance Evaluation
On Pre-agreed tasks only. No surprises.
Specific targets on periodical basis are set.
Targets on volume and outlet productivity could befor a week or a month or a quarter.
Targets relating to increasing market shares ortotal outlet coverage could be for 6 months
Different Weightages could be given for each of
the parameters for evaluation
The performance appraisal is open andtransparent
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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 idealchannel structure and comparewith existing to know gaps by evaluatingbased on standard parameters relating toeffectiveness and efficiency
Action to bridge the gaps and put modifiedchannel system into place
Define key performance indicators
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Channel Comparison Factors
Efficiency
Effectiveness
Flexibility
Consistency
Reliability
Integrity
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Non-store Retailing
Selling door-to-door
Vending machines
Tele-shopping networks
Selling through catalogs
Other forms ofdirect selling
Electronic channels
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Retailing on the Internet
Unlimited assortment Items may not be on hold
No product touch or feel
More information makes the customer abetter shopper
Comparison shopping possible
Consumer has to plan purchases ahead
No need to handle cashpayment can beon-line
Shopping is 24X7
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Vertical Integration
This means owning the channel. Thecompany does the work of production,
branding and distribution.
Downstream integration means theproducer of the goods also does the
distribution Eureka Forbes, Bata
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Vertical Integration
Upstream integration means the selleralso produces the goods privatelabels of modern retailers.
If the organization does the work ofproduction, branding and distribution, itis said to be vertically integrated.
Vertical Integration provides better
control over the distribution function
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Outsourcing Distribution
Is the most prevalent situation as: The reach is better The cost may be lower
The company can exploit the core competence ofits channel partners, which is distribution
Vertical integration is a choice which willbecome long term and cannot be easilychanged once the resources have beencommitted.
However, direct distribution (owning thechannel) is still the best solution for intensivedistribution.
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Key Learnings
The nature of distribution channels requiredin different situations is based on a number offactors
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) orout-sourced Channel design alternatives are assessed
primarily on effectiveness and efficiency
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Key Learnings Channel alternatives are evaluated on cost,
ability to control, adaptability and capability tohandle range and volume.
Training of channel partners can be in theclass room or on the job and is a continuousprocess
Motivating channel partners can be doneusing different power equations
There are different formats ofnon-storeretailing like catalogues, internet etc
Electronic channels are used to sell productsto consumers directly