Lecture Sales and distribution management: Chapter 12 - Krishna K Havaldar, Vasant M Cavale

Chapter 12, designing channel systems. After studying this chapter you will be able: 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.

• How channel partners are: selected, trained

and kept motivated

• Principles of vertical integration and electronic channels

Channel design factors….

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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 of customer 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

meet these objectives

• Estimate cost of operating the channel system

• Evaluate available alternatives

• Finalise the ‘ideal’ system

Customer needs….

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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 …

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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 sales support

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

Design issues….

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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

– 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

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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

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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

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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 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

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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

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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 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

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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

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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

by company rules, building company

image, innovativeness etc

• Quantitative: financial status,

infrastructure, location, present

businesses, customer relationships,

market standing etc

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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…

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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

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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 specs, installation procedure, repair and maintenance and effective

demonstrations

• Servicing of automobiles and other

engineering products

Motivation….

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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 “power”……

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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

French & Raven

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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…

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

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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 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

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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 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

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Channel Comparison Factors

Efficiency Effectiveness Scalability Flexibility Consistency Reliability Integrity

• Selling through catalogs

• Other forms of direct selling

• Electronic channels

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 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….

• Downstream integration means the

producer of the goods also does the distribution – Eureka Forbes, Bata

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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

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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’ 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

• 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

• 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