Chapter 12 Designing Channel Systems

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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.
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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 Look at alternative systems which can meet these objectives Estimate cost of operating the channel system Evaluate available alternatives Finalise the ideal system
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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 aftersales support Each part of the system is likely to be handled by a different entity.
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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
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Channel Design Process

Similar to any other marketing task

Segmentation

Positioning

Focus

Development
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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.
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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 of Major Alternatives

Cost of operations Ability to manage and control Adaptability Range and volume to be handled

Criteria for evaluation

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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
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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
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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.
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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
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power
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French & Raven

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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Role of ROI..

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
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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.
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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
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Non-store Retailing
Selling door-to-door Vending machines Tele-shopping networks 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.
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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

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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.
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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
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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
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