Chapter 3 Supply Side Channel Analysis: Channel Flows and Efficiency Analysis

Key Topics for Ch. 3

I. Review: Three Examples of Service Output Demand I. High Tech Product II. Peapod (Online grocery shopping) III. Charles Schwab II. Channel Flows III. Channel Efficiency Analysis: Efficiency Template

SERVICE OUTPUT DEMAND TEMPLATE

SERVICE OUTPUT DEMAND: SEGMENT NAME/ DESCRIPTOR

BULK BREAKING

SPATIAL CONVENIENCE

DELIVERY/ WAITING TIME

ASSORTMENT/ VARIETY

OTHER SOD(s)

1.

2.

3.

4.

5.

INSTRUCTIONS: If quantitative marketing-research data are available to enter numerical ratings in each cell, this should be done. If not, an intuitive ranking can be imposed by noting for each segment whether demand for the given service output is high, medium, or low.

Ex 1) B2B CHANNEL SEGMENTS FOR A NEW HIGH-TECH PRODUCT

Possible Service Output Priorities
References and Credentials Financial Stability and Longevity Product Demonstrations & Trials Proactive Advice & Consulting Responsive Assistance During Decision Process One-Stop Solution Lowest Price Installation and Training Support Responsive Problem Solving After Sale Ongoing Relationship with a Supplier Total Lowest Total Cost/ Pre-Sales Info Segment 5 4 11 10 Responsive Support/ Post-Sales Segment 4 4 10 9 9 1 8 Full-Service Relationship Segment 6 5 8 8 References and Credentials Segment

25 16 20
10 6 3 6 10 3 1 100

14
4

10 18
8

32
10 8 1 100

15 29 11
100

12 10 15
100

% Respondents

16%

13%

61%
= Additional Important Attributes

10%

= Greatest Discriminating Attributes

IDEAL CHANNEL SYSTEM FOR B2B SEGMENTS BUYING A NEW HIGH-TECH PRODUCT
Manufacturer (New High Technology Product)

Pre-Sales Dealers Sales VARs Post-Sales

Associations, Events, Awareness Efforts TeleSales/ TeleMktg Internal Support - Install, Training & Service Group ThirdParty Supply Outsource

Full-Service

Responsive Support

References/ Credentials

Lowest Total Cost

Source: Reprinted with permission of Rick Wilson, Chicago Strategy Associates, 2000.

Example 2) PEAPOD GROCERY SHOPPING STEPS

Who Performs This Step In: Shopping Process Step Plan what to buy (prepare shopping list) Travel to grocery store Walk aisles of store Pick grocery items one by one Check-out process Bag groceries Transport groceries home Unpack groceries A Standard Grocery Store Shopping Trip: Shopper Shopper Shopper Shopper Shopper Shopper Shopper Shopper A Peapod Shopping Experience Shopper PEAPOD PEAPOD PEAPOD PEAPOD PEAPOD PEAPOD Shopper

THREE CHANNEL SEGMENTS FOR GROCERY SHOPPING

Range of Service Outputs Demanded Purchase process easy to find, select & buy Purchases are delivered to home Information on product usage/ needs planning Fast and efficient buying process Information on comparing and choosing Ability to see, touch and inspect products Absolute lowest prices Experience provides social interaction Place sells specific brands desired Percent who are heavy Internet users

Segment's Relative Importance of Service Output "Branded Products "Low "Fast/Efficient Delivered" Price/Comparisons" Purchase Process" HIGH HIGH Moderate VERY HIGH Low HIGH Moderate Low HIGH Low VERY HIGH Low Low VERY HIGH Low HIGH Low Low Moderate 31%

Moderate Moderate Low VERY HIGH 44%

Moderate VERY HIGH VERY HIGH Moderate 23%

Source: 2000 Chicago Strategy Associates. Used with permission of Rick Wilson.

THREE CHANNEL SEGMENTS: VALUE OF HOME DELIVERY

On a 10 point scale
(1 = lowest importance and 10 = highest importance)

Low Price and Efficiency Segments Importance of home delivery in creating ideal grocery shopping experience

Home Delivery Segment

1.8

7.4

Improvement in having groceries delivered to your home would make shopping more ideal

3.8

6.7

Source: 2000 Chicago Strategy Associates. Used with permission of Rick Wilson.

Example 3) SCHWAB: SERVICE OUTPUT DEMANDS FOR MUTUAL FUND INVESTORS

Bulk-Breaking Spatial Convenience Delivery/Wait Time Assortment/ Variety Pre-Sale Service

SOD defined as:

Minimum investment amount

Ease of initiating transactions and transfers between fund families and consequent transfer costs High

Initiation/ execution time (including between fund families)

Assortment of funds offered to investors

Amount of investment advice required before sale of mutual fund

DIY Sophisticated Investor

Varies

High

High

Low

ServiceDemanding Sophisticated Investor

Varies

Medium

High

High

High

Unsophisticated Investor

Varies (likely to be smaller)

Low

Low

High

High

Source: Carmichael, Trent, Bill Norris, Rob Rozwat, and Emiko Taguchi (1996), "Charles Schwab OneSource: Channel Audit." Used with permission of the authors.

SCHWAB: SERVICE OUTPUTS SUPPLIED BY DIFFERENT CHANNELS FOR THE MUTUAL FUND INDUSTRY
Bulk-Breaking Spatial Convenience Delivery/Wait Time Assortment/ Variety Pre-Sale Service

SOD defined as:

Minimum investment amount

Ease of initiating transactions and transfers between fund families and consequent transfer costs Low

Initiation/ execution time (including between fund families) High (within family) Low (between families)

Assortment of funds offered to investors

Amount of investment advice required before sale of mutual fund

Direct Sales by Mutual Fund Family

Medium/High

High (most families offer a variety of funds)

Low

Traditional Brokerage and Investment Advisors

Low

Low

Medium/High

High

High

Mutual Fund Supermarket

High

High

High (both within and between families)

High

Low

Source: Carmichael, Trent, Bill Norris, Rob Rozwat, and Emiko Taguchi (1996), "Charles Schwab OneSource: Channel Audit." Used with permission of the authors.

FIGURE 1.2: MARKETING FLOWS IN CHANNELS

Physical Possession Ownership Promotion Negotiation Producers Financing Risking Ordering Payment Wholesalers

Physical Possession Ownership Promotion Negotiation Financing Risking Ordering Payment Retailers

Physical Possession Ownership Promotion Negotiation Financing Risking Ordering Payment Consumers Industrial and Household

Commercial Channel Subsystem

The arrows above show flows of activity in the channel (e.g. physical possession flows from producers to wholesalers to retailers to consumers).

Allocating Five Marketing Functions in an Automobile Channel* Exhibit 3.1

Suppliers

Physical Function Transporters

Warehouses

Manufacture r

Title Function
Suppliers Manufacturer

Transporter s Warehouse s

Dealers

Transporters

Custome r

Dealers

Suppliers

Payment Function

Custome r Banks

Banks

Manufacture r

Banks

Dealer s

Information Function
Suppliers Transporter s Warehouse s Banks Advertising Agency Manufacture r Transporter s Warehouse s Banks Advertising Agency Dealer s Transporter s Banks

Custome r

Customer

Promotion Function
Suppliers

Manufacture r

Dealer s

Custome r 12

McGraw-Hill Companies, Inc. 2002

MARKETING FLOWS IN CHANNELS

Each flow carries a cost. Some examples of costs of various flows are given below:
Marketing Flow Physical possession Ownership Promotion Cost Represented Storage and delivery costs Inventory carrying costs Personal selling, advertising, sales promotion, publicity, public relations costs, trade show costs

Negotiation Financing Risking

Time and legal costs Credit terms, terms and conditions of sale Price guarantees, returns allowances, warranties, insurance, repair, and after-sale service costs

Ordering Payment

Order-processing costs Collections, bad debt costs

Example 1: CDWS PARTICIPATION IN VARIOUS CHANNEL FLOWS

Channel Flow Physical possession CDWs Investment in Flow (a) CDW has a 400,000 sq. ft. warehouse. (b) CDW ships 99 percent of orders the day they are received. (c) For CDWs govt buyers, CDW has instituted an asset tagging system that lets buyer track what product is going where; product is scanned into both buyer and CDW databases, for later ease in tracking products (e.g. for service calls) (d) CDW buys product in large volumes from mfgrs., taking in approximately eight trailer-loads of product from various suppliers every day. Loads are received in bulk, with few added services. (a) CDW devotes a salesperson to every account (even small, new ones!), so that an end-user can talk to a real person about technology needs, system configurations, post-sale service, etc. (b) Salespeople go through 6 weeks of basic training, then 6 months of on-the-job coaching, then a year of monthly training sessions. (c) New hires are assigned to small-business accounts to get more opportunities to close sales. (d) Salespeople contact clients not through in-person sales calls (too expensive), but through phone/e-mail. (e) CDW has longer-tenured salespeople than its competitors.

Promotion

Negotiation

(a) CDW-G started a small-business consortium in 2003 to help small firms compete more effectively for federal IT contracts. What CDW-G gives the small biz partner: lower prices on computers than they could otherwise get; business leads; and access to CDWs help desk and product tools; CDW also handles shipping and billing, reducing the small biz partners channel flow burden. What the small biz partner provides: access to contracts CDW could not otherwise get. (a) CDW collects receivables in just 32 days; CDW turns its inventories 2x per month; CDW has no debt. (a) Were a kind of chief technical officer for many smaller firms: (b) In April 2004, CDW was authorized as a Cisco Systems Premier (CSP) partner, in serving the commercial customer market.

Financing

Risking

Example 2: PEAPOD SHOPPING AND FULFILLMENT PROCESS: ORIGINAL CHANNEL STRUCTURE

ACTIVITY:
1. Shopper connects to Peapod system:  shops  Places order  Specifies 90-minute delivery window 2. Peapod server receives order, places in queue to shop 3. Order is transmitted to professional Peapod shoppers in the Jewel food store

FLOW (performer):
ORDERING (shopper)

ORDERING (Peapod) PROMOTION (Peapod, via data storage)

ORDERING (Peapod)

4. Order is shopped inside Jewel food store* *Out-of-stocks are replaced with second choice if shopper has specified one during the online shopping step.

PHYSICAL POSSESSION (Jewel Peapod)

Continued on next slide

Example 2: PEAPOD SHOPPING AND FULFILLMENT PROCESS: ORIGINAL CHANNEL STRUCTURE ACTIVITY: FLOW (performer):
FINANCING (Jewel Peapod) RISKING (Jewel Peapod) OWNERSHIP (Jewel Peapod) PAYMENT (Peapod Jewel) PHYSICAL POSSESSION (Peapod) OWNERSHIP (Peapod) RISKING (Peapod)

5. Peapod pays Jewel for order

6. Peapod packs order in temperatureappropriate delivery containers

7. Peapod delivery person delivers order to shopper:**  unloads bags at shopper's door  accepts payment  accepts coupons (if any) ** If errors are discovered in the order, Peapod assumes responsibility for correcting them.

PHYSICAL POSSESSION (Peapod Shopper) OWNERSHIP (Peapod Shopper) PAYMENT (Shopper Peapod)

PHYSICAL POSSESSION (Shopper) OWNERSHIP (Shopper) 8. Shopper unloads and puts away groceries

Example 3: SCHWAB: IDENTITIES AND ROLES OF COMPANIES INVOLVED IN PRODUCING MUTUAL FUNDS
Investment Advisor (product design) Fund Administrator (management, administrative services to fund) Mutual Fund Family ("Producer") Fund Distributor (underwriting, manages the marketing and promotion functions)

Custodian (asset custody, safekeeping, transfer)

Flows Performed by Various Entities: Investment Advisor: promotion (through portfolio design) Fund Administrator: negotiation (through management of administrative processes) Fund Distributor: promotion (through performance of selling and marketing tasks) Custodian: physical possession, risking (through responsibility for safekeeping of shares) Transfer Agent: ordering, payment (through responsibility for processing orders and recording share purchases/redemptions)

Transfer Agent (maintain records of fund ownership, process and record share purchases and redemptions)

FIGURE 4.4: SCHWAB STRUCTURE OF MUTUAL FUND DISTRIBUTION CHANNELS

Producers (including all entities in Figure 4.3):
"Independent" Fund Managers (Kaufmann, Gabelli, Wasatch) "Direct" Mutual Fund Company (Fidelity, Vanguard, T. Rowe Price) "Indirect" Mutual Fund Company (Putnam, Kemper, Franklin) Banks & Trusts (Bankers Trust, Northern Trust)

12b-1 Fees: 0.250.35%

Sales Commission: Sales Load or 12b-1 Fees

Intermediaries:

Mutual Fund "Supermarket"

Registered Investment Advisor (RIA)

Brokers

Retail Bank

Annual Fees: 1.0-1.5% Loads: low to high

Annual Fees: 1.0-1.5% Loads: none to low

Consumers:

Annual Fees: 1.0-1.5% Loads: 3.0-5.0+% Advisory Fee: 1.02.0%

Annual Fees: 1.01.5% Loads: 3.0-5.0+% Advisory Fee: 1.03.0%

Annual Fees: 0.9-1.25% Loads: 3.0-5.0+%

Do-It-Yourself Investor

Unsophisticated Investor Service-Demanding Investor

FIGURE 3-4: THE BULLWHIP EFFECT

Consumption

Customer

Retailers

Wholesalers

Manufacturers

Suppliers

Source: Based on the lecture notes of Enver Ycesan at INSEAD.

The Efficiency Template

I. Purpose II. Firm Perspective (cf. SOD) III. Focus: Benefit Versus Cost of Each Channel Activity IV.Need a Template for Each Channel V. Include End-Users in the Analysis VI.For your exercise,

FIGURE 3-3: THE EFFICIENCY TEMPLATE

WEIGHTS FOR FLOWS: COSTS * BENEFIT POTENTIAL (High, Medium, or Low)* FINAL WEIGHT* PROPORTIONAL FLOW PERFORMANCE OF CHANNEL MEMBER: 1 2 3 4 (end-user) TOTAL

PHYSICAL POSSESSION* * OWNERSHIP PROMOTION NEGOTIATION FINANCING RISKING ORDERING PAYMENT TOTAL NORMATIVE PROFIT SHARE*** 100 N/A N/A N/A 100 N/A N/A N/A N/A N/A

100

100 100 100 100 100 100 100 N/A 100

* Entries in column must add up to 100 points. ** Entries across row (sum of proportional flow performance of channel members 1 through 4) for each channel member must add up to 100 points. *** Normative profit share of channel member i is calculated as: (final weight, physical possession)*(channel member i's proportional flow performance of physical possession) + + (final weight, payment)*(channel member i's proportional flow performance of payment). Entries across row (sum of normative profit shares for channel members 1 through 4) must add up to 100 points.

TABLE 3.APP3A-1 BUILDING MATERIALS COMPANY EFFICIENCY TEMPLATE FOR CHANNEL SERVING END-USERS THROUGH RETAILERS: (UNDISGUISED DATA)
WEIGHTS FOR FLOWS: COSTS BENEFIT POTENTIAL (High, Medium, or Low) High FINAL WEIGHT PROPORTIONAL FLOW PERFORMANCE OF CHANNEL MEMBER: Mfgr. Retailer End-user (Contractors) TOTAL

PHYSICAL POSSESSI ON OWNERSHIP PROMOTION NEGOTIATION FINANCING RISKING ORDERING PAYMENT TOTAL NORMATIVE PROFIT SHARE

30

35

30

30

40

100

12 10 5 25 5 6 7 100 N/A

Medium Low Low/Medium Medium Low Low Low N/A N/A

15 8 4 29 2 3 4 100 N/A

30 20 20 30 30 20 20 N/A 28%

40 80 60 30 50 60 60 N/A 39%

30 0 20 40 20 20 20 N/A 33%*

100 100 100 100 100 100 100 N/A 100

TABLE 3.APP3A-2 BUILDING MATERIALS COMPANY EFFICIENCY TEMPLATE FOR CHANNEL SERVING END-USERS THROUGH RETAILERS: RANKORDER DATA (0-3)
WEIGHTS FOR FLOWS: COSTS BENEFIT POTENTIAL (High, Medium, or Low) High Medium Low Low/Medium Medium Low Low Low N/A N/A FINAL WEIGHT PROPORTIONAL FLOW PERFORMANCE OF CHANNEL MEMBER: Mfgr. Retailer End-user (Contractors) TOTAL

PHYSICAL POSSESSION OWNERSHIP PROMOTION NEGOTIATION FINANCING RISKING ORDERING PAYMENT TOTAL NORMATIVE PROFIT SHARE

30 12 10 5 25 5 6 7 100 N/A

35 15 8 4 29 2 3 4 100 N/A

2 2 1 1 2 2 1 1 N/A ?

2 2 3 2 2 2 2 2 N/A ?

2 2 0 1 2 1 1 1 N/A ?

100 100 100 100 100 100 100 100 N/A 100

TABLE 3.APP3A-3 BUILDING MATERIALS COMPANY EFFICIENCY TEMPLATE FOR CHANNEL SERVING END-USERS THROUGH RETAILERS : TRANSFORMED RANK-ORDER DATA
WEIGHTS FOR FLOWS: COSTS BENEFIT POTENTIAL (High, Medium, or Low) High Medium Low Low/Medium Medium Low Low Low N/A N/A FINAL WEIGHT PROPORTIONAL FLOW PERFORMANCE OF CHANNEL MEMBER: Mfgr. Retailer End-user TOTAL

PHYSICAL POSSESSION OWNERSHIP PROMOTION NEGOTIATION FINANCING RISKING ORDERING PAYMENT TOTAL NORMATIVE PROFIT SHARE

30 12 10 5 25 5 6 7 100 N/A

35 15 8 4 29 2 3 4 100 N/A

33 33 25 25 33 40 25 25 N/A 32%

33 33 75 50 33 40 50 50 N/A 38%

33 33 0 25 33 20 25 25 N/A 29%

100 100 100 100 100 100 100 100 N/A 100