Designing Channel System

7/30/2019 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

Documents

Designing Channel System