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Channel design-advanced
- 2. Why is Distribution Channel Management so Why is Distribution Channel Management so important important The distribution channels are your interface with your customer Channel decisions are very difficult to change Channels could be a major bottleneck Channels could be used as a differentiator A well defined channel strategy is needed to achieve your segmentation objectives
- 3. Distribution Channels Needs Wants Exchange
- 4. Flows in a Channel Physical Possession Physical Possession Ownership Ownership Promotion Promotion Negotiation Negotiation Financing Financing Risking Risking Ordering Ordering Payment Payment
- 5. Channel Flows Manufacturer Money Goods Bank Money Distributor Go s o y od ds Goods ne Mo ne Go Mo y Money Retailer.3 Retailer.3 Retailer.1 Retailer.2 Retailer.2
- 6. Case Study-DELL Computers Study Suppliers Shipping 2 days DELL 3 days WAREHOUSE Assembly Customer Customs 2 days 3 days Local Shipping
- 7. Why do we need intermediaries Temporal discrepancy Spatial Discrepancy Need to break the bulk Need for assortment
- 9. Dimensions for Channel Designs Channel Length Channel Length Channel Breadth Channel Breadth Types of Intermediaries used at each level Types of Intermediaries used at each level
- 10. A typical FMCG Company would have Carrying and Forwarding Agent 30 Distributors and Super Stockists 1200 Sub-stockists 1000 Retailers reached directly 500,000 Retailers reached via wholesalers 100,000 Total 15,00,000
- 11. A typical FMCG distribution channel 5 to 20% 5% Customer Manufacturer Retailer Reimbu rsed Distributor C&F agent 2% 1% Super-stockist Wholesaler 5% Sub-stockist
- 12. Ex ante Channel Design Channel Design Channel establishment Channel establishment Managing Channel Member Behavior Managing Channel Member Behavior Ex poste Monitoring Channel Monitoring Channel Managing channel Managing channel member performance member performance Conflicts Conflicts Motivating Channel Motivating Channel Controlling Controlling members members Channel Members Channel Members
- 13. Channel Design Considerations What Kind of Services have to be provided What Kind of Services have to be provided What kind of logistical activities have to be What kind of logistical activities have to be performed to generate these services performed to generate these services What type of institutions are best poised to What type of institutions are best poised to perform these functions perform these functions Product Product Competitive Competitive Company’s Company’s Characteristics Characteristics Characteristics Characteristics objectives objectives
- 14. A Customer Oriented Channel Design Process Segment the Market Segment the Market 1. Look at the service output demands of segments 1. Look at the service output demands of segments 2. Look at the economic characteristics and constraints 2. Look at the economic characteristics and constraints Configure the Channel Configure the Channel 1. Define optimal channel Flow Performance 1. Define optimal channel Flow Performance 2. Define optimal channel structure for each segment 2. Define optimal channel structure for each segment Target Target Suggest segments to target Suggest segments to target Design New channels Design New channels Refine Existing Channels Refine Existing Channels
- 15. Generic Service Outputs Lot Size Lot Size Market Market Decentralization Decentralization Waiting Time Waiting Time Assortment Assortment
- 16. The Service Output Demand Template Market Decentralization Waiting Time Lot size Assortment Urban consumers Rural consumers
- 17. Developing the Service Output Demand Template Segment Breaking Spatial Delivery- Assortment After Any Name The Bulk Convenie Waiting Variety sales Other nce Time service Organisati Generally Very high Medium Medium High Customiz ons buys in bulk ation Individual Buys in Not very Medium Medium High s small high, but quantities would prefer to enjoy high levels
- 18. Developing the Service Output Demand Template Collect Data directly from the Potential customers Conduct a Trade-off analysis Do benchmarking with regard to each of the Service Outputs Find out the most critical levels for each service outputs
- 19. Trading Area Analysis 1.5 Km Grocery 2.4 Km Cosmetics 2.74 Km Books 4.05 Km Apparel 4.6 Km Jewelry Source: KSA Technopak
- 20. Product Characteristics that influence Service Output Demands Direct if Direct if Indirect if Indirect if Time of Consumption Time of Consumption High Low Purchasing Effort Purchasing Effort High Low Technical Complexity Technical Complexity High Low Order Size Order Size Large Small Need for Service Need for Service High Low Significance of Purchase Significance of Purchase High Low
- 21. Configuring the Channel Service Output Demanded Finding out the Requisite Channel Functions Technical Analysis Defining the Optimum Channel Flow Commercial Analysis
- 22. Technical Analysis: Major Considerations Ordering and Payment Process Warehousing Inventory Transportation
- 23. Costs Associated with Market Flows Physical Possession Physical Possession Storage and Delivery costs Storage and Delivery costs Ownership Ownership Inventory carrying costs Inventory carrying costs Promotion Promotion Personal selling, publicity Personal selling, publicity Negotiation Time and legal costs Time and legal costs Negotiation Credit terms, terms and Credit terms, terms and Financing Financing conditions of sale conditions of sale Risking Risking Price guarantees, insurance Price guarantees, insurance Ordering Ordering Order-processing costs Order-processing costs Payment Payment Collections, bad debt costs Collections, bad debt costs
- 24. Channel Efficiency Template Adjusted Manufacturer Distributor Customer Total Cost Value value Physical v1 f1 100 Possession Ownership 100 Promotion 100 Financing 100 Risk taking 100 Negotiation 100 Ordering 100 Payment 100 Total 100 100 Σvi*fi
- 25. The Equity Principle for developing the Incentive Structure The proportion of margin = Proportion of functional value provided Equitable margin leads to greater motivation Equitable margin leads to less channel conflict
- 26. Calculating the Distributor’s margin Distributor’s ROI = Net Margin / Net Investment Investment •Inventory carrying cost •Accounts receivables Income •Gross margin on sales Expenses •Discount Expenses •Distribution expenses •Overheads
- 27. Case Study Titan watches Factory Factory Reimbursed C&FA C&FA 3 to 5% Redistribution Stockist Redistribution Stockist Time Zones Retailer Retailer World of Titan World of Titan Time Zones 20% of MRP 18 to 20% of MRP 12 to 19% of MRP
- 28. Gap Analysis for Channel Design Sources of gaps •Environmental Bounds •Managerial Bounds Demand side gap Supply side gap SOS<SOD Flow cost is too high SOS>SOD •Offer tired service levels •Bring in new technology •Expand-contract SOs •Restructure channels •Change segments targeted •Bring specialists
- 29. Types of Gaps SOD>SOS SOD=SOS SOS>SOD No Price Value No Gap Price-Value Supply proposition is proposition is side Gap right for a less right for a more demanding value segment segment Supply Insufficient SO High cost, but High costs and side Gap provision; at SO are right: SOs. No extra is present high costs; value is god value created, price or cost but price is but price or too high., value high cost is high too low
- 30. Selection and Appointment of Channel Partners Structure of the Distribution set-up Structure of the Distribution set-up Who performs what Who performs what Returns for each activity Returns for each activity Responsibilities of entities at each level Responsibilities of entities at each level Criteria for selection Criteria for selection Inviting applicants Inviting applicants Evaluation and selection Evaluation and selection Negotiation Negotiation
- 31. Criteria for appointing channel partners Shot-listing criteria Shot-listing criteria Type of business Type of business Experience Experience Essential Criteria Essential Criteria Investment capability Investment capability Attitude Attitude Past history Past history Span of Control Span of Control Situational Criteria Situational Criteria Storage space Storage space Location Location Infrastructure Infrastructure
- 32. P&G Criteria for appointing Stockists Criteria for appointing Wholesalers •Investment capacity Reliability •Storage space Loyalty •Location Ability to service retailers •Span of control Willingness to work with stockists •Market Knowledge Other brands kept •Infrastructure Other related products •Support to the Organisation Delivery time •Orientation/Trustworthiness Reach and capacity Tendency to diversify
- 33. Forms of Opportunism and Possible Outcomes Circumstances Existing New Passive Evasion Refusal to adapt Behavior Violation Forced renegotiations Active
- 34. Strategies for Managing Channel Relationship Monitoring Incentives Selection Socialization
- 35. Dimensions for evaluating Channel Designs Efficiency Efficiency Effectiveness Effectiveness Adaptability Adaptability
- 36. Channel Profitability Analysis Contribution Approach Strategic Profit Model
- 37. Contribution Approach Department store Discount store Net sales 12,000 28,000 COGS 6,000 14,000 Manufacturing contribution 6,000 14,000 Segment Variable cost 1,000 4,000 (Marketing and Physical distribution costs) Assignable non-variable costs 300 4000 Segment controllable margin 4,700 6000 Segment controllable margin 39.2% 21.4% to sales
- 38. Strategic Profit Model Strategic Profit Model is mostly used to explore the changes in ROI with the addition of one or more layers in the distribution chain ROI = Net Profit Margin * Asset Turnover = (Net Profit/ Net Sales ) * (Net Sales/ Total Assets)
- 39. Customer service Gross Sales Margin = - Volume discount COGS Lot quantity costs Transportation costs Total Expenses Inventory carrying costs Warehousing costs Bad debt expenses General and Administrative expenses
- 40. Inventory Current assets Total Assets + Accounts receivable Fixed assets Other current assets