Measurement of Channel PerformancePerformance may be define as‘ the sum of allprocesses that will lead managers to takingappropriate actions in the present that willcreate a performing organisation in the future’or in other words, ‘ doing today what will lead tomeasured value outcomes tomorrow’ 2
Macro or societal perspectiveMicro or managerial perspective
MacroDoes distribution cost too much?Are there people who are disadvantaged by thecurrent distribution system?(inner city & ruralareas)How do channel members at various levels ofdistribution compare, in aggregate, in termsproductivity per employee?Has productivity been increasing more rapidly inmanufacturing, wholesaling, or retailing?
Performance Measurement Channel performanceEffectiveness : Providing the required service most cost effectively.c. Delivery : A short term, goal oriented measure of on time delivery e.g – Number of times the order was serviced OTIF.f. Stimulation of demand: What are the efforts made by the channel member to increase customer base or increase the usage of the product. example: The cross marketing effort of Khimji & Sons, Kalamandir & Panda enterprises in Marriage season. Selling Maruti through Nalco Co-operative by Orbit Motors. 6
Performance Measurement Channel performanceEquity : Extent to which marketing channel serves problem riddenmarkets and market segments, such as disadvantaged orgeographically isolated consumers.Examples:Providing sales & after sales service to remote placeslike Malkangiri by CD distributors ( even at credit ). Higher freightPayout by the manufacturer & greater effort by distributor.Providing After sales service to the Coke ( NCFC ) refrigeratorsrequired tremendous training effort & investment in infrastructure. 7
Performance Measurement Channel performanceEfficiency: Output / Input3. Productivity : The efficiency with which the output is generated from the resources and inputs. Operational efficiency. a. Manpower productivity: Productive call % Sales volume per call b. Productivity of vehicle: Number of outlets covered10. Profitability: Essentially financial efficiency w.r.t R.O.I. a. Stock turns & margins b. Control on overhead costs c. Cost & use of funds 8
Performance Measurement Measuring performance of marketing channels Normally tracked by H.O.1. Productivity tracking of manpower ( call reports, DSR )2. Profitability tracking ( branch level contribution / prod. Mix ).3. Market Penetration tracking ( Network expansion objectives ) .4. Market share tracking ( ORG studies, internal reports ).5. Budget Vs actual. Internal data analysis. Dependence on market research. Objectivity of measurement. 9
MicroQuestion here focus on profitability & cost relativeto figure outWhich channel member are solid runWhich channel seems to produce highest returnsWhich suppliers/intermediaries will help the firmgenerate the greatest end user satisfactionwhich of the marketing flows is best performed byspecific channel member
Managerial point of viewWe look at how an individual channel membershould go about evaluating its own performanceHow the channel member (Manufacturer)willevaluate the performance of another channelmember (wholesaler)How an individual channel member might measure& compare the various channel it employs
Measuring financial performanceCost, revenue, & distribution channels can beused by a firm to determine the relativeprofitability and financial performance ofchannelsAs a result of the financial analysis one or moreappropriate managerial action may be taken.May be seek operational changes that wouldresult in changes in profitability. Changes in frequency of sales calls, the size of minimum order, promotional expenses might lead to changes in profitability.
Distribution channel segmentation (a) Corporate Profitability Channel segmentation Direct channel Indirect channelProduct A Product B Product C Product A Product B Product C (a) Segmentation analysis by channel & product category
(b) Corporate Profitability Channel segmentation Direct channel Indirect channel Territory segmentation East West East West A B C A B C A B CA B C Product segmentation (b)Segmentation analysis by channel, territory and product category
Revenue Cost AnalysisRevenue and cost associated with each segmentmust be analyzedDirect selling costIndirect selling costAdvertisingSales promotionTransportationStorage and shipmentOrder processing products with serving specific channels, Identify the cost associated territories, and
Contribution margin approachCMA requires all cost be identified as fixed orvariable according to behavior of the costIncome statement in the CMA method ofanalysis can be prepared that identifyprobability for each segment by determinationof fixed, variable, direct and indirect cost
Contribution Margin Income Statement By Channel Segment Health care Retail channel Total company channelRevenue 100,000 150,000 250,000Less: Variable Cost of goods sold 42,000 75,000 117,000Variable Gross Profit 58,000 75,000 133,000Less: Variable direct cost 6,000 15,000 21,000Gross segment contribution 52,000 60,000 112,000Less: fixed direct cost 15,000 21,000 36,000Net segment contribution 37,000 39,000 76,000Less: indirect fixed cost 41,000Net profit 25,000Net segment contribution 37% 26% 30.4%
Net profit approachNet profit approach to financial assessment ofsegments requires that all operating costs be chargedor allocated to one operating segment. all ofcompanys activity exists to support the productionand delivery of goods & services to customer.Furthermore most of the costs that exists in a firm are,in fact, joint or shared cost. In order for the trueprofitability of a channel, territory, or product to bedetermined, each segment must be charged with itsfair share of these costs.
Profits by commercial distribution channel Contract Industrial Government OEM Total commercial suppliersGross profit 27371 10284 136 2461 40256Selling expensesCommissionsAdvertisingCatalogCo-op advertisingSales promotionwarrantySales administrationCash discounttotalGeneral & Admin expensesOperating profitOperating margin
Strategic profit ModelSPM is an analytic tool frequently used todetermine ROI in a business firm. It is a tool thatincorporates both income and balance sheetdata and demonstrates how these data relate toeach other to result in RONW (return on networth)& ROA (return on assets) Strategic objective of a firm is ROI
Gross margin Sales Net profit (-) Cost of goods sold Net profit margin ÷ % sales Variable Total expenses Net profit/ expenses net sales (+)Return on net Financial Return on assets worth Fixed Leverage expense = x % Net profit/ SalesNet profit/net Total assets / net worth total assets Assets turnoverworth Inventory Current ÷ assets (+) Net sales/ Accounts total assets Total assets (+) receivable Fixed (+) assets Other Strategic Profit Model current assets
Net profit margin- is defined as % net profit divided by netsales how ever net profit margin actually measures theproportion of each sales rupees that is kept by firm as netprofitAsset turn over- is a ratio of total sales divided buy totalassets. It actually measures the efficiency of management inutilizing assets. Its shows how mush money in total salesvolume is generated by each dollar that the firm has spent.Leverage – the result by multiplying net profit marginpercentage times asset turnover ratio in return onassets(ROA). For OR, ROA is a critical measure of performancebecause it especially tells how well they have used all theresources at their disposal to achieve profit