Channel design-advanced


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Channel design-advanced

  1. 1. DesigningtheCustomer OrientedMarketing Channel
  2. 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 achieveyour segmentation objectives
  3. 3. Distribution Channels Needs Wants Exchange
  4. 4. Flows in a ChannelPhysical PossessionPhysical Possession Ownership Ownership Promotion Promotion Negotiation Negotiation Financing Financing Risking Risking Ordering Ordering Payment Payment
  5. 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.3Retailer.1 Retailer.2 Retailer.2
  6. 6. Case Study-DELL Computers Study Suppliers Shipping 2 days DELL 3 days WAREHOUSE AssemblyCustomer Customs 2 days 3 days Local Shipping
  7. 7. Why do we need intermediaries Temporal discrepancy Spatial Discrepancy Need to break the bulk Need for assortment
  8. 8. A Pharmaceutical channelMedicalrepresentatives Doctor
  9. 9. Dimensions for Channel Designs Channel Length Channel Length Channel Breadth Channel BreadthTypes of Intermediaries used at each levelTypes of Intermediaries used at each level
  10. 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. 11. A typical FMCG distribution channel 5 to 20% 5% CustomerManufacturer Retailer Reimbu rsed Distributor C&F agent 2% 1% Super-stockist Wholesaler 5% Sub-stockist
  12. 12. Ex ante Channel Design Channel Design Channel establishment Channel establishment Managing Channel Member Behavior Managing Channel Member Behavior Ex posteMonitoring ChannelMonitoring Channel Managing channel Managing channelmember performancemember performance Conflicts Conflicts Motivating Channel Motivating Channel Controlling Controlling members members Channel Members Channel Members
  13. 13. Channel Design ConsiderationsWhat Kind of Services have to be providedWhat Kind of Services have to be providedWhat kind of logistical activities have to beWhat kind of logistical activities have to beperformed to generate these servicesperformed to generate these servicesWhat type of institutions are best poised toWhat type of institutions are best poised toperform these functionsperform these functions Product Product Competitive Competitive Company’s Company’sCharacteristicsCharacteristics Characteristics Characteristics objectives objectives
  14. 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 targetDesign New channelsDesign New channels Refine Existing Channels Refine Existing Channels
  15. 15. Generic Service Outputs Lot Size Lot Size Market Market Decentralization Decentralization Waiting Time Waiting Time Assortment Assortment
  16. 16. The Service Output Demand Template Market Decentralization Waiting Time Lot size AssortmentUrban consumersRural consumers
  17. 17. Developing the Service Output Demand TemplateSegment Breaking Spatial Delivery- Assortment After AnyName The Bulk Convenie Waiting Variety sales Other nce Time serviceOrganisati Generally Very high Medium Medium High Customizons buys in bulk ationIndividual Buys in Not very Medium Medium Highs small high, but quantities would prefer to enjoy high levels
  18. 18. Developingthe 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. 19. Trading Area Analysis 1.5 Km Grocery 2.4 Km Cosmetics 2.74 Km Books 4.05 Km Apparel 4.6 Km JewelrySource: KSA Technopak
  20. 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 LowSignificance of PurchaseSignificance of Purchase High Low
  21. 21. Configuring the Channel Service Output Demanded Finding out the Requisite Channel Functions Technical Analysis Defining the Optimum Channel Flow Commercial Analysis
  22. 22. Technical Analysis: Major Considerations Ordering and Payment Process Warehousing Inventory Transportation
  23. 23. Costs Associated with Market FlowsPhysical PossessionPhysical 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. 24. Channel Efficiency Template Adjusted Manufacturer Distributor Customer Total Cost Value valuePhysical v1 f1 100PossessionOwnership 100Promotion 100Financing 100Risk taking 100Negotiation 100Ordering 100Payment 100Total 100 100 Σvi*fi
  25. 25. The Equity Principle for developing the Incentive StructureThe proportion of margin = Proportion of functional value provided Equitable margin leads to greater motivation Equitable margin leads to less channel conflict
  26. 26. Calculating the Distributor’s margin Distributor’s ROI = Net Margin / Net InvestmentInvestment •Inventory carrying cost •Accounts receivablesIncome •Gross margin on salesExpenses •Discount Expenses •Distribution expenses •Overheads
  27. 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 MRP18 to 20% of MRP 12 to 19% of MRP
  28. 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. 29. Types of Gaps SOD>SOS SOD=SOS SOS>SODNo Price Value No Gap Price-ValueSupply proposition is proposition isside Gap right for a less right for a more demanding value segment segmentSupply Insufficient SO High cost, but High costs andside Gap provision; at SO are right: SOs. No extrais 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. 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. 31. Criteria for appointing channel partnersShot-listing criteriaShot-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. 32. P&GCriteria 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. 33. Forms of Opportunism and Possible Outcomes Circumstances Existing New Passive Evasion Refusal to adaptBehavior Violation Forced renegotiations Active
  34. 34. Strategies for Managing ChannelRelationship Monitoring Incentives Selection Socialization
  35. 35. Dimensions for evaluating Channel Designs Efficiency Efficiency Effectiveness Effectiveness Adaptability Adaptability
  36. 36. Channel Profitability Analysis  Contribution Approach  Strategic Profit Model
  37. 37. Contribution Approach Department store Discount storeNet sales 12,000 28,000COGS 6,000 14,000Manufacturing contribution 6,000 14,000Segment Variable cost 1,000 4,000(Marketing and Physicaldistribution costs)Assignable non-variable costs 300 4000Segment controllable margin 4,700 6000Segment controllable margin 39.2% 21.4%to sales
  38. 38. Strategic Profit ModelStrategic Profit Model is mostly used to explore thechanges in ROI with the addition of one or morelayers in the distribution chain ROI = Net Profit Margin * Asset Turnover = (Net Profit/ Net Sales ) * (Net Sales/ Total Assets)
  39. 39. Customer serviceGross SalesMargin = - Volume discount COGS Lot quantity costs Transportation costs Total Expenses Inventory carrying costs Warehousing costs Bad debt expenses General and Administrative expenses
  40. 40. Inventory Current assetsTotal Assets + Accounts receivable Fixed assets Other current assets