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2002 Edition

Vitale and Giglierano

Chapter 12Channel Relationships

Prepared by John T. Drea, Western Illinois University

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Basic Channel Terms

Direct ChannelParticipants

Wholesalers, distributors, retailers, etc. who are part of the proactive marketing design of the channel

Ancillary ChannelParticipants

Business and service providers who are necessary for the channel to function (trucking, JIT, 3PL, etc.)

Direct ChannelA channel in which the supplier markets and sells directly to the buying organization

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Exhibit 12-1 Channels Can Create Efficiency

Direct: V x C transactions

V1

V2

V3

V4

C1

C2

C3

C4

V1

V2

V3

V4

C1

C2

C3

C4

Via reseller: V x C transactions

RS

V = Vendors C = Customers RS = Reseller

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Economic Utility

FormFormFormFormThe quantity/mode of the product most preferred by the customer

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Economic Utility

FormFormFormForm

TimeTimeTimeTime

The quantity/mode of the product most preferred by the customer

The availability of the product when the customer needs it.

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Economic Utility

FormFormFormForm

TimeTimeTimeTime

PlacePlacePlacePlace

The quantity/mode of the product most preferred by the customer

The availability of the product when the customer needs it.

The availability of the product where it is needed. In B2B, it involves rapid/frequent product delivery.

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Economic Utility

FormFormFormForm

TimeTimeTimeTime

PlacePlacePlacePlace

PossessionPossessionPossessionPossession

The quantity/mode of the product most preferred by the customer

The availability of the product when the customer needs it.

The availability of the product where it is needed. In B2B, it involves rapid/frequent product delivery.

The process by which the customer obtains ownership or the right to use a product/service.

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Exhibit 12-2b Marketing Channel Flows from Customer to Supplier

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Why Do Some End Users

Prefer Distributors?

Distributors Can…

Provide fast deliveryProvide fast delivery

Provide segment-base product assortment

Provide segment-base product assortment

Provide local creditProvide local credit

Provide product informationProvide product information

Assist in buying decisionsAssist in buying decisions

Anticipate needsAnticipate needs

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Why Do Some Suppliers

Prefer Distributors?

Distributors Can…

Buy and hold inventoryBuy and hold inventory

Combine manufacturers’ outputsCombine manufacturers’ outputs

Share credit riskShare credit risk

Share selling riskShare selling risk

Forecast market needsForecast market needs

Provide market informationProvide market information

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Exhibit 12-5 A Value Network

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Different target

markets have

different expectations of the total

offering

User TrainingUser TrainingThink about the different training needsof corporate customers vs. consumers

Product InformationProduct InformationDealers are likely to emphasize what

an offering can accomplish, rather thanhow it can accomplish it

Product Support and DeliveryProduct Support and DeliveryInstitutional buyers expect more

than consumers.

FinancingFinancingInstitutional buyers are likely to expectsuppliers/distributors to arrange credit.

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The Physical Distribution Concept Focuses on Three Elements

InventoryInventoryManagementManagement

WarehousingWarehousing

TransportationTransportation

It is a balancing of cost and service.

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Inventory Management

• Often the largest logistics cost.

• Inventory management tools are important for reducing logistics costs.

• While lower inventory levels result in lower costs, lower inventory levels may result in more frequent and costly transportation.

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Transportation

• Involves the choice of water, air, truck, rail, or pipeline.

• Slower transportation methods usually have lower costs, but imply larger safety stocks and longer lead times.

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Warehousing

• As inventory increases, so do warehousing costs.

• Lowering inventory levels and warehousing costs can lead to stockouts.

• Channels that focus on rapid movement of goods (as opposed to storage of large quantities) are likely to utilize distribution centers.

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Channel Design Decisions

Through marketing

intermediariesor a directchannel?

Through marketing

intermediariesor a directchannel?

Intensity ofdistribution issues:

1) Kinds ofchannel partners2) Structure ofchannel flows

3) How competitiveadvantage can be built

Intensity ofdistribution issues:

1) Kinds ofchannel partners2) Structure ofchannel flows

3) How competitiveadvantage can be built

One channel, dual distribution

or multidistribution?

One channel, dual distribution

or multidistribution?

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FactorsFavoring

the Use ofDistributorChannels

FactorsFavoring

the Use ofDistributorChannels

Product requireslocal stock.

Small product line,unable to support

a direct sales force.

Product has lowunit value.

Product is nearthe end of its

product life cycle.

Customers arewidely dispersed.

Local repackaging,sizing, or

fabrication is required

Many small buyers.

Product issomewhat generic.

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Factors not

Favoringthe use ofDistributorChannels

Factors not

Favoringthe use ofDistributorChannels

Product is highlycustomized.

Product is newor innovative.

Significant missionaryselling isrequired.

Manufacturerrequires control

over productapplication.

Geographicconcentration of

large buyers.

Product istechnically

sophisticated.

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Selecting & Caring for Distributors:Points to Remember

Ask potential customers who they recommend.

Determine which distributor fitsyour marketing plan goals.

Make calls with them.

Make calls on them.

Train and support themwell and often, at both

your facilities and theirs.

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Bases of Power in Marketing Channels

Soft Basesof Power

Hard Basesof Power

Expertise

Identification

Information

Legitimate

CoercionReward

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New Types of Channels

Someone with a special link on its web site that refers a viewer to a product or service supplier’s site. The affiliate downloads a special code from the supplier’s web site that allows the supplier to track referrals. A commission is paid for each referral.

AffiliatesAffiliates

HubsHubs

An intermediate that brings buyers and sellers together to make a market. These can include catalog hubs, auction hubs, exchange hubs, and barter hubs.

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System Visibility:System Visibility:

Measuring and improving Measuring and improving Distribution ManagementDistribution Management

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Measurement

EDI

SPC

MRP

ERP

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Real Time Systems

• Customer Service Metrics

• Internal Operations Metrics

• Purchasing/Planning Metrics

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Customer Service Metrics

*Revenue MetricsTrack Total Sales Volume, New Product and Market GrowthSame Store Sales

*Profitability MetricsIncome stream from certain market segments

*Efficiency MetricsEffectiveness in meeting customer needs

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Customer Service Metrics

Challenges

• Customers do not know what they want• Unsure if what they got is what they need• Educating the customer• Used to blame rather than improve• Isolated, need other global metrics

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Internal Operations Metrics

• Physical process metrics

• Financial metrics

• Purchasing / Planning metrics

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Financial Metrics

• Automation in tracking DSO, ROA, ROI

• Electronic Funds Transfer/ Fax

• Real time financial processing

• Lead time reduction

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Internal Operations Metrics

Sales function Quoting Design/Mfg.

Picking

ShippingReceivingScheduling

Invoicing

Scope for Automation in the Internal Operations Cycle

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Automation in Internal Metrics

• Sales Force Automation (SFA)

• Auto Quote Generation

• Real Time WMS

• Shipping management system

• Auto invoicing and tracking

• Other ERP bolt-ons

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Advanced Planning/Scheduling

Web OrderProcessing

Sales ForceAutomation

IntegratedLogistics

CustomerService/Call

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Warehousing

InternetCatalogs

WMS

TransportationPlanning

Forecasting

Executive Information

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ProfitabilityAnalysis

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Internal Operations Tools

Supplier Connections

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Conclusion

• Information tools enable the collection and interpretation of metrics

• System Visibility refers to the connection of measurement and tracking systems

• Allows participants to work in real time

• Firms that measure and improve using the right tools with succeed