Edition Vitale and Giglierano Chapter 12 Channel Relationships Prepared by John T. Drea, Western Illinois University

2 Basic Channel Terms Direct Channel Participants Wholesalers, distributors, retailers, etc. who are part of the proactive marketing design of the channel Ancillary Channel Participants Business and service providers who are necessary for the channel to function (trucking, JIT, 3PL, etc.) Direct Channel A channel in which the supplier markets and sells directly to the buying organization

3 Exhibit 12-1 Channels Can Create Efficiency Direct: V x C transactions V1 V2 V3 V4 C1 C2 C3 C4V1 V2 V3 V4 C1 C2 C3 C4 Via reseller: V x C transactions RS V = Vendors C = Customers RS = Reseller

4 Economic Utility FormForm The quantity/mode of the product most preferred by the customer

5 Economic Utility FormForm TimeTime The quantity/mode of the product most preferred by the customer The availability of the product when the customer needs it.

6 Economic Utility FormForm TimeTime PlacePlace 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.

7 Economic Utility FormForm TimeTime PlacePlace PossessionPossession 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.

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

9 Why Do Some End Users Prefer Distributors? Distributors Can… Provide fast delivery Provide segment-base product assortment Provide segment-base product assortment Provide local credit Provide product information Assist in buying decisions Anticipate needs

10 Why Do Some Suppliers Prefer Distributors? Distributors Can… Buy and hold inventory Combine manufacturers’ outputs Share credit risk Share selling risk Forecast market needs Provide market information

11 Exhibit 12-5 A Value Network

12 Different target markets have different expectations of the total offering User Training Think about the different training needs of corporate customers vs. consumers Product Information Dealers are likely to emphasize what an offering can accomplish, rather than how it can accomplish it Product Support and Delivery Institutional buyers expect more than consumers. Financing Institutional buyers are likely to expect suppliers/distributors to arrange credit.

13 The Physical Distribution Concept Focuses on Three Elements InventoryManagement Warehousing Transportation It is a balancing of cost and service.

14 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.

15 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.

16 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.

17 Channel Design Decisions Through marketing intermediaries or a direct channel? Through marketing intermediaries or a direct channel? Intensity of distribution issues: 1)Kinds of channel partners 2)Structure of channel flows 3)How competitive advantage can be built Intensity of distribution issues: 1)Kinds of channel partners 2)Structure of channel flows 3)How competitive advantage can be built One channel, dual distribution or multidistribution? One channel, dual distribution or multidistribution?

18 Factors Favoring the Use of Distributor Channels Product requires local stock. Small product line, unable to support a direct sales force. Product has low unit value. Product is near the end of its product life cycle. Customers are widely dispersed. Local repackaging, sizing, or fabrication is required Many small buyers. Product is somewhat generic.

19 Factors not Favoring the use of Distributor Channels Product is highly customized. Product is new or innovative. Significant missionary selling is required. Manufacturer requires control over product application. Geographic concentration of large buyers. Product is technically sophisticated.

20 Selecting & Caring for Distributors: Points to Remember Ask potential customers who they recommend. Determine which distributor fits your marketing plan goals. Make calls with them. Make calls on them. Train and support them well and often, at both your facilities and theirs.

21 Bases of Power in Marketing Channels Soft Bases of Power Hard Bases of Power Expertise Identification Information Legitimate CoercionReward

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

23 System Visibility: Measuring and improving Distribution Management

24 Measurement EDI SPC MRP ERP

25 Real Time Systems Customer Service Metrics Internal Operations Metrics Purchasing/Planning Metrics

26 Customer Service Metrics *Revenue Metrics Track Total Sales Volume, New Product and Market Growth Same Store Sales *Profitability Metrics Income stream from certain market segments *Efficiency Metrics Effectiveness in meeting customer needs

27 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

28 Internal Operations Metrics Physical process metrics Financial metrics Purchasing / Planning metrics

29 Financial Metrics Automation in tracking DSO, ROA, ROI Electronic Funds Transfer/ Fax Real time financial processing Lead time reduction

30 Internal Operations Metrics Sales function Quoting Design/Mfg. Picking Shipping Receiving Scheduling Invoicing Scope for Automation in the Internal Operations Cycle

31 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

32 Visibility in Inventory Management

33 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