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Channel Conflict

Channel Conflict

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Channel conflict

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Channel conflict occurs when manufacturers (brands) disintermediate their channel partners, such as distributors, retailers, dealers, and sales representatives, by selling their products direct to consumers through general marketing methods and/or over the internet through eCommerce. Some manufacturers want their brands to capture the power of the internet but do not want to create conflict with their other distribution channels, as these partners are necessary and viable for any manufacturer to maintain and gain success. The Census Bureau of the U.S. Department of Commerce reported that online sales in 2005 grew 24.6 percent over 2004 to reach 86.3 billion dollars[1]. By comparison, total retail sales in 2005 grew 7.2 percent from 2004[1]. These impressive numbers are attractive to manufacturers, however they have not been able to participate in these sales without harming their channel relationships. According to Forrester Research and Gartner, despite the rapid growth of online commerce, an estimated 90 percent of manufacturers do not sell online and 66 percent identified channel [citation needed] .However, conflict as their single biggest issue hindering online sales efforts results from a survey show that click-and-mortar businesses have an 80% greater chance of sustaining a business model during a three-year period than those operating just in one of the two channels. Among others, the reach will be enhanced by creating another selling channel. Nowadays, E-commerce wins in popularity as second distribution channel, because of the low overhead expenses and communication costs. Their advant ge is at the same time their a disadvantage, since consumers can communicate less expensive and more easily with each [2] other too. Therefore, price and product differentiation is getting tougher than ever. Channel conflict can also occur when there has been over production. This results in a surplus of products in the market place. Newer versions of products, changes in trends, insolvency of wholesalers and retailers and the distribution of damages goods als affect channel conflict. o In this connection, a company's stock clearance strategy is of importance. To avoid a channel conflict in a click-and-mortar, it is of great importance that both channels are fully integrated from all points of view. Herewith, possible confusion with customers is excluded and an extra channel can create business advantages.[3][4][5][6]

Channel Conflict/Harmony

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" InfoWorld. October. Greenberg. 2000. January 22. Southam January 2001 . Channel Cooperation by Adam G. Gil ert Alorie. Martin.M t i t tt i t i ti C l t t t W t it ilit li l t t tt tt i i t i t ti t ti it l i t t i t tt i t t lti t t t t il i t i ti t il t t i iz ti ti t l i t t t ll i li i i t tt l t tt t i t l t il t W t t l li i t i t i t i t i t t li li t t li t i t t t t t t it l i t l ti i t l t tt li t l i l t t t i ti l ti t li ti i t i t i ti l i ll ti t C l i t t i i t t t ti l t i i t ll i i t iti l t t l i l t i FURTHER READING: B C 2000. L K " i t l C i q z " e-Business Advisor. 2000. "W n C nnel C nfli t i Good. 2000. 2000. Available from www. March 27. 2001. La Monica. Zetlin. "Love-Hate Business Relationships. April C 2000.com. September 25. Jul Andy. and Bet Bacheldor. SEE ALSO: Cannibalization. "Channel Conflicts. " he Bi Squeeze.Managing The Development Of An E-business Strategy. "Manufacturers Beset by E-Commerce 'Channel Conflict. "Rutting an End to Channel Conflict. Managing Staffing Issues.ecommercetimes. Kador. Paul A. Minda." Computerworld." InformationWeek. John. Channel Transparency. January 7." Electronic Business. Disintermediation Channel Transparency [next [back] Managing Change . Managing Integration And New Customer Relationships Channel Conflict vs."' E-Commerce Times." Sales and Marketing Management.

Bruce Merrifield. Apple. Various forms of channel cooperation solutions now exist.s Web site to an authorized dealer.s (www. which is then shipped by a geographically-designated distributor.To say that the Internet has revolutionized the way businesses do business is an understatement of vast proportions. browse local dealer inventories." Indeed. everyone involved enjoys enhanced visibility and profitability. however. Specialty products manufacturers that have restricted distribution requirements may discover that selling online breaches the relationship with the very hand that feeds them"channel partners. And the Tumi TracerΠentices consumers to return to the Web site and register their product with a lost luggage location system. and establish an upper limit price. Manufacturers are in the best position to control and market their brand on the Internet because they understand it better than anyone else and have the resources to drive consumers to their site. and Net Perceptions. L.com).but not an obstacle -.com) program allows consumers to specify the vehicle they wish to purchase. And retailers from specialty boutiques to major department stores are no longer reticent to dictate terms to manufacturers who can. And it has provided bricks and mortar companies new ways to market their goods. Key retailers told Levi. "As retailers and manufacturers recognize that their role is to serve empowered consumers together.and expect to coexist on-line with retailers that will dominate the channel.s BuyPower (www. It has given virtually anyone with a product or service a means of selling directly to customers without going through and sharing profits with distributors and retailers. well-designed "xbrand" site. Manufacturers.com) has turned conflict into cooperation with technology that enables retailers and consumers to purchase products from its branded Web site. a leading branding expert whose clients have included Microsoft. no matter how strong the brand.merrifield. Retailers and distributors share in the net profits from every purchase in same manner as if the purchase was made in a retail store. As these examples highlight.s that their account was in jeopardy of being cancelled if it continued to sell direct to consumers on-line.lanza. it causes channel conflict.gmbuypower. resolving channel conflict doesn.com) store locator directs motivated consumers from Tumi. however. marketing and selling directly to consumers. The National Association of Automobile Dealers used their clout and lobbying influence to redirect the actions of all major car manufacturers away from selling around their dealerships.forrester. General Motors. For example: Tumi. According to a recent analysis by Forrester Research (www.t merely benefit the manufacturer. says: "Every manufacturer that has a memorable brand name must be prepared for end users to go to brandname. Hundreds of sites that sell "xbrand" are far less effective and far more confusing to consumers than a single.anza (www." says Chuck Batko. current. the foremost expert on how electronic commerce is changing distribution channels (www. a leading technology industry research firm. hoping to find the mos t . while still others are in the process of being created and refined. Not surprisingly. is not problem-free. "Manufacturers must preserve the value in their brand or everyone suffers. In short.s found out quickly after launching an e-commerce site. Selling on the Internet. Rollerblade. are actively looking for new options. Manufacturers and retailers must build bridges and (technology) vendors must offer channel cooperation solutions.t afford to lose the sales volumes attributable to those accounts. this has prompted the creation of scores of ebusinesses.com.tumi. Retailers and consumers alike see both as valuable additions. all on-line. They acknowledge that channel conflict is an issue -. Most consumer goods manufacturers envision a role for themselves on-line.com). How do you know if you have channel conflict? Levi. channel cooperation will replace channel conflict. co-existence is already occurring. A reduction in brand value also means reduced margins for retailers.

[edit] Overview The decentralized decision making in supply chains leads to a dilemma situation which results in a suboptimal overall performance called double marginalization [1]. asymmetric information. the free encyclopedia Jump to: navigation. The manufacturer should meet these expectations to protect and improve the brand name. Some end users may even discover products that they didn. outsourcing and delayed differentiation.informative site for those goods. These are called coordination mechanisms or schemes. a contracting scheme should consist of the following components [2]: y y y local planning methods which consider the constraints and objectives of the individual partners. Vendor Managed Inventory (VMI) and Quick Response (QR). [Internet customers] will also expect to be able to order any pre. and an incentive scheme for aligning the individual interests of the partners. search Channel coordination (or supply chain coordination) aims at improving supply chain performance by aligning the plans and the objectives of individual enterprises. The theory of channel coordination aims at supporting the performance optimization by developing arrangements for aligning the different objectives of the partners. Recently." Channel coordination From Wi i edia.or post-sale materials or samples. as well as recent paradigms of manufacturing. partners in permanent supply chains tend to extend the coordination of their decisions in order to improve the performance for all of the participants. Channel coordination models may involve multi-echelon inventory theory. In general. short product life-cycles. . such as mass customization. which control the flows of information.t know existed and will want to buy them then and there. materials (or service) and financial assets along the chains. Forecasting. an infrastructure and protocol for information sharing. It usually focuses on inventory management and ordering decisions in distributed inter-company settings. The theoretical foundations of the coordination are based chiefly on the contract theory. and Replenishment (CPFR).s meaning for both end users and all channel partners that sell the product line. multiple decision makers. Some practical realizations of this approach are Collaborative Planning.

The general method for studying coordination consists of two steps. In the second step one regards the decentralized problem and designs such a contract protocol that approaches or even achieves the performance of the first-best. When the number of rounds or plans is high. Therefore the aim is often only the achievement of mutual benefit compared to the uncoordinated situation. but they are not complete. the negotiation protocols cannot provide optimality. A contract is said to coordinate the channel. Finally. if thereby the partners' optimal local decisions lead to optimal system-wide performance[3]. using rolling schedules or frame plans). Channel coordination is achievable in several simple models. In addition. The second component should support the information visibility and transparency both within and among the partners and facilitates the realization of real-time enterprises. However.g. In several cases there already exists an initial plan (e. the protocol should also specify the number of plans offered in each round. Another widely studied alternative direction for channel coordination is the application of some negotiation protocols [4][5]. the third component should guarantee that the partners act upon to the common goals of the supply chain. where the partners exchange proposals and counter-proposals until an agreement is reached. At first. The counter-proposals usually define side-payments (compensations) between the companies in order to inspire the partner deviating from its previously proposed plan. this approach is commonly referred to as collaborative planning. and they require some special conditions to assure convergence. Generally.. By contrast. a set of . The result is a first-best solution which provides bound on the obtainable system-wide performance objective. the practical application necessitates fast local planner systems in order to quickly evaluate the proposals and generate counter-proposals. it is referred to as downstream planning. and the considered classes are not disjoint [6]. [edit] Characteristics of coordination schemes There are several classifications of channel coordination contracts. but it is more difficult (or even impossible) in more realistic cases and in the practice. when the initiator is the supplier. therefore they are usually not considered as channel coordination approaches. ³auctions are most applicable in pure market interactions at the boundaries of a supply chain but not within a supply chain [4]. y y y An also commonly used instrument for aligning plans of different decision makers is the application of some auction mechanisms. The negotiation protocols can be characterized according to the following criteria: y The initial proposal is most frequently generated by the buyer company which is called upstream planning.The appropriate planning methods are necessary for optimizing the behavior of the production. In order to guarantee finite runtime. For this reason. Instead of a complete classification. There are also some protocols where the initial plan is generated randomly. Such approaches apply iterative solution methods. one assumes a central decision maker with complete information who solves the problem. the maximal number of rounds should be determined.

However. Some models include a service level constraint. considering more products in the general case is necessary if technological or financial constraints²like capacity or budget limits²exist. the production can be based on the preliminary forecast with normal production mode or on the updated forecast with emergency production. production cost and inventory holding cost. On the other hand. The main decision variables are quantity-related (production quantity. [edit] Parameters and variables This viewpoint shows the largest variations in the different models. [edit] Number of products Almost all contract-based models regard only one product.e. etc. the demand can be stochastic (uncertain) or deterministic. The most common parameters are related to costs: fixed (ordering or setup) cost. loss of profit. when the demand must be fulfilled later at the expense of providing lower price or lost sales which also includes some theoretical costs (e.g. but higher cost. it can be considered static (constant over time) or dynamic (e. Besides. the horizon can consist of multiple periods and it can be even infinite. The parameters can be either constant or stochastic. [edit] Problem characteristics [edit] Horizon Most of the related models consider either one-period horizon or two-period horizon with forecast update [8]. The practically most widespread approach is the rolling horizon planning. number of options.. [edit] Risk treatment In most of the models the players are regarded to be risk neutral. but sometimes prices are also decision variables. order quantity. [edit] Demand characteristic On one hand. This means that they intend to maximize their expected profit (or minimize their expected costs). some studies regard risk averse players who want to find an acceptable trade-off considering both the expected value and the variance of the profit.aspects are enumerated below which generalizes the existing taxonomies by allowing classification along multiple viewpoints[4][7]. etc. loss of goodwill. These are optional. many models disregard fixed . Some models study the special cases of substitute or complementary products. overtime.g.. i.). updating and extending an existing plan in each period. which limits the occurrence or quantity of expected stockouts.. However.). having seasonality).. outsourcing) for higher costs. Most authors consider either backlogs. which means shorter lead-time.g. In the latter. Even the 100% service level can be achieved with additional or emergency production (e. [edit] Shortage treatment The models differ in their attitude towards stockouts.

ratio in the value creation. while in the latter situation each player is interested only in its own goals. There are also extensions of this simple model: the multiple customers with correlated demand and the multiple suppliers with different production parameters. stochastic program. and thus more powerful mathematical programming techniques may be required. These simple models usually completely disregard technological constraints. sparse in the literature. There exist numerous other parameters: prices for the different contracts. As for the optimization criteria. [edit] Basic model and solution technique Most of the one-period models apply the newsvendor model. The most frequently considered companies are manufacturers. such as LP. the coordination is even more important in permanent relations. distributors or logistic companies. This necessitates more complex models. where the planning is usually done in a rolling . they share a common goal and act like a team. or in case of deterministic demand the EOQ models are the most widespread. [edit] Relation of the players One of the most important characteristics of the coordination is the power relations of the players.or twoperiod models are applied. but other alternatives are also conceivable. When the coordination is within a supply chain (typically a customer-supplier relation). otherwise horizontal. e. In the former case. [edit] Decentralization characteristics [edit] Number and role of the players The most often studied dilemmas involve the two players and call them customer and supplier (or buyer-seller). number of competitors. The players can behave in a cooperative or opportunistic way. since the opportunistic claims for profitability and growth are sustainable usually only with a certain cooperative attitude. Considering multiple criteria is not yet prevalent in the coordination literature. lead-time. such as possessed process know-how. throughput time minimization. Sometimes the roles of the participants are also important. However. or even an auction mechanism.or inventory holding costs. shortage penalty. Multi-echelon extensions are also conceivable. salvage value.. however. In the temporary case usually one. access to the market and financial resources. inventory or budget constraints may be relevant. however. The relation can be temporary or permanent. These two behaviors are usually present in a mixed form. retailers. etc.g. the most usual objectives are the profit maximization or cost minimization. in real industrial cases resource capacity. it is called vertical. MIP. On a multiple period horizon the base-stock. On two-period horizon. The power is influenced by several factors. In such cases the optimal solution can be determined with simple algebraic operations. An example for the latter is when different suppliers of the same customer coordinate their transportation. this is extended with the possibility of two production modes.

there is a more-or-less general classification in this aspect: forced and voluntary compliance.. Under forced compliance the supplier is responsible for satisfying all orders of the customer. The asymmetric case. Other typical form of cooperative games involves some bargaining framework²e. the uncertainty of the forecasts can also be private information. However. Under voluntary compliance. several papers assume that the supplier decides about the price and then the customer decides the order quantity. i. but more realistic as well. This approach is very convenient for cost and profit sharing.horizon manner. the leader moves . The cooperative approach studies. even some sort of fairness may be required. Usually the sequential Stackelberg game model is considered.e. the non-cooperative approach is used. which necessitates some kind of side-payment in order to provide a win-win situation. since all players know the incurring system cost. In addition. the supplier decides about the production quantity and it cannot be forced to fill an order. In a more advanced form of coordination. This latter is more complex analytically. The asymmetry typically concerns either the cost parameters. the partners intend to improve supply chain performance by approaching or even achieving the optimal plan according to some criteria. the Nash bargaining model²for agreeing upon the parameters of the applied contracts. In case of stochastic demand. On the other hand. [edit] Information structure Some papers study the symmetric information case. but poses new challenges. [edit] Goal of the coordination The simplest possible coordination is aimed only at aligning the (material) flows within the supply chain in order to gain executable plans and avoid shortages. therefore it does not have the opportunity to decide about the production quantity. where one of the players. but it is not only hard to guarantee. when all of the players know exactly the same parameters. how the players form coalitions therefore these models are usually applied on the strategic level of network design. players intend to learn each other's private information and behavior. the capacities or the quantities like the demand forecast. on the operational level. a coordinated plan may incur losses for some of the players compared to the uncoordinated situation. Most of the coordination approaches requires that the goal should be achieved in an equilibrium in order to exclude the possibility that an opportunistic player deviates from the coordinated plan. one has to consider the learning effect. When coordinating a permanent supply relation. but even to define. limited to only two possible values: high and low. [edit] Game theoretic model From the viewpoint of game theory the models can take cooperative or non-cooperative approaches. Even so. The demand and the forecast are often considered to be qualitative. [edit] Decision structure The decision making roles of the players depend on the specified decision variables..g. when there is an information gap between the players is more realistic. Generally.

[edit] Buyback/return With these types of contracts the supplier offers that it will buy back the remaining obsolete inventory at a discounted price. in the area of planning such mediators already exist as application service providers. [edit] Sales rebate This contract specifies two prices and a quantity threshold. [edit] Quantity discount Main article: Discounts and allowances This resembles to the sales rebate contract. most researches concentrate only on one of the phases. [edit] Contract types There are many variants of the contracts. a similar sequential model is used and it is called principal-agent setting. If the . there exist several combinations and customized approaches. The study of the long-term supply relationship can also be modeled as a repeated game. [edit] Two-part tariff Main article: Two-part tariff In this case the customer pays not only for the purchased goods. Besides. trusted third party. she pays a lower price for the units above the threshold. In case of information asymmetry. but the customer pays a wholesale price inversely proportional to the order quantity. Although at first glance the involvement of a third party seems to be unrealistic. a collaboration generally consists of a cooperative. but there is no threshold defined. and if it is above. the customer pays the higher price. too. This supports the sharing of inventory risk between the partners. the powerful theory of the market mechanism design can be applied for channel coordination. This is intended to compensate the supplier for his fixed setup cost. some widespread forms are briefly described below. If such a mediator exists. followed by a non-cooperative game. but in addition a fixed amount called franchise fee per order. To sum up. However. [edit] Involvement of a mediator Some coordination mechanisms require the existence of an independent. Both cases²the supplier or the customer as the Stackelberg leader²are widely studied in the literature. where the customer gives a preliminary forecast and then makes an order less or equal to the forecasted quantity. A variation of this contract is the backup agreement.first and then the follower reacts. If the order size is below the threshold.

e. e. [edit] Options The option contracts are originated from the product and stock exchange. [edit] VMI contract This contract can be used when the buyer does not order. CD and fashion industries. With an option contract. but also the forecast imprecision.. Such contracts are widespread in several markets. it must also pay a proportional penalty for the remaining obsolete inventory. In this way. that the optimal revenue sharing and buyback contracts are equivalent.order is less. i.e. among the suppliers of the European automotive industry. [edit] Revenue sharing Main article: Revenue sharing With revenue sharing the customer pays not only for the purchased goods. i. Buyback agreements are widespread in the newspaper. and the risk of market uncertainty is shared between the partners. the buyer is inspired to increase the forecast quality. This approach is a generalization of some previous contract types. the differece between the estimated and realized demand. This contract is successfully used in video cassette rental and movie exhibition fields.g. but also shares a given percentage of her revenue with the supplier. book. The options can be bought at a predefined option price and executed at the execution price. they generate the same profits for the partners. It can be proved. only communicates the forecasts and consumes from the inventory filled by the supplier. as well as buy rights to purchase more (call option) or return (put option) products later. [edit] Quantity flexibility In this case the customer gives a preliminary forecast and then it can give fixed order in an interval around the forecast. the customer can give fixed orders in advance.. The VMI contract specifies that not only the consumed goods should be paid. ..

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