The Distribution Channels Governance of Auto-mobile Supply Chain

JI Guojun ,ZHANG Qiaohong

School of management, Xiamen University, Xiamen Fujian, 361005
Abstract Several kinds of the auto-mobile distribution channels in China present are discussed in this
paper at first, and the phenomenon of the distribution channel of auto-mobile in China is analyzed.
Some frangible factors are found. By using cooperative game theory, credit management and channel
incentives, the frangibility factors of supply chain are solved to govern the processes of distribution in
auto-mobile supply chain. The aim of governance is to improve the robustness of auto-mobile supply
chain and make the distribution channels operate efficiently.
Authors Brief
Key words distribution channel; governance; confliction of channel; cooperative game

1 Introduction
With the advance of information technology and internationalization, all industries have been
involved into the environment of the supply chain competition. In this economic environment, some
enterprises can have the outstanding achievement, some of them lost in the competition. In automobile
industry, the one who controls the distribution channels gains more market share. Conflict in the channel
can be lowed down with the governance of automobile distribution channel. With the governance,
products can be delivered perfectly to customers. The satisfaction and the market share will be enhanced
and the advantage of the whole supply chain can be maximized. Therefore, channel governance is the
issue deserved to be researched.
Distribution channel was mentioned in system discussion of marketing channel by Stern and
EI-Ansary (1972) at first. Philip (1997) considers that a distribution channel is the process that goods
and service are moved from maker to consumer, the entities that gain the ownership of goods and the
service just helps to transfer the ownership. The distribution channels that are operated and coordinated
by the parties produce the form use, the ownership use, the time use and the place use, and create value
for the final customer [1]. In the former development of the commodity trade, the idea of the supply chain
has not formed yet, enterprises only pay attention to the hybrid modes. With the development of the
marketing theory, governance of the channel is market modes. At this moment, the thinking of the
supply chain becomes mature and used in kinds of industries. Because of the need of cooperation
between the enterprises, the channel governance modes have changed, therere some modes between the
hybrid modes and the market modes, such as strategic alliance, contract.
Governance in different area has different meaning, and is used differently in each industry.
Governance is generally used in the management and the political activities of the countrys public
affairs. Governance is a kind of management activity, but it emphasizes the control, leading and
operation in politics, connects with power, benefit, responsibility, and obligation and so on. Under the
background of supply chain, controlling the frangibility of supply chain needs more concern, in order to
strengthen the link and make the whole chain go well.
If single enterprise is governed, the aim is to improve the flexibility of enterprise. If the whole supply
chain needs to be governed, various factors must be considered, such as the whole stock, attaining the
coordination, reaction speed, delivery of the product. Thus the supply chain can be fitted for changing
environment, and gains competition ability. This is the root of the supply chain governance.
In distribution channel governance, different frail factors must be considered, then find out the right
way to deal with them. Conflict with different kinds is the main frail factor of supply chain. The conflict
(I.EL-Ansary, Louis W.Stern, 1992) is a member discovers that other members are obstructing and
hindering a target which will be finished. Conflict (Louis W.Stern, 1996) is also considered as a member
of hostile consciousness or hostile motion. Webb and Didow(1997) put forward the conflict of hybrid
distribution, which meant another manufacturer or supplier of hybrid distribution forms "quasi- alliance"

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carry out arrestment or injure the behavior of another "quasi- alliance" [2].
With the conflict arising, its necessary to build up the mechanism of coordination to govern it and
dissolve the damage of conflict. Current theory research is mainly in view of the organization behavior,
social psychology, system economics etc. The Burk (2001) put forward a frame, pointing out
coordination method in strategy to reach consistency. The coordination in the governance of distribution
channel is also one of the problems worth researching. This issue is concerned by some scholars from
organization theory, law and economics etc. Then many theories are put forward such as resources
theory and trade cost theory, organization control theory and contract etc.. The coordination mechanism
CCO (manufacturer's commitment, coordination and performance outcomes) model is put forward by
David (David, 1997) on the foundation of previous research [3]. Three-parts promise relation
coordination model is proposed by Wang Tieming (Wang Tieming, 2005), adding the variants such as
environment and time, making the model more adaptable [4]. There are some scholars thought that the
distribution conflict is caused by information dissymmetry (He Qing, 2004), brought out the advices of
information integration distribution mode and outlet the information integration of hybrid distribution
mode based on the information theory [5].
Above all, the conflict of distribution channel is analyzed in previous literatures, and the conflict is
dealt with certain strategy to carry on coordination governance. But there is still no literature focusing
on any certain industry, either any use under the background of supply chain, and all members in the
chain were neither treated as a benefits system to be governed.
This paper focus on auto-mobile industry analyzes the frail factors of distribution channel under the
framework of supply chain and the conflict of supply chain, brings forward strategy solutions to govern
the distribution channel, in order to attain lower transaction cost, raise the customers satisfaction and
increase the whole benefits of the supply chain. The start-point of distribution channel is the car
manufactory in this paper, the end-point is customer. Governance of the auto-mobile distribution is
based on the frame of coordination mechanism.

2 Channel governance of supply chain

The core of governance is how to coordinate. The supply chain is a coordination mechanism between
the market and the hybrid. Its also a kind of "the half combine organization. Although it can avoid the
limitations of the market and hybrid governance, it still has some bugs including (1) the profit brought
by cooperation is uncertain, (2) the financial information can't be shared with, (3) the assigning principle
and the calculation method are very complex.
How can the channel conflict be solved? This is the difficulty of governance. The definition of
governance conformity is proposed by Stoker and Gerry (1,998) in the governance theory research, and
a theory frame is constructed in five aspects to understand the concept of governance [6]. To be used in
the supply chain channel governance, this frame should include: (1) Governance involves a complex
deploy including the government or the non-governance system and actors. In the supply chain
environment, the structure of governance changes from original "the longitudinal integration" to
enterprise dynamic alliance. Therefore, the concept of governance emphasizes that manufacturer is not a
sole authority core; especially the correlation benefit must be concerned in order to melt the role conflict.
(2) Governance realizes that in the solution of dispute, boundary and responsibility are fuzzy.
Governance not only realizes that the environment is becoming more complex, but also reminds us to
notice the authority shift. After boundary ability sharing, the fairness of excess profit share affects
sharing. As a result, governance emphasizes division between the boundaries, and also pays attention to
the fairness of benefit redistribution. (3) The meaning of the governance needs confirmation of the
authority dependence relations among each pitch point in the chain. The result of exchange and sharing
is not only determined by each enterprise's resources, but also depends on the rules. The government is
one kind of interaction process, also is the resources redistribution process. (4) Governance means the
network is independent autonomously. In the self-control network, the organization resources,
technology and the goal will be connected based on certain mechanism by the actors. After such alliance
established, enterprises will initiatively fulfill the contract in the chain, and achieve the situation that
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enterprises restrict each other mutually. (5) Governance essentially requests to be able to build a
coordination frame, melt the benefit conflict among the channels and establish corresponding strategies.

3 Cooperation game of the supply chain

Cooperation game is referred to gamblers considering their own benefit form alliance in order to
achieve the coordination. Obviously, the cooperation game emphasizes association rationality, efficiency,
and fairness. The supply chain channel government is needed in the channel to carry on consultation and
cooperation, ask for the chain core enterprise's rationality fairly to treat other cooperative enterprises and
create cooperation environment.
In cooperation gambling, the most important two concepts are the alliance and the assignment: (1)
Supposes N = {1,2,3.L , I } , then a non- spatial subset S N is an alliance. One gambler is a special
alliance. The null set is also one kind of special alliance. (2) A cooperation game assignment refers

x = V (N);

that gambler I has a vector x = (x1 , L , x I ) satisfies that: (a)

(b)xi V (i)

V ( N ) indicates the total income of I gamblers, V (i ) indicates the income the gambler

does not

[7]

form an alliance with any person .

The most essential step is to establish the characteristic function of gamblers in cooperation game.
Because choosing different characteristic functions will cause influences on the result. Thus, the
industry characteristic and the preference of gamblers various comprehensive factors have to be
considered.

4 Analysis of the auto-mobile distribution channel condition

At present, the distribution channel of the automobile has the main problems as follow:

1The distributors and manufacturer begin to compete for the core status in the chain. Some large

distributors already have the ability to control the auto-mobile supply chain.
(2)The automobile channel lacks effective governance. The pattern of distribution channel only makes
the products well sold and maintains high channel profit. The manufacturer controls the distributors
through the product. As a result, the entire market becomes chaos.
(3) The information transmission of automobile distribution channel has barrier. The marketing
decision-making dependency of automobile manufacturer reduces.
(4)The strategy is carried out difficultly in the automobile distribution. In the channel, information is
concealed by distributors, causing customer satisfaction get worse.
(5)The fund chain of automobile distribution channel is extremely frail.

5 The distribution channel conflict governance mechanism

The coordinated governance is researched by many scholars in the organization theory, legal and
economic viewpoint. These theories can be used organic synthesis, designing a set which takes the
enterprise as the chain host's multilateral government for the manufacturer as the chain host's
multilateral government mechanism to deal with the conflict, reducing the transaction cost from the
traditional unilateral government to the bilateral government. In automobile industry, the automobile
manufacturer is treated as the host of the chain, and distributors, the third party and benefit correlation
main body are combined into a strategic alliance, using scale economics of the third party to make the
entire chains cost reduced, thus enhancing the benefit of each entity.
From the analyses above, the governance strategies are proposed as below:
(1) We will use the cooperation game theory to explain the stock conflict. The manufacturer, the
distributors and the third party logistics form into an alliance, reducing the stock cost is the effective
decision-making. Therefore the supposition are
the stock cost provided by 3PL C3 pl , the distributors

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stock cost C d , C3 pl < Cd ;

represents for distributor stock level , CN represents automobile

manufacturer stock cost each unit.

N

VN =1/

(C L )
N

Effectiveness

value characteristic function satisfies:

; V0 V() = 0 ; Vd presents the distributors use value; Vd' presents distributors use value

stock after outsourcing; V n presents the manufacturer use value ; V n' presents manufacturers use
value stock after outsourcing; Vi represents any member's use value in the alliance; S represents
alliance; Vi ( S ) represents use value of composition alliance. Suppose that therere 1 distributor and 5
kinds of automobile in area A, and there is 1 third party logistics act as an agent to manage the stock in
this area.
The worst situation faced by the distributor is that 1 distributor in the alliance receives all stocks of 5
manufacturers in the business, therefore, the characteristic function of distributor

satisfy: Vd = 1/

(C

Ln ), n = 5, if the distributors and the third party logistics build up an alliance, the

distributors will give the stock to the 3PL, because the core competitive ability of 3PL is the stock cost
control, the unit stock cost of distributor is transferred to the unit stock keeping cost paid for 3PL. The
5

gambler's characteristic value turns to be Vd ' = 1 /

(C

3 pl

Ln ), n = 5 , by supposition

Vd' > Vd

. The

manufacturer

also

may

build

up
an
alliance
with
3PL,
namely:
Vn = 1 /(C n
= 1 /(C3 PL Ln ), n = 1, 2, L 5 . Because of the economic man supposition, all
distributors in the area outsource the stock to 3PL. 3PL can use the scope economy and the scale
economies to promote the profit. Obviously, any manufacturer, the distributor and 3PL building up an
alliance is more effective than that the single enterprise operates. If use vector is optimal,
namely V i ( S ) > V i , iS , alliance S is the cooperation gambling solution. The cooperation gambling
solution under the supposition premise is: S = {manufactur er1 L manufactur er 5 distributo r 3PL}
In order to reduce the stock cost, it must refer the enterprise mutually gambles process in the chain.
The supposition of the automobile supply chain has only three pitch points: The manufacturer, the
distributor and 3PL. They can achieve information sharing. This paper supposes that the enterprises
share the stock cost for the gambler 1, gambler 2 and gambler 3. The strategies choices are showed
below:
Gambler 1: Strategy A1 is VMI. Strategy A2 is manufacturer extrudes stock to distributors.
Gambler 2: Strategy B1 is outsourcing the stock to 3PL. Strategy B2 is digesting the manufacturer
stock by the way of reducing price.
Gambler 3: Strategy C1 is cooperation with distributors or manufacturer, providing the stock
management service. Strategy C 2 is stock coordination of the entire chain.
According to each strategy, three gamblers can have eight strategies combinations,
( A1 , B1 , C1 ) , ( A1, B1, C 2) , ( A1 , B2 , C1 ) , ( A1, B2 , C2 ) , ( A2 , B1 , C1 ) , ( A2 , B1 , C2 ) , ( A2 , B2 , C1 ) , ( A2 , B 2 , C 2 ) .Based
on the present actual situation of domestic automobile entire vehicle stock management and each
enterprise's actual situation, considered the gamblers and the strategy collection, payment matrix is
constructed as follows, a, b, c represent three gamblers payment matrix. Its showed as table 1.
The stock problem of the automobile distribution multi-people cooperation game model characteristic
function solutions are as follows:
According to the analysis above, the automobile supply chain multi- people cooperation game model
entire vehicle stock characteristic function must satisfy:
Ln ) > Vn'

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Table1 payment matrix

gambler
2
3

1
A1

strategy

B1

payment
( a, b, c )

(212)
(312)
(432)
(231)
(142)
(112)
(120)
(3 2 3)

C1

A1

B1

C2

A1

B2

C1

A1

B2

C2

A2

B1

C1

A2

B1

C2

A2

B2

C1

A2

B2

C2

V ( ) = 0
V ({1}) = 2
V ({1,2}) = 5

V ({2}) = 1
V ({1,3}) =

16
3

2
3
9
V ({2,3}) =
2
V ({3}) =

V ({1,2,3}) = 9

V ({I}) = V (1,2,3) = 9, V ({i}) = V ({1}) + V ({2}) + V ({3}) = 113 V({I})> V({i})

n

i =1

i=1

Therefore this is a substantive gambling. Namely: participating in the entire vehicle stock gambling,
the stock is managed by the third party, the governance strategy is to build up the local strategic alliance,
carrying on JMI, finally reduce the stock cost of the entire chain. Because each entity benefit can be
enhanced, enterprise has the possibility to build up an alliance.
(2)The effective revolution of fund flows is very important to an enterprise. Only the account
receivable effective management can cause enterprise operation smoothly. The entire vehicle
manufacturer implements credit administration on the downriver enterprise in automobile supply chain.
Enterprise must strengthen the risk guard consciousness.
(3) The entire vehicle manufacturer usually makes use of the government mechanisms as follows:
The incentive plan, monitoring processes, enforceable contracts and so on to control their distributors
and reduce the conflict. Of the many mechanisms available, the channel incentive is generally
recognized as the one most likely to motivate specific distributor action. Because channel incentives are
so closely tied to specific performance, they play a key role in allowing lots of suppliers to maintain
productive relationships with channel members [9].
Each distributor has different pursuit, some pursue difference, some pursue achievement and so on [10].
Therefore it needs to formulate the incentive mechanism which may be accepted. Based on Dabid I.
Gilliland in the distribution channel research, we propose the following formulation incentive
mechanism frame as figure 1 followed.
Distributors concerned with the attainment of economic goals will evaluate an offered incentive by
how it supports bottom-line performance. In this case, two bases for incentive rejection are salient.
These bases are related to the attainment of economic goals. Incentive magnitude refers to the monetary
size of the offered incentive.
Distributors concerned with system integration are interested in the extent that the incentive supports
or detracts from its ongoing marketing program. In this case, an incentive might be rejected for reasons
of destabilization.

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Step1: Identify distributors requirements for high

performance

Step2: Based on distributor performance

requirements, recognize possible based for incentive
rejection

Step 5: Track information and feed

back, observing the effect of the conflict
solution

Step 3: Consider all performance-related factors that

may lead to rejection

Step4: Design incentives such that the channel

control categories match the bases for rejection
Figure 1 the process of making the incentive plan

Regarding the distributors concern for harmony, as stress and tensions rise, equity, the extent of the
incentive is fair becomes an important aspect of consideration. In turn, these pledges are often met with
reciprocal pledges of commitment and loyalty. On the other hand, inadequate commitments and policies
may be rejected by distributors concerned about the strength of their social attachments with the supplier
or other distributors.
The distributor focuses on the need for adaptability. It is concerned about its capacity to maintain the
flexibility and responsiveness
The sale returns is commonly used in the automobile industry, returns have many types: cash returns
according to the sales volume, returns and the cash reward unifies, returns and the market propaganda,
training, clear returns, dark returns and so on . Return is actually one way of benefit sharing, and it is the
profit redistribution in the supply chain.
The members in the automobile supply chain have malicious behaviors, for example: Fleeing goods,
destroying price system, and then we should use the opportunism of transaction cost theory to explain.
The opportunism that is controlled by the contract governance is not enough. It should be used as the
assets property [11]. The corresponding governance strategy is that the manufacturer and the distributors
invest to marketing channel facility construction and the correlation fixed asset of this brand together,
tying up the benefit.
The perfect channel establishment and the policy still have limitations. Even if the benefit share
principle guarantees the fairness, the execution process can cause "malfunctions" phenomenon.
Therefore the government main concern is how to establish the trust mechanism. The auto-mobile
distributors are ranked, and suitable elimination mechanism is constructed.

6. Conclusion
The distribution channel of automobile supply chain is discussed in this paper; and some appropriate
governance strategies are proposed to solve the channel conflict. The cooperation game method is used,
and the third party logistics is introduced to solve the automobile stock. The fund credit administration is
used to solve the distributor which doesnt return the funds to the manufacturer immediately. The
incentive mechanism is used to solve the channel conflict. Thus, the benefit redistribution and sharing in
the supply chain will realize, the channel member's coordination is going to achieve and the channel
governance goal will finally come true.
This work is supported by new century outstanding talent plan in Fujian.

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[11]Hans Voordijk, Job de Haan, Geert-Jan Joosten. Changing governance of supply chains in the building industry:
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Ji Guojun PhD, Dongnan university and Washington State University jointly train the post-doctor, Washington
University visits professor, research area are information system, systems engineering, supply chain management
Publishes paper more than 120, publication work 4.
Zhang Qiaohong master, School of Management Science and Engineering, Xiamen University, China. Research
area is logistics and supply chain management.
The Author can be contacted from Email: jiking@xmu.edu.cn zhangqiaohong01@163.com

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