CHAPTER 12: DESIGNING CHANNEL SYSTEM

Channel System – the bridge between the manufacturer and the ultimate customer of product
and service offered by the company.

The channel system gets build around the local opportunities, condition and requirements. A
marketing channel is expected to add value to the product passing trough it.

I. Channel Design Factors

1. Nature of the product or service being distributed
2. The expectation from the system. The deliverable of the system
3. Location and nature of the customer
4. Nature of competition and its distribution system
5. Intensity of distribution required
6. Nature of the market being targeted.

II. Requirements of designing suitable channel system

1. Defining the customer needs
Customer needs are defined by the desired customer service level expected out
of channel system.

The service level desired by the customer relate to:

A. Lot size –the most convenient pack size which the customer can buy at a
time.
B. Waiting Time – time elapsed between the desire to buy the product and
the time when he can actually but it- should almost zero.
C. Choice to the customer – the company has to offer the customer a
variety of products to choose from.
D. Place Utility –choice of buying where he wants. For a consumer product
it has to be at location closest to his residence.
E. Service Support - service back-up is all the add-ons that channel can help
provide.

2. Clarify channel objectives

Define what the channel system is supposed to do to support customer service.
These objectives can be set in terms of the customer service deliverables. Once
the objectives is clearly stated, it is expected that the system will carry out all the
activities required to achieved the service level at the least cost.

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 3. Look at alternative system which can meet these objective
A company looks at alternatives for its distribution channel after it has decided
on the targeted customers and the customer service deliverables it desires from
its channel partners to reach these customers. At the time of deciding on the
alternatives, the company will scan for:
a. Business intermediaries currently available in the market.
b. The number and type of intermediaries required.
c. Aby new channel members that need to be specially developed
d. Roles of each of the channel members.

4. Cost of the channel

The cost of the distribution channel ultimately get reflected in the price the end
user or customer of the product or service has to pay. Balancing the level of
customer service required and the cost of willing to be spent by the company on
the distribution system is important responsibility of sales management.

Cost elements of the channel network include:

a. Margins of the channel partners
b. Cost of transportation of goods between the company and the end-user
c. Cost of order booking and execution
d. Cost of stock return/date expired stocks taken back from the market
e. Cost of any reverse logistics required –for example getting empties back.

5. Evaluate the various alternatives to hone in on the ideal channel system.

Criteria for evaluating alternatives:

a. Cost – a company may already have salesforce in place, which can be
expanded if necessary. It is necessary to determine first if the salesforce
is capable of handling the entire range of product for distribution to
current volume and for the future growth.

In case the distribution has to be much wider like in case of intensive

distribution, all channel system may not run for the same cost for the
desire service level. If possible, the cost of the different channel system at
different volume is to be estimated and compared. The system with the
lowest cost would be preferred.

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 b. Ability to manage and control
The distribution network contracted is still considered an extended arm
of the company to reach it customers and end users of its product
effectively. Such contracted partners have certain obligations to the
company to run the network. The operating guidelines are decided by the
company and the channel partners are abiding by these rules.

c. Adaptability

The channel should be flexible to handle different types of markets and

changes in the market conditions

d. Range and volume to be handled

This is the ability to handle larger range of products and volumes.
Capable even when business grows or expands.

III. Components of Channel Design

1. Revenue generation or the commercial part
2. Physical delivery of the goods or services (logistic/ supply chain part)

IV. Channel Design Process

1. Segmentation – putting customers in similar group based on their needs.
2. Positioning –creating the right channel system to meet these customer needs.
3. Focus – decides only the segments that need to be addressed.
4. Development - define the roles and responsibilities of the channel members
prior to actual implementation.

V. Variables which can affect the channel structure

1. Market Related: the summary of the customer need which is aggregated at the
market level and is of first relevance to the design of channel.
2. Product Related: physical characteristics of the product like size, weight, unit
value, perishability that can influence the channel structure.
3. Company Related: channel design is also based on the size of the company, its
product. Financial strength and managerial capabilities.
4. Intermediary Related:the channel structure also depends on what kinds of
channels are likely to be available, how much would it cost to run them and what
services are they capable of offering.

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 5. Environment Related: this is not control of the company which is trying to build
a channel system. Some of these environmental factors include social, cultural,
legal, economic and technological framework of the geography where the
system is being set up.

SELECTING CHANNEL PARTNERS

VI. Criteria in selecting partners
1. Qualitative – willingness, confidence in company product, willingness to abide
company rules, building company image, innovativeness.
2. Quantitative –financial status, infrastructure, location, present business,
customer relationship and marketing standing.

VII. Factors Influencing Channel Selection

The three (3) most important factors influencing channel selection are:
1. Nature of the Product or Services and the relevant markets
2. The company characteristics
3. The kind of channel partners who likely to be available.

VIII. Change of Channel Members

Any change in the selected channel members is quite rare unless the company is not
satisfied with the performance of a partner. Changing channel partners is not a pleasant
experience and if done often results in the company not getting good partners willing to
work with it.

IX. Training Channel Members

This starts at the time channel members is recruited and continue right through the time
that the channel members are associated with the company. Training is done for the
channel member owners and their staff.

1. Types of training
a. On the job field training
b. Class room training
c. Special training for launch of new products
d. Training of submitting reports
e. Statutory requirements
f. Care of the company products

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Training is an ongoing process as the markets in which the companies operate are not static
and customer expectations keep increasing.

X. Motivating Channel Partners

Companies operate with ambitious volume and growth targets which requires extra
effort on the part of the company salesforces and their channel partners to achieve. The
channel members need to be kept highly motivated to deliver result consistently.

Motivation includes:
a. Capacity building program
b. Training
c. Promotion support
d. Marketing research support
e. Working with company personnel
f. Incentives

XI. The Power of Motivation

Powers that can be used on intermediaries to make them effective:

1. Referent power -positive effects of associations. This power emanates out of the
eminent position that the company holds in the industry. This power generate
instant recognition and respect to any intermediary associated with this kind of an
organization will automatically get favorable rub-off of this image.
2. Expert power – support special knowledge. This implies that the company has some
special knowledge that is value adding to the channel partner.
3. Legitimate power – enforcing contract. This is enforcing task expected of the
intermediary as per agreement or contract signed with the company.
4. Support power – additional benefits for performers. This support could be in form of
promotions on the products and subsidies. The company can use this support
selectively to encourage the more effective partners by giving them additional
support to perform even better.
5. Competition power – pitting against peers. It is the method of generating rivalry
among channel partners so that they try to compete on performing better than their
peers.
6. Coercive power – threat of punitive action. This is the power of threat used by the
company to put defaulting channel partner back on tract.

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XIII.
Evaluating the Channel Members
The performance and success of the company business depends on the effectiveness of its
distribution channel. Therefore, it is necessary for the company to constantly keep reviewing the
performance of the channel partners to ensure the highest standards of performance and help
them improve where required.

A. ROI as a measure
Leading FMCG companies feel that ROI 30% for a distributor is healthy and is a fair
indication that he is performing well.

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If ROI is more, additional tasks are given
If ROI is less, the company may provide additional support.

Post evaluation task include counseling, retraining and motivating. It extreme cases it
may result to termination.

B. Performance Evaluation
1. On pre-agreed task only.
2. Specific target on periodical basis are set.
a. Targets on volume and outlet productivity could for a week or a month
b. Targets relating to increasing market shares or total outlet coverage
could be for 6 moths
3. The performance appraisal is open and transparent

Modifying an Existing Channel Network

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n Channel Design Comparison Factors
1. Efficiency - The measure is the effort required to achieve a desired service level.
2. Effectiveness –this is the analysis of how well the channel system meets its objectives.
3. Capacity – of the channel has been designed for a current volume of business handling
a specific number of customer, it should still be effective.
4. Agility –is the ability to handle changing demand patterns ( because of the nature of
the product or the impact of the competition), new customer, new products or pack
size.
5. Consistency –the channel network should deliver the same level of service day after
day or month without fail.
6. Reliability –this is measure of the commitment on performance of obligations and the
certainity with which commitment is met.
7. Integrity – a channel system may have all the qualities described above, but it still to
do business in a fair and broad manner. At no stage is it expected to indulge in any
practice, which may have the slightest nature of irregularity.

Channel Design Implementation

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XVI. Non-Store Retailing and Electronic Channels
1. Selling Door-to-Door
2. Vending Machines
3. Tele-Shopping
Using television as medium to demonstrate results from the use of these products
and accept order by phone and deliver the product and collect the payment at your
door-step.
4. Marketing through catalogs
Retailers publishes catalogs of goods he is selling along with prices. The consumer
browse through these catalogs and then order the goods to be delivered directly to him
by the retailer and paid for by him.

5. Selling Direct
Is the company reaching the product directly to the consumer of the product. The focus
here is on personal selling.

6. Use of Electronic channels

Electronic channels are those which use the internet to sell goods to the customers
directly. The consumer by his requirements online. The channel can be business to
customer (B2C) or business (B2B).

7. Other Applications of the use of the internets

a. Electronic Data Interchange (EDI) – the use of internet by a company and its
suppliers to exchange information and data.
b. Vendor Managed Inventory (VMI) – the system of suppliers keeping inventory
on behalf of their customers and supplying regular quantities as per an agreed
schedule.
c. Continuous Replenishment Program (CPR) – use of electronic scanners on retail
display shelves and relay information to suppliers about the selling of their
products so that they could replenish stocks to the retailer to replace on the
shelves.

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