Doc. Ref. No.

PALAWAN STATE UNIVERSITY Effectivity Date: August 17, 2022

North External Campuses Revision No.: 001

Coron Campus Total Page No.: 35
Instructor: Mark Justine Vicera
Student Name: Program: BSBA MM3 Block: 1

DISTRIBUTION MANAGEMENT WITH

FRANCHISING AND NETWORKING

Module No. 4

Student Signature: Date Returned:

Vision Mission
An Internationally recognized university that provides relevant and Palawan State University is committed to upgrade people’s quality of life by
innovative education and research for lifelong learning and providing education opportunities through excellent instruction, research and
sustainable development innovation, extension, production services, and transnational collaboration
 DISTRIBUTION
MANAGEMENT

Part I: Course Background

Main Topic and Subtopics:

Designing Channel Networks

Defining Channel Networks

a. Exploring Channel Systems
b. Basic Channel Networking Structures

Network Configuration: Definitions

a. Reasons for Channel Networks
b. Network Channel Design Considerations

Channel Network Design Process

a. Map Channel Strategy
b. Segment Marketplace
c. Channel Positioning

Channel Selection
a. Facility Selections Issues
b. Methods for Locating Channel Network Facilities

Channel Implementation
a. Selection of Channel Partners
b. Role of Channel Power
c. Managing Channel Conflict
d. Achievieving Strategic Channel Collaboration

Introduction:

This course covers the principles and functions of distribution management, the roles of marketing
channels and physical distribution in the marketing system, the cost implications of management
decisions involving distribution. It also aims to analyse the distribution cost through students’
participation in exercises and projects in the area of distribution management.

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Learning Outcomes:

Upon the completion of the course, the students will be able:

A. Cognitive
a. Understand and appreciate the importance of logistics about organization’s business
performance.
b. Establishing plan of action using management functions to integrate distribution
management concepts to a given problem.
B. Psychomotor
a. Use of distribution management concepts and practices in both local and international
setting that is supplemented with information technology in maximizing business
operations.
b. Application of the concepts in ethical supply chain or logistics practices in developing
integrity and values of professional practice as a basis for decision making and problem
solving that arises in the corporate setting.
C. Affective
a. Recognizes the value of analyzing the business environment using distribution
management concepts and practices for establishing strategic direction to the organization
Core Values

a. Academic Excellence
b. Cultural Identity
c. Social Responsibility
d. Global
Competttiveness Instructional
Materials
a. Articles
b. Module
c. Reading Material
d. Videos

Learning Resources

1. Ross, David Frederick. 2015. “Distribution Planning and Control Managing in the Era of Supply
Chain Management 3rd Edition.” Springer Science+Business Media New YorkVideo:
2. Video : Network Design in Supply Chain
https://www.youtube.com/watch?v=01bI1XeMaaw

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Learning Modalities

a. Google Classroom
b. Google Meet
c. Zoom Meeting Room
d. Facebook Room

3
Part II: MODULE CONTENT

Discussion

DESIGNING CHANNEL
NETWORKS

Introduction

A fundamental task of supply chain management (SCM) is structuring supply and distribution channel
networks. As emphasized in Module 1, no business is an island. All businesses are suppliers of products
and services to their customers as well as customers of some other business’s products and services. But
supply chains go much deeper. In reality, all businesses are members of supply chains consisting not only
of their own customers and suppliers, but also of their customers’ customers and suppliers’ suppliers.
Structuring effective supply chain systems is, therefore, fundamental to the ability of all organizations to
effectively leverage the resources and competencies of their channel partners to achieve competitive
success.

The diversity and complexity of supply chain arrangements make it difficult to generalize the many
decisions planners make when structuring an effective channel network. Planners must understand the
possible outcomes of channel economic and business relations involved in any particular decision. They
must also have a firm grasp of what customers want and expect from a supply channel, what it will cost to
meet customer goals, and which channel partners will provide the right mix of resources and capabilities.
Ensuring that a supply channel successfully satisfies the customer and increases the profitability of
network participants requires considerable planning and negotiation. Even when a channel strategy is
implemented, planners will over time make changes, modifying the network links to eliminate unforeseen
costs and capture unexpected opportunities. The task of channel network design must address such
questions as: How many echelons should be in the supply and distribution channel? Where should
channel facilities be located? What level of customer service should be
attained? What are the capacity levels of each channel Watch Video : Network Design in Supply Chain
facility? How deep is the ownership of supply and
distribution channels and when should a firm use
independent channel partners? What channel design
models are available to assist channel planners in
making critical decisions regarding channel network
design?

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 DEFINING CHANNEL
NETWORKS

Channel network is “an interconnection of organizations which relate to each other through upstream or
downstream linkages between the different processes and activities that produce value in the form of
products and services to the ultimate customer.” There are several characteristic features of a channel
network that differentiate it from the more general concept of a supply chain:

 Channel networks usually consist only of a company’s first-tier suppliers and customers.
 A company rarely forms network relationships with suppliers and customers beyond the first tier.
 Channel members perceive their relationships as established on a long-term basis.
 The cooperative, often collaborative, relationships that exist are perceived by channel members as
an essential component of their continued success in the marketplace.

Of all the factors, perhaps the most critical in choosing a particular channel network is the degree of
functional dependence involved. Is the channel to be characterized as purely transactional, unencumbered
by channel dependencies, or is it based on a relational dependence among channel constituents? What are
the required capabilities and costs of dealing with each network entity and how are they to be woven
together? What is the distribution of power among channel players: who wields the most and who the
least power? What are the strengths and weaknesses of the competition and how are existing channels
responding to the initiatives of these alternative formats?

Exploring Channel Systrems

When crafting a network channel, strategists have a choice of four types of systems:

1. Transaction-based systems, there is minimal-to-no dependency between channel trading partners.

Such systems, in fact, are formed for the performance of an often non-repeated transaction. The
products or services are normally confined to commodity products or very expensive durable
goods, such as machinery or other processing equipment, and the services rendered are usually
customized around a unique event. Once the transaction is completed, the likelihood of continued
interaction is remote. These companies are described as being minimally, if at all, part of a
company’s channel network.

2. Limited channel, is similar to a single-transaction system in that businesses only engage with
other firms to capture a marketplace opportunity. Once executed, buyers and sellers do not seek
to form extensive dependencies. Limited channels are defined as loose arrangements of
businesses that intermittently and opportunistically coalesce with channel specialists in the
buying and selling of goods. The overriding objective of such channels is achieving best selling
price and short delivery time, and their longevity is directly dependent on the ongoing usefulness
of the arrangement. There is little or no loyalty in a limited channel, minimal effort is expended to
build collaborative partnerships, and there is minimal desire to improve channel efficiencies.
Often channel relations are characterized as adversarial and arrangements can be dissolved at a
moment’s notice. Finally, limited channels do not view their success at providing value as
stemming from the capabilities of

5
 their network partners. Each firm stands alone and autonomous, free to choose or disengage from
any trading partner as long as they augment the internal objectives of the business.

3. Federated network system is formed by businesses that acknowledge mutual dependencies and
actively seek to integrate individual core competencies, resources, and market opportunities on a
long-term basis. By pooling together the specialties of each channel member, a federated network
realizes levels of efficiency, profitability, and customer value that could not be achieved by
individual firms acting alone. A critical factor driving coalescence is that each participating
member perceives the relationship as fair and equitable and that they will financially and
competitively benefit in the short- and long-term from the arrangement. Unlike the first two types
of delivery channels, where firms compete on their own, federated networks enable channel
partners to compete as a unified delivery system.

4. Partnerships and alliances. Partnerships arise when two or more firms integrate core
competencies and resources in the pursuit of an emerging market opportunity. Each participant in
such an arrangement agrees to surrender some of its independence to achieve long-term benefits
arising from cooperative marketing, operations, and information sharing. A serious drawback of a
partnership is the inability of the relationship to withstand conflict stemming from differences in
operations or go-to-market strategies. When businesses agree to move to the next level of
cooperation by jointly undertaking to improve performance, cost effectiveness, and
competitiveness, this type of federated network is called an alliance. While it can be voluntary,
most alliances are centered on contractual agreements. Examples are franchises, dealerships, and
warehousing and transportation service agreements. Contracts provide network partners with a
sense of permanence where risks, profitability, and accountability are shared legally.

Basic Channel Networking Structures

The structure of any channel network

is composed of supply and delivery
nodes and the links connecting them.
Perhaps the simplest way to portray a
channel network is to see it as a
series of linked trading dyads as
exhibited in Figure Channel dyads.
In this model, channel networks
consist of series of primary and
secondary trading relationships
where supply and delivery functions
are performed one channel partner at
a time. Normally, the supply and
demand relationships between
trading dyads are closed to

6
other members of the channel network.

While this basic model is characteristic of some channels, it does not work well with today’s multichannel
strategies where companies buy from any supplier and sell to any customer. For example, a channel
intermediary, such as a large retailer like Wal-Mart, could literally be dealing with hundreds of suppliers
and customers, some of whom sell to each other. For most channel constituents, the supply chain looks
less like a closed series of dyads and more like a power grid representing an extensive network of
customers and suppliers, many simultaneously interacting with each other

Since it is virtually impossible to form close relationships with each member of such large channel
ecosystems, each channel node must clearly identify the supply and delivery channels it uses directly to
acquire products and services and to drive delivery to the end-customer. This extended network should be
constructed around a common strategy and set of operational objectives that support the channel’s
collective best interests. This step should also reveal incongruities between the strategies and metrics of
individual partners and areas of potential conflict. The goal is to tightly integrate the various links that
constitute the reach of the channel network. Without strategic and operational alignment, the channel will
have weak links that easily break as the pressure of demand variability and limitations in network
resources appear at critical points in product or marketing campaign lifecycles.

Finally, as direct convergence matures, the number of nodes occupying positions outside the channel
network, both upstream and downstream, are brought in from the supply chain and integrated into the
channel network. The goal is to increase the length of the contiguous channel network, thereby expanding
opportunities for collaboration, focus on customer value, operations excellence, and supplier integration.

NETWORK CONFIGURATION: DEFINITIONS

Configuring a channel network has a significant impact on performance because it determines the
physical structure of the channel and sets constraints on the channel demand and supply drivers governing
how it manages costs and pursues market opportunities. Channel configuration decisions affect the
amount of flexibility the channel has to adapt to marketplace changes, how many facilities are needed and
where are they to be located, what is the capacity of the channel, and what inventories and customers are
assigned to each channel node. Finally, the channel configuration impacts total production, inventory, and
transportation costs needed to satisfy the network’s customers.

Reasons for Channel Network

If customers could be presented with the goods and services they want instantaneously, there would be no
reason to build channel networks. Since there is often a lag between the time customers order a product or
service and when it can be delivered, companies must establish distribution channels to facilitate their
ability to reduce customer wait time and costs. Companies establish distribution channels to meet the
challenges of the following critical drivers.

7
 Customer service. Servicing the customer drives the creation of channel structures in two ways.
First, a business decides that the number of existing internal channel facilities or outside channel
partners are insufficient to meet current or potential customer service levels. “Insufficient” is
defined as limited plant capacity, length of lead times, or the existence of obsolete warehouse
technology. By expanding the channel network, companies hope to trade the cost of an expanded
channel network for additional sales gained by increasing response flexibility or improving
logistics functions. The second reason driving channel expansion is a strategy that moves demand
fulfillment resources closer to new markets. Because of the growth in products, services, and
market share, businesses may wish to expand their reach into markets currently on the peripheral
of their existing channel structures. Reasons for expansion could also include the establishment of
new state-of-the-art facilities.
 Relocation. Often, shifts in such factors as product offerings, markets, population, transportation
access, industries, technologies, availability of raw materials and energies, growth of competitors,
environmental or governmental regulations, and general operational expenses will force a
company to expand its channel network to include alternative geographical areas.
 Product diversification. When a company diversifies a product line, it might prove advantageous
to locate it in a new facility close to raw materials, product suppliers or producers, and/or
customer markets. Diversification, driven by the acquisition of a supplier’s or competitor’s
product lines, often requires the firm to assume the plant, distribution facilities, equipment, and
personnel of the former company. In any case, the objective is to pursue a channel strategy that
minimizes logistics expenses while enhancing customer service performance.
 Rationalization. An easy method to improve return on investment (ROI) and cash flow is to
reduce the amount of capital needed to operate large assets such as plants, warehouses, and
transportation assets. Employing the latest optimization tools, real estate management expertise,
and lean channel management strategies, companies can reduce costs and increase profitability by
consolidating inventories and resources and eliminating unnecessary facilities. Often these
activities will require companies to consolidate the channel network by centralizing functions or
relocating facilities to provide better customer service at a reduced cost.
 Decentralization. The opposite channel network strategy is to expand the number of channel
networks nodes and partners as a result of a decision to decentralize product lines and service
delivery. The reasons for such a decision are optimization of outbound logistics responsiveness;
tariffs and tax incentives; community zoning, government, or environmental restrictions;
favorable exchange rates; greater specialization of activities; simplified administration; and
increased customer response time and local presence

8
In summary see the table for the reasons for Channel Networks

Network Channel Design Considerations

Once it has been determined that a

company will establish, reduce, or
expand a channel network, several
fundamental design decisions must be
considered. Design decisions are
critical because they determine the
overall performance goals of the
channel configuration. All network
decisions affect each other and either
increase or
decrease channel cost and responsiveness to the customer. Collectively, the decisions made relating to
channel design considerations should always support the business strategy and accurately reflect the
channel’s capabilities.

The following design decisions must be taken into consideration.

 Facility role. Channel planners must decide what role each facility and channel partner is to play
in the channel network. Included are decisions regarding what processes, inventories, and
transportation functions are to be performed by each channel node and partner. These decisions
are critical because they determine the level of flexibility the channel network possesses to
quickly adapt to changes in costs and customer service. Options include whether facilities are to
be storage, consignment, crossdocking warehouses, or a combination.
 Balancing efficiency with responsiveness. Effective channel network design requires balancing
efficiency (least-cost) with responsiveness (quick response to changing marketplace demand).
Channels characterized by relatively stable demand and product and service offerings tend to
focus primarily on efficiency. Channels with volatile or seasonal demand and short product life
cycles tend to focus on responsiveness. As channel networks strive to improve performance, it is
essential that they strike the right balance between efficiency and responsiveness.
 Facility location. Decisions regarding the number and location of facilities are very critical since
they represent a long-term commitment on the part of the firm. A good location is one that
enables the facility to keep operating costs low while realizing high levels of customer service.
Among the other location decisions is determining whether to centralize in order to gain
economies of scale or to decentralize to gain responsiveness to the local customer. An important
consideration is the establishment of the transportation links ensuring timely and cost effective
movement of inventory in the supply channel. Finally, location decisions must take into
consideration macroeconomic and regulatory factors such as workforce availability, quality of
life, availability of utilities, and government restrictions and taxes.
 Capacity allocation. Decisions in this area determine the types and levels of capacities of channel
facility resources needed to meet performance targets. Excess capacities enable a facility to be

9
 flexible and scalable to meet changing demand patterns. On the negative side, excess capacities
render a facility less efficient. On the other hand, a high-utilization facility, while being efficient,
will lack adaptability to respond to unplanned variations in marketplace demand.
 Supply and distribution channel integrative intensity. This decision area relates to the level of
ownership a company decides to pursue relative to the different echelons of its external supply
and distribution channel networks. A strategy that seeks to increase ownership of channel
partners is normally driven by the desire of the channel master to increase channel control. The
advantages of such a strategy are direct interaction with the customer, control of sources of vital
production materials, and increased control over pricing, promotion, brand awareness, and
inventory. The negative side to increased ownership of channel nodes is higher costs to manage
an extended channel network.
 Logistics costs. Logistics costs in a channel network will change as the number of facilities, their
location, and capacity allocation change. Logistics costs associated with inventory and facilities
management increase as the number of facilities in the channel increase. Normally, transportation
costs decrease as the number of facilities increases, but could reverse if inbound transportation
economies of scale are lost. Total logistics costs are determined as the sum of facility, inventory,
and transportation costs. The number of channel facilities should at least equal the number that
minimizes total logistics costs. Addition of facilities beyond this point must be counter-balanced
by increased sales driven by better customer response times.

In summary these are the Critical Design Considerations:

CHANNEL NETWORK DESIGN PROCESS

The purpose of the channel network design process is to ensure the channel configuration optimizes
customer service at the lowest operating cost. Effective channel network design involves two major
functions: (1) design of the best channels in terms of service and cost, and (2) channel design
implementation.

10
As illustrated in by the figure on Channel Metwork
Design Process, the channel design consists of four
major steps: mapping the business strategy to basic
channel alternatives; segmenting customers to match
channel service outputs; review of possible channel
configurations; and channel network selection. The
final step, channel implementation, is concerned with
managing channel power, conflict resolution, and
adaptation of channel structures to meet changing
conditions.

Map Channel Strategy

The first step in supply channel design is mapping the business strategy to alternative channel structures.
Companies, for example, with strategies emphasizing cost leadership tend to locate production plants and
distribution centers at least-cost locations, regardless of where their markets are. Strategies focusing on
responsiveness tend to locate facilities close to the markets they serve, even if this means selecting high-
cost locations. The goal is to be able to react quickly to the changing needs of customers. In addition to
location, channel planners must be cognizant of capacities. Allocating too many resources to a location
risks poor utilization, while allocating too little results in poor responsiveness. Channel planners must
continuously review channel structures as the channel grows to adjust total production, inventory,
warehousing, and transportation resources to meet new marketplace demands.

The Channel Network Matrix

An important model used to assist companies design effective supply and demand channels is the channel
network design matrix. All organizations must use supply partners to acquire production materials or
finished goods and determine the role of channel distribution entities to deliver the product to the
customer. As illustrated in
Figure on Channel Network
Design Matrix Model,
companies must determine
how supply and demand
channel structures will support
the business strategy by
deciding on how the six
channel design attributes will
be leveraged to support the
business strategy.

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Before practical use can be made of the matrix, it is important to first define the six design attributes
illustrated in the Figure.

The three supply channel attributes are described as:

 Supply integrative intensity. This channel attribute is concerned with how far back in the supply
channel a company wants to control product sourcing. This could involve extending backward in
the channel through ownership of supply sources or negotiated contracts with suppliers for
exclusive or limited rights to products and services. Among the issues involved are ensuring
specific levels of quality, quantity availability, and protection from the inroads of competitors.
 Supply integrative intensity. This channel attribute is concerned with how far back in the supply
channel a company wants to control product sourcing. This could involve extending backward in
the channel through ownership of supply sources or negotiated contracts with suppliers for
exclusive or limited rights to products and services. Among the issues involved are ensuring
specific levels of quality, quantity availability, and protection from the inroads of competitors.
 Supplier intensity. This channel attribute is concerned with how the production process choice
affects the scope and depth of the partnerships existing with primary and deeper echelons of
suppliers. Partnership will involve such issues as collaboration on product designs and
specifications, shared cost, and mutual responsibility of total quality management.

The three distribution channel attributes are described as:

 Market penetration intensity. This attribute describes how many echelons deep in the delivery
network producers or intermediaries must go to deliver goods to the customer. The desired level
of penetration will require the formulation of strategies associated with capabilities and costs
(executing delivery activities), channel power (distribution of influence among channel players),
and competitive actions (presence of competitors and buying alternatives).
 Distribution integrative intensity. This channel attribute determines the level of forward
integration a company chooses to pursue in the delivery channel. Forward integration identifies
how much control a company seeks over downstream customer facing delivery echelons.
Horizontal integration refers to a level of control whereby a company acquires a former channel
intermediary. According to the matrix map, the more a product or service is customized, the more
intense is the control over downstream channel delivery functions.
 Distribution intensity. This attribute determines the number of intermediaries needed to bring
products to the end-customer. There are four strategies available. In the first, single source
distribution, a producer performs all distribution activities. This strategy is chosen by producers
who wish to retain control over marketing elements such as brand, delivery, price, promotion, and
service. In the second strategy, intensive distribution, a company seeks to utilize a broad and deep
distribution network to reach as many customers as possible. The third strategy, limited
distribution, is pursued by companies who want to limit the number of intermediaries who deal
with customers. This strategy takes two forms: exclusive distribution, in which a producer
authorizes exclusive distribution rights to a select group of intermediaries, and exclusive dealing,
where a producer restricts intermediaries to selling only its products. The final strategy, selective

12
 distribution permits select intermediaries, but not all possible intermediaries, to handle and sell its
products.

A broad example of how the distribution channel design matrix is used is to match the different forms of
production with the supply and distribution attributes on the matrix. The reasoning is that the nature of
how products are produced influences how channel designers will use the matrix attributes to structure
supply and demand channels. There are five production methods used in the matrix:

1. Project
2. Job shop
3. Batch
4. Mass
5. Continious

The basic design matrix detailed in Figure Channel Network Design Matrix Model earlier has been
expanded in Figure Channel Design Matrix below to include the five production process types and how
the channel design attributes would be applied to each type. For example, for a producer of one-of-a-kind
products, supply chain complexity is low because materials are usually purchased on a one-time basis
from suppliers one echelon deep. On the other hand, common materials or components used in a mass or
continuous production process normally require highly complex supply chains involving detailed
planning and negotiations extending several supply echelons deep.

13
Since materials are purchased for unique jobs, a producer of unique products would have low supply
integrative intensity. For example, a job shop would not seek backward ownership or special supplier
controls that extend beyond the supply requirements of specific projects. On the other hand, a company
with make-to-stock products may actually purchase key suppliers to guarantee a constant supply of
production inventories and keep critical components out of the hands of competitors. The extent of
supplier intensity will depend on the depth of collaborative relationships. For example, a producer of
mass produced products will seek close partnerships with essential suppliers to ensure a constant flow of
high quality materials and components while a custom producer, that often buys inventories on a
spotpurchase basis, will have low supplier intensity.

When it comes to the distribution side of the matrix, a producer must decide on the level of market
penetration intensity necessary to reach the customer. For example, since custom producers create unique
products to customer order, they normally have fairly shallow delivery channels. Commodity producers,
on the other hand, are constantly searching to expand market penetration of product and service offerings
and will pursue very high market penetration strategies. Likewise, a custom producer is more apt to
deliver products to customers directly from the factory and has very high distribution integrative intensity
versus a commodities producer that rarely delivers to the end-use customer. In fact, a commodities
producer would depend on very high distribution intensity, seeking to establish extensive echelons of
channel partners to execute last-mile delivery, while a custom manufacturer would have a low distribution
intensity, delivering directly from the plant to the customer.

Deciding on Vertical Integration or Channel Intermediates

A critical decision that drives the distribution integrative intensity attribute of the channel design matrix is
centered on ownership of the nodes in the distribution network. One option is for a company to vertically

14
integrate (own some or all of the distribution channel); another option is to outsource to independent
entities some or all of the channel’s distribution functions. There are many arguments for vertical
integration. Issues such as brand control, direct contact with the customer, control over pricing and
promotions, and direct information feedback from the marketing channel are but a few.

Probably the most critical factor driving a company toward or away from vertical integration is
efficiency. Efficiency is the ratio of operating performance (revenues) to the resources (direct costs and
overhead) expended. For the most part, producers do not vertically integrate the distribution flow because
it is typically inefficient to do so. The commitment to establishing remote facilities, personnel,
inventories, local marketing, and logistics functions is expensive and it diverts corporate focus away from
its prime role as a producer. However, a producer could own the distribution channel if it has the
resources and the strategy increases efficiency in the long run.

Most producers and channel intermediates, however, choose to outsource their distribution channel flows
simply because it is more efficient. According to Coughlan et al., independent distributors possess six
advantages in performing channel functions:

1. Motivation
2. Specialization
3. Survival of the economically fittest.
4. Economic of scale
5. Heavier market coverage
6. Independence from any single manufacturer

15
Segment Marketplace

Using the channel design matrix model to broadly outline channel structures, planners must next determine
the nature of customer demands. From a marketing standpoint, this step is usually perceived as
segmenting customers by profitability, age, average purchase, or some other dimension. Effective
customer segmentation consists of three dimensions:

1. Customer Needs
2. Customer behavior
3. Customer Profitability

Once market segmentation is completed, the next step is to determine the channel structure needed to
realize the segmentation strategy. For network designers, delivery channels are best defined by matching
demand with channel service outputs. Grouping customers by the service outputs enables channel
planners to associate market segments with specific channel network designs. In addition, understanding
the market’s environmental characteristics and constraints further assists designers to focus on how
channel service outputs can best meet customer requirements.

16
When these services (bulk-breaking, spatial convenience, waiting and delivery time, and variety or
assortment) outputs are combined with the distribution attributes of the channel design matrix, they form
a table where planners can position customers by their market segmentation characteristics. For example,
W.W. Grainger, a leading distributor of maintenance, repair, and operating (MRO) supplies, has supplied
products to a global market for over 75
years. Grainger’s business strategy
is to service buyers through
catalogs, telephone sales, and
direct selling with products either
picked up at their 711 (400 plus in
the U.S.) branches scattered
throughout the world or shipped
from six zone DCs, the national
distribution center, or local
country distribution sites. Local
presence is critical for Granger’s
customers who need small
quantities of MRO parts on an
immediate, or very short delivery
lead time. Grainger’s e-commerce
solution also gives customers access to
more than one million products online which are shipped directly or picked up at one of the branch
locations. When the service outputs and channel design matrix are applied to Grainer’s market strategy,
the results would resemble above Figure.

Channel Positioning

Channel designers have access to a wide variety of available channel structures. Selecting which channel
structure to use requires consideration of four groups of decision criteria. First, the channel structure must
satisfy the channel design attributes. Second, as the channel configuration is designed, planners must be
careful to identify which of the channel members is performing which of the essential ten transaction
flows discussed in Module 2. Third, planners must validate that the service outputs identified in the
segment channel phase as essential to customer segments are being met and that there are no gaps.
Finally, planners must validate that the channel structure represents the minimal cost that is to be
expended by each network entity in executing the channel flows. Knowing the cost further assists
planners in determining how channel profits are to be allocated equitably among channel members so that
cooperation is furthered and reasons for channel conflicts are reduced.

17
Producer Storage with Direct Delivery

Probably the most basic structure is producer storage with direct delivery. As illustrated in the Figure, the
producer ships directly to the end-use customer without using any form of channel intermediary. A
significant advantage of this channel model is
very high interaction with the customer.
Customers normally have direct contact with the
producer through either company salespersons, a
catalog, or some form of Internet-based
communication. Order information flows
directly from the customer to the producer.
Products in this model tend to be make-to-order
and flow from the producer’s plant directly to
the customer either by using an internal
transportation fleet or a third-party carrier.

Companies selecting this model assume full

responsibility for managing the distribution
channel.

The ramifications of
choosing this model are
detailed in following Table.
The probability of most
companies rigidly using this
structure, however, is
unlikely. Even if the
producer possessed the
capacity to perform all the
necessary sales, inventory
storage, transportation, and
transaction flows, the
producer would probably
outsource some of the
functions to channel
partners who perform them
better and at a lower cost.

18
Producer Storage with Drop Ship

In this channel option, order

information originates at a channel
distributor or retailer. As illustrated
in Figure: Producer with Drop Ship,
the customer order is sent to the
producer and is shipped directly to
the customer by the producer,
bypassing the intermediary. In this
option, downstream channel
intermediaries carry no inventories
(this would be especially true of
online sellers). Interaction with the
customer must first pass through the
intermediary before it comes to the
producer, thereby degrading the
producer’s level of direct customer contact. Products with high value and low, unpredictable demand
benefit the most from this channel option.

Companies selecting this model use channel intermediaries for customer-facing functions while assuming
responsibility for inventory, transportation, and final delivery to the customer. The biggest advantage to
the producer is that the cost of customer-facing functions is shifted to downstream distributors and
retailers. The biggest disadvantage is increased costs for small lot transportation. Some of this cost is
offset by postponing finished goods carrying costs until the customer order arrives. The ramifications of
choosing this model are detailed in Table below:

19
Producer with Extended Channel Networks

In this channel option, a single or multiple

distribution centers (DCs) and local retail
facilities are established geographically
between the regional customer and the
producer plant (Figure: Producer with
Extended Channel Network). Inventory is
pushed down to the retail echelon through
regional DCs where it is stored in
anticipation of customer orders. Sales are
made directly by the customer choosing
products at the retail store. Overall, because
inventories are stocked at the retail stores,
which must respond to local demand uncertainty, total channel inventory costs greatly increase. This model
is used to distribute inexpensive, mass-produced, commoditytype products into a mass market
characterized by high competition. The most important benefits of the model are dramatically increased
customer service and product availability.Companies selecting this model make extensive use of channel
intermediaries for inventory storage, channel forward functions, and delivery. If a producer decides to
establish its own channel DCs, the producer will have to bear higher facility and inventory carrying costs.
The biggest advantage to the producer is that the cost of customer-facing functions, outbound
transportation, and small lot inventory storage is shifted to downstream distributors and retailers.

20
Disadvantages include diminished control of brand, pricing, promotions, and direct contact with customer
information. Table below describes the characteristics of this channel model.

Aggregator with Extended Channel Network

In this option, an independent distributor aggregates a wide assortment of products, often in various item
categories, from a wide variety of producers to meet the demands of downstream channel distributors,
retailers, and customers (Below Figure). This model enables upstream channel producers to gain access to
a diverse marketplace, and it helps downstream channel intermediaries to access a wide assortment of
products from a single supply source. Besides cutting supplier search costs, an aggregator often enables
channel customers to gain economies of scale in pricing, as well as transportation costs. A drawback for
producers is that they can lose control over branding, pricing, and promotion, as well as access to certain
markets due to downstream exclusivity contracts.

Companies selecting this model are normally large distributors who sell to a mass market. These types of
distributors must develop a detailed supply channel as well as a distribution network. Normally they will
buy from other distributors or producers, thereby having minimal supply channel complexity and supply
integrative intensity. Because they normally buy from a multitude of sources, they often have high
supplier intensity, characterized by extensive use of supplier contracts governing pricing, lead times,
product availability, shared costs, and mutual responsibility for quality. A large distributor will also
pursue strong relations with downstream channel intermediaries for the performance of aggregate
inventory storage, channel transaction functions, and delivery. The biggest winner in this channel model
is the customer who gains access to a wide range of products while minimizing the cost of supplier
search. One-stop-shopping also enables the customer to significantly cut transportation costs by
aggregating purchases into a single order. A serious disadvantage of this model is the high cost of holding
inventories in multiple channel echelons, transportation, information system connectivity to guide in
channel replenishment, and diminished control of brand, pricing, promotions, and direct contact with
customer information. Table below describes the characteristics of this channel model.

21
Aggregator with e-Business Network

e-B usiness has revolutionized the distribution channel. In the past, companies were forced to stock large
quantities of product assortments close to the marketplace. Often distributors lost sales because they could
not fulfill customer orders for items considered too slow moving to be inventoried. Online sales has
dramatically helped channel intermediaries eliminate this problem. Internet websites enable distributors to
leverage specialty channel partners to fulfill orders considered non-stock without the customer even
knowing it. In addition, customers can
order directly online without having
to shop retail, further enhancing
customer convenience and cementing
brand loyalty. By leveraging multiple
channels to satisfy the customer,
distributors can drastically cut the
number of stocked products and focus
on the fast-selling items. The
downside is that online sales places
tremendous pressure on the logistics
channel to execute flawlessly. This
channel model is illustrated in Figure.

22
Companies selecting this model are normally large distributors who sell to a mass market direct and
through local distributors, retailers, and e-business. The multi-channel approach enables the
distributor/aggregator to reach a very large geographical market with a very large product assortment. The
use of the Web for product search and ordering dramatically increases customer convenience. Customers
can comparison shop, search for different product brands, assemble a purchase of diverse products, and
pay online. The diversity of the delivery channel enables them to receive deliveries by mail, direct from
the distributor, or pick up from local retail stores.

Comparing Distribution Network Option Performance The five channel arrangements represent only a
small number of the possible channel configurations. As designers propose possible channel structures,
they must thoughtfully weigh the potential strengths and weaknesses of each possible configuration.
While the five channels presented on the previous pages are fairly representative of most networks, the
permutations can be endless and can change dramatically as the business strategy changes. For example,
Dell’s decision to sell PCs in a retail environment in addition to its traditional online sales business model
required a thorough understanding of the effect it would have on its original distribution channel strategy.

Building a successful channel network requires planners to consider the opposing objectives of high
customer service and low channel costs. If a network strives for very high customer service with high
product assortment and short delivery times, the costs for channel inventories, transportation, facilities
management, and overall channel complexity will increase. On the other hand, a focus on cost reduction
will weaken customer service attributes. Although techniques such as channel postponement, the use of
drop shipping, and online sales, blunt the sharpness of the dichotomies between customer service and
cost, the service/cost trade-off restricts channel designers in their choice of network options.

CHANNEL SELECTION

Once possible channel structures are identified in the channel positioning phase, channel designers are
ready to move to the next step in the
channel design process: channel selection.
The overall goal of the channel selection
process is to maximize customer
responsiveness while optimizing company
profits and lowering operations costs.
Graphically, this goal is represented in the
Figure. The dotted line represents the
customer response time and the solid line
represents the total logistics cost (inventory,
transportation, and facilities). As the
customer response time shortens and the

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number of channel entities grows, total logistics costs at first decrease but then increase as they cross over
response time. Planners must ensure the network has at least the number of channel facilities that
optimize customer responsiveness.

Fundamental to determining the location and number of warehouses is clearly understanding the elements
of channel network cost. Essentially, channel planners must balance total supply channel fixed and
current costs (plant and inventory) with the cost of transportation and overall sales (response time). As the
number of warehouses expands to increase customer response times, inventory and facilities costs
increase while relative outbound transportation and sales costs would decline due to increased closeness
to the customer. However, as the number of channel supply points continues to increase, eventually
inbound transportation and facilities costs would also begin to slope upward as the costs associated with
interbranch transfer and customer delivery increase. Simply, as the number of warehouses grow, the
ability of the channel to ship on a full truckload (TL) basis declines, requiring the firm to pay a higher
transportation rate. Overall, the goal of the location strategy is to maximize the perceived benefits arising
from the optimal positioning of each distribution point geographically in the channel.

In addition to calculating optimum transportation and assets cost trade-offs, determining the number of
warehouses in the channel must also be guided by targeted customer service levels and, in particular, the
speed with which product is delivered. In theory, the more centralized the pipeline inventories, the greater
the average distance between supply points and the customer, and the longer the delivery lead time. This
means that if customer service levels are related to the speed of delivery, it is likely that sales will decline
as inventory is concentrated, and vice versa.

Making the best channel network decisions requires channel design teams to follow the following four-
step process.

1. Facility Selection
2. Modeling choices
3. Assembling the network
4. Confirming the network

Facility Selection Issues

Identifying and quantifying the

selection of possible channel
network facilities is a critical first
step. As mentioned above, these
issues are broken down into three
sets of factors. Macro issues affect
the channels business strategy and include the following:

 corporate objectives translated into markets and competitive positioning

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  customer service-level goals
 global economic conditions
 country-level political stability
 government regulations
 location of markets
 exchange rates and currency risks
 local cultural and economic issues and others.
On the micro level, regional/community issues are concerned with
 local taxes, culture, and climate
 labor availability, costs, wages, and union strength
 cost and availability of utilities
 local environmental regulations
 government incentives
 community resources (police, fire, schools, public transportation, and affordable housing)
 proximity to competitors (clustering) to take advantage of a major resource found in the region
 proximity to suppliers and customers
Finally, site issues are concerned with

 facility cost and size

 availability and accessibility of transportation modes
 proximity to highway systems
 communications infrastructure
 local taxes and fees
 environmental regulations

Methods For Locating Channel Network Facilities

There are several methods channel planners can use when locating channel facilities. These methods use
both qualitative and quantitative methods to assist in the selection process.

Factor-Rating Method

A simple method is the factor-rating method. This method utilizes the macro and micro factors detailed
earlier. The advantage of this method is that it enables channel designers to incorporate quantitative
factors, such as taxes, labor, and facility costs, as well as qualitative factors, such as community attitude
and quality of life, into their channel network design criteria. Since some of these factors are more
important than others for a particular network design, planners can assign weights to each factor that
result in an objective, quantitative means of site selection.

The factor-rating method has seven steps:

1. Channel designers establish, quantify, and then select from a list of facility selection issues those
relevant to the channel network design project.

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 2. The design team then assigns a weight to the selection criteria. The size of the weighting factor
reflects the importance the team assigns to each design issue. The total weight must sum to 100
%.
3. A scale, such as 1–10 or 1–100, is established for the decision criteria.
4. The possible channel network locations are selected.
5. The design team, with top management assistance, rates the proposed channel locations for each
decision criterion using the rating scale.
6. The scale is then multiplied by the weighting factor for each location and decision criterion.
7. The scores are summed and a recommendation based on the maximum point score is then made
by the team.

Center of Gravity Method

Once facility selection criteria have been identified and quantified, channel planners can proceed to
employ various design models to structure the proposed distribution channel. As previously mentioned,
there are several models that are used ranging from simple mathematical to complex computerized
models based on simulation, heuristics, optimization, and expert systems. A commonly used model is the
center-of- gravity or the centroid method. Gravity models are used to find locations that minimize
logistics costs to transport materials and components from suppliers and finished goods to the markets
served. The method uses the location of markets, the volume of goods shipped to those markets, and
shipping costs to find the best location for a new distribution center.

Location Break-Even Analysis

Often channel planners are charged with determining the optimal location to stock a product based on
cost. The location break-even analysis model provides a quantitative way of selecting a location. Output
can be examined either mathematically or graphically. There are three steps that must be performed in
assembling the data and calculating the results.

1. The fixed and variable cost (per item) must be determined.

2. The costs for a specific projected item volume are then plotted for each channel location.
3. The location with the lowest cost is then chosen.

Least-Cost-Per-Lane Problem

Often channel designers are faced with the problem of

determining the least cost delivery from a supplying channel
entity. Figure illustrates a simple channel structure consisting
of two DCs, two warehouses, and three customer zones. The
costs associated with shipping product from the DCs and the
warehouses is also shown. DC1 has an inventory limitation of
5,000 units and DC2 has an inventory limit of 20,000
units.

26
Demand at each of the three stores is illustrated at the far right of the figure. The object to find the
shipping lane to satisfy store demand at the least cost.

CHANNEL
IMPLEMENTATION

Once the channel selection process is completed, designers can turn to the final step in the channel
network design process: channel implementation. This step is concerned with the management of four
major functions: selection of channel partners, the nature and distribution of channel power, managing
channel conflicts, and achieving strategic channel collaboration.

Selection Of Channel Partners

Once the structure of the distribution channels needed to reach each targeted customer market segment
has been identified, the channel design team proceeds to select the channel partners. The choice of
partners is an important task. In many ways, channel partners are the face of the company. Many
customers, often separated by global space and time, never deal with the producers of the products they
purchase from their local distribution or retail source. Channel partners should be chosen that possess the
attributes that best fit the requirements of the customer market segments. Critical criteria is the number of
years in business, financial stability, depth of product assortment, relationships with possible competitors,
growth and profit history, level of cooperativeness and collaboration, and service reputation.

Another critical element in today’s computerized environment is the depth and status of channel partner
information technologies. This element is particularly important if the product is sold through the Internet
and a multi- or omni-channel strategy is being pursued. If the channel partners are retailers that want
exclusive distribution, designers should evaluate locations, future growth potential, and type of customer.
For intermediaries with sales forces, designers should evaluate the size and quality of the sales
organization and the number and character of other lines carried by the company.

Once channel intermediaries are selected, the channel design team must be careful to determine their
strengths and weaknesses and develop constructive relationships that ensure that the products and services
to be sold through the channel provide them with strong incentives to provide customers with superior
value. The goal is to incent intermediaries to be top performers. The channel master should provide
training programs (to learn such things as product lines and sales and marketing techniques), market
research programs, and other capability-building programs to drive higher channel member performance.
The channel master should be committed to communicate that channel intermediaries are essential
partners and that they are part of an integrated joint effort in the pursuit of marketplace leadership.

The final component in the selection of channel members is evaluating performance. Measurements
include attainment of sales quotas, customer delivery time, average inventory levels, value of damaged
and lost inventories, and cooperation in promotional and discounting programs. As time moves on,
channel designers continue to determine the utility and effectiveness of the channel configuration
and the

27
intermediaries occupying key supply chain nodes. Channel modification becomes necessary when the
distribution structure is not working as planned. Reasons are changes in marketplace buying habits,
expanding or shrinking markets, inroads of a powerful competitor, innovations to distribution channel
functions, or the product moves from one stage of its product life cycle to another. Metrics also indicate
that a channel member is underperforming. Poorly performing intermediaries need to be counseled and
their motivation increased, their staffs retrained, or in some cases they need to be terminated from the
channel network.

Role Of Channel Power

The issue of getting, using, and keeping power is of the utmost importance to channel leaders. The very
basis of an effective channel network is the interdependence of members and how power is to be
exercised to maintain viable, working relationships where each member creates strategies and performs
actions that support the cooperation of all members in the pursuit of both individual company and
aggregate supply channel value. It is important to note, however, that maximizing the supply channel’s
value is not the same thing as maximizing the value of each channel member. Without channel power, the
tendency of individual members to maximize their own profit act as a powerful centripetal force
splintering networked communities and institutionalizing local customer management decisions at the
expense of overall channel performance. Preventing channel disintegration from occurring requires the
exercise of power so that members can pursue their own objectives while engaging the entire channel to
generate value.

Activating power requires a single channel entity (such as a channel master) or a tightly integrated
alliance of a small group of channel players to act as the driving force to engineer a power structure that
enforces network cohesiveness while enabling a sustainable level of individual channel member
independence. Channels that have weak power relationships soon disintegrate. On the other hand,
channels that are too strongly centralized and held hostage by a powerful channel master that routinely
imposes its will on weaker members that have no escape become a kind of celestial black hole where
members cannot escape the gravitational pull of the channel master and soon see their profitability and
sustainability evaporate into insolvency.

Creating and exerting power in a channel network is a hotly debated subject that is approached from
many angles. The commonly used concept comes from psychology and defines power as consisting of
five forms:

1. Reward power
2. Coercive power
3. Expert power
4. Legitimate power
5. Referent

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Managing Channel Conflict

Supply channel networks are often subject to conflict. Because they are really ecosystems of independent
companies, each with their own set of performance metrics and competitive objectives, constantly finding
common ground where everyone can realize their own goals in an atmosphere of mutual trust is a delicate
and often complex management skill. Despite the fact that today’s communications technologies enable
companies to more closely integrate with their channel partners and customers, resistance to rather than
the espousal of change is the norm for most channel networks. While individual players may want to
embark on new initiatives designed to promote increased competitiveness or closer customer intimacy,
getting other channel constituents to go along can be difficult. According to Rangan, there are three
critical impediments to channel change.

1. Unless there is an overwhelming channel power player, influencing the behavior and policies of a
community of independent companies is complex. Besides constantly changing and recalibrating
the strategic and performance targets of each channel member, there are also legal restrictions,
contractual commitments, potential relationships with other delivery intermediaries, competitive
practices, and marketplace conventions that make change difficult.
2. When channel changes are initiated, they are often undertaken by a single player. While a channel
master possesses the power to mandate and orchestrate an initiative such as RFID, most channels
do not have strong centralized leadership driving and coordinating improvements. Changes are
normally seen as local, with no one overseeing the impact on overall channel capabilities,
competitive positioning, and customer relations.
3. Because channels are opportunistic and voluntary, the operating conventions that do arise over
time tend to get petrified. Even a strong leader often resorts to threats and admonishments
targeted at altering often decades-old ingrained systems of behavior. As a result, the changes that
are made are often realized on a local level and rarely impact channel design.

Because delivery networks by nature are difficult to change, conflict between channel players can easily
erupt. Conflict could arise over a decision to drastically change the channel, such decision to abandon
altogether retail stores in favor of a purely Internet-driven business format. Additionally, conflict can arise
over channel goal compatibility, such as moving from a low-cost, high-volume commodity focus to a
more upscale product focus. Since channels are often non-exclusive, a company could find its products
being offered by a downstream player alongside those of a direct competitor’s. Then again, conflict can
arise over lack of specific demarcation in channel roles and rights, such as the conflict between major
computer companies and their value-added resellers (VARs) who sometimes find themselves competing
for the same customer. What is worse, a network partner could assume control over the end-customer
relationship, even usurping brand identity and product pricing and promotions.

Conflict can arise between players at the same level in a channel, at different levels in a channel, and
between two or more channels that sell within the same market. Selling directly to the customer has the
effect of disintermediating downstream delivery partners; sometimes this strategy violates long-held
contracts, such as between automakers and car dealerships. For the most part, it is argued that as delivery
networks elongate and become complex, the more difficult it is for producers to control brand and pricing

29
issues. On the other hand, the more powerful a channel player, the less room network members have to
create sources of channel conflict.

Progressive supply channel networks consider conflict not as a negative, but as a force for change. Since
revenue growth and profitability is directly linked to a company’s ability to manage their delivery
network partners, identifying and quickly resolving conflict is essential to ongoing channel success. Still,
while some channel conflict can be constructive and supportive of responses to a dynamically changing
marketplace, much of it is dysfunctional. As illustrated in Figure, there are four general ways to respond
to channel conflict . At the bottom left quadrant is found channel members that avoid channel conflict.
Such channel members normally occupy a weak position or have poor negotiation representatives. Often
this strategy is followed by channel partners that do not have much invested in each other or the channel
as a whole.

On the top left quadrant is found channel members that manage conflict by being accommodating to other
channel parties. In this strategy a channel member seeks to strengthen channel relationships by expressing
a willingness to cooperate and build trust and cooperation over the long term. Channel members
following this model must be careful not to be exploited by more powerful channel members. In contrast,
channel members in the bottom right quadrant pursue a strategy of competition by taking an
uncompromising stance when channel conflict arises. The problem with this strategy is that it aggravates
the conflict, fosters distrust, and strains channel relations to the breaking point, particularly in regard to
long-term relationships.

The best form of channel conflict management is illustrated in the top right quadrant and is defined as
channel conflict collaboration. Achieving this level of channel conflict management is difficult to achieve
and involves a high degree of compromise
and willingness to engage in joint
problem- solving. There are several
methods for ensuring effective conflict
management.

Removing delivery network conflict must

be conceived as an evolutionary process.
Whether driven by a mega-channel power
or an emergent channel steward, highly
collaborative channel networks need
leadership focused on guiding and
directing changes in channel design and
management, while at the same time
ensuring customer intimacy and
profitability for all network participants.

30
Achieving Strategic Channel Collaboration

Integrating the separate and often competing interests of the independent organizations constituting a
supply channel network is a daunting task. Channel networks work best when they are able to cooperate
and resolve power and conflict issues where each channel member benefits, and link goals and strategies
so as to appear as a single, unified organization focused on total customer service. Because the interests of
channel members are often pursued separately, at cross-purposes, or, at worse, competitively,
collaboration is difficult to achieve. Strategic channel collaboration seeks to counter this challenge. While
providing benefit to the customer is the prime objective, often linked channel members do not all profit
the same way nor equally share in the cost. To make strategic channel collaboration work, all channel
members must be committed to a common objective. Each channel member must be willing to surrender
some power and to sacrifice some short-term advantages to grow the necessary long-term channel
relationships. This means that each party must develop a sense of trust: a feeling that each side is honest,
will fulfill its obligations, is sincere, is generally interested in its partners’ welfare, and will seek mutual
gains rather than just manipulation to achieve selfish gain. Collaboration also means that channel
members must risk becoming dependent on one another. Commitment to collaborative relationships
occurs over a long- term horizon, requires the active participation of channel members to keep the
relationship in place, and requires a willingness to solve conflict issues and accept power relationships
that enable collaboration to grow.

As illustrated in Figure below, there are four types of relationship that can be created between channel
members. The first type, channel awareness, is barely representative of a relationship. Parties are aware
of each other, possibly through minor channel competition, but there is little interaction. When members
trade with one another, relations are based solely on ongoing transactions, each evaluated on its own
merits. Members do not seek to explore their one-on-one business dealings by converting them into a
more committed, continuous relationship. Conflicts that arise are primarily handled through avoidance.
Parties could terminate for any reason their transactional relationship for a different party that provides
more cost savings or competitive advantage.

31
In stage 2, channel relationships, channel members seek to move their dealings with each other beyond a
transaction basis to one characterized by a more stable relationship. The goal is to seek a deeper
interaction with other channel members in the hopes of securing additional sources of competitive
advantage beyond just the buying and selling of inventories. Members begin to see synergies that can
benefit both parties. Channel planners begin to determine the costs and benefits of creating a closer
marketing channel together. Among the key discussion points are identifying regions of interdependence,
power and fairness issues, motives and expectations, and channel roles. Relationship norms begin to
emerge, information sharing becomes more open, trust begins to be established, and boundaries of risk
begin to be defined. However, the budding relationship can be easily cancelled, especially if channel
conflict grows.

In stage 3, channel cooperation, channel members begin to experience significant mutual benefit and high
performance from their partner relationships. A deeper sense of trust and interdependence enables each
partner to increase risks associated with exploring new markets and products. Cooperation relating to
inventory flows, new product introduction, sharing of customer data, pricing and promotions, marketing
information, and other elements grows. Contracts and agreements increase relationship stability and goal
congruence, while establishing the boundaries for the exercise of channel power. Information
technologies are increasingly used to convey every-day, as well as, critical events to planners on each
side. Channel conflicts are managed by accommodation.

Stage 4, channel collaboration, represents the highest stage of channel network relationship. Each party
feels that they have a substantial investment in the success of the channel network. They not only do not
fear, but see their interdependence as providing extended resources and innovative ideas for marketplace
growth. The robust cooperation ensures a high level of shared values and competitive strategies. Each
party regards the relationship as long-term, views other partners as if they were an extension of the home
business, and collaboratively engages in joint projects where new ideas are discussed, new products and
processes tested, and costs shared. A growing history of collaborative success provides a strong desire for
continuity maintained through robust communications and trust. Conflicts are resolved by compromise
and joint-problem solving.

It is important to note that while a lot of time, understanding, and commitment is needed to build a
collaborative relationship, unfortunately it could also experience quick dissolution or a long drawn out
death due to disinterest or a failure to maintain consensus. Many events could spark a decline in
cooperation: management changes, competitive pressures, arrival of breakthrough products,
dissatisfaction that causes one party to hold back investment and resource sharing, faltering
communications, and others. Many collaborative relationships decline simply because one party takes the
other for granted or one party simply decides they want to free themselves to pursue other opportunities.

When they work, channel network relationships generate significant competitive advantage and
outperform weaker channels. But not all channel members must engage in a collaborative relationship to
be successful. In fact, because of the nature of the business environment, companies may find the risk is
too great and they can generate better results with more traditional channels. According to Coughlan et al,
channel alliances are more likely to hold together when:

1. One partner has special needs that can be satisfied by another channel member.

32
 2. The other channel member has the resources and capabilities to meet those needs.
3. Each side faces barriers to exiting the relationship.

The first two conditions create the basis for mutual value add, which is the foundation of collaborative
channel relationships. One channel member feels that its interests are best served through a strategic
alliance to the exclusion of other possible network parties. The third condition is necessary to prevent one
partner from exploiting the other. Simply, the level of mutual dependence and past record of high
marketplace performance is so great that the partners prefer to explore ways of keeping it together rather
than dissolving the relationship. In the end, collaborative relationships must “mature, grow, and develop
into a valuable asset.” They cannot be built quickly. Effective relationship building “requires persistence,
resources, and patience.”

33
 Learning Activity

INSTRUCTIONS:

To answer your learning activity go to Google Classroom. Be carefull on what you click, you are only entitled to one take only.

Goggle Classroom: Learning Activity link:

https://docs.google.com/forms/d/e/1FAIpQLSd4Qs7n8Km4lxm2z0fg4rfoSz6sNSAXddRHvs34OnnQSkM
BcQ/ viewform?usp=sf_link

ESSAY:
1. Why do businesses establish supply and distribution channel networks?
2. What are the four critical design considerations that guide channel design?
3. What are the three distribution channel attributes used in channel planning?
4. How do channel networks add value?
5. What are some of the detailed design factors that will influence channel design?
6. A key factor in channel design is the level of desired channel dependency. What are the four
types of channel dependencies?
7. If a company decided on a distribution channel where it distributed directly to the customer, how
would the decision impact the following channel service objectives: customer service level,
product assortment, product availability, delivery time, channel complexity, inventory,
transportation, and facilities?
8. Describe some of the micro-factors influencing channel design.

34
CASE STUDY
Selecting Distribution Channels
It was only about 20 years ago that most banks typically only used one distribution channel (their
branches). However, since that time they have dramatically expanded the number of channels that they
use. Below is a list of common distribution channels for a bank. Your task is to identify the most
appropriate mix of channels for two different banks.

ACTIVITY/TASK
 The first bank is a major bank that has an extensive number of branches throughout Australia.
One of the key aspects of their positioning is that they offer great personal service. Select the five
most suitable channels for them.
 The second bank is new to Australia. They have no branches and have very little brand awareness
in the market. Their plan is to specialize in offering great value home loans only. Select the five
most suitable channels for them.

Direct channels Direct channels Indirect channels

Mobile managers (who visit the Enable transactions through third-
Branches
customer) party retail stores
Personal Banker (staff who
Phone (a call center) Utilize mortgage/loan brokers
directly look after customers)
Utilize investment
Phone (an automated system) Direct mail
advisers/financial planners
Get referrals from real estate
Internet banking Email
agents and accountants
Generate sales/referrals via
ATM’s Mobile phone messages
independent internet sites

QUESTIONS
1. What are the most suitable distribution channels for each bank?
2. Is your selection of channels relatively similar or different between the two banks?
3. Therefore, what role does ‘place’ (distribution channels) play in a firm’s overall strategy
and marketing mix?

Reference: https://www.greatideasforteachingmarketing.com/selecting-distribution-channels/

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