Chapter

12
Designing Channel Systems

SDM- Ch 12 Tata McGraw Hill Publishing 1

 Channel Design Factors
• Product mix and nature of the product
• Width and depth of market / outlet coverage
planned
• Long term commitments to channel partners
• Level of customer service planned
• Cost affordable on the channel system
• Channel control requirements of the company

Steps….
SDM- Ch 12 Tata McGraw Hill Publishing 2
 Channel Design Steps
• Define customer needs
• Clarify channel objectives
• Look at alternative systems which can
meet these objectives
• Estimate cost of operating the channel
system
• Evaluate available alternatives
• Finalise the ‘ideal’ system
SDM- Ch 12 Tata McGraw Hill Publishing
Customer needs….
3
 Channel Design Process
Similar to any other marketing task

Segmentation

Positioning

Focus

Development
SDM- Ch 12 Tata McGraw Hill Publishing 4
 Segmentation
• Putting customers in similar clusters based
on their needs
– Doctors who prescribe medicines
– Chemists who dispense medicines
– Hospitals and nursing homes who use them
• Each segment has a different need to be
serviced by the channel
• Gives an idea to the sales manager as to the
kind of channel members he should be
planning for.
SDM- Ch 12 Tata McGraw Hill Publishing 5
 Positioning
• Defines the channel element required to
service each of the segments
– The sales manager decides the channel partner
who is ‘ideal’ to meet the expectations of the
segments.
– The number of each category of intermediary is
also decided based on the number of customers to
be serviced in each segment.
– The service objectives and flows for each channel
partner are also frozen
SDM- Ch 12 Tata McGraw Hill Publishing 6
 Focus
• It may not be possible to meet the
needs of all segments – cost and
practicality considerations (the
managerial talent available for instance)
• The sales manager has to firmly decide
which of the segments he will service
• The competitive scenario also helps in
this decision

SDM- Ch 12 Tata McGraw Hill Publishing 7

 Development
• At this stage the channel system is being put
in place to achieve the objectives
• Select the best of the alternatives
– Comparison with the most successful competitor
could be a good benchmark
• Channel partners of competitors may be
willing to share best practices of their
principals
• For modifying an existing channel, the gap
between the ideal and the existing is to be
identified for remedial action.
SDM- Ch 12 Tata McGraw Hill Publishing 8
 Evaluation Critieria
• Cost:
– If existing sales force can be expanded cost
effectively, this is the best alternative
– Cost of alternatives at different volumes can only
be estimated for comparison
– System with the lowest cost is preferred
• Adaptability – the channel should be flexible
to handle different types of markets and
changes in the market conditions
• Volume and range to be handled – Capable
even when business grows or expands
SDM- Ch 12 Tata McGraw Hill Publishing 9
 Evaluation Criteria
• Ability to manage and control:
• Distribution network being an extended arm of
the company, the channel partners have some
obligations
• Operating guidelines specify these rules
• The channel system should help the company
enforce these rules fairly to all channel partners
• Some of the operating rules are……
• Company trains channel personnel and
provides proper product literature
SDM- Ch 12 Tata McGraw Hill Publishing 10
 Selecting Channel Partners
• Getting good channel partners is a difficult
part of doing business
• Some of the methods employed to select
channel partners are:
– Sales people identify prospects and talk to them
– Press advertising (industrial goods)
– Existing channel partners can give good
references
– Competitors’ channel members for reference, not
poaching

SDM- Ch 12 Tata McGraw Hill Publishing 11

 Selection Criteria
• Qualitative: willingness, confidence in
company products, willingness to abide
by company rules, building company
image, innovativeness etc
• Quantitative: financial status,
infrastructure, location, present
businesses, customer relationships,
market standing etc
SDM- Ch 12 Tata McGraw Hill Publishing 12
 Chapter
13
Channel Management

SDM- Ch 13 Tata McGraw Hill Publishing 13

 Channel Management
• Is in three broad phases:
– Use of power bases
– Identifying and resolving channel conflicts
– Channel co-ordination

Use of power….
SDM- Ch 13 Tata McGraw Hill Publishing 14
 Channel Power French & Raven

“Power” of Motivation
• Reward – incentives for good performance
• Coercion – threat of punishment for non-
performance
• Referent – benefit of sheer association with a
strong company
• Legitimate – arising out of a contract
• Expert – specialized knowledge
• Support – additional benefits for better
performers only
• Competition – created between channel
partners
Countervailing power…
SDM- Ch 13 Tata McGraw Hill Publishing 15
 Countervailing Power
• Balances the power exerted by one channel
member. It is not a one-sided equation.
• Both the channel member and the principal
can have influence on each other.
• Results from interdependence within the
channel system.
– Company exerts power on the distributor to get its
coverage and revenues
Examples

– Distributor has enough influence on his customers

and this is critical for the company also
– Weaker partners do get exploited – ancillary units
SDM- Ch 13 Tata McGraw Hill Publishing 16
Co-ordination…
 Channel Conflicts
• Conflict is generated when actions of any
channel member come in the way of the
system achieving its objectives
• Three broad categories of channel conflict
are:
– Goal conflict – understanding of objectives by
various channel members is different
– Domain conflict – understand responsibilities and
authority differently
– Perception conflict – reading of the market place is
different and proposed actions vary

SDM- Ch 13 Tata McGraw Hill Publishing 17

 Types of Conflicts
• Latent Conflict:
– Some amount of discord exists but does not affect
the working or delivery of customer service
objectives.
– Disagreement could be on roles, expectations,
perceptions, communication.
• Perceived Conflict:
– Discords become noticeable – channel partners
are aware of the opposition.
– Channel members take the situation in their stride
and go about their normal business
– No cause for worry but the opposition has to be
recognized
SDM- Ch 13 Tata McGraw Hill Publishing 18
 Types of Conflicts
• Felt Conflict:
– Reaching the stage of worry, concern and alarm.
Also known as ‘affective’ conflict.
– Parties are trying to outsmart each other.
– Causes could be economical or personal
– Needs to be managed effectively and not allowed
to escalate.
• Manifest Conflict:
– Reflects open antagonistic behaviour of channel
partners. Confrontation results.
– Initiatives taken are openly opposed affecting the
performance of the channel system.
– May require outside intervention to resolve
SDM- Ch 13 Tata McGraw Hill Publishing 19
 Chapter
14
Channel Information Systems

SDM – Ch 14 Tata McGraw Hill Publishing 20

 CIS Purpose
• CIS is Channel Information Systems
• CIS is the orderly flow of pertinent operational
data both internally and between channel
members, for use as a basis of decision
making in specified responsibility areas of
channel management
• CIS is of primary use of sales managers.

SDM – Ch 14 Tata McGraw Hill Publishing 21

 Information - Advantages
• Useful in marketing planning – helps
improve quality of marketing decisions
• Can help tap market opportunities
• Provides an alert against competition
• Helps spot trends – favourable or
otherwise
• Helps develop action plans for growth
• Gives feedback on consumer needs
SDM – Ch 14 Tata McGraw Hill Publishing 22
 Classification of Information
• Based on the use made of it by marketing –
planning, operations, decision making or
control
• Based on subjects – consumers, products,
competition, channels, promotions, pricing,
sales volume, value etc
• Operations data – facts and figures
• Also based on assumptions, anticipated
occurrences – forecasts relating to the
channel system
SDM – Ch 14 Tata McGraw Hill Publishing 23
 Information Process
• Collection: acquiring and placing raw data –
monthly sales by each territory
• Processing: analyzing data to get meaning
out of it – arranging, modifying and
interpreting the data by the user –
comparison of sales between periods
• Storage: keeping the information intact till it is
needed
• Use: application of information for
management decision making – sales data of
the last 6 months to forecast the sales of the
next month.
Development….
SDM – Ch 14 Tata McGraw Hill Publishing 24
 Developing a Channel MIS
Decide what information is required

Organize information in a manner suitable

for interpretation and action

Decide who will use the information

when and for what purpose

SDM – Ch 14 Tata McGraw Hill Publishing 25

 A Good Channel MIS…
• Integrated system to handle all regular data
• Useful decision support system
• Reflects the style of the marketing
organization
• User friendly and user oriented
• Convincing to the providers of the info as to
its purpose
• Be cost effective
• Not need for verification from other sources
• Be fast and totally reliable

SDM – Ch 14 Tata McGraw Hill Publishing 26

 Channel Performance
Evaluation

SDM – Ch 14 Tata McGraw Hill Publishing 27

 Distributor Evaluation
• Once a month by the sales people on
the performance of the previous month
on all agreed criteria
• Criteria varies with the category of
channel member, nature of the product
and the nature of customers.

SDM – Ch 14 Tata McGraw Hill Publishing 28

 Evaluation
• Each of the primary criteria can be
given a weightage and performance
scores worked
Criteria Weightage Criteria Weighted
%-X score (1 to score X*Y
10) - Y
Sales target achievement 50 7 3.50
Inventory management 15 8 1.20
Selling resources 15 7 1.05
Market coverage 10 8 0.80
Back office support 10 6 0.60

SDM – Ch 14 Overall performance score – 7.15

Tata McGraw Hill Publishing 29
 Evaluation
• Each of the primary criterion can be broken down
into it components and also rated.

Criterion Weightage Score 1 Weighted

%-X to 10 - Y score X*Y
Primary sales 15 8 1.20
Secondary sales 50 7 3.50
Achievement of secondary 20 7 1.40
sales target
Sales growth by period 10 8 0.80
Market share achievement 5 6 0.30
Sales target achievement – 7.20
Performance score
SDM – Ch 14 Tata McGraw Hill Publishing 30
 Evaluation Overall Rankings
Channel Overall performance Ranking
member score
A 7.39 1
B 7.20 2
C 7.15 3
D 6.89 4
E 6.56 5
F 5.60 6
SDM – Ch 14 Tata McGraw Hill Publishing 31
 Chapter
15
Market Logistics & Supply Chain
Management

SDM – Ch 15 Tata McGraw Hill Publishing 32

 Materials Management
• Materials forms the largest single cost item in
most manufacturing companies – needs to be
carefully managed
• Materials management function includes
planning and control, purchasing and stores
and inventory control
• Materials management is the precursor to
logistics and supply chain management
Logistics……
SDM – Ch 15 Tata McGraw Hill Publishing 33
 Logistics Defined
• Logistics means having the right thing, at
the right place, at the right time
• The procurement, maintenance, distribution
and replacement of personnel and materials
– Webster’s Dictionary
• The science of planning, organizing and
managing activities that provide goods or
services – Logistics World, 1997

SDM – Ch 15 Tata McGraw Hill Publishing 34

 Logistics
• Functions: planning, procurement,
transportation, supply and maintenance
• Processes: requirements determination,
acquisition, distribution and conservation
• Business: science of planning, design and
support of business operations of
procurement, purchasing, inventory,
warehousing, distribution, transportation,
customer support, financial and human
resources
SDM – Ch 15 Tata McGraw Hill Publishing 35
 Components of LOG
Management
Logistics Activities
Input Output
Customer service
Demand forecasting
Distribution
• Marketing
• Natural
Communications Orientation
Resources Inventory control (competitive
(land, facilities Materials handling
Advantage)
Equipment) Order processing
• Time and
• HR Parts and service support
• Finance
Plants and warehouse selection Place utility
Procurement • Efficient move
• Information Packaging
Return goods handling to customer
Salvage and scrap disposal
Traffic and transportation
Warehouse and storage

SDM – Ch 15 Tata McGraw Hill Publishing 36

 Links and Flows
General material flow/ service flow

Information flow

Information flow

Customer’s Supplier’s
Customer Lead Firm Supplier
customer supplier

General cash flow

Outbound / Downstream logistics Inbound / Upstream logistics

SDM – Ch 15 Tata McGraw Hill Publishing Source: ICFAI 37

 Source: Michael Porter

The Value Chain

S Company Infrastructure
U
P Organisation, people, methods
margin
P
Systems & technology
P
O
R Procurement
T

Inbound Outbound Marketing Service

Operations
logistics logistics & sales

margin

SDM – Ch 15 Tata McGraw Hill Publishing 38

Primary activities
 Logistics Plan Outline
• Internal analysis (current position)
– Organisation
– Human resources
– Transportation
– Relations with internal customers
– Quality of product
– Quality of Service
• External / situation analysis
– Competitor logistics performance
– Trends
– External environment / economy
– Public, private and contract warehouse
– Public, private and contract carriage
SDM – Ch 15 Tata McGraw Hill Publishing 39
 Logistics Focus Areas

Customer service related Operations related

Packaging Plant and warehouse site
Order processing location
Spare parts and service support Procurement
After sales Customer service Inventory control
support Materials handling
Demand forecasting Salvage and scrap disposal
Distribution communications Traffic and transportation
Return goods handling Warehousing and storage

Logistics may be confined to the company whereas SCM extends beyond

SDM – Ch 15 Tata McGraw Hill Publishing 40

 Supply Chain Integration
Customer Analysis
Order Fulfillment
Purchasing/Supplier
Partnering

Integrated Inventory Management and

control
Storage & Supply Chain
Transportation Management

Demand & Lead

Manufacturing/ Time Management
Re-manufacturing/
Assembly
Materials
Inventory management…
SDM – Ch 15 Management
Tata McGraw Hill Publishing 41
 Why Carry Inventory?
• Support production requirements
• Support operational requirements
• Maximize customer service – ensure
availability when needed – protect
against uncertainty
• Hedge against marketplace uncertainty
• Take advantage of order quantity
discounts
SDM – Ch 15 Tata McGraw Hill Publishing 42
 Functions of Inventory
• Inventory serves as a buffer between:
– Supply and demand
– Customer demand and finished goods
– Requirements for an operation and the
output from the previous operation
– Parts and materials to begin an operation
and the suppliers of the materials

The shock absorber of business !

SDM – Ch 15 Tata McGraw Hill Publishing 43
 Categories of Inventory
• Anticipation – built in anticipation of future
demand – peak season, strike, promotion
• Fluctuation (safety) – to cover random,
unpredictable fluctuations in supply and
demand and lead time – to prevent disruption
in operations, deliveries etc
• Lot-size – to take advantage of quantity
discounts, reduce shipping, set up and
clerical costs – also called cycle stock
SDM – Ch 15 Tata McGraw Hill Publishing 44
 Categories of Inventory
• Transportation – pipeline or movement
inventories – to cover the time needed to
move from one point to another – factory to
distribution point for example
• Hedge – for materials where prices are
volatile
• Maintenance, repair and operating supplies
(MRO) – to support M and O – spare parts,
lubricants, consumables etc
SDM – Ch 15 Tata McGraw Hill Publishing 45
 Types of Inventory
• Obvious….
– Raw materials
– Work-in-process
– Finished goods – of primary concern to
marketing
– Maintenance, repair and operating (MRO)
supplies
– In-transit, pipeline
Performance measures…
SDM – Ch 15 Tata McGraw Hill Publishing 46
 Types of Inventory Systems
• Pure Inventory – when and how much to
order. RM procurement. Simple
manufacturing operations
• Production Inventory – finite production
rates. Demand fluctuation. Products compete
for manufacturing capacity
• Production – distribution Inventory –
compete for production capacity. Geographic
placement of inventory for best service of
demand
SDM – Ch 15 Tata McGraw Hill Publishing 47
 Types of Classification
• ABC category – most common for all
• HML - high, medium, low - similar
• FSND – fast moving, slow moving, non-
moving, dead – spare parts / FG
• SDE – scarce, difficult, easy to obtain –
procurement / Spares
• GOLF – govt, ordinary, local, foreign source –
procurement / Spares
• VED – vital, essential, desirable – spare parts
/ FG
• SOS – seasonal, off-seasonal - commodity
SDM – Ch 15 Tata McGraw Hill Publishing 48
 ABC Inventory Analysis
• Based on Pareto’s law:
– A – 20% items worth 80% of value
– B – 30% items worth 15% of value
– C – about 50% items account for 5% of the usage
• Classify items based on the above criteria
• Apply degree of control in proportion to the
importance of the group

SDM – Ch 15 Tata McGraw Hill Publishing 49

 Inventory Related Costs
• Unit costs – basic value of the item carried
• Ordering costs – generating and sending a
material release, transport, any other
acquisition costs
• Carrying costs – capital, storage,
obsolescence
• Stock-out costs
• Quality costs – non-conforming goods
• Other costs – duties, tooling, exchange rate
differences etc
SDM – Ch 15 Tata McGraw Hill Publishing 50
 Reasons for Warehousing
Service related
Maintain source of supply
Support customer service
policies
Meet changing market
conditions
Overcome time and space
differentials
Support JIT programs of
suppliers and customers
Provide customers with the right
mix of products at all times
Temporary storage of materials
to be disposed or re-cycled
SDM – Ch 15 Tata McGraw Hill Publishing
Cost related
Achieve production economies
Achieve transportation
economies
Take advantage of Quantity
Purchase discounts and forward
buys
Least Logistics cost for a
desired level of customer
service
51
 Transportation

SDM- Ch 12 Tata McGraw Hill Publishing 52

 Chart of Relative Merits
Parameter Weight Rail Road Air Water Pipe Rope
age line way
Speed 30 5 6 8 4 3 3
Versatility 10 6 8 5 6 3 2
Reliability 20 6 8 5 5 7 4
Availability 10 7 8 5 6 3 2
Continuity of 10 6 7 5 5 8 3
service
Distribution cost 20 4 5 6 6 7 8
Total score 10 5.4 6.7 5.1 5.1 5.1 4.0
Overall ranking 10 2 1 4 5 5 6

SDM – Ch 15 Tata McGraw Hill Publishing 53

 Chapter
16
International Sales & Distribution
Management

SDM-Ch 16 Tata McGraw Hill Publishing Ltd 54

 CHOOSING THE MARKET

• Factors to be borne in mind while choosing markets:

• Size of the market

• Language & Culture of the market
• Competition in the market
• Proximity of the market
• Political and Financial stability of the country
• Ease of doing business

SDM-Ch 16 Tata McGraw Hill Publishing Ltd 55

 LEGAL ASPECTS OF INTERNATIONAL
BUSINESS
• Laws vary from country to country – there is no
“international law”
• Important to know the local laws to do business – on
investment, management, employment, marketing,
pricing, royalties, profit repatriation, taxation etc
• Developed countries have stringent laws on safety,
pollution, intellectual property rights etc.
• In times of disputes, which law will prevail – this
needs to be spelt out in contracts

SDM-Ch 16 Tata McGraw Hill Publishing Ltd 56

 RISKS IN INTERNATIONAL BUSINESS

• Two main risks in international business:

• Political risks – involve disruption of contracts

or payments due to sudden political changes,
expropriation of businesses etc

• Commercial & Financial risks – failure of the

buyer to pay due to bankruptcy or sudden
changes in the exchange availability or rate.

SDM-Ch 16 Tata McGraw Hill Publishing Ltd 57