Designing Distribution Channels

Sales and Distribution Management

Channel Design Factors

Product mix and nature of the product Location and nature of the customer Level of customer service planned Nature of competition

Channel control requirements of the company

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

Finalize the ideal system

Channel Design Process

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.

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

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

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.

Channel Design Issues

Activities required and who will perform Activities relationship to service levels Number of channel members required and the relationship between categories Roles, responsibilities, remuneration and appraisal of performance of channel members

Alternatives

Channel Alternatives
Are planned after deciding the customer segments to be serviced and the levels of service Business intermediaries currently available like C&FAs, distributors, dealers, agents wholesalers and retailers. The number and type of intermediaries required Developing new channel types Roles of each channel member

Evaluation of Major Alternatives

Evaluation Criteria
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

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

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

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

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

Training & Motivation

Training Channel Members

Starts from the time of recruitment Channel member owner and his staff Market views channel member as part of the company he has to behave in a like manner hence training assumes significance Training could be on the job field training or classroom training Training is an ongoing process.

Subjects for Training

Field training on how the markets are to be worked to achieve sales, collect payments and ensure the right kind of merchandising Class room training on company products, competition and how to tackle it to gain market shares Special meetings for new product launches

Submitting reports and maintaining records

Statutory compliance

Subjects for Training

Care of company products Technical specifications and answering FAQs of customers For technical and industrial products recognition of specs, installation procedure, repair and maintenance and effective demonstrations Servicing of automobiles and other engineering products

Motivating Channel Members

Ambitious volume and growth targets continuous motivation required to achieve Motivation includes:
Capacity building programs Training Promotions support Marketing research support Working with company personnel Incentives

Power of Motivation
Reward positive support Coercion- threat of punitive action Referent positive effects of association Legitimate enforcing a contract Expert support of special knowledge Support additional benefits for performers Competition pitting against peers

Channel Members Evaluation

Effectiveness of the distribution channel determines the success of the company Company would like its channel partners to perform at the highest standards possible Need to constantly evaluate performance on sales targets, coverage, productivity, inventory holdings, attending to servicing requests etc

Performance Evaluation
On pre-agreed tasks only. No surprises. Specific targets on periodical basis are set.
Targets on volume and outlet productivity could be for a week or a month Targets relating to increasing market shares or total outlet coverage could be for 6 months

Different weightages could be given for each of the parameters for evaluation

The performance appraisal is open and transparent

Steps for Modifying Networks

Service level desired and willing to deliver Activities required to deliver service level, who will do it and at what cost

Derive ideal channel structure and compare with existing to know gaps by evaluating based on standard parameters relating to effectiveness and efficiency
Action to bridge the gaps and put modified channel system into place Define key performance indicators

Channel Comparison Factors

Efficiency Effectiveness Scalability Flexibility Consistency Reliability Integrity

Implementation

Vertical Integration
This means owning the channel. The company does the work of production, branding and distribution. Downstream integration means the producer of the goods also does the distribution Eureka Forbes, Bata

Vertical Integration
Upstream integration means the seller also produces the goods private labels of modern retailers. If the organization does the work of production, branding and distribution, it is said to be vertically integrated. Vertical Integration provides better control over the distribution function

Outsourcing Distribution
Is the most prevalent situation as:
The reach is better The cost may be lower

The company can exploit the core competence of its channel partners, which is distribution

Vertical integration is a choice which will become long term and cannot be easily changed once the resources have been committed. However, direct distribution (owning the channel) is still the best solution for intensive distribution.

Non-store Retailing
Selling door-to-door Vending machines Tele-shopping networks Selling through catalogs

Other forms of direct selling

Electronic channels

Retailing on the Internet

Unlimited assortment Items may not be on hold No product touch or feel More information makes the customer a better shopper Comparison shopping possible Consumer has to plan purchases ahead No need to handle cash payment can be on-line Shopping is 24X7

Thank You