Sales & Distribution Management

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Designing Channel System & Selecting A channel Partner

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Flow of presentation
Channel design factors Channel planning process Channel design steps Choice channel of distribution A Check list for selecting the most Appropriate Channels Selecting Channel Partners Training Channel Members Motivating Channel Members Channel Members Evaluation Channel Comparison Factors Channel design Implementation Vertical Integration Outsourcing Distribution
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Definitions:
Channel System: The channel system is the
bridge between the manufacturer & the ultimate customer of the products or the services offered by the company.

Channel Partner: The channel partner facilitate

change of title of the products from the manufacturers to the consumers. They place an order on the manufacturers, buy the products & pass it on to the customers.

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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

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Channel Planning Process

Segmentation

Positioning

Focus

Development
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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.

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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

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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.

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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.
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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

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Customer Needs
Lot size most convenient pack size which the consumer can buy at a time Waiting time time elapsed between the desire to buy the product and the time when he can actually buy it should be almost zero Variety choice of products, brands, packs Place utility choice of buying where he wants. For a consumer product it has to be at a location closest to his residence
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Channel Design Components

Revenue generation or the commercial part Physical delivery of the goods or services the logistics part The service part to take care of after-sales support Each part of the system is likely to be handled by a different entity.

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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

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Channel Objectives
Defines what the channel system is supposed to do to support customer service. Customer needs could include:
Lot size convenience Minimum waiting time Variety and assortment Place utility

The product characteristics and the market profile also impact the objectives. Competition could also affect the objectives
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Examples of Channel objectives

Category of product Channel objectives

Industrial/Technology
Consumer Products Frozen desserts/ ice cream Fertilizers, pesticides Pharma products House construction items

Direct Marketing
Large no. of distributer, wholeseller,retailer Cold chain channel system Rural based channel ststem May required different set of partners Distributors of hardware

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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

Cost of operations Ability to manage and control Adaptability Range and volume to be handled

Criteria for evaluation

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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 Cost element of channel member includes:
Margins of the channel partners Cost of transportation Cost of order booking and execution Cost of stock returns Cost of reverse logistics required
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Evaluation Criteria
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 Ability to manage and control: The channel system should help the company enforce these rules fairly to all channel partners Company trains channel personnel and provides proper product literature

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Kinds of Distribution Channels

Manufacturer Customer (Bata,dell,perishable goods) Manufacturer Retailer Customer (refrigerator,TV,washing machine, type writer etc.) Manufacturer Wholesaler Retailer Customer (groceries,drugs,cosmetics)

Choice Channel of Distribution

Market Consideration Product Consideration Middlemen Consideration Other financial consideration

Market Consideration
Customer or Industrial Market Number & location of Buyers Size of Order Customer buying habits

Product Consideration
Unit value (Industrial goods) Perishability (Vegetables, Fruits, Bakery) Bulk & weight (Coal, Stones, Bricks) Standardization (Microsoft) Technical nature (Automobile) Product line (Dabur, HUL) Age of product(MTS, Uninor, Aircel)

Middlemen Consideration
Availability Attitudes Services Sales potentials Costs

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Other financial consideration

Level of investment (Eg:-FMCG,Durables)
Inventory management (Eg:-carring cost, insurance,
warehouse space, property cost etc.)

Debtor management

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A Check list for selecting the most Appropriate Channels

Product factor Market factor Institutional factor

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Product Factor
Physical nature Technical nature Length of product line (HUL VS. P&G) Market position

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Market Factor
Existing market structure Nature of the purchase deliberation Availability of the of the channel

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Institutional factor
Financial ability of the channel members Promotional ability of the channel members Post-sales service ability

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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 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.

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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

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ROI as a Measure
Leading FMCG companies feel that an ROI of 30% for a distributor is healthy and is a fair indication that he is performing well. If the ROI is more, additional tasks are given If the ROI is less, the company may provide additional support Post evaluation tasks include counseling, retraining and motivating. In extreme cases it may result in termination.

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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

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Channel Design Comparison Factors

Efficiency Effectiveness Capacity Flexibility / Agility Consistency Reliability Integrity

Channel Design Implementation

Define Criteria for appointment of channel partner. Document channel objectives for salespeople & channel partner. Define the profile of the customers to be serviced. List down all the customer service levels in detail. List the tasks in sequence which will drive these service levels. Get benchmark of good practices from knowledge of competitors. Define channel structure & channel partners who constitute it. Allocate the tasks among the channel partners. Workout cost of delivering CS levels & prepare a budget. Advice the channel partners on the tasks & their benefits. Define channel partner performance appraisal system & share it. List down Reports, Records & Frequency from each channel partner.

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

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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 Brooke Bond India - Case

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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.

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Non-store Retailing
Selling door-to-door Vending machines Tele-shopping networks Selling through catalogs Other forms of direct selling Electronic channels

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Retailing on the Internet

Unlimited assortment Items may not be on hold No Product touching or feeling is possible 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