Chapter 3 Supply Side Channel Analysis: Channel Flows and Efficiency Analysis

OUTLINE
Channel Flows Customizing Flows Channel Efficiency Template Zero !ase" Channel #esign E$uity %rinciple &ho '(OUL# !e in the Channel) 'ingle or #ual Channel

Channel Flows
8 generic flows
Physical Possession Ownership Promotion Negotiation Financing Risking Ordering Payment

Costs
'torage* "eli+ery* sustaina!ility In+entory* 'hipping* Loss 'elling* a"s* promos* pu!lic relations* pu!licity, Time* legal costs* templates* contracts Cre"it terms* terms* con"itions of sale* ris-s %rice guarantees* warranties* insurance* repair* after sale support.ser+ice* reputation /"ministration* technology* time %rocessing* collection* !a" "e!t ser+icing

FIGURE 3-1:

AR!E"I#G F$%&S I# C'A##E$S

%hysical %ossession Ownership %romotion Negotiation %ro"ucers Financing 0is-ing Or"ering %ayment &holesalers Financing 0is-ing Or"ering %ayment %hysical %ossession Ownership %romotion Negotiation 0etailers Financing 0is-ing Or"ering %ayment %hysical %ossession Ownership %romotion Negotiation Consumers In"ustrial an" (ousehol"

Commercial Channel 'u!system

The arrows a!o+e show flows of acti+ity in the channel 1e2g2 physical possession flows from pro"ucers to wholesalers to retailers to consumers32 Each flow carries a cost2 'ome e4amples of costs of +arious flows are gi+en !elow5 ar(etin) Flow Physical possession Ownership Promotion Negotiation Financing is!ing Ordering Payment Cost Represented Storage and delivery costs Inventory carrying costs Personal selling, advertising, sales promotion, publicity, public relations costs, trade show costs Time and legal costs Credit terms, terms and conditions of sale Price guarantees, returns allowances, warranties, insurance, repair, and after"sale service costs Order"processing costs Collections, bad debt costs

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Customizing Flows
It is possi!le to remo+e interme"iaries an" thus minimize profit

sharing* howe+er* the flow must continue somehow:

Loo- at clumping flows to one mem!er Loo- at splitting flows to su! flows an" su! mem!ers I8%O0T/NT CON'I#E0/TION'5
0ecogniza!le channel mem!ers Channel Layout matches Channel Cost.Usage /ccounts for all the rele+ant costly flow acti+ities

Channel Efficiency Template Flows

Is use" to "escri!e5 a2 The types an" amounts of wor- "one !y each channel mem!er in the performance of the mar-eting flows2 !2 The importance of each channel flow to the pro+ision of "eman"e" consumer ser+ice outputs c2 The resulting share of total channel profits that each channel mem!er shoul" reach2

FIGURE 3-*: "'E EFFICIE#C+ "E ,$A"E

#$I%&TS FO F'O#S( COSTS, +$N$FIT POT$NTI)' -&igh, *edium, or 'ow. FIN)' #$I%&T, P OPO TION)' F'O# P$ FO *)NC$ OF C&)NN$' *$*+$ ( / 0 1 2 -end"user. TOT)'

P&3SIC)' POSS$SSION,, O#N$ S&IP P O*OTION N$%OTI)TION FIN)NCIN% IS5IN% O 6$ IN% P)3*$NT

/44 /44 /44 /44 /44 /44 /44 /44

1-N7) points2 1-N7) N7) N7) N7) N7) ;TOT)' Entries in column must a"" up to <== ;; Entries across row 1sum of channel mem!ers < through >3 for each channel mem!er NO *)TI8$ N7) of proportional N7) flow performance N7) 1-must a"" up to <== points2 P OFIT ;;; Normati+e S&) $,,, profit share of channel mem!er i is calculate" as5 1final weight* physical possession3;1channel mem!er i?s proportional flow performance of physical possession3 @ , @ 1final weight* payment3;1channel mem!er i?s proportional flow performance of payment32 Entries across row 1sum of normati+e profit shares for channel mem!ers < through >3 must a"" up to <== points2

Zero !ase" Channel #esign

1.

Meets target market segments demand for ser ice o!tp!ts while" Minimi$ing the cost of performing the necessary flows for those ser ice o!tp!t demands ItAs all a!out ma4imizing profita!ility !y ma4imizing customer satisfaction,-ey, BCNO& T(E CU'TO8E0 &ELLD

#.

2 2

(O&) #efine target mar-ets* un"erstan" each target mar-etAs !uyer !eha+ior an" en" user "eman"s* meet those re$uirements with ma4imum utility an" minimum cost 1more efficiently than competitors3 E/% /N/L9'I') loo- for points of le+erage,means !y which you can increase satisfaction with a lower incremental cost (this might mean reducing one satisfaction measure that is high cost in return for satisfying more significant factors that are lower cost in total)

"A.$E 3-1: ,R%/UC" RE"UR#S: A $ARGE-SCA$E ,R%.$E

,roduct Returns: A $ar)e-Scale ,ro0le1 The value of returned goods is close to 9:4"/44 billion annually in the ;<S< #eb returns alone had value between 9/<= and 90<> billion in 0440 $stimates are that the cost of processing those #eb returns is twice as high as the merchandise value itself? ;<S< companies are estimated to spend 91> billion to more than 924 billion per year on reverse logistics The average company ta!es 14"@4 days to move a returned product bac! into the mar!et The estimated number of pac!ages returned in 0442 is >44 million Furthermore* returns are +ery significant in many in"ustries2 In a sur+ey of o+er F== re+erse logistics managers in <GGH* researchers foun" the following ranges for return percentages5

"A.$E 3-2: ,R%/UC" RE"UR#S: ,ERCE#"AGE RA#GES

Industry *agaAine Publishing Catalog etailers +oo! Publishers %reeting Cards C6" O*s Computer *anufacturers +oo! 6istributors *ass *erchandisers $lectronic 6istributors Printers )uto Industry -Parts. Consumer $lectronics *ail Order Computer *anufacturers &ousehold Chemicals

Return 3 Ran)es >4B /="1>B 04"14B 04"14B /="0>B /4"04B /4"04B 2"/>B /4"/0B 2"=B 2":B 2">B 0">B 0"1B

"A.$E 3-3: /IFFERE#CES .E"&EE# F%R&AR/ A#/ RE4ERSE $%GIS"ICS

Factor 8olume forecasting Transportation

/ifference .etween Forward and Re5erse $o)istics *ore difficult for returns than for original sales of new product Forward( ship in bul! -many of one S5;., with economies of scale< disparate S5;s in one pallet, no economies of scale< everse( ship many

Product Cuality

Forward( uniform product Cuality< everse( variable product Cuality, reCuiring costly evaluation of every returned unit< Forward( uniform pac!aging< everse( pac!aging varies with some li!e"new, some damaged D no economies of scale in handling< Forward( clear destination D to retailer or industrial distributor< everse( many options for ultimate disposition of product, necessitating separate decisions< Forward( high< everse( low, because activities are not consistently trac!ed on a unified basis<

Product pac!aging

;ltimate destination

)ccounting cost transparency

FIGURE 3-6: ,%SSI.$E ,A"'&A+S F%R RE"UR#E/ ,R%/UC"

%oor $uality pro"uct* ships as spare parts to manufacturer

0eturn for sale

8anufacturer
Inspect* gra"e
In sp ec t*

8anufacturer run 0eturn.'orting Facility

0e pa ir

0etailer
Ins p ect *

Consumer

Cey5 soli" lines "enote pro"uct to !e sal+age" for su!se$uent re+enue2 #otte" lines "enote non re+enue pro"ucing pro"uct flows2

0eturn for cre"it 0eturn for refun"

gr

a"

a! le

pr o" uc

gra "e

Thir" %arty 0eturns. 0e+erse Logistics Firm

0epaira!le pro"uct
(ig h

0epair. 0efur!ishment Facility

$ua lit

yp

ro" uct

'econ"ary 8ar-et* 7ro-er* Io!!er

Charity

E$uity %rinciple
Normati+e profit share measures that portion of the total

channel profits that each channel mem!erAs efforts generates2

Therefore* competition in channel "istri!ution shoul" !e

gi+en !ase" on +alue pro+i"e" relati+e to "egree of participation 1flawJthis can +ary !y weighting 1monopoly* limite" supply* accessi!lity3

Type of Channel)
#o you use interme"iaries at all) #o you select a retail or non retail channel

partner)

#ecisions shoul" !e !ase" on the a!ility of that

channel type to meet the en" userAs ser+ice output "eman"s regar"ing any positi+e or negati+e impacts that type coul" ha+e on other ser+ice output "eman"s

'ingle or #ual Channel

#ual #istri!ution J whenever more than one channel coexists in a market Criteria5
#eman" K segmentation
Users with "iffering ser+ice output "eman"s

'upply K cost
/ctual cost to "istri!ute in that manner

Coor"ination
Increase" conflict* o+erhea"* management,e4clusi+ities*

con"itions

IN T(E EN#
The chosen channel structure must help to meet targeted segments expressed demands for service outputs while looking at economies of scope, scale and inherent efficiencies.