Relational Capital

1
Relational Capital
Lecture 5 in IC Series

• Managing Distribution Channels

2
The 4 Ps of Marketing

• Product policy
• Promotion (advertising)
• Pricing
• Place (distribution channels)
• In this lecture we focus on how goods get from
  producer to end-user and how accounting and other
  measurement tools can be used in the process

3
Distribution channels

• Two definitions
• The paths goods and title to these goods
  follow from the producer to consumer
• Structures through which goods and services move
  from the producer to the consumer

4
Multiple levels possible

• Direct distribution

5
Conventional indirect

• One channel

Customer
Producer
Retailer
ExampleAutomobiles
6
Conventional indirect

• Two channel

Grocery storePharmacy
7
Conventional indirect

• Three channel

Customer
Producer
Whole-saler
Retailer
Agent/Broker
8
Relationships, Roles, Conflicts

• Most channel members have little control over
  other members and there is no formal way to
  assign roles and resolve conflicts

9
Vertical Distribution

• Unified system to end conflict that results from
  independent channel members pursuing their own
  objectives
• Corporate
• Combines successive stages of production and
  distribution under single ownership
• Administered
• Channel dominated by one powerful member who acts
  a channel captain
• Contractual (NEXT SLIDE)

10
Vertical Distribution

• Contractual
• Channel coordinated through contractual
  agreements among channel members
• Wholesaler-sponsored voluntary chains
• Retail cooperative
• Franchise system
• Dual/multiple distribution systems also possible

11
Distribution is part of marketing mix
12
Key distribution management responsibilities from
AICPA Module

• Establishing channel objectives
• Designing and establishing channel systems
• Evaluating channel systems
• Modifying channel systems
• Managing channel conflict
• Selecting and terminating channel members
• Evaluating channel members

13
1. Establishing channel objectives

• Typically include
• Desired level of customer service
• Functions that channel members should provide
• Basis for evaluating overall channel success
• Example Our channel objective for Best Pens is
  to ensure that at least 50 of the quality
  stationary stores who handle quality pens in the
  10 to 95 range will carry the minimum
  assortment of 25 pens covering the complete range
  from 10 to 95.

14
2. Designing and establishing channel systems

• Control options
• Franchised
• Contracted independents
• Uncontracted independents

• Channel options
• Variety
• Directness
• Novelty
• Density

15
2. Designing and establishing channel systems
(options)

• D. Density how many distributors or retailers
  to use in an area?
• Exclusive
• Selective
• Intensive

16
2. Designing and establishing channel systems

• Services often require DIRECT channels due to
• Intangibility
• Inseparability
• Client relationship
• Perishability
• Fluctuating demand

17
2. Designing and establishing channel systems

• In the long-run, channel systems must provide the
  right balance of service and cost
• Other senior management objectives might include
• loyalty to certain distributors
• earning a hurdle rate of return
• limiting legal exposure

18
2. Designing and establishing channel systems

• Example Shell Chemical
• Problem operating cost structure high in
  relation to competition
• Shell determined that it was critical to
  simultaneously examine customer value as well as
  customer needs

19
Shell Example, cont

• Process
• Benchmarking
• Research on customer needs
• Identify customer groups
• Translate research into mission
• Match product/service offerings to user needs
• Mission Statement
• Short-term targets
• Result
• Different channels for different customer groups
• Channels became partners in meeting customer needs

20
Evaluating Distribution System

• 1. Evaluate and compare the channels used to
  deliver the product or service 3
• 2. Evaluate entities that are part of a
  particular channel 7

21
3. Evaluating channel systems

• Regular review important
• Markets change
• Products change over their life cycle
• Usual evaluation measures include
• Channel effectiveness
• Channel productivity
• Channel profitability

22
3. Evaluating channel systems

• Regular review important
• Markets change
• Products change over their life cycle
• Usual evaluation measures include
• Channel effectiveness
• Channel productivity
• Channel profitability

23
7. Evaluating channel members

• Differentiate between controllable and
  uncontrollable factors
• Commonly used techniques
• Contribution analysis
• Weighted factor analysis
• Compliance profiles
• Market share performance index

24
Examples

• You can see the examples a lot more clearly in
  the Excel file provided
• In the contribution analysis, the profitability
  index (or profit index) is determined by the
  following formula

Profit index
Annual intermediary controllable marginNet sales
100
25
Contribution Analysis
26
Weighted Factor Analysis
27
Weighted Factor Analysis
Lets take a closer look at the computation for
Distributor 1
28
Compliance Profile
This is the easiest one mathematically!
29
Analysis

• In comparing distributors or distribution
  channels, we could graph them similar to the
  customer graphs discussed or possibly using other
  schemes

30
Supply Chain Management

• Relational capital for networks between company
  and its suppliers and distributors

31
Supply chain vs distribution channel management
depends on where you are!
Distribution channel management
Supply chain management
32
Bullwhip effect
33
Supply chain collaboration
34
Role of supply chain

• Support the overall competitive strategy and
  goals of the corporation
• Examples of strategies
• Low cost provider
• Leading-edge products
• Brand dominance
• Customer service

• Contrast
• The Gap
• Wal-Mart

35
Whats involved in SCM?

• Operational level
• Materials handling
• Issuing purchase orders
• Materials requirement planning
• Releasing work orders
• Taking customer orders
• Strategic level
• Supply chain planning
• Minimize total supply chain costs while
  maintaining desired customer service levels

36
Local optimization ? overall optimum

• Supply Chain Planning (SCP) involves assessing
  trade-offs across entire supply chain
• Three areas must work together
• Supply Chain Management (SCM)
• Customer Relationship Management (CRM)
• Product Life-Cycle Management (PLM)

37
Supplemental readings

• Making the Supply Chain Management Business
  Case by Scott Hadley, Strategic Finance, April
  2004, pp. 29-34
• Supply Chain Collaboration Making Sense of the
  Strategy Continuum by Matthias Holweg, Stephen
  Disney, Jan Holmstrom, and Johanna Smaros,
  European Management Journal, Vol. 23, No. 2, pp.
  170181, 2005
• New not on e-reserve but available thru library

38
HW 7

• Get MsWord File with instructions
• This assignment asks you to evaluate distributors
  given a set of facts. Similar to question on the
  Fall 2003 Exam 2.
• You have my Excel sheet examples to follow in
  preparing your analysis.
• Due Tuesday Apr 26
• WILL BE GRADED IN CLASS no late assignments
  accepted.

39
HW 8 9

• There are a total of 3 HW assignments on the new
  material that will be on final exam.
• You must do at least 2 of the 3.
• I will drop the lowest of the three if you do
  all three.