BUSINESS MARKETING CHANNEL PARTICIPANTS

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CHAPTER 7

• BUSINESS MARKETING CHANNEL PARTICIPANTS

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Important Topics of this Chapter

• Business Marketing Channel Members.
• Business Channel Strategy.
• Differences Between Business and Consumer
  Channels.
• Roles and Functions of Channel Intermediaries.
• Direct and Indirect Channels.
• Channel Cooperation.
• Channel Conflict.
• Channel Width.

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Business Marketing Distribution Channel Members

• Channel members A set of independent companies
  that form cooperative buyer-seller relationships
  involving transactions (such as raw material,
  components, process materials, and finished goods
  for resale), all leading to getting a particular
  product line to the final user.
• It is important that each channel member see its
  competition not as the other companies that make
  its particular materials, but as the alternative
  channels that can supply equivalent finished
  products to the final user.
• Cooperation, coordination, and strategically
  acting in the best interests of the channel are
  key. If the channel loses business to a
  competitive source of supply, then all channel
  members lose.

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Business Marketing Distribution Channel Members
(cont.)

• Where a producer has alternative channels of
  distribution available, the marketers challenge
  is to
• Select the channel (or combination of channels)
  that provides best coverage, provides best
  service to target segments, and meets revenue
  objectives of the organization.
• Remember that title-taking intermediaries (i.e.,
  distributors) are customers of the producer, not
  just providers of a distribution service.
• The study of distribution channels involves
  relationships between channel member companies.
  Dont confuse this with physical distribution,
  which involves the actual flow of materials.

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Business Channel Strategy

• Channel Strategy
• Segmentation and targeting according to products
  specifications
• Develop channel strategy to match the product
  with the segment
• Channel Objectives
• Low cost channel operations
• Control of channel
• Closer relationships-partnering

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Business Channel Strategy (Cont.)

• Sales effort
• Service and technical assistance
• Market feedback
• Company image
• Channel Options
• Direct channel
• Indirect channel
• Selecting Appropriate Channels

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Business Channel Strategy (Cont.)

• Selecting Intermediaries
• Industrial distributors
• Manufacturers representatives
• Establishing Channel Arrangement
• Sales territory.
• Provisions about returns.
• Discounts.
• Advertising arrangements.
• FOB.
• Termination procedures.
• Implementation
• Control and Evaluation (MIS)

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Differences Between Business and Consumer Channels

• Short and direct
• 70-75 direct sales
• Dominated by manufacturers
• Partnering relationships are common
• Two major intermediaries
• Industrial distributor.
• Manufacturer representatives.
• Selection of intermediaries is rational
• Inventory requirement is extensive
• Personal selling and major accounts are very
  common

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Functions of the Channel Intermediary

• Buying An intermediary buys products for resale
  to other intermediaries or to final business
  users.
• Selling An intermediary with a capable sales
  force supported by established warehouse
  distribution centers, which is already serving
  other product needs of a wide user customer base,
  would be a valuable channel addition.
• Storing An inventory commitment is composed of
  products to satisfy customer purchase
  requirements in a timely manner.
• Transporting A vast array of transportation
  alternatives are available for intermediaries to
  use to manage the physical flow of the product
  to the business user.

(continued)
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Functions of the Channel Intermediary

• Sorting Most intermediaries buy in large
  quantities and then sort (breaking of bulk)
  shipments into smaller lots (often in
  combinations) for resale to business users.
• Financing Intermediaries may invest in
  inventory, sell and deliver merchandise to
  business user, and provide credit terms, then
  finance the exchange process.
• Risk taking Because of obsolescence and
  deterioration, risk is inherent in the ownership
  of inventory additional risk comes from
  uncollectable customer accounts.
• Providing market information Importance of
  continuous and accurate flow of market
  information concerning final user needs, pricing
  conditions, competitive conditions, and user
  satisfaction is critical to the success of the
  channel.

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Business Channel Systems

• Direct Channel
• Field salespeople
• Regional sales office.
• Inside salespeople
• Use for straight re-buy customers.
• Telemarketing
• Direct marketing.
• Catalogs
• No personal contacts.
• National or major accounts
• Important customers.
• Indirect Channels
• Industrial distributors-independently owned and
  owned title
• Specialists
• Specialize in one product 50 or more.
• Generalists
• Industrial supermarkets.
• The combination house.

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Direct Distribution Channel

• Example As a first-tier component supplier to
  automotive OEMs, Rockwell Automation Inc. may
  contract to supply BMW USAs annual usage of
  wheel bearings. The requirement may include
  several sizes, each in 50,000 to 100,000
  quantities. This Rockwell would sell direct. A
  Rockwell salesperson would call on BMW to review
  its requirements, coordinate purchase
  transactions, and maintain the relationship.

Images courtesy of Rockwell Automation
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Indirect Distribution Channels

• Example Rockwell also produces similar wheel
  bearings that are used in automotive repair shops
  and to repair industrial material handling
  equipment. Individually these quantities are too
  small to be attractive but in total the
  quantities are quite high. In this case, Rockwell
  sells through a distributor, such as W.R.
  Grainger.

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Repair and Maintenance Market
BMW
Direct distribution
Indirect distribution
Rockwell Automation Inc.
(car image courtesy of BMW USA)
(continued)
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BMW
Both BMW and Grainger would be important
customers of Rockwell, probably purchasing
millions of dollars worth of bearings each year.

Rockwell Automation Inc.
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Internet Direct Distribution Channel

• At some point, Rockwell may decide that software
  technology exists to allow it to sell to small
  users directly over the Internet. Rockwell may
  then stop using the distributor, or alternatively
  use it for additional intensive distribution.
• It is not unusual for industrial Internet buyers
  to be required to use company credit cards (such
  as American Express). That removes the necessity
  for a company like Rockwell to assess credit and
  set up an account for a small dollar purchase.
  Still, a company like Grainger has an advantage
  in direct Internet sales that Rockwell does not.
  What is it?

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Graingers advantage is one-stop shopping, which
means convenience for the customer.

• Grainger is the nation's leading
  business-to-business distributor of maintenance,
  repair, and operating (MRO) supplies and related
  information. Its customers have access to over
  560,000 products available to them through
  on-line ordering, phone ordering, and stopping by
  branch locations.
• Rockwell Automation Inc. may agree that Grainger
  will be its exclusive distributor in the state of
  South Carolina.
• That is, of course, except for BMWs South
  Carolina assembly plant, which Rockwell will
  supply directly.

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Business Channel Intermediaries

• Industrial distributors
• 15-20 of sales to farm supplies, construction
  and mining, professional equipment, lumber and
  plywood, plumbing and heating, and industrial
  machinery and equipment.
• Product is standardized.
• Gross margin is low.
• Unit value is low.
• Frequent purchases.
• Order size is small.
• Decentralized market.
• Short lead time.
• Low purchasing effort.

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Business Channel Intermediaries (cont.)

• How industrial distributor serves
• Establish sales force
• Locally owned and operated
• Stock goods in their warehouses
• Extend credit
• Good source for feedback
• Lower costs to customers
• delivery/inventory service.
• Limitations
• Difficult to control.
• Bad management.
• Handle competitors products.
• Low inventory level.
• Major accounts create problems.
• Inadequate service.

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Business Channel Intermediaries (cont.)

• Distributors Trend
• Will be more specialized and larger
• Merger and acquisition will take place small
  ones will merge with larger ones to be
  competitive
• Closer relationship(partnership) with
  manufacturers
• Manufacturers Representative
• Do not own title
• independent sales person
• They can be seen in consumer market

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Business Channel Intermediaries (Cont.)

• Sales through manufacturers representatives
• Electronic parts and equipment, coal, plumbing
  and heating, industrial machinery and equipment
• market is not big enough for a full-time sales
  person
• Gross margin is not large enough
• Manufacturers want quick entry in a new market
• Product is a part of package of other products
• Manufacturer is new in the market and can not
  support full time sales people

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Business Channel Intermediaries (Cont.)

• Service of manufactures representative
• they have contacts provide immediate entry to
  the market.
• represent more than one manufacturers and wide
  group of products.
• they serve better for seasonal products because
  they work on commission.
• provides full representation if manufacturers can
  not support full time sales person.
• if company is not financially strong, they are
  the most qualified technical people.
• provides more stable sales presence.

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Business Channel Intermediaries (Cont.)

• Limitations of manufacturers representatives
• lack of specialized care of products.
• difficult to get feedback and service.
• they do not carry any inventory.
• poor representatives have little value.
• Manufacturers representatives trends
• they will be larger and more important if
  manufacturers are willing to reduce cost of
  selling.

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Channel Transaction Facilitators

• Do not take title or carry inventory, but rather
  provide services such as storage, transportation,
  or arranging of sales.
• Independent warehouses, carriers, and
  manufacturers representatives fall into this
  category.
• Can be very important to the success of the
  channel.

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Partnering Relationships

• Dependence and influence to each other.
• Conflict of interest
• Intensity, duration and frequency.
• Coordination and communication.
• Trust and cooperation.
• Satisfaction.

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Channel Cooperation

• It is what the channel members expect from each
  other in the long run.
• Missionary sales person.
• Participating in the planning function
• Promotional aid.
• Acting as a management consultant.

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Channel Conflict

• Channel conflict may result when channel members
  have mutually exclusive values, interests, or
  goals. Manufacturers may want control of
  distribution channels for better execution of
  their marketing strategies, whereas
  intermediaries may not see the manufacturer-determ
  ined strategies as in their best interest.

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Problem Areas in Manufacturer-Intermediary
Relationship

• Service and technical assistance
• House accounts
• Inventory levels
• Marketing information and feedback
• Training and support services
• Other product lines carried
• Other manufacturer-supplied channels competing
  with intermediary
• Prices and discounts

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Channel Conflict Revisited

• Whether between channel members or between
  channel members and channel transaction
  facilitators, potential conflict is reduced by
• Relationship building and team management
• Team-building efforts
• Clear and complete contracts

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Conflict Resolution (A)

• As the senior (manufacturers) marketer involved,
  resolve the following
• The manufacturers rep who sells your products to
  IBM has been so successful that her commissions
  (7.5 of gross sales) now exceed your company
  presidents compensation.
• It is not clear in the contract whether
  commissions would end if the relationship ends.

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Conflict Resolution (B)

• As the senior (manufacturers) marketer involved,
  resolve the following
• Your company is a 200 million (annual)
  manufacturer of electric motors.
• You have an exclusive distribution agreement with
  a multibillion dollar distributor with many
  distribution centers and sales branches
  throughout the U.S. and Canada.
• Your distributor is in the process of dictating
  to you the prices it will pay, the inventory it
  will carry, and the service it will provide to
  customers.

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Types of Channel Width

• Intensive distribution Gain access to as many
  resellers as possible within a particular
  geographic area.
• Selective distribution Distribute product to
  limited number of resellers in a particular
  geographic region highly chosen based on
  distinctive capabilities and high-quality
  service.
• Exclusive distribution Only one channel member
  can sell a manufacturers products in a given
  geographic area.

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International Distribution Channels

• Domestic agents-do not take title
• domestic middlemen who sell to foreign buyers
• Domestic merchants-take title, but not
  necessarily possession
• He does not have power, but work for foreign
  manufacturer