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Distribution Channel Management
Chapter 3
Supply Side Channel Analysis:
Channel Flows and Efficiency Analysis
Chapter 3 Outlines
Learning Objectives
• Be able to define the eight generic channel flows that characterized
costly and value-added channel activities.
• Understand how the efficiency template helps codify channel flow
performance by channel and channel participant.
• Understand the role of channel flow allocation in designing a zero-based
channel.
• Understand how channel flow performance leads to appropriate
allocation of channel profits among channel members using the equity
principle.
• Be able to place the channel flow analysis in the overall channel audit
process.
• Know how to use the efficiency template with little available information.
Channel Flows
The meaning of Channel Flows
“The activities or functions that produce the service outputs
demanded by end-users”
FIGURE 3-1: MARKETING FLOWS IN CHANNELS
Eight Generic Channel Flows
The arrows above show flows of activity in the channel (e.g. physical
possession flows from producers to wholesalers to retailers to consumers).
Channel Flows
Every flow not only contributes to the production of valued
service outputs but also carries an associated costs.
Marketing Flow
Cost Represented
Physical possession
Storage and delivery costs
Ownership
Inventory carrying costs
Promotion
Personal selling, advertising, sales promotion,
publicity, public relations costs, trade show costs
Negotiation
Time and legal costs
Financing
Credit terms, terms and conditions of sale
Risking
Price guarantees, returns allowances, warranties,
insurance, repair, and after-sale service costs
Ordering
Order-processing costs
Payment
Collections, bad debt costs
TABLE 3-1: CDW’S PARTICIPATION IN VARIOUS CHANNEL FLOWS
Channel Flow
CDW’s Investment in Flow
Physical
possession
(a) CDW has a 400,000 sq. ft. warehouse.
(b) CDW ships 99 percent of orders the day they are received.
(c) For CDW’s gov’t buyers, CDW has instituted an “asset tagging” system that lets buyer track what product is
going where; product is scanned into both buyer and CDW databases, for later ease in tracking products (e.g. for
service calls)
(d) CDW buys product in large volumes from mfgrs., taking in approximately eight trailer-loads of product from
various suppliers every day. Loads are received in bulk, with few added services.
Promotion
(a) CDW devotes a salesperson to every account (even small, new ones!), so that an end-user can talk to a real
person about technology needs, system configurations, post-sale service, etc.
(b) Salespeople go through 6½ weeks of basic training, then 6 months of on-the-job coaching, then a year of monthly
training sessions.
(c) New hires are assigned to small-business accounts to get more opportunities to close sales.
(d) Salespeople contact clients not through in-person sales calls (too expensive), but through phone/e-mail.
(e) CDW has longer-tenured salespeople than its competitors.
Negotiation
(a) CDW-G started a small-business consortium in 2003 to help small firms compete more effectively for federal IT
contracts. What CDW-G gives the small biz partner: lower prices on computers than they could otherwise get;
business leads; and access to CDW’s help desk and product tools; CDW also handles shipping and billing, reducing
the small biz partner’s channel flow burden. What the small biz partner provides: access to contracts CDW could
not otherwise get.
Financing
(a) CDW collects receivables in just 32 days;
Risking
(a) “We’re a kind of chief technical officer for many smaller firms”:
(b) In April 2004, CDW was authorized as a Cisco Systems Premier (CSP) partner, in serving the commercial
customer market.
CDW turns its inventories 2x per month;
CDW has no debt.
Channel Flows
Inventories are stocks of goods or the components
used to make final goods.
Inventories exist for several reasons:
• Demand surges outstrip production capacity
• Economies of scale exist in production or in transportation
• Transportation between points of production and points of
consumption takes time
• Supply and demand are uncertain
TABLE 3-2: PRODUCT RETURNS: A LARGE-SCALE PROBLEM
Product Returns: A Large-Scale Problem
The value of returned goods is close to $60-100 billion
annually in the U.S.
Web returns alone had value between $1.8 and $2.5
billion in 2002
Estimates are that the cost of processing those Web
returns is twice as high as the merchandise value itself!
U.S. companies are estimated to spend $35 billion to
more than $40 billion per year on reverse logistics
The average company takes 30-70 days to move a
returned product back into the market
The estimated number of packages returned in 2004 is
500 million
TABLE 3-3: PRODUCT RETURNS: PERCENTAGE RANGES
Returns are very significant in many industries. In a survey of over 300
reverse logistics managers in 1998, researchers found the following
ranges for return percentages:
Industry
Magazine Publishing
Return % Ranges
50%
Catalog Retailers
18-35%
Book Publishers
20-30%
Greeting Cards
20-30%
CD-ROMs
18-25%
Computer Manufacturers
10-20%
Book Distributors
10-20%
Mass Merchandisers
4-15%
Electronic Distributors
10-12%
Printers
4-8%
Auto Industry (Parts)
4-6%
Consumer Electronics
4-5%
Mail Order Computer Manufacturers
2-5%
Household Chemicals
2-3%
FIGURE 3-2: POSSIBLE PATHWAYS FOR RETURNED PRODUCT
Poor quality product, ships as spare parts to manufacturer
Return for sale
Manufacturer
Return for credit
Inspect, grade
In
sp
ec
t
Manufacturer-run
Return/Sorting
Facility
Re
pa
ir
,g
ra
de
ab
le
pr
od
uc
Retailer
Return for refund
Ins
pec
t, g
r ad
e
Third-Party Returns/
Reverse Logistics Firm
Repairable product
Hig
h-q
ua
lity
Consumer
t
Repair/
Refurbishment
Facility
pro
duc
t
Secondary Market,
Broker, Jobber
Charity
Key: solid lines denote product to be salvaged for subsequent revenue. Dotted lines denote
non-revenue-producing product flows.
TABLE 3-4: DIFFERENCES BETWEEN FORWARD AND REVERSE LOGISTICS
Factor
Difference Between Forward and Reverse Logistics
Volume
forecasting
More difficult for returns than for original sales of new
product
Transportation
Forward: ship in bulk (many of one SKU), with economies
of scale. Reverse: ship many disparate SKUs in one pallet,
no economies of scale.
Product quality
Forward: uniform product quality. Reverse: variable
product quality, requiring costly evaluation of every
returned unit.
Product
packaging
Forward: uniform packaging. Reverse: packaging varies
with some like-new, some damaged – no economies of scale
in handling.
Ultimate
destination
Forward: clear destination – to retailer or industrial
distributor. Reverse: many options for ultimate disposition
of product, necessitating separate decisions.
Accounting cost
transparency
Forward: high. Reverse: low, because activities are not
consistently tracked on a unified basis.
The Efficiency Template
The efficiency template is a tool to measure the costs
borne and the value added by each channel member
in its performance of channel flows.
The efficiency template is used to describe:
• The types and amount of work done by each channel
member
• The importance of each channel flow
• The resulting share of to channel profits
FIGURE 3-3: THE EFFICIENCY TEMPLATE
WEIGHTS FOR FLOWS:
COSTS*
BENEFIT
POTENTIAL
FINAL
WEIGHT*
PROPORTIONAL FLOW PERFORMANCE
OF CHANNEL MEMBER:
1
2
3
(High, Medium,
or Low)
4
(enduser)
TOTAL
PHYSICAL
POSSESSION**
100
OWNERSHIP
100
PROMOTION
100
NEGOTIATION
100
FINANCING
100
RISKING
100
ORDERING
100
PAYMENT
100
TOTAL
100
N/A
100
NORMATIVE
PROFIT
SHARE***
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
100
* Entries in column must add up to 100 points.
** Entries across row (sum of proportional flow performance of channel members 1 through 4) for each channel member must add up
to 100 points.
*** Normative profit share of channel member i is calculated as: (final weight, physical possession)*(channel member i's proportional
flow performance of physical possession) + … + (final weight, payment)*(channel member i's proportional flow performance of
payment). Entries across row (sum of normative profit shares for channel members 1 through 4) must add up to 100 points.
Using Channel Flow Concepts to design
A Zero-Based Channel
A zero-base channel is an optimal channel being
designed from scratch.
A zero-base channel design is one that
a) meets the target market segment’s demand for service
outputs,
b) At minimum cost of performing the necessary channel
flows that produce those service outputs.
FIGURE 3-4: THE BULLWHIP EFFECT
Consumption
Customer
Retailers
Wholesalers
Manufacturers Suppliers
Source: Based on the lecture notes of Enver Yücesan at INSEAD.
The Efficiency Template
The efficiency template is a tool to measure the costs
borne and the value added by each channel member
in its performance of channel flows.
The efficiency template is used to describe:
• The types and amount of work done by each channel
member
• The importance of each channel flow
• The resulting share of to channel profits
TABLE 3.APP3A-1
BUILDING MATERIALS COMPANY EFFICIENCY TEMPLATE FOR
CHANNEL SERVING END-USERS THROUGH RETAILIERS:
UNDISGUISED DATA
WEIGHTS FOR FLOWS:
COSTS
BENEFIT
POTENTIAL
(High, Medium,
or Low)
PROPORTIONAL FLOW
PERFORMANCE OF
CHANNEL MEMBER:
FINAL
WEIGHT
Mfgr.
Retailer
End-user
TOTAL
PHYSICAL
POSSESSION
30
High
35
30
30
40
100
OWNERSHIP
12
Medium
15
30
40
30
100
PROMOTION
10
Low
8
20
80
0
100
NEGOTIATION
5
Low/Medium
4
20
60
20
100
FINANCING
25
Medium
29
30
30
40
100
RISKING
5
Low
2
30
50
20
100
ORDERING
6
Low
3
20
60
20
100
PAYMENT
7
Low
4
20
60
20
100
TOTAL
100
N/A
100
N/A
N/A
N/A
N/A
NORMATIVE
PROFIT SHARE
N/A
N/A
N/A
28%
39%
33%
100
TABLE 3.APP3A-2
BUILDING MATERIALS COMPANY EFFICIENCY TEMPLATE FOR
CHANNEL SERVING END-USERS THROUGH RETAILERS:
RANK-ORDER DATA
WEIGHTS FOR FLOWS:
COSTS
BENEFIT
POTENTIAL
PROPORTIONAL FLOW
PERFORMANCE OF
CHANNEL MEMBER:
FINAL
WEIGHT
Mfgr.
Retailer
End-user
TOTAL
(High, Medium,
or Low)
PHYSICAL
POSSESSION
30
High
35
2
2
2
100
OWNERSHIP
12
Medium
15
2
2
2
100
PROMOTION
10
Low
8
1
3
0
100
NEGOTIATION
5
Low/Medium
4
1
2
1
100
FINANCING
25
Medium
29
2
2
2
100
RISKING
5
Low
2
2
2
1
100
ORDERING
6
Low
3
1
2
1
100
PAYMENT
7
Low
4
1
2
1
100
TOTAL
100
N/A
100
N/A
N/A
N/A
N/A
NORMATIVE
PROFIT
SHARE
N/A
N/A
N/A
?
?
?
100
TABLE 3.APP3A-3
BUILDING MATERIALS COMPANY EFFICIENCY TEMPLATE FOR
CHANNEL SERVING END-USERS THROUGH RETAILERS :
TRANSFORMED RANK-ORDER DATA
WEIGHTS FOR FLOWS:
COSTS
BENEFIT
POTENTIAL
PROPORTIONAL FLOW
PERFORMANCE OF
CHANNEL MEMBER:
FINAL
WEIGHT
Mfgr.
Retailer
End-user
TOTAL
(High, Medium,
or Low)
PHYSICAL
POSSESSION
30
High
35
33
33
33
100
OWNERSHIP
12
Medium
15
33
33
33
100
PROMOTION
10
Low
8
25
75
0
100
NEGOTIATION
5
Low/Medium
4
25
50
25
100
FINANCING
25
Medium
29
33
33
33
100
RISKING
5
Low
2
40
40
20
100
ORDERING
6
Low
3
25
50
25
100
PAYMENT
7
Low
4
25
50
25
100
TOTAL
100
N/A
100
N/A
N/A
N/A
N/A
NORMATIVE
PROFIT
SHARE
N/A
N/A
N/A
32%
38%
29%
100