Chapter 3
Supply Side Channel Analysis:
Channel Flows and Efficiency Analysis
Key Topics for Ch. 3
I. Review: Three Examples of Service Output Demand
I. High Tech Product
II. Peapod (Online grocery shopping)
III. Charles Schwab
II. Channel Flows
III. Channel Efficiency Analysis: Efficiency Template
SERVICE OUTPUT DEMAND TEMPLATE
SERVICE OUTPUT DEMAND:
SEGMENT
NAME/
DESCRIPTOR
BULK
BREAKING
SPATIAL
CONVENIENCE
DELIVERY/
WAITING
TIME
ASSORTMENT/
VARIETY
OTHER SOD(s)
1.
2.
3.
4.
5.
INSTRUCTIONS: If quantitative marketing-research data are available to enter numerical ratings in each cell,
this should be done. If not, an intuitive ranking can be imposed by noting for each segment whether demand for
the given service output is high, medium, or low.
Ex 1) B2B CHANNEL SEGMENTS FOR A NEW HIGH-TECH PRODUCT
Lowest Total
Cost/ Pre-Sales
Info Segment
5
Responsive
Support/ Post-Sales
Segment
4
Full-Service
Relationship Segment
References and
Credentials Segment
6
25
Financial Stability and
Longevity
4
4
5
16
Product Demonstrations &
Trials
11
10
8
20
Proactive Advice &
Consulting
Responsive Assistance
During Decision Process
10
9
8
10
14
9
10
6
4
1
18
3
Lowest Price
32
8
8
6
Installation and Training
Support
10
15
12
10
Responsive Problem Solving
After Sale
8
29
10
3
Ongoing Relationship with a
Supplier
1
11
15
1
100
100
100
100
16%
13%
61%
10%
Possible Service
Output Priorities
References and Credentials
One-Stop Solution
Total
% Respondents
= Greatest Discriminating Attributes
= Additional Important Attributes
IDEAL CHANNEL SYSTEM FOR B2B SEGMENTS BUYING A
NEW HIGH-TECH PRODUCT
Manufacturer
(New High Technology Product)
Associations,
Events,
Awareness
Efforts
Pre-Sales
Dealers
Sales
TeleSales/
TeleMktg
VARs
Internal Support
- Install, Training &
Service Group
Post-Sales
Full-Service
Responsive
Support
Source: Reprinted with permission of Rick Wilson, Chicago Strategy Associates, 2000.
References/
Credentials
ThirdParty
Supply
Outsource
Lowest
Total
Cost
Example 2) PEAPOD GROCERY SHOPPING STEPS
Who Performs This Step In:
Shopping Process Step
A Standard Grocery
Store Shopping Trip:
A Peapod Shopping
Experience
Plan what to buy (prepare
shopping list)
Shopper
Shopper
Travel to grocery store
Shopper
PEAPOD
Walk aisles of store
Shopper
PEAPOD
Pick grocery items one by
one
Shopper
PEAPOD
Check-out process
Shopper
PEAPOD
Bag groceries
Shopper
PEAPOD
Transport groceries home
Shopper
PEAPOD
Unpack groceries
Shopper
Shopper
THREE CHANNEL SEGMENTS FOR GROCERY SHOPPING
Range of Service
Outputs Demanded
Purchase process easy
to find, select & buy
Purchases are
delivered to home
Information on product
usage/ needs planning
Fast and efficient
buying process
Information on
comparing and
choosing
Ability to see, touch
and inspect products
Absolute lowest prices
Experience provides
social interaction
Place sells specific
brands desired
Percent who are
heavy Internet users
Segment's Relative Importance of Service Output
"Branded Products
"Low
"Fast/Efficient
Delivered"
Price/Comparisons"
Purchase Process"
HIGH
HIGH
Moderate
VERY HIGH
Low
Low
Low
HIGH
Low
HIGH
Low
VERY HIGH
Moderate
VERY HIGH
Low
Moderate
Moderate
HIGH
Moderate
Low
VERY HIGH
VERY HIGH
Low
Low
VERY HIGH
Moderate
Moderate
44%
23%
31%
Source: 2000 Chicago Strategy Associates. Used with permission of Rick Wilson.
THREE CHANNEL SEGMENTS:
VALUE OF HOME DELIVERY
On a 10 point scale
(1 = lowest importance and 10 = highest importance)
Importance of home
delivery in creating ideal
grocery shopping
experience…
Improvement in having
groceries delivered to
your home would make
shopping more ideal…
Low Price and
Efficiency Segments
Home Delivery
Segment
1.8
7.4
3.8
6.7
Source: 2000 Chicago Strategy Associates. Used with permission of Rick Wilson.
Example 3) SCHWAB: SERVICE OUTPUT DEMANDS
FOR MUTUAL FUND INVESTORS
Bulk-Breaking
Spatial
Convenience
Delivery/Wait
Time
Minimum
investment
amount
Ease of initiating
transactions and
transfers
between fund
families and
consequent
transfer costs
Initiation/
execution time
(including
between fund
families)
Assortment of
funds offered to
investors
Amount of
investment
advice required
before sale of
mutual fund
DIY Sophisticated
Investor
Varies
High
High
High
Low
ServiceDemanding
Sophisticated
Investor
Varies
Medium
High
High
High
Varies (likely to
be smaller)
Low
Low
High
High
SOD defined as:
Unsophisticated
Investor
Assortment/
Variety
Pre-Sale Service
Source: Carmichael, Trent, Bill Norris, Rob Rozwat, and Emiko Taguchi (1996), "Charles Schwab OneSource: Channel Audit."
Used with permission of the authors.
SCHWAB: SERVICE OUTPUTS SUPPLIED BY
DIFFERENT CHANNELS FOR THE MUTUAL FUND INDUSTRY
Bulk-Breaking
SOD defined as:
Minimum
investment
amount
Direct Sales by
Mutual Fund
Family
Medium/High
Spatial
Convenience
Delivery/Wait
Time
Ease of initiating
transactions and
transfers
between fund
families and
consequent
transfer costs
Initiation/
execution time
(including
between fund
families)
Low
Assortment/
Variety
Pre-Sale Service
Assortment of
funds offered to
investors
Amount of
investment
advice required
before sale of
mutual fund
High (within
family)
Low (between
families)
High (most
families offer a
variety of funds)
Low
Traditional
Brokerage and
Investment
Advisors
Low
Low
Medium/High
High
High
Mutual Fund
Supermarket
High
High
High (both within
and between
families)
High
Low
Source: Carmichael, Trent, Bill Norris, Rob Rozwat, and Emiko Taguchi (1996), "Charles Schwab OneSource: Channel Audit."
Used with permission of the authors.
FIGURE 1.2: MARKETING FLOWS IN CHANNELS
Producers
Physical
Possession
Ownership
Physical
Possession
Ownership
Physical
Possession
Ownership
Promotion
Promotion
Promotion
Negotiation
Negotiation
Negotiation
Financing
Financing
Financing
Wholesalers
Retailers
Risking
Risking
Risking
Ordering
Ordering
Ordering
Payment
Payment
Payment
Consumers
Industrial
and
Household
Commercial Channel Subsystem
The arrows above show flows of activity in the channel
(e.g. physical possession flows from producers to wholesalers to retailers to consumers).
Allocating Five Marketing Functions in an
Automobile Channel*
Exhibit 3.1
Physical
Function
Transporters
Suppliers
Warehouses
Manufacture
r
Title Function
Suppliers
Manufacturer
Payment
Function
Suppliers
Transporter
s
Warehouse
s
Banks
Manufacture
r
Dealers
Transporters
Dealers
Banks
Dealer
s
Custome
r
Banks
Information Function
Suppliers
Promotion
Function
Suppliers
Transporter
s
Warehouse
s Banks
Advertising
Agency
Manufacture
r
Manufacture
r
©McGraw-Hill Companies, Inc. 2002
Transporter
s
Warehouse
s Banks
Advertising
Agency
Dealer
s
Dealer
s
Custome
r
Transporter
s Banks
Custome
r
Customer
Custome
r
12
MARKETING FLOWS IN CHANNELS
Each flow carries a cost. Some examples of costs of various flows are given
below:
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
Example 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;
CDW turns its inventories 2x per month;
CDW has no debt.
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.
Example 2: PEAPOD SHOPPING AND FULFILLMENT
PROCESS: ORIGINAL CHANNEL STRUCTURE
ACTIVITY:
1. Shopper connects to Peapod system:
n
shops
n
Places order
n
Specifies 90-minute delivery
window
2. Peapod server receives order, places in
queue to shop
3. Order is transmitted to professional
Peapod shoppers in the Jewel food store
4. Order is shopped inside Jewel food
store*
*Out-of-stocks are replaced with second
choice if shopper has specified one during
the online shopping step.
FLOW (performer):
ORDERING (shopper)
ORDERING (Peapod)
PROMOTION (Peapod, via data storage)
ORDERING (Peapod)
PHYSICAL POSSESSION (Jewel 
Peapod)
Continued on next slide
Example 2: PEAPOD SHOPPING AND FULFILLMENT
PROCESS: ORIGINAL CHANNEL STRUCTURE
ACTIVITY:
5. Peapod pays Jewel for order
6. Peapod packs order in temperatureappropriate delivery containers
7. Peapod delivery person delivers
order to shopper:**
n
unloads bags at shopper's door
n
accepts payment
n
accepts coupons (if any)
** If errors are discovered in the
order, Peapod assumes responsibility for
correcting them.
FLOW (performer):
FINANCING (Jewel  Peapod)
RISKING (Jewel  Peapod)
OWNERSHIP (Jewel  Peapod)
PAYMENT (Peapod  Jewel)
PHYSICAL POSSESSION (Peapod)
OWNERSHIP (Peapod)
RISKING (Peapod)
PHYSICAL POSSESSION (Peapod 
Shopper)
OWNERSHIP (Peapod  Shopper)
PAYMENT (Shopper  Peapod)
PHYSICAL POSSESSION (Shopper)
OWNERSHIP (Shopper)
8. Shopper unloads and puts away groceries
Example 3: SCHWAB: IDENTITIES AND ROLES OF
COMPANIES INVOLVED IN “PRODUCING” MUTUAL FUNDS
Investment
Advisor (product
design)
Fund Administrator
(management,
administrative services
to fund)
Mutual Fund
Family
("Producer")
Custodian (asset custody,
safekeeping, transfer)
Fund Distributor
(underwriting,
manages the
marketing and
promotion functions)
Transfer Agent (maintain
records of fund ownership,
process and record share
purchases and
redemptions)
Flows Performed by Various Entities:
Investment Advisor: promotion (through portfolio design)
Fund Administrator: negotiation (through management of administrative processes)
Fund Distributor: promotion (through performance of selling and marketing tasks)
Custodian: physical possession, risking (through responsibility for safekeeping of shares)
Transfer Agent: ordering, payment (through responsibility for processing orders and recording share
purchases/redemptions)
FIGURE 4.4: SCHWAB STRUCTURE OF MUTUAL FUND DISTRIBUTION CHANNELS
Producers (including all entities in Figure 4.3):
"Independent" Fund
Managers
(Kaufmann, Gabelli,
Wasatch)
"Direct" Mutual Fund Company
(Fidelity, Vanguard, T. Rowe
Price)
12b-1 Fees: 0.250.35%
Intermediaries:
Annual Fees: 1.0-1.5%
Loads: low to high
Mutual Fund
"Supermarket"
Annual Fees: 1.0-1.5%
Loads: none to low
Consumers:
Do-It-Yourself Investor
"Indirect" Mutual Fund
Company
(Putnam, Kemper, Franklin)
Banks & Trusts
(Bankers Trust, Northern
Trust)
Sales Commission: Sales Load or 12b-1
Fees
Registered Investment
Advisor (RIA)
Annual Fees: 1.0-1.5%
Loads: 3.0-5.0+%
Advisory Fee: 1.02.0%
Brokers
Annual Fees: 1.01.5%
Loads: 3.0-5.0+%
Advisory Fee: 1.03.0%
Retail Bank
Annual Fees: 0.9-1.25%
Loads: 3.0-5.0+%
Unsophisticated Investor
Service-Demanding Investor
FIGURE 3-4: THE BULLWHIP EFFECT
Consumption
Customer
Retailers
Wholesalers
Manufacturers
Source: Based on the lecture notes of Enver Yücesan at INSEAD.
Suppliers
The Efficiency Template
I. Purpose
II. Firm Perspective (cf. SOD)
III. Focus: Benefit Versus Cost of Each Channel Activity
IV.Need a Template for Each Channel
V. Include End-Users in the Analysis
VI.For your exercise,
FIGURE 3-3: THE EFFICIENCY TEMPLATE
WEIGHTS FOR FLOWS:
COSTS
*
BENEFIT
POTENTIAL
(High,
Medium, or
Low)*
FINAL
WEIGHT*
PROPORTIONAL FLOW PERFORMANCE OF
CHANNEL MEMBER:
1
2
3
4
(end-user)
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.
TABLE 3.APP3A-1
BUILDING MATERIALS COMPANY EFFICIENCY TEMPLATE FOR
CHANNEL SERVING END-USERS THROUGH RETAILERS:
(UNDISGUISED DATA)
WEIGHTS FOR FLOWS:
PROPORTIONAL FLOW PERFORMANCE OF
CHANNEL MEMBER:
COSTS
BENEFIT
POTENTIAL
(High, Medium,
or Low)
FINAL
WEIGHT
Mfgr.
Retailer
End-user
(Contractors)
TOTAL
PHYSICAL
POSSESSI
ON
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: RANKORDER DATA (0-3)
WEIGHTS FOR FLOWS:
PROPORTIONAL FLOW PERFORMANCE OF
CHANNEL MEMBER:
COSTS
BENEFIT
POTENTIAL
(High, Medium,
or Low)
FINAL
WEIGHT
Mfgr.
Retailer
End-user
(Contractors)
TOTAL
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:
PROPORTIONAL FLOW PERFORMANCE OF
CHANNEL MEMBER:
COSTS
BENEFIT
POTENTIAL
(High, Medium,
or Low)
FINAL
WEIGHT
Mfgr.
Retailer
End-user
TOTAL
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