“Education in Pursuit of
Supply Chain Leadership”
dp&c Chapter4
Chapter 4
Designing Channel
Networks
4-1
dp&c Chapter4
Learning Objectives
• Defining channel networks
• Exploring types of supply channel systems
• Reviewing channel trading dyads
• Detailing the channel network alignment structure
• Exploring the reasons for channel networks
• Detailing critical channel design considerations
• Outlining the channel network design process
• Reviewing the channel network design matrix model
• Defining supply channel attributes
4-2
dp&c Chapter4
Learning Objectives (cont.)
• Reviewing manufacturing methods
• Exploring the channel design matrix
• Reviewing independent distributor functional advantages
• Detailing customer segmentation dimensions
• Exploring different network structures and channel
characteristics
• Making channel network decisions
• Facility selection – macro and micro issues
• Reviewing different facility location models
• Managing channel power and network collaboration
4-3
dp&c Chapter4
Chapter 4
Designing Channel Networks
Inventory
Defining Channel
Management Basics
Networks
4-4
dp&c Chapter4
Defining Channel Networks
Supply Chain Definition
The global network used to deliver products and services from
raw materials to end customers through an engineered flow of
information, physical distribution, and cash
Channel Network Definition
An interconnection of organizations which relate to each other
through upstream or downstream linkages between the different
processes and activities that produce value in the form of
products and services to the ultimate customer.
4-5
dp&c Chapter4
Key Characteristics of Channel Networks
Channel networks usually consist only of a
company's first-tier suppliers and customers
A company normally does not form network
relationships with all of the different tiers of suppliers
and customers found in the supply chain
Channel members perceive their relationships as
established on a long-term basis
The cooperative, often collaborative, relationships
that exist are perceived by channel members as an
essential component of their continued success in the
marketplace
4-6
dp&c Chapter4
Question of Functional Dependence
•
•
•
•
Is the delivery channel to be characterized as purely
transactional, unencumbered by channel dependencies, or is
it based on a relational dependence among channel
constituents?
What are the required capabilities and costs of dealing with
each network entity and how are they to be woven together?
What is the distribution of power among channel players: who
wields the most and who the least power?
What are the strengths and weaknesses of the competition
and how are existing channels responding to the initiatives of
these alternative formats?
4-7
dp&c Chapter4
Types of Supply Channel Systems
TransactionBased
There is minimal-to-no dependency between channel
trading partners. Such systems, in fact, are formed for
the performance of an often non-repeated transaction
Limited
Channel
Loose arrangements of businesses that intermittently
and opportunistically coalesce with delivery channel
specialists in the buying and selling of goods
Federated
Network
Partnerships
/Alliances
Businesses that acknowledge mutual dependencies and
actively seek to integrate individual core competencies,
resources, and customer market opportunities on a longterm basis
Two or more firms integrate core competencies and
resources in the pursuit of an emerging market
opportunity
4-8
dp&c Chapter4
Channel Trading Dyads
(Pair 1)
Requirements Flow
2nd Tier
Supplier
(Pair 2)
Requirements Flow
1st Tier
Supplier
Materials Flow
Manufacturer
Materials Flow
(Pair 3)
Requirements Flow
Manufacturer
(Pair 4)
Requirements Flow
Distributor
4-9
Retailer
dp&c Chapter4
Supply Chain as a Network Grid
Network Ecosystem
Channel
Node
Channel
Node
Channel
Node
Channel
Node
Channel
Node
Channel
Node
Channel
Node
Channel
Node
Channel
Node
Channel
Node
4-10
Channel
Node
dp&c Chapter4
Channel Network Alignment Structure
Manufacturer Consolidator
Store
Wholesaler
Wholesaler
Materials
Supplier
Materials
Supplier
Materials
Supplier
Manufacturer
Store
Manufacturer Consolidator
Regional
DC
Wholesaler
Customer
Store
Manufacturer
Importer
Consolidator
Materials
Supplier
Materials
Supplier
Manufacturer
Materials
Supplier
Manufacturer
Direct Channel Network
Materials
Supplier
Manufacturer
Secondary Supply Chain Nodes
4-11
dp&c Chapter4
Chapter 4
Designing Channel Networks
Inventory
Network
Management
Basics
Configurations
Definitions
4-12
dp&c Chapter4
Reasons for Channel Networks
Customer Service
Relocation
Requirement to increase customer service
levels
Moving facilities due to changes in
geographic location of demand
Flexibility and
Scalability
Requirement for high levels of distribution
channel responsiveness to dynamic demand
Product
Diversification
Creation or acquisition of a new product line
Rationalization
Reduction of channel costs by consolidating
distribution facilities
Decentralization
Addition of channel facilities to accommodate
product decentralization, cost optimization,
and other events
4-13
dp&c Chapter4
Critical Channel Design Considerations
Facility Role
Efficiency/
Responsiveness
What is the role of each facility in the channel
network?
How is efficiency (least-cost) balanced with
responsiveness (agile customer response)
Facility
Location
How many and where should facilities be located?
Capacity
Allocation
What are the types and capacities of channel
facilities resources need to meet performance goals?
Integrative
Intensity
What is the depth of company ownership of supply
and distribution channels?
Logistics Costs
Logistics costs increase as the number of facilities in
the channel increase?
4-14
dp&c Chapter4
Chapter 4
Designing Channel Networks
Inventory
Channel Network
Management Basics
Design Process
4-15
dp&c Chapter4
Channel Network Design Process
Business
Strategy
Map Channel
Strategy
Competition
Service Outputs
Segment
Channel
Customer
Preferences
Configure
Channels
Channel
Positioning
Channel Costs
Establish New
Channels
Channel
Selection
Redefine
Existing
Channels
Channel Power
Channel
Implementation
Channel
Conflicts
Customer Needs
Channel
Design
Steps
Implementation
Step
Product Choices
4-16
dp&c Chapter4
Channel Network Design Matrix Model
Supply Channel
Supply
Channel
Complexity
Supply
Integrative
Intensity
Distribution Channel
Supplier
Intensity
Market
Penetration
Intensity
4-17
Distribution
Integrative
Intensity
Distribution
Intensity
dp&c Chapter4
Defining Supply Channel Attributes
Supply Channel
Complexity
Describes how many echelons deep in the
supply channel a manufacturer or distributor
will extend their planning and acquisition of
production or finished goods inventories
Supply Integrative
Intensity
Determines how far back in the supply
channel a company wants to control product
sourcing.
Supplier Intensity
Determines how the production process
choice affects the scope and depth of the
partnerships existing with primary and deeper
echelons of suppliers
4-18
dp&c Chapter4
Defining Distribution Channel Attributes
Market
Penetration
Intensity
Describes how many echelons deep in the
delivery network producers or intermediaries
must go to deliver goods to the customer
Distribution
Integrative
Intensity
Determines the level of integration forward or
horizontally a company chooses to pursue in
the delivery channel
Distribution
Intensity
Determines the number of intermediaries
needed to bring products to the customer
4-19
dp&c Chapter4
Manufacturing Methods
Project
Job Shop
Batch
Used to produce a wide variety of large scale, highly
unique products associated with a project such as
shipbuilding and house construction
Associated with make-to-order (MTO) manufacturing
environments. Jobs produced to customer order with
low production rates using very flexible equipment
Similar to the job shop process, but variety is lower
and volume is higher. Products are normally built
based on standard bills of material and routings
Mass
involves the manufacture of standardized or products
subject to fixed features and options produced in very
high batch volumes in a narrow variety
Continuous
produces a very narrow range of highly standardized,
commodity products in high volumes utilizing
dedicated equipment
4-20
dp&c Chapter4
Supply Channel
Supply
Supply
Channel
Integrative
Complexity Intensity
Custom/Single Source
Standard/Intense Distribution
Channel Design Matrix - Example
Distribution Channel
Supplier
Intensity
Process
Method
Market
Distribution
Penetration Integrative Distribution
Intensity
Intensity
Intensity
Low
Very Low
Very Low
Project
Low
Very High
Low
Low/
Medium
Low
Low
Job Shop
Low
High
Low
Medium
Low/
Medium
Medium
Batch
Medium
High
High
High
Mass
High
Medium/
High
Medium/
Low
Low/
Medium
Medium/
High
Very High
Very High
Very High
Continuous
Very High
Low
Very High
4-21
dp&c Chapter4
Independent Distributor Functional Advantages
Motivation
Highly motivated to provide superior service because
they are accepting the risk of stocking, storing, and
delivering inventories and conducting sales and
marketing functions in return for the expectation of
reward
Specialization
An independent channel intermediary is focused solely
on performing distribution functions
Survival of the
Fittest
The more successful channel distributors quickly weed
out the poor performers, leaving on the most efficient
distributor in charge of the market
Economies of
Scale
Pooling of different product lines provides them with a
significant advantage over vertically integrated
channels which only carry the products of the
manufacturing plant
4-22
dp&c Chapter4
Independent Distributor Functional Advantages
Market
Coverage
Ability to appeal to a very wide marketplace stems from
their ability to call on a large customer base, often local
in origin, with an assortment products and services that
meet their individual needs
Supplier
Independence
Channel intermediaries offer their customers what they
consider the best products and services without the
interference of the manufacturers
4-23
dp&c Chapter4
Customer Segmentation Dimensions
Customer
Needs
Centers on documenting what customers value the
most from the array of company offerings. This
dimension reveals the most critical value proposition
available to the customer
Customer
Behavior
Utilizes technology tools to reveal the experiential
world of the customers. The goal is to document how
brand and service impact experiences in both
consumer and business-to-business contexts from the
perspective of the customer
Customer
Profitability
Seeks to divide customers into segments by
profitability. This step is concerned with how this
information can be used to further long-term customer
loyalty and not purely as a way to devise strategies
focused on just selling more products
4-24
dp&c Chapter4
Grainger Service Output/Design Matrix
Distribution Channel
Service Output
Market
Penetration
Intensity
Distribution
Integrative
Intensity
Distribution
Intensity
Bulk-Breaking
High
Medium
Low
Spatial Convenience
Very High
Very High
Medium
Waiting and Delivey Time
Very High
Very High
Low/
Medium
Variety (Assortment)
High
Very High
Low/
Medium
4-25
dp&c Chapter4
Producer Storage with Direct Delivery
Producer
Inventory
Flow
Customer
Information
Flow
Customer
4-26
Customer
dp&c Chapter4
Producer Storage with Direct Delivery
Characteristics
Channel Design Attributes
Characteristics
Market penetration intensity
One echelon delivery channel means company totally controls
the distribution channel. Producer has direct control over
product quantities.
Distribution integrative intensity
One echelon delivery channel means total logistics control.
Distribution intensity
No channel intermediaries. Single source distribution.
10 Transaction Flows
High cost of performing all channel transaction flows. Normally
one or more intermediaries involved to reduce costs. Producer
incurs heavy inventory risk.
Service Outputs
Characteristics
Bulk-breaking
Unique products or large lot quantities. Ability to minimize
inventory costs by centralizing distribution warehouses.
Presence of very low carrying costs.
Spatial convenience
Supply source often far from the customer. Possibly long-lead
times for transportation to customer.
Waiting and delivery
Possible long-lead time wait for product delivery.
Transportation costs normally low due to bulk shipments.
Variety (assortment)
Very low product variety available to the customer.
4-27
dp&c Chapter4
Producer Storage with Drop Ship
Producer
Order Flow
Inventory
Flow
Distributor/
Retailer
Customer
Customer
4-28
Customer
dp&c Chapter4
Producer Storage with Drop Ship
Characteristics
Channel Design Attributes
Characteristics
Market penetration intensity
Producer fully responsible for product delivery. Producer has
reduced inventory costs due to centralization.
Distribution integrative intensity
Use of multiple customer-facing (forward) distributors and
retailers. Producer retains control of all distribution flows.
Distribution intensity
Producer pursues an intensive or exclusive distribution model
to reach as many customers as possible.
10 Transaction Flows
Producer surrenders costs of selling and promoting, pricing,
negotiations, order management, customer financing to
forward intermediaries.
Service Outputs
Characteristics
Bulk-breaking
Offers small lot quantities. Ability to minimize inventory costs by
centralizing warehouses and postponement.
Spatial convenience
Loss of direct contact with the customer. Supply source can be
far from the customer. Possibly long-lead times for
transportation to customer.
Waiting and delivery
Possible long-lead time wait for product delivery. Delivery costs
normally high due to many low quantity shipments. High
information connection to forward distributors and retailers.
Variety (assortment)
Very low product variety available to the customer. Enables
distributors and retailers to increase product variety.
4-29
dp&c Chapter4
Producer with Extended Channel Network
Producer
Distribution
Center #1
Western
Region
Retailer
Customer
Retailer
Customer
Distribution
Center #2
Resupply
Flow
Retailer
Customer
Retailer
Customer
4-30
Retailer
Customer
Eastern
Region
Retailer
Customer
Customer
dp&c Chapter4
Producer with Extended Channel Network
Characteristics
Channel Design Attributes
Characteristics
Market penetration intensity
Deep marketplace penetration using multiple levels of
distributors and retailers.
Distribution integrative intensity
Producer heavily dependent on channel intermediaries for all
customer-facing (forward) order management and delivery
functions. None to minimal supply/distribution channel
ownership
Distribution intensity
Producer uses a wide multi-echelon network of channel
partners to sell and deliver mass produced products.
10 Transaction Flows
Producer performs minimal channel transaction flows.
Service Outputs
Characteristics
Bulk-breaking
Producer ships in bulk quantities to distributors who perform
bulk-break activities. Low inventory costs due to centralized
inventories
Spatial convenience
Total loss of direct contact with the customer. However,
channel partners remove geographical distance and shrink
customer wait and delivery lead times. High customer
convenience.
Waiting and delivery
Low cost inbound and outbound transportation from producer
to distribution partners. High information connection to forward
distribution centers.
Variety (assortment)
Very low product variety available to the customer. Enables
distributors and retailers to increase product variety by using
other producers.
4-31
dp&c Chapter4
Aggregator with Extended Channel Network
Producer
Producer
Producer
Producer
Producer
Distributor
(Aggregator)
Producer
Producer
Inventory
Flow
Local
Distributor
Retailer
Retailer
Retailer
Retailer
Direct Sales
Customer
Customer
Customer
Customer
4-32
Customer
Customer
Customer
dp&c Chapter4
Aggregator with Extended Channel Network
Characteristics
Channel Design Attributes
Characteristics
Market penetration intensity
Deep marketplace penetration using multiple levels of
distributors and retailers. Includes some direct sales.
Distribution integrative intensity
Distributor has no ownership of backward or forward supply or
distribution echelons. Depends on channel partners.
Distribution intensity
Distributor uses a deep, multi-echelon network to penetrate
deep into the marketplace to sell and deliver mass produced
products.
10 Transaction Flows
Distributor performs channel replenishment transactions and
initial inventory ownership. Minimizes risk by passing most
transactions functions to downstream channel members.
Service Outputs
Characteristics
Bulk-breaking
Engages in significant bulk-break activities. High storage costs.
Due to high cost of inventory, channel stock only high-volume
items, with slow movers stored upstream in the distribution
channel.
Spatial convenience
Fast-selling items have immediate delivery. Slow sellers must
move at slower pace through the distribution channel.
Waiting and delivery
Low cost inbound but relatively higher cost outbound
transportation due to more delivery points and smaller lot sizes
to customers and delivery partners.
Variety (assortment)
High level of product variety by using multiple suppliers.
4-33
dp&c Chapter4
Aggregator with e-Business Network
Producer
Producer
Distributor
Slow
moving
Producer
Producer
Distributor
(Aggregator)
Local
Distributor
Distributor
Distributor
Inventory Flow
Order Flow
Channel Resupply
e-Sales
Drop Ship
Direct
Ship
Retailer
Retailer
Retailer
Direct Sales
Customer
Customer
Customer
Customer
4-34
Customer
Customer
Customer
dp&c Chapter4
Aggregator with e-Business Network
Characteristics
Channel Design Attributes
Characteristics
Market penetration intensity
Deep marketplace penetration using multiple levels of
distributors and retailers. Includes direct and e-sales.
Distribution integrative intensity
Distributor has no ownership of backward or forward supply or
distribution echelons. Depends on channel partners.
Distribution intensity
Requires a complex channel composed of distributors, brokers,
jobbers, retailers, direct customer delivery, and e-business to
sell and deliver a high level of product assortments.
10 Transaction Flows
Most transaction functions performed by channel partners.
Manages e-business channel, replenishment to local
distributors and retailers, performs direct shipment. Minimizes
risk by passing most transactions functions to downstream
channel members.
Service Outputs
Characteristics
Bulk-breaking
High level of bulk-break and assortment assembly. Stocks only
fast sellers, with slow seller dropped shipped using channel
partners.
Spatial convenience
Customers can get immediate delivery at local stores for fast
moving items. Slow sellers move at slower pace through the
distribution channel.
Waiting and delivery
High customer service and product availability at retail level. Ebusiness and slow moving sales has a short delivery wait.
Distributor has low cost inbound but higher outbound
transportation costs due to more delivery points and smaller lot
sizes to customers and delivery partners.
Variety (assortment)
High level of product variety by using multiple suppliers.
4-35
dp&c Chapter4
Comparing Channel Network Options
Producer
Storage with
Direct
Delivery
Producer
Storage with
Drop Ship
Distribution intensity
Low
Low
High
High
Very High
Customer service level
Low
Medium
High
High
Very High
Product assortment
Very Low
Low
Low
High
Very High
Product availability
Low
Medium
Medium/High
High
Very High
Delivery time
Low
Low/Medium
High
High
High
Very Low
Low
Medium
High
Very High
Inventory cost
High
High
Medium
Medium
Low
Transportation
Very High
High
Medium
Low
Low/Medium
Channel facilities
Very Low
Medium
Medium/High
Medium
Low/Medium
Performance Attribute
Channel complexity
Producer with Aggregator
Extended with Extended
Channel
Channel
Network
Network
4-36
Aggregator
with eBusiness
Network
dp&c Chapter4
Chapter 4
Designing Channel Networks
Inventory
Management
Basics
Channel Selection
4-37
dp&c Chapter4
Customer Responsiveness vs. Channel Costs
Long
Customer
Response
Time
Minimum
Channel Size
Total
Logistics Costs
Short
Number of Facilities
4-38
dp&c Chapter4
Making Channel Network Decisions
Facility
Selection
Identifying and quantifying all necessary macro
(corporate) and micro (local site factors) issues
affecting possible channel facility choices
Modeling
Choices
Selection of modeling techniques: statistical charting,
simulation, heuristics, optimization, and expert
systems
Assembling
the Network
Identifying the geographical areas where proposed
channel facilities are to be located
Confirming
the Network
Linking facilities to markets and determining the
capacity resource allocation for each channel facility
4-39
dp&c Chapter4
Facility Selection – Macro Issues
Corporate objectives translated into markets and
competitive positioning
Customer service goals
Global economic conditions
Country-level political stability
Government regulations
Location of markets
Exchange rates and currency risks
Local cultural and economic issues and others.
4-40
dp&c Chapter4
Facility Selection – Micro Issues
Local taxes, culture, and climate
Labor availability, costs, and union strength
Cost and availability of utilities
Local environmental regulations
Government incentives
Community resources (police, fire, schools, public
transportation, and affordable housing)
Proximity to competitors (clustering) to take advantage
of a major resource found in the region
Proximity to suppliers and customers
4-41
dp&c Chapter4
Facility Selection – Site Issues
Facility cost and size
Availability of transportation modes
Proximity to highway systems
Communications infrastructure
Local taxes and fees
Environmental regulations
4-42
dp&c Chapter4
Factor Rating Method
This method utilizes the macro and micro site issue factors. Site
issues are selected, weighted by importance, sites selected, rated
using the scale, scores are then summed and a recommendation
made by the team
Example:
Site Scores (100 points)
Weight
Chicago San Diego
Decision Issue
Weighted Scores
Chicago San Diego
Labor costs
20.0%
18
25
3.60
5.00
Labor availability
14.0%
95
75
13.30
10.50
Transportation costs
14.0%
20
45
2.80
6.30
Transportation availability
14.0%
95
70
13.30
9.80
Taxes
3.0%
10
10
0.30
0.30
Quality of life
8.0%
75
85
6.00
6.80
Infrastructure costs
7.0%
15
20
1.05
1.40
20.0%
40
45
8.00
9.00
Totals
48.35
49.10
Facilities cost
Total
100%
4-43
dp&c Chapter4
Center of Gravity Method
Geographical Grid:
1600
Boston
1400
New York
1200
Philadelphia
1000
800
Denver
600
400
Los Angeles
200
0
0
500
1000
4-44
1500
2000
dp&c Chapter4
Center-of-Gravity Method (cont.)
Channel Network for ABC Distribution
Location
1600
Transportation
Quantity/Tons
Cost US$/Ton Mile
Los Angeles
1400
Denver
1200
Boston
New York
1000
Philadelphia
$
$
$
$
$
800
Distance Table
1.25
1.25
1.20
1.20
1.20
SUM
Denver
Denver
Coordinate x
Coordinate y
Boston
Boston
100
2,000.0
350
1,000.0
New
York
New
York
1800
1,000.0
Philadelphia
2,000.0
Philadelphia1650
1450
1,500.0
7,500.0
400
600
1400
1200
1000
Cincinnati
Location600
Philadephia
New York
Boston
Denver
Los Angeles
Distance:
1,477.33
1,744.28
1,972.31LA to Denver
320.16
0.00
Los Angeles
400
1,170.47
1,431.78
1,656.05
0.00
320.16
Denver
Angeles
LosLos
Angeles
531.51
250.00
0.00
1,656.05
1,972.31
Boston 200
282.84
0.00
250.00
1,431.78
1,744.28
New York
0.00
282.84
531.51
1,170.47
1,477.33
Philadelphia0
3,462.15
3,708.90
4,409.87
4,578.46
5,514.07
Distance
500 6,915,631.14
1000 6,897,927.04
1500 5,594,598.88
2000 5,222,320.05
7,997,010.22
Weight Total0
Cost $ 9,612,420.07 $ 8,330,772.99 $ 8,557,545.75 $ 6,959,535.40 $ 6,473,040.42
1043.33
x Location
893.33
y Location
4-45
dp&c Chapter4
Location Break-Even Analysis
Product Data for ABC Distribution
$250,000
1400 Sump Pumps
120.00
$
2,000
Product Line
Purchase Price
Forecast
$200,000
$150,000
Channel Network for ABC Distribution
Location
$
$
Fixed Cost
Variable Cost/unit
Breakeven Points
Los Angles
30,000
75.00
$
$
Chicago
60,000
45.00
$
$
$
Value
105,000
150,000
172,500
Units
1,000
1,600
2,500
Los Anges vs. Chicago
Los Anges vs. New York
Chicago vs. New York
New York
110,000
$
25.00
$
Los Angles
Chicago
$100,000
New York
$50,000
$0
500
1000
1500
2000
2500
3000
Analysis
Location
Total Cost
Expected Profit
Expected Profit %
$
$
Los Angles
180,000 $
60,000 $
33%
New York
Chicago
160,000
150,000 $
80,000
90,000 $
50%
60%
Los Angles
30,000
217,500
Chicago
60,000
172,500
Graph
Units
0 $
2,500 $
$
$
$
$
New York
110,000
172,500
4-46
dp&c Chapter4
Least-Cost-Per-Lane Problem
Channel structure, costs, and inventory limits
Demand
5,000
units limit
DC1
US$2
Warehouse1
US$1
US$5
DC2
5,000 units
Store 2
10,000 units
Store 3
5,000 units
US$1
US$4
20,000
units limit
Store1
US$4
Warehouse 2
US$2
US$1
US$3
4-47
US$3
dp&c Chapter4
Least-Cost-Per-Lane Problem (cont.)
Channel Lane Solution for item PC1600-01
Total Channel Requirements
20,000
Warehouse 2 Quantity Limit
5,000
Store Costs from Warehouse 1
Store
Store 1
Store 2
Store 3
Delivery Cost $
1 $
1 $
2
Quantity
5,000
10,000
5,000 Total cost
Total Cost $
5,000 $
10,000 $ 10,000 $ 25,000
Store Costs from Warehouse 2
Store
Store 1
Store 2
Store 3
Delivery Cost $
4 $
3 $
3
Quantity
5,000
10,000
5,000 Total cost
Total Cost $
20,000 $
30,000 $ 15,000 $ 65,000
Least Cost $
Warehouse Costs from DC1
Warehouse
Warehouse 1
Delivery Cost $
2
Quantity
5,000
Total Cost $
10,000
25,000
Warehouse Costs from DC2
Warehouse
Warehouse 1
Delivery Cost $
5
Quantity
15,000
Total Cost
$
75,000
Least Cost
$
85,000
Least Cost Channel Solution
4-48
$110,000
dp&c Chapter4
Least-Cost-Per-Lane Problem – Optimized
Demand
5,000
units limit
20,000
units limit
DC1
DC2
5,000 units
US$2
15,000 units
US$1
US$1
Warehouse1
Store1
5,000 units
Store 2
10,000 units
Store 3
5,000 units
US$3
Warehouse 2
4-49
US$3
dp&c Chapter4
Chapter 4
Designing Channel Networks
Inventory
ChannelBasics
Management
Implementation
4-50
dp&c Chapter4
Managing Channel Power
Reward
Power
Coercive
Power
A channel member is rewarded by conforming to a
required or suggested behavior.
A channel member is punished by nonconformance to
a required or suggested behavior
Expert
Power
A channel member possesses a certain expertise in
the form of special knowledge, technical expertise,
marketing dominance, or customized resources
Legitimate
Power
a dependent channel members feels obligated,
ethically, socially, or contractually, to comply with the
requirements or policies of another channel member
Referent
Power
A dependent channel member, who values the
marketplace recognition, technical expertise, or other
attribute possessed by another channel member, seeks
identification with the influencing member
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Impediments to Channel Change
Unless there is an overwhelming channel power player, influencing the behavior
and policies of a community of independent companies is a complex. Besides
constantly changing and recalibrating the strategic and performance targets of
each channel member, there are also legal restrictions, contractual
commitments, potential relationships with other delivery intermediaries,
competitive practices, and marketplace conventions that make change difficult
When channel changes are initiated, they are often undertaken by a single
player. While a channel master possesses the power, most channels do not
have centralized leadership driving and coordinating improvements. Changes
are normally seen as local, with no one overseeing the impact on overall
channel capabilities, competitive positioning, and customer relations
Because channels are opportunistic and voluntary, the operating conventions
that do arise over time tend to get petrified. As a result, the changes that are
made are often realized on a local level and rarely impact channel design.
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Assertiveness
Impediments to Channel Change
Accommodation
Collaboration
Avoidance
Competition
Cooperation
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Ensuring Effective Conflict Management
Leadership
A dominant channel player or steward that acts as an
advocate for change, transforming discordant partners into
a unified channel for customer value and joint channel
member profitability
Integration
Networking supply chain partners to share data, search for
ways to reduce costs, deepen customer intimacy at each
level in the delivery network, and search for ways to
rationalize new sources of channel conflict
Technologies
Use of technologies like POS, CRM and PRM that
provide visibility of sell-side data to supply chain members
from every source in the delivery network
Performance
Intelligence
Realizing the opportunities found in the marketplace
requires looking at the performance of not just one
company, but of all the firms comprising the entire end-toend delivery channel
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Stages of Channel Network Collaboration
Stage 4
Stage 3
Stage1
Channel
Awareness
• Little interaction
• Transactional
relations
• Minor
marketplace
competition
• Channel power
not an issue
• Channel
conflict avoided
or non-existent
• Relationship
easily cancelled
Stage 2
Channel
Relationships
• Identification of
channel partners
• Search for
market synergies
• Regions of
interdependence
• Identification of
power and
fairness issues
• Role definitions
become more
elaborated
• Channel conflict
can end early
cooperation
Channel
Cooperation
• Mutual benefits
identified
• Interdependence
expands
• Contracts and high
performance lead to
deepening commitment
• Goal congruence
increases
• Cooperation increases
• Channel power mutual
enhancing
• Channel conflict
managed by
accommodation
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Channel
Collaboration
• Investment in strong
interdependent
relationships and norms
• Long-term horizon
• Power-sharing enhances
the competencies of each
partner
• High mutual dependence
• High trust and level of
compromise
• Parties resolve conflict by
engaging in joint problemsolving
• Shared values, risks, and
strategies
dp&c Chapter4
“Education in Pursuit of
Supply Chain Leadership”
dp&c Chapter4
Chapter 4
End of Session
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