Channel Management




Once the company has reviewed its channel alternatives and decided on the best channel design, it must implement and manage the chosen channel. Marketing channel management calls for selecting, managing and motivating individual channel members and evaluating their performance over time. Producers vary in their ability to attract qualified marketing intermediaries. Some producers have no trouble signing up channel members. When selecting intermediaries the company should determine what characteristics distinguish the better ones. It will want to evaluate each channel member’s year in business, other lines carried, growth, profit record, cooperativeness and reputation. If the intermediaries are sales agents, the company will want to evaluate the number or character of other lines carried and the size of the sale force. If the intermediary is a retail store that wants exclusive or selective distribution, the company will want to evaluate the store’s customers, location and future growth potential.

Once selected, channel members must be continuously managed and motivated to do their best. The company must sell not only through the intermediaries but to and with them. Most companies see their intermediaries as first line customers and partners. They practice strong partner relationships management to forge long term partnerships with channel members. This creates a value delivery system that meets the needs of both the company and its marketing partners. In managing its channel a company must convince distribution that they can succeed better by working together as a part of a cohesive value delivery system.

Many companies are now installing integrated high tech partner relationship management systems to coordinate their whole channel marketing efforts. Just as they use customer relationship management software systems to help manage relationships with important customers, companies can now use PRM and supply chain management software to help recruit, organize, manage, motivate and evaluate relationships with channel partners.

The producer must regularly check channel member performance against standards such as sale, quotas, average inventory levels, cooperation in company promotion or training programs. The company should recognize and reward intermediaries who are performing and services to the customers. The company should recognize and reward intermediaries who are performing well and adding goods value for consumers. Those who are performing poorly should be assisted or as a last resort. Finally manufacturers need to be sensitive to their dealers. Those who treat their dealers poorly risk not only losing dealer support but also causing some legal problems. The next section describes various rights and duties pertaining to manufactures and their channel members.

Public Policy and Distribution Decision
For the most part companies are legally free to develop whatever channel arrangements suit them. In fact the law affecting channels seek to prevent the exclusionary tactics of some companies that might keep another company from using desired channel. Most channel law deals with the mutual rights and duties of the channel members once they have formed a relationship. Many products and wholesalers like to develop exclusive channel for the products. When the seller allows only certain outlets to carry its products, this strategy is called exclusive distribution. When the sellers require that these dealers not handle competitor’s product, its strategy is called exclusive dealing. Both parties can benefit from exclusive arrangements.

The seller obtains more loyal and dependable outlets and the dealer obtain a steady source of supply and stronger seller support. But exclusive arrangements also exclude other products from selling to these dealers. They are legal as long as they do not substantially lessen competition or tend to create a monopoly and as long as both parties enter into the agreement voluntarily. Exclusive dealing often includes exclusive territorial agreements. They product may agree not to sell to other dealers in a given area or the buyer may agree to sell only in its own territory. The first practice is normal under franchise systems as a way to increase dealer enthusiasm and commitment. It is perfectly legal; a seller has no legal obligation to sell through more outlets than it wishes. The second practice whereby the producer tries to keep a dealer from selling outside its territory has become a major legal issue.

Products of a strong brand sometimes sell it to dealers only if the dealers will take some or all of the rest of line. This is called full line force. Such tying agreements are not necessarily illegal but that may be considered illegal if they tend to lessen competition substantially. The practice may prevent consumers from freely choosing among competing suppliers of these other brands. Finally producers are free to select their dealers but their right to terminate dealers is somewhat restricted. In general sellers can drop dealers for cause.

In today global marketplace, selling is products it’s sometimes easier than getting it to customers. Companies must decide on the best way to stone, handle and more their products and services so that they are available to customers in the right assortments at the right time, in the right place. Logistics effectiveness has major impact on both customer’s satisfaction and company costs. Here we consider the nature and importance of logistics managements in the supply chain, goals of the logistics system, major logistic function and the need for integrated supply chain management.

To some manager, marketing logistics mean only trucks and warehouses. Bur modern logistics is much more than this. Marketing logistics also called physical distribution involving planning, implementing, controlling the physical flow of goods, services and related information from points of origin to points of consumption to meet customers’ requirements. In short it involves getting the right product to the right customer in the right place at the right time. In the past physical distribution planners typically started with products at the plant and then tried to find how solution to get them to customers cost. However today marketers prefer customer centered logistic thinking which starts with the marketplace and works backward to the factory or even to source of supply. Marketing logistic involve not only outbound distribution and reserve distribution. That is it involves entire supply chain management, managing upstream and downstream value added flows of material, final goods and related information among suppliers, the company, resellers and final consumers.

The logistics manager’s task is to coordinate activities of suppliers, purchasing agents, marketers, channel members and customers. These activities include forecasting, information systems, purchasing, production planning, order processing, inventory, warehousing and transport planning. Companies today are placing greater emphasis on logistics for several reasons. First companies can gain a powerful competitive advantage by using improved logistics to given customers better service or lower prices. Second, improved logistics can yield tremendous cost saving to both the company and its customers. Third, the explosion in product variety has created a need for improved logistics managements. Improvements in information technology have also created opportunities for major gains in distribution efficiency.

Today’s companies are using sophisticated supply chain management software. Web based logistic systems, point of sale scanners, uniform product codes, and satellite tracking and electronic transfer of order and payment data. Such technologies let them quickly and efficiently manage the flow of goods, information function; logistic affects the environment and a firm’s environmental sustainability efforts. Transportation, warehousing, packaging and other logistics functions are typically the biggest supply chain contributors to the company’s environmental footprint. At the same time, they also provide one of the most fertile areas for cost savings. So developing a green supply chain is not only environmentally responsible, it can also be profitable.

Boxes of Logistic Scheme
Some companies state their logistics objectives as providing maximum customer service at the least cost. Unfortunately no logistics system can both maximize customer service and minimize distribution costs. Maximum customer service implies rapid delivery, large inventories, flexible assortments, liberal returns policies and other services. In contrast minimum distribution costs imply slower delivery, smaller inventories and large shipping lots which represent a lower level overall customer service.

The goal of marketing logistic should be to provide a targeted level of customer service at the least cost. A company must first research the importance of various distribution services to customers and then set desired services levels for each segment. The objective is to maximize profits not sales. Therefore the company must weigh the benefits of providing higher level of service against the costs. Some companies offer less service than their competitors and charge a lower price; other companies offer more service and charge higher prices to cover higher costs.

Given a set of logistic objectives, the company is ready to design a logistics system that will minimize the cost of attaining these objectives. The major logistics functions include warehousing, inventory management, transportation and logistics information management. Production and consumption cycles rarely match so most companies must store their goods while they wait to be sold. Like some manufactures run their factories all year long and store up products for the heavy spring and summer buying seasons. The storage function overcomes differences in needed quantities and timing, ensuring that products are available when customers are ready to buy them. A company must decide on how many and what types of warehouses it needs and where they will be located. The company might use either storage warehouses or distribution centers.

Storage ware houses store goods for moderate to long periods. Distribution centers are designed to move goods rather than just store them. They are large and highly automated warehouses designed to receive goods from various plants and suppliers, take order, fill them efficiently and deliver goods to customers as quickly as possible. Inventory managements also affect customer satisfaction. Here, managers must maintain the delicate balance between carrying too little inventory and carrying too much. With too little stock the firm risks not having products when customers want to buy.

To remedy this firm may need costly emergency shipments or production. Main companies have greatly reduced their inventories and related costs through just in time logistics systems. With such systems, producers and retailers carry only small inventories of parts or merchandise often only enough for a few days of operations. New stock arrives exactly when needed rather than being stored in inventory until being used. Just in time systems require accurate forecasting along with fast, frequent and flexible delivery so that new supplies will be available when needed. However these systems result in substantial saving in inventory carrying and handling costs.

Companies manage their supply through information. Channel partners often link up to share information and make offer join logistics decisions. From a logistics perspective, information flow such a customer transactions, billing, shipment, inventory levels and even customers data are closely linked to channel performance. The company wants to design a simple, accessible, fast and accurate process for capturing and share channel information. Information can be shared and managed in many ways but most sharing takes place through traditional or inter based electronic interchange.

In some cases, suppliers might actually be asked to generate orders and arrange deliveries for their customers. Using vendor managed inventory systems, the customers share real time data on sales and current inventory levels with the suppliers. The supplier than get full responsibility for manages of inventories and deliveries. Some retailers even go so far as to shift inventory and delivery costs to supplier. Such systems require close cooperation between the buyers and seller.

Today more and more companies are adopting the concept of integrated logistic managements. This concept organizes that providing better customer service and trimming distribution costs require teamwork, both inside the company and among all the marketing channel organizations. Inside, the company’s various departments must work closely together to maximize the company’s own logistic performance. Outside, the company must integrate its logistics systems with those of its suppliers and customers to maximize the performance of the entire distribution network.

Most companies assign responsibility for various logistics activities to many different departments, marketing, sales, finance, operations and purchasing. Too often each function tries to optimize its own logistics performance without regard for the activities of the other functions. However transportation, inventory, warehousing and information management activities interact, often in an inverse way. Lower inventory levels reduce inventory carrying costs but they may also reduce customer service and increase costs from stock outs, book order, special production runs and costly fast freight shipments. Distribution activities involve strong tradeoffs; decisions by different functions must be coordinated to achieve better overall logistics performance. The goal of integrated supply chain management is to harmonize all of the company’s logistics decisions. Close working relationships among departments can be achieved in several ways. Some companies have created permanent logistics committees made up of managers responsible for different physical distribution activities. Companies can also create supply chain managers positions that link the logistics activities of functional areas.

Design Logistic Tools
Companies must do more than improve their own logistics. They must also work with other channel partners to improve whole channel distribution. The members of marketing channel are linked closely in creating customers value and building customer relationship. One company’s distribution system is another company’s supply system; the success of each channel member depends on the performance of the entire supply chain. Smart companies coordinate their logistic strategies and forge strong partnerships with suppliers or customers to improve customer service and reduce channel costs. Many companies have created cross functional, cross company teams. Some companies use third party logistics providers for several reasons.

First, getting the product to market is their main focus; these providers can often do it more efficiently and at lower cost. Outsourcing typically results in fifteen percent to thirteen percent cost saving. Second, outsourcing logistics frees a company to focus more intensely on its core business. Finally, integrated logistics companies understand increasingly complex logistics environments. Third party logistics partners can be especially helpful to companies attempting to expand their global market coverage. Companies distributing their products across Europe face a bewildering array of environment restrictions that affect logistics including packaging standards, truck size, weight limits and emissions pollution controls. By outsourcing its logistics, a company can gain a complete pan European distribution system without incurring the costs, delays and risks associated with setting up its own system.

Role of Retailers in the Distribution Channel
Retailers include all the activities involved in selling products or services directly to the final consumers. These products and services are sold in smaller quantities and with high frequency. In fact many marketers are now embracing the concept of shopper marketing; the idea that the retail store itself is an important marketing medium. Shopper marketing involves focusing the entire marketing process from product and brand development to logistics, promotion and merchandising toward turning shopper into buyers at the point of sale. Of course, every well design marketing effort focuses on customers buying behavior. But the concept of shopper marketing suggests that these efforts should be coordinated around the shopping process itself. Shopper marketing emphasizes the importance of the retail environment on customer buying.
The most important types of retail store are;

  • Super stores: Very large stores traditionally aimed at meeting consumer’s total needs for routinely purchased food and nonfood items. Include supermarkets, combined supermarket and discount stores
  • Specialty stores: Carry a narrow product line with a deep assortment such as sporting goods, furniture store or book stores. A clothing store would be a single line store, a men’s clothing store would be a limited line store and a men’s custom shirt store would be a super specialty store
  • Departmental stores: Carry several products lines typically clothing, homes furnishings and household goods; with each line operated as a separate department managed by specialist buyers or merchandisers
  • Supermarkets: A relatively large, low cost, low margin, high volume and self-service operation, designed to serve the customer’s total needs for grocery and household products
  • Convenience stores: Relatively small stores located near residential areas, open long hour seven days a week and carrying a limited line of high turnover convenience products at slightly higher prices
  • Discount stores: Carried standard merchandise sold at lower price with lower margins and higher volumes
  • Off price retailers: Sell merchandise bought at less than regular wholesale prices and sold at less than retail, often leftover goods overruns and irregulars obtained at reduced prices from manufactures independent off price retailers owned and run by entrepreneurs or by division of larger retail corporations

Although many retail stores are independently owned, others band together under some form of corporate or contractual organization. The major type of retail organizations can be describes as;

  • Corporate chain store: Two or more outlets that are commonly owned and controlled. This chain appears in all types of retailing but they are strongest in department stores, food stores, drug stores, shoe stores and women’s clothing stores
  • Voluntary chain: Wholesaler-sponsored group of independent retailers engaged in group buying and merchandising
  • Retailer cooperative: Group of independent retailers who set up central buying organization and conduct joint promotion efforts
  • Franchise organization: Franchise organizations are normally based on some unique product or service, on a method of doing business or a trade name, goodwill or patent that the franchisor has developed
  • Merchandising conglomerate: A free form corporation that combines several diversified retailing lines and under central ownership along with some integration of their distribution and management functions

Retailers are always searching for new marketing strategies to attract and hold customers. In the past, retailers attract customers with unique product assortments and more or better services. Today retail assortments and services are looking more and more alike. Many national brand manufactures in their drive for volume have placed their brand almost everywhere. You can find most customer brands not only in department stores but also in mass merchandise stores, off price discount stores and on the web. Thus it’s now more difficult for any one retailer to offer exclusive merchandise.

Role of Wholesalers in the Distribution Channel
Wholesaling include all activities involved in selling goods and services to those buying for resale or business use. We called wholesalers those firms engaged primarily in wholesaling activities. Wholesalers buy mostly from producers and sell to retailers, industrial consumers and other wholesalers. As a result, many of important wholesalers and wholesales markets are largely unknown to final consumers. Why are wholesalers important to sellers? Or why would a producer use wholesalers rather than selling directly to retailers or consumers? Simply put, wholesalers add value by performing one or more of the following channel functions.

  • Selling and promoting: Wholesaler’s sales forces help manufactures reach many small customers at a low cost. The wholesalers have more contacts and are often more trusted by the buyer than the distant manufacture
  • Buying and assortment building: Wholesalers can select items and build assortment needed by their customers, thereby saving the consumers much work
  • Bulk breaking: Wholesalers save their customers money by buying in carload lots and breaking bulk
  • Warehousing: Wholesalers hold inventories, thereby reducing the inventory costs and risks of suppliers and customers
  • Transpiration: Wholesalers can provide quicker delivery to buyers because they are closer than the producers
  • Financing: Wholesalers finance their customers by given credit and they finance their suppliers by ordering early and paying bills on time
  • Risk bearing: Wholesalers absorb risk by taking title and bearing the cost of theft, damage, spoilage and obsolescence
  • Market information:  Wholesalers give information to suppliers and customers about competitor’s new products and price developments
  • Management’s services and advice: Wholesalers often help retailers train their salesclerks, improve store layouts and displays and set up accounting and inventory control systems

Wholesalers fall into these major groups; Merchant wholesalers, agents and broker and manufacturers/retailer’s branches or offices. Merchant wholesalers are the largest single group of whole sales, according to a survey more than fifty percent of all wholesaling. Merchant wholesalers include two broad types, full service wholesalers and limited service wholesalers. Full service wholesalers provide a full set of services whereas the various limited service wholesalers offer fewer services to their suppliers and customers. The several different types of limited services wholesalers perform varied specialized functions in the distribution channel.

Broker and agents differ from merchant wholesalers in two ways. They do not take title to goods and they perform only a few functions. Like merchant wholesalers, they generally specialize by product line or customer type. A broker brings buyers and sellers together and assists in negotiation. Agents represent buyers or sellers on a more permanent basis. Manufacturer’s agents are the most common type of agent wholesaler. The third major type of wholesaling is that done in manufacture’s sales branches and offices by sellers or buyers themselves rather than through independent wholesalers.
The details of major types of wholesalers are as below.

Merchant Wholesalers (Independently owned business that take title to the merchandise they handle. In different trades they are called jobbers, distributors or mill supply houses.)

  • Full service wholesalers: Provide a full line of service, carrying stock, maintaining a sales force, offering credit, making deliveries and providing management assistance
  • Wholesale merchants: Sell primarily retailers and provide a full range of services. General merchandise wholesalers carry several merchandise lines, whereas general line wholesalers carry one or two lines in great depth. Specialty wholesalers specialize in carrying only part of a line
  • Industrial distribution: Sell to manufactures rather than to retailers. Provide several services such as carrying stock, offering credit and providing deliveries. May has a broad range of merchandise, a general line or specialty line
  • Limited services wholesalers: Offer fewer services than full service wholesalers
  • Cash and carry wholesalers: Carry a limited line of fast moving goods and sell to small retailers for cash. Normally do not deliver
  • Truck wholesalers: Perform primarily a selling and delivery function
  • Drop shippers: Do not carry inventory or handle the product. On receiving an order, they select manufacturer who ships the merchandise directly to the customer. The drop shipper assumes title and risk from the time the order is accepted to its delivery to the customer. They operate in bulk industries such as cool and lumber
  • Rack jobbers: Serve grocery and drug retailers mostly in nonfood items. They send delivery trucks to stores where the delivery people set up toys, paperbacks or other items
  • Producer’s cooperatives: Are owned by farmer members and assemble farm produce to sell in local markets. They often attempt to improve product quality and promote a co-op brand name
  • Mail order wholesalers: Send catalogs to retail, industrial and institutional customers featuring. Main customers are business in small outlying areas. Orders are filled and sent by mail and other transportation

Broker and Agents (Do not take title to goods. Main function is to facilitate buying and selling for which they earn a commission on the selling force. Generally specialize by product line or customer type.)

  • Brokers: Chief function is bringing buyers and sellers together and assisting in negotiation. They are paid by the party who hired them and do not carry inventory, get involved in financing or assume risk
  • Agents: Represent either buyers or sellers on a more permanent basis than brokers do
  • Manufacturer’s agent: Represent two or more manufacturers of complementary lines. A formal written agreement with each manufacturer cover pricing, territories, order handling and commission rates. Most manufacturers’ agent is small business with only a few skilled salespeople as employees. They are hired by small manufacturers who cannot afford their own field sales forces and by large manufacturers who use agents to open new territories or to cover territories that cannot support full time salespeople
  • Selling agents: Have contractual authority to sell a manufacturer’s entire output. The manufacturer either is not interested in the selling function or feels unqualified. The selling agent serves as a sales      department and has significant influence over prices, terms and conditions of the sale. Found in product area such as textiles, industry machinery and equipment
  • Purchasing agents: Generally have a long term relationship with buyers and make purchase for them, often receiving, inspecting, warehousing and shopping the merchandise to the buyers. They provide helpful market information to clients and help them obtain the best goods and prices available
  • Commission merchants: Take physical possession of products and negotiate sales. Normally, they are not employed on a long term basis. Most often used in agricultural marketing by farmers who do not want to sell their own output and do not belong to producer’s cooperatives. The commission merchant takes and expenses and remits the balance to the producers

Manufacturers/Retailer’s Branches or Offices (Wholesaling operation conducted by sellers or buyers themselves rather than through independent wholesalers. Separate branches and offices can be dedicated to either sales or purchasing.)

  • Sales branches and offices: Set up by manufacturers to improve inventory control, selling and promotion. Sales branches carry inventory and are found in industries such as lumber and automotive equipment. Sales offices do not carry inventory and are most prominent in dry goods and nation industries
  • Purchasing officers: Perform a role similar to that of brokers or agents but are part of the buyer’s organization. Many retailers set up purchasing offices in major market centers

Like retailers and wholesalers must decide on product and service assortments, prices, promotion and place. Wholesalers add customer value through the products and service they offer. They are often under great pressure to carry a full line and do stock enough for immediate delivery. But this practice can damage profits. Wholesalers today are cutting down on the number of lines they carry, choosing to carry only the more profitable ones. They are also rethinking which services count most in building strong customer relationships and which should be dropped or paid for by the customer. The key is to find the mix of services most valued by their target customers.