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Channel Design: Review Distribution Channel Strategy L. P. Bucklin Spring 2000.

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Presentation on theme: "Channel Design: Review Distribution Channel Strategy L. P. Bucklin Spring 2000."— Presentation transcript:

1 Channel Design: Review Distribution Channel Strategy L. P. Bucklin Spring 2000

2 Concepts in Channel Design Channel Structure: the organization and juxtaposition of commercial organizations providing distribution services Channel Design: a blueprint for a channel structure to balance end-user needs against the cost of channel services so as to minimize total channel costs

3 End-User Service Needs Delivery Time Needs Lot Size Needs Assort- ment Needs Market Access Needs Infor- mation Needs The End-User The End User Interface Service Provision

4 The Channel Design Process Stage I: Determine services valued by the end-user Stage II: Ascertain alternative end-user interfaces (EUI) for these services Stage III: Ascertain costs of different supply chains to serve the EUI Stage IV: Select design which minimizes total channel costs--end-user and commercial Stage V: Adjust design to meet constraints of history, intra-channel competition

5 The Channel Model End-users' needs are driven by their personal costs of acquiring goods or services (exclusive of the purchase price) Logistic and information services provided by the commercial channel –Reduce end-user costs –Raise commercial channel costs Designers seek to build channels with the lowest total costs across the commercial channel and the end user

6 Channel Service Equilibrium Costs/Transaction Service Output End-user Costs (A) Commercial Sector Costs (B) Total Channel Costs (A+B) Equilibrium total channel costs commercial channel costs end-user costs Service level provided

7 End-User Interface Design Ford seeks a less proximate location to provide wider assortment. Modest loss in end-user product access, but major losses in service convenience. Arrow builds an EUI by creating “stores” located directly in end user factories where all logistics functions are managed by this distributor Ingersoll-Rand creates different EUI, one direct and the other indirect to serve the needs of different end users Egghead seeks without great luck to build an EUI where the balance of its costs and services will permit a profit.

8 Generic Channel Designs Supplier End-User Proximate EUI Remote EUI Proximate Node Proximate EUI

9 The Remote EUI (Catalog & Internet) Benefits –Reduce costs of assortment breadth (enhance selection for hard to find items) –Reduce land, labor costs --> lower prices –Product freshness (faster turns, fewer sites) –Ordering convenience Detriments –Weaker availability, end user price elastic –Loss of person-person information –Return goods hassle

10 Basic Guidelines for Efficient Channel Design Logistic services: The need for logistic services, e.g., lot size, fast delivery, broad assortment leads to a lengthier, vertical supply chain. Information services: The need for information intensive services, e.g., extensive, faster information, leads to a shorter, vertical supply chain.

11 Logistic Service Costs Logistic services are increasing in cost to the commercial component of the channel –The smaller the lot size delivered to the end user, the higher the cost –The faster the delivery time to the end user, the higher the cost –The greater the accessibility to the end user, the higher the cost –The broader the assortment, the higher the cost

12 End User Logistic Savings End users incur logistics costs to participate in the channel –Buyer in larger lot size may increase end user storage costs –Buying in broad assortments may reduce end user delivery and shopping costs –Buying from accessible outlets may reduce travel cost and reduce delivery time

13 Information Service Costs Information is expensive to send from producer to end user The absence of information can be expensive to the end user by increasing the probability of making a disadvantageous purchase The need for information intensity by the end user may diminish over time as knowledge is stored

14 Impact of Intermediaries upon Information Intensity the Channel SII 1 II 2 EU High Intensity Information II 1 SII 2 EU Low Intensity Information SEU II Information Intermediary

15 Multiple Direct Links in a Channel SSSS EU Direct information flows in a channel creates the need for many links within the channel. Note the presence of 16 links above.

16 Reduced Information Costs through an Information Intermediary (II) S S S S EU II The use of the information intermediary reduces linkages to 8. This significantly reduces information costs as long as information intensity needs are not high.

17 Case-1: Information Intermediary Focus: The potential for a intermediary network provides the potential for eliminating linkage costs in the system Concepts: Arrow –Network diminishes contacts with customers and ability to establish personal relationships, price discriminate –Intermediary network must provide broader market access to suppliers to compensate for losses in relationship benefits from information services –Buyers will have a stronger preference for the networks

18 Case 2: Designing the EUI Focus: Balancing end-user access value for access with EUI efficiency Concepts: Ford –Reducing the number EUI’s in a market reduces end user accessibility, but may enhance EUI efficiency –Product and repair services may require difference degrees of accessibility –Historical "baggage“ makes adjustment hard

19 Class 3: The Logistic Supply Chain Focus: Centralization in logistic design Concepts: Polaroid –Decentralized logistic system permits unique adaptation to customer needs at each point –Centralization reduces inventory costs dramatically as a lower buffer stock is required while stock outs are reduced –Centralization moves stocks away from end user and increases risks of delivery time failure –Internal conflict occurs because risk/rewards are not evenly distributed throughout the organization

20 Case 4: Information Services Focus: designing the information network Concepts: Ingersoll-Rand –Direct sales force is better informed than indirect –High EU information needs call for direct design –Low EU information needs call for intermediaries –Base design decisions on product line rather than individual product –Mesh product innovation with channel strategy

21 Case 5: Information Failure Focus: Identifying the decision center (DC) to assess critical service needs Concepts: MathSoft –DC constitutes all buying influences within end user –Identify role importance of actual user of product –Meeting needs of product user ineffective through direct sales –Many end users require pull indirect channels –Mesh new products with current channels

22 Case 6: Remote Channels Focus: Viability of Internet remote Issues: Egghead –High cost to reach end users and provide EUI information –High price elasticities where similar products sold reduces gross margins –Gross margin squeeze requires great scale to achieve profitability and long development time and substantially increases supplier risk

23 Rules for Channel Structure and Service Outputs Logistics service –Small lots, fast delivery, wide product assortment –Heavy end user needs lead to longer channels, e.g., traditional flowers, auto repair parts Information service –Complex, error free, fast response, interactive information transfer –High end-user needs leads to shorter channels, Product services –Complex after-sale service leads to shorter channel

24 Channel Structure Determinants Indirect Channels Mixed Channels (Drop Ship with Agent) Mixed Channels (Direct with Fulfillment House) Direct Channels Logistic Services HighLow High Information Services Traditional, unified flowsHybrid, independent flows

25 Traditional v. Hybrid Designs Supplier End-User Reseller A F TraditionalHybrid DirectIndirectAgentFulfillment House Logistic FlowInformation Flow

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