1. 10 Business Marketing Channel Participants McGraw-Hill/Irwin Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved.

2. 10-2 Agenda Functions of the Channel Intermediary The Nature of Channel Decisions Direct Channels Indirect Channels Combining Direct and Indirect Channels Channel Cooperation Channel Conflict Channel Width

3. 10-3 Business Marketing Channel Members Channel members: A set of independent companies that form cooperative buyer-seller relationships involving transactions (such as raw material, components, process materials, and finished goods for resale), all leading to getting a particular product line to the final user. It is important that each channel member see its competition not as the other companies that make its particular materials, but as the alternative channels that can supply equivalent finished products to the final user. Cooperation, coordination, and strategically acting in the best interests of the channel are key. If the channel loses business to a competitive source of supply, then all channel members lose.

4. 10-4 Business Marketing Distribution Channel Members Where a producer has alternative channels of distribution available, the marketer’s challenge is to: Select the channel (or combination of channels) that provides best coverage, provides best service to target segments, and meets revenue objectives of the organization. Remember that title-taking intermediaries (i.e., distributors) are customers of the producer, not just providers of a distribution service. (continued)

5. 10-5 A distribution channel’s differential advantages can be difficult for competitors to copy and, done correctly, can form a sustainable differential advantage. The study of distribution channels involves relationships between channel member companies. Don’t confuse this with physical distribution, which involves the actual flow of materials. Business Marketing Distribution Channel Members

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7. 10-7 Functions of the Channel Intermediary Buying: An intermediary buys products for resale to other intermediaries or to final business users. Selling: An intermediary with a capable sales force supported by established warehouse distribution centers, which is already serving other product needs of a wide user customer base, would be a valuable channel addition. Storing: An inventory commitment is composed of products to satisfy customer purchase requirements in a timely manner. Transporting: A vast array of transportation alternatives are available for intermediaries to use to manage the physical flow of the product to the business user. (continued)

8. 10-8 Sorting: Most intermediaries buy in large quantities and then sort (breaking of bulk) shipments into smaller lots (often in combinations) for resale to business users. Financing: Intermediaries invest in inventory, sell and deliver merchandise to business user, and provide credit terms, thereby financing the exchange process. Risk taking: Because of obsolescence and deterioration, risk is inherent in the ownership of inventory; additional risk comes from uncollectable customer accounts. Providing market information: Importance of continuous and accurate flow of market information concerning final user needs, pricing conditions, competitive conditions, and user satisfaction is critical to the success of the channel. Functions of the Channel Intermediary

9. 10-9 Images courtesy of Rockwell Automation Direct Distribution Channel Example: As a first-tier component supplier to automotive OEMs, Rockwell Automation Inc. may contract to supply BMW USA’s annual usage of wheel bearings. The requirement may include several sizes, each in 50,000 to 100,000 quantities. This Rockwell would sell direct. A Rockwell salesperson would call on BMW to review its requirements, coordinate purchase transactions, and maintain the relationship.

10. 10-10 Indirect Distribution Channels Example: Rockwell also produces similar wheel bearings that are used in automotive repair shops and to repair industrial material handling equipment. Individually these quantities are too small to be attractive but in total the quantities are quite high. In this case, Rockwell sells through a distributor, such as W.R. Grainger.

11. 10-11 Rockwell Automation Inc. Direct distribution Indirect distribution BMW (car image courtesy of BMW USA) (continued)

12. 10-12 Rockwell Automation Inc. Both BMW and Grainger would be important customers of Rockwell, probably purchasing millions of dollars worth of bearings each year. BMW

13. 10-13 Internet Direct Distribution Channel (Website image courtesy of www.grainger.com) Grainger uses the Internet for direct transactions with thousands of repair and maintenance users. Browse its on-line catalog at www.grainger.com (continued)

14. 10-14 Internet Direct Distribution Channel At some point, Rockwell may decide that software technology exists to allow it to sell to small users directly over the Internet. Rockwell may then stop using the distributor, or alternatively use it for additional intensive distribution. It is not unusual for industrial Internet buyers to be required to use company credit cards (such as American Express). That removes the necessity for a company like Rockwell to assess credit and set up an account for a small dollar purchase. Still, a company like Grainger has an advantage in direct Internet sales that Rockwell does not. What is it?

15. 10-15 Grainger’s advantage is one-stop shopping, which means convenience for the customer. Grainger is the nation's leading business-to-business distributor of maintenance, repair, and operating (MRO) supplies and related information. Its customers have access to over 560,000 products available to them through on-line ordering, phone ordering, and stopping by branch locations. One stop shopping with one invoice and one delivery. Rockwell Automation Inc. may agree that Grainger will be its exclusive distributor in the state of South Carolina. That is, of course, except for BMW’s South Carolina assembly plant, which Rockwell will supply directly (as house account).

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17. 10-17 Trends - B2B Products Intermediary Distributors Consolidation Production outsourcings - often offshore Globalization of purchasing Increasing customer emphasis on total value Distributor offerings becoming more sophisticated Distributors expecting more services from supplier manufacturers

18. 10-18 Channel Transaction Facilitators Examples include: Independent warehouses Carriers Manufacturer’s representatives Do not take title or carry inventory, but rather provide services such as storage, transportation, or arranging of sales. Can be very important to the success of the channel.

19. 10-19 Manufacturer’s Representatives In the previous example of Rockwell Automation selling bearings through an exclusive distributor in South Carolina, it may have been because research indicated hundreds of small users. If research had suggested several additional medium-sized users, Rockwell may have gone with a manufacturer’s representative, who would sell its bearings plus complementary products from other manufacturers in return for a commission on sales. The hundreds of very small users may have been covered by several nonexclusive distributors. At some point, sales from the medium-sized users may grow to the point that manufacturer’s representative’s commissions exceed cost of supporting a direct Rockwell field salesperson. Then what would Rockwell likely do?

20. 10-20 Manufacturer’s Representatives If a direct Rockwell field salesperson does take over the territory, at some point their commissions from their largest account may grow to the point that the company finds it logical to make the account into a house account to be handled by headquarters. As you might guess, distributors, manufacturer’s representatives, and direct field salespersons are not very happy about house accounts.

21. 10-21 Channel Conflict Channel conflict may result when channel members have mutually exclusive values, interests, or goals. Manufacturers may want control of distribution channels for better execution of their marketing strategies, whereas intermediaries may not see the manufacturer-determined strategies as in their best interest.

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23. 10-23 Problem Areas in Manufacturer- Intermediary Relationship Service and technical assistance House accounts Inventory levels Marketing information and feedback Training and support services Other product lines carried Other manufacturer-supplied channels competing with intermediary Prices and discounts

24. 10-24 Channel Conflict Revisited Whether between channel members or between channel members and channel transaction facilitators, potential conflict is reduced by: Relationship building and team management Team-building efforts Clear and complete contracts

25. 10-25 Conflict Resolution (A) As the senior (manufacturer’s) marketer involved, resolve the following: The manufacturer’s rep who sells your products to IBM has been so successful that her commissions (7.5% of gross sales) now exceed your company president’s compensation. It is not clear in the contract whether commissions would end if the relationship ends.

26. 10-26 Conflict Resolution (B) As the senior (manufacturer’s) marketer involved, resolve the following: Your company is a $200 million (annual) manufacturer of electric motors. You have an exclusive distribution agreement with a multibillion dollar distributor with many distribution centers and sales branches throughout the U.S. and Canada. Your distributor is in the process of dictating to you the prices it will pay, the inventory it will carry, and the service it will provide to customers.

27. 10-27 Types of Channel Width Intensive distribution: Gain access to as many resellers as possible within a particular geographic area. Selective distribution: Distribute product to limited number of resellers in a particular geographic region; highly chosen based on distinctive capabilities and high-quality service. Exclusive distribution: Only one channel member can sell a manufacturer’s products in a given geographic area.