Channel Integration

1 January 2017

In the world of Sales and Distribution Management, it is imperative to have upstream partners like logistics , distributor , retailers , transporter and whole sellers to effectively sell the products manufactured by a company . Channel integration is a collaborative effort to bring together all these partners into the system and integrate the efforts so that all the partners are benefited out of it. By using the concepts of Channel Integration, rather than the traditional methods of distribution the organisations save on transaction costs and have better control over the partners.

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This concept also closely relates to the Supply Chain Management and better management of downstream partners. Importance of Channel Integration As has been suggested in the previous paragraphs , the concept of Channel Integration helps us reduce the transaction cost and enjoy better control over the channel members . SCM concepts of Collaborative Planning ,Replenishment and Forecasting (CPFR) apply to the Channel integration. Experts suggest that there is a cost saving to the tune of 10-15% by using channel integration.

Channel integration provides sustainable competitive advantage by using the following concepts: • It bridges gaps between the consumption and production . The gaps that can be bridged include but are not limited to quantity gap , space gap time gap and variety gaps • Since the manufacturer can have real time information of the consumption on distributor and retailer front , it helps him plan the inventory and production levels , thus preventing the stock pile at the retailer , distributor or the manufacturer level. Channel integration is useful in the international and the exports markets as well • Channel Integration helps build a strong relationship between the channel members and helps each exploit the advantage the other holds in the market . This concept is built along the lines of exploiting horizontal as well as vertical integration in the channel • Channel Integration by virtue of controlling the inventory levels at all stages of integration , prevents and avoids the issues of stock outs . Issues like over stocking and Bull whip effect can also be effectively dealt with the using this. Channel integration helps in reduction of transaction cost and have great control over entire process by elimination of individual vested interests and working towards common goals. • As different channel members have different degree of experience and expertise. If all of them work together for common purpose then it can lead to becoming a very efficient distribution system. • Successful integration work as barrier to entry in market as it provides competitive advantage to the company and helps in reduction of sales due to stock out situations. Integrated channel also helps in doing sales promotion and campaigns for increasing sales. Manufacture and channel can forge a relationship and strike a good balance on need and timings of promotion. • An integrated channel strategy also works a successful marketing strategy against its competitors and helps to win competition. Vertical Marketing System In Vertical Marketing system, channel is controlled by one of the channel members and the manufacturer, distributor and retailers vertically integrate to form a marketing system.

The member join together for the mutual benefit and helps the companies to control the changing market conditions. Vertical Marketing systems or VMS allows better cooperation between the channel members and reduces conflicts . Good examples of companies successfully completing VMS are Mc Donalds and Wendy. Vertical Marketing System can be further subdivided into Corporate VMS, Adminstered VMS and contractual VMS. Corporate VMS In a corporate VMS , the VMS is owned and controlled by the manufacturer.

Since control is in the hands of the company , it develops the key strategies to properly coordinate the VMS. When the company runs the VMS at the retailer or distributor level , this is known as the forward integrated VMS. Certain factors help the company decide if the company should develop Corporate VMS . Following are the factors which decide the same • The cost involved • Price competition • Manufacturing capacity • Value addition • Product sustainability • Environmental uncertainty • Coordination and team selling • Transaction size Administered VMS

In this type of VMS , no member exercises complete over the channel . This type of the VMS is used by companies who are into traditional distribution system. In administered VMS, level of control is more than traditional system but less than corporate VMS. This type of system is mainly popular in retail sector as lately importance of retailers has increased in trade. Retailers in this system work closely with manufacturer and helps in development of new products designs, quality control and delivery schedule. Retailers have got greater bargaining power in this system.

The foundation of this system is longevity and stability of relation between manufacturer and retailer. Relations are usually long term. These types of systems are prevalent in grocery, apparel and finished goods sector. The need for administered VMS arises due to following factors: 1. Good product quality 2. Very agile delivery schedules 3. Joint product development 4. Need based delivery system 5. Strong company brand and image Contractual VMS In this type of VMS, companies enter in to contact with channel members for performing channel functions.

In this type of systems all entities are independent yet they work together towards common goal. This type of arrangement can be utilized either to exploit marketing capabilities or to exploit resources available with partners. One primary need for such arrangement is to have sound knowledge of legal and contractual clauses so that all situations can be mentioned in contract. This requires thorough understanding of business and repercussions in case of non-delivery. Contract requires mentioning all deliverables, SLA and also penalty clause in case of non-performance.

Most of organization works through this type of system by outsourcing their activities. Horizontal Marketing Systems In this system, channels at same level work together to harness opportunity available in market by pooling in their joint resources and skills. This arrangement helps to complement each other by skills which everyone may not have so by being together a consortium is having all required skills and knowledge to become successful in market. It may be technology, money or marketing knowledge. Such arrangements usually take form of JV or strategic alliances.

For successful integration it is likely to have four mix ups which are operational, intellectual, social and emotional. Operational integration means standardization of manufacturing and marketing processes. Intellectual integration includes sharing of information at all levels so that gaps can be minimized and knowledge can be used. Social and emotional integration means that employees at same level in all organizations work together and collaborate to achieve a single goal. This type of system is quite successful in pharma, research & development and retailing segments.

As advance research requires lot of knowledge and skill such arrangement helps to share the same across board and achieve objective with lesser cost and higher speed. Hybrid Channel Systems Hybrid channels systems is merger of two or more type of systems like Vertical and horizontal system. Many companies to beat competition resort to multiple channel system like direct selling, channel selling, internet selling and telemarketing. Main purpose for implementing such system is to overcome difficulties faced due to different and large boundaries, different behaviour shown by customers and difficult territories.

Also target of achieving higher sales continuously push to go for new means of achieving the same. Different steps in developing hybrid channel involve identification of determinants, identification of channel mix and selection of channel. After this comparing the outcome of channel with that of planned one and then analyse results. Distributor Advisory Council It is necessary to motivate channel so that best performance can be achieved. To motivate them, it is important to understand their issues and needs to that same can be taken care of.

It is work of Distributor advisory council to determine needs and problems of channel and apprise the same to manufacturer for appropriate action. Advisory council encourage sharing of information between channel and manufacturer. It also motivates channel to provide inputs in planning process and improve overall working. Personal relation and strong relationship also helps to engage in channel members. Company should also try to provide enough incentive to channel so that they can improve sales by putting in extra efforts and lowering costs.

Modifying Channel Arrangement Most of the companies think that Once the Channel setup is in place, then there is no need to do any changes in the channel setup. As same channel setup can be used in all the time and all situations. But this thought process is not right, different situations required different channel arrangement. We can discuss the how different situations can have impact on Channel arrangement. Product Lifecycle Changes: Different distribution strategy is required for product Based on the Product life cycle stage of the product.

Even for the same product, different distribution strategy is required at the different stages of PLC. As in the early stage, the motivation of the distributor to sell a product will be low as compared to the product in growth stage. Also in the early stage the Distribution should be selective in the early stage of PLC and later when the products enter the growth stage then extensive distribution stragety is to be used. There will be one point of influx when distribution strategy is to be changed from selective to extensive.

Customer driven refinement of existing channels Based on the consumer behaviour study, it is found that with time there are changes in the customer expectation from same product. For example, the products and services which used to be luxury 10 years back are now commodities. So earlier companies if were able to perform even missing on some particular distribution channel, but because of change in expectation, it becomes necessary to be available on those channels.. Companies need to take into consideration for these changes and modify their distribution strategy.

If companies will not modify their distribution strategy with time, then it will become difficult to survive in the competing environment. For example now Online retail has been so popular, if any company is not concentrating on this channel, then it will be difficult to survive in near future. Growth of multi-channel marketing systems Earlier, companies used to rely on one distribution channel for reaching to the customer, but because of changing environment and consumer behaviour, no company can rely on only one kind of distribution channel. Companies are trying to use different distribution channel to reach the customer.

Earlier companies were using only tradition distribution system(Distributor -> Wholesaler -> Retailer -> Customer) , but with Modern Trade into picture, companies have started putting emphasis on this distribution channel also. Looking at the exmples of Developed economies where Modern Trade constitutes of more than 80% of the Sales, it is evident that in Future, Modern Trade will take a major share of the overall sales. Managing Channel Relationship Once the distribution system is in place and different channels are established, then organization needs to maintain the channel relationships.

It is an important part of the Sales and Distribution because good relationship will not be maintained with channel members, and then it can impact the company’s objective. Cooperation and Coordination AS each channel member have a different role in the overall strategy of the company. So It is the companies responsibility that all channel members should work in-sync with each other. Different channel members should co-operate and co-ordinate with other channel members, so that overall objective of growth for the company can be achieved.

Conflict As the organization goal is to achieve higher customer reach and growth for all the channel members. But it is possible that some channel members work in way which help them grow at the expense of other channel members. This can have a negative impact on the overall company strategy. In such scenario companies have to intervene and resolve the conflict. There are two stages of the conflict Perceptual Stage: When it is perceived that there is some conflict on-going between different channel members.

Manifest Stage: Once it is know that conflict exist then, company will take some corrective action to resolve the conflict. This stage is called as manifest stage of the conflict. Power A channel member’s capability of changing the behaviour of other channel members can be termed as the channel power. If one channel members have some resource which is required by other channel members, then the channel member having resource can exert power on other. This is not a good situation for the company. There are basically five types of power viz. Coercive power, Expert Power, Legitimate power, Referent power and Reward power.

Coercive power is exercised by one channel partner, when he has ability to get the things done from other. It can be exercised either by decreasing profit margins or by withdrawing the rights given earlier. Expert power is enjoyed by channel when he has expertise or special knowledge about product or market. He may have gained it by attending special trainings or by having long period of experience in industry. Legitimate power can be granted by way of exclusive contract which one channel member may have. This contract gives him extra power and rights over the other channel members.

Referent power is derived by channel based on his relationship with other channel members or manufacturer based on previous history. Channel may be well known in market for its reputation etc. Reward power is enjoyed by channel when he gets appreciated for his work by industry or manufacturer. As powers can be misutilised as well, Company should always try to balance the power between different distribution channel members. ———————– Channel Integration- Sales and Distribution Management Prepared by: Pankaj Jain- 31 Vishal Babuta-63 Rohit Khanna-72 October 2010 PTPGPM Batch

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