Channel designing is resorted to by the industrial marketer when he has to develop either a new channel system or modify an existing one. As channel design and management is a difficult and an incessant task, an industrial marketer has to go through certain stages that are involved in designing a superlative channel system. The various steps that are involved in channel design process are analyzing needs of the customer, establishing channel objectives, considering channel constraints, listing channel tasks, identifying channel alternatives, evaluating alternate channels and selecting the intermediaries.
The industrial marketer also has to take appropriate decisions on channel management by selecting the right intermediaries based on the various steps. The intermediaries need to be continuously motivated by means of offering them various benefits and facilities. Any conflicts arising between the intermediaries due to various reasons need to be solved by the industrial marketer. Finally, the entire channel performance has to be evaluated and necessary control measures need to be taken in order to enhance the performance of the entire channel network.
After a company completes the task of choosing a channel alternative, it has to start the process of selecting the intermediaries, motivate them, control any channel conflicts and evaluate the performance of channel members.
Selecting the Intermediaries
Selecting the intermediaries is not part of channel design as some intermediaries leave the channel while others are terminated by the manufacturer. Selecting the best intermediary is a continuous process that is sometimes a more difficult task as producers have to work hard to get qualified middlemen. It involves finding out the distinct characteristics possessed by the intermediaries. Such evaluation is generally based on the experience possessed by the intermediaries, their number of years in the line of business, exposure in other fields, their past history, growth and profit records, their reputation, future growth potential, type of clientele possessed, etc.. Thus, a channel that effectively satisfies the needs of a customer better than the competitors should find a place in the manufacturer’s priority list.
Motivating the Channel Members
After selecting the middlemen, the industrial marketer needs to continuously motivate them to do their job better to achieve long-term success. Though the terms and conditions that made them join the channel is a motivating factor, it must be further supplemented by training and encouragement. Understanding the needs and wants of the middlemen is the first step of motivation process. Depending on the motivational technique used by the manufacturer, there would be varying levels of support from the middlemen. Manufacturers generally try to maintain relationship with their distributors by motivating through cooperation, partnership, discounts/commission, and distributor councils.
- Cooperation: Most of the manufacturers use the carrot and stick approach to gain cooperation from middlemen. Positive motivators like higher margins, special prices, allowances etc, along with threats like reduction in margins, slow delivery, terminating the contracts etc, are used to increase business. The manufacturer has to do a SWOT analysis of the distributors before implementing this approach.
- Partnership: Manufacturers enter into an agreement or partnership with their intermediaries that list the objectives, policies and terms of jobs to be performed by both the parties in order to avoid any future conflicts. A good example of partnership is Vendor Managed Inventory System (VMI) where effective communication happens between the vendor and channel members through the assistance of electronic data interchange (EDI). The EDI helps the company to fill up the stock automatically at the channel member once it reaches the minimum reorder level. All relevant invoices, acknowledgements are electronically processed and sent to the distributors. The system also helps to check the slow moving products at the distributor’s end, generates a purchase return order based on which the products are returned back to the company. This digital revolution helped in reducing costs and improving customer service both by the manufacturer and distributor thus nurturing their partnership.
- Offering discounts/commissions: Another motivating factor for intermediaries is the offering of discounts/commissions by the manufacturers. The compensation is offered taking into account the expenses incurred and the services provided by the intermediaries.
- Establishing distributor councils: Manufacturers establish distributor councils to get closer to their distributors through the company executives. These councils help both the manufacturer and the middlemen to mutually plan various activities like sharing market information, conducting training programs, planning promotional schemes and then implementing them. The middlemen should be considered by the manufacturers as their working partners rather than as customers. Apart from above motivators, several other practices should also be considered like arranging seminars, sponsorships for annual retreats, immediate response to queries through call centers etc., With the advancement in information technology, newer techniques should be used that helps to increase the business and strengthen the relationship among both.
Managing Channel Conflicts
A well designed distribution channel though has several benefits as observed, it is not the ultimate for the manufacturers. There are several differences and problems that still exist between the manufacturers and the distributors due to various simple and intricate reasons like:
- Dissimilar objectives: If the objective of manufacturer is to offer good customer service to develop long-term relationship while that of distributor is to somehow make short-term profits, then it gives rise to conflict among the two.
- Less interest on products by the distributors: If distributors concentrate on those manufacturer’s products where they earn more profits or which are fast moving in the market, then it creates a conflict between him and the other manufacturers on whose products the distributors do not focus.
- Customer dealings: This is another common source of conflict that generally happens where the manufacturer tries to cater to large customers directly and makes the distributors serve the small customers thus making them earn less profit and hampering their business growth.
- Dissimilar views: If the manufacturer is of the view that a promotional scheme would increase the business while the distributor feels that it would decrease their margins as it involves cost, then conflict arises.
- Commission to distributor: If the distributor demands more commission while the manufacturer feels the existing commission is too high and denies the same, then it causes conflict.
- Territorial problems: When the areas among the distributors are not properly demarcated then it leads to conflict as one tries to enter the other’s territory to get business.
A dispute in the channel network can seriously affect the performance of channel members. It instigates a need for the industrial marketers to assess the areas of conflict and take corrective measures. There are different ways in which channel conflict can be controlled. They include:
- Creating an effective communication set-up: There should be effective communication between the manufacturer and the other members of the channel network. This can happen through frequent interactions with the channel members where they can discuss the common issues and sort them out.
- Setting joint goals: All the channel members jointly set the goals they wish to achieve by coming to a common agreement. The goals set by them can be anything in common that range from customer satisfaction, increasing market share, increasing profits, reducing costs, improving quality of service etc., Involving mediators: A third party in the form of arbitrator or mediator enters in between the two parties among whom conflict arises and tries to solve their problems by eliminating disagreement.
Evaluating Channel Performance
The performance of the industrial distribution channel is said to be effective if the channel members are able to reach the overall objectives smoothly. This calls for periodic evaluation of their performance where various parameters like meeting the sales target, maintaining the required inventory levels, ontime delivery to customers, their cooperation and service levels, generation of new customers, etc., are taken into consideration. The aspects where the middlemen score less during the evaluation process are analyzed and discussed with them where they are motivated to improve upon those areas. Sometimes, manufacturers terminate their services with middlemen if they are unable to meet their expectations or shape up as required.
Credit: Industrial Marketing-MGU