Channel Management Logistics

Channel Management Logistics

• Choosing the Best Channel Structure
• Financial Approach
• Limitation/Cons of Financial Approach

Choosing the Best Channel Structure

Channel Design:

It refers to the decisions involving the development of new marketing channels where none existed or the modification of existing channels.

Importance of Channel Design

1. It is cost saving. Members of the distribution channels specialize in what they do and would be able to perform their activities at lower costs as compared to the firm trying to manage all activities.

2. Customer convenience. Through distribution channels, goods have been made easily accessible to consumers.

Customers can also receive credit services for the different goods available.

3. Maximize value of marketing. One can maximize value of the effort put into marketing strategies by collaborating with intermediaries.

4. Wider Customer Reach. Through distribution channels a firm can reach a larger number of customers at a faster rate. Hence, helping with the market coverage that the firm may not have been able to achieve on its own.

5. Easily available feedback. Retail chains know which products sell well in their specific areas of coverage. Their feedback can prove valuable in making products that more consumers need and want.

Approaches to choosing the Best Channel structure

1. ‘Characteristics of goods and Parallel Systems’ Approach

2. Financial Approach

3. Transactional Cost Analysis

4. Management Science Approach

5. Management Heuristic Approach

We will be tackling the ‘Financial Approach’ to choosing the best channel.

Financial Approach by Lambert

This approach was developed in the 1960s, arguing that the most important variables for choosing channel structure are financial.

Shorter Channel = More Capital

Lengthened Channel = More funds available

The financial approach entails:

1. Comparing estimated returns on capital from alternative channel structures, to determine the most profitable channel. This can be done using the following financial variables to calculate future costs:

• Stock Returns
• Interest Returns
• Economic Recession etc

2. Compare the use of capital for manufacturing vs. using the capital in manufacturing.

If the firm can earn more than the cost of capital and more than the returns that can be earned if capital was used in manufacturing, then the organization can shift performance of marketing functions to intermediaries.

Example

Recently,Chu,et al.have developed a methodology for accessing the economic value of a particular channel structure using Lambert's approach.

Using highly sophisticated structural modeling and policies simulation techniques to analyze channel structures in the personal computer industry,these researchers were able to provide economic questionnaires for decisions that P.C manufacturers such as Del,IBM and others made with regard to the channel structures these firms chose.

Cons of using the Financial Approach

1. Obtaining accurate estimates of future revenues and costs from alternative channel structures is very difficult.

2. A large number of variables affect channel relationships, especially when independent intermediaries are involved, estimating returns becomes far more difficult.