DESIGNING CHANNEL Arslan Haider

arslan.haider@lbs.uol.edu
NETWORKS .pk
Week 4 & 5
OUTLINE
1 Exploring Channel Systems
2 Network Configuration
3 Channel Network Design Process

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NO BUSINESS IS AN ISLAND

All businesses are suppliers of products and services to their customers

as well as customers of some other business’s products and services.

But supply chains go much deeper.

In reality, all businesses are members of supply chains consisting not

only of their own customers and suppliers, but also of their customers’

customers and suppliers’ suppliers.

CHANNEL NETWORK
“An interconnection of organizations which relate to each other through upstream
or downstream linkages between the different processes and activities that
produce value in the form of products and services to the ultimate customer”.
Collaboration is an essential component of their continued success in the
marketplace.

The nature of a channel network depends on a matrix of factors, such as the

desired level of market penetration, how deeply forward and backward
integration with channel partners is to extend, and how intensive is the targeted
level of product and service distribution.
IMPORTANCE & KEY
QUESTIONS
Structuring effective channel networks are, therefore, fundamental to the

ability of all organizations to effectively leverage the resources and

competencies of their channel partners to achieve competitive success.

a firm must grasp of what customers want and expect from a supply or

distribution channel, what it will cost to meet customer goals, and which

channel partners will provide the right mix of resources and capabilities.
The task of channel network design must address such
questions as:

How many echelons should be in the supply and distribution

channel?

Where should channel facilities be located?

What level of customer service should be attained?

What are the capacity levels of each channel facility?

How deep is the ownership of supply and distribution channels and

when should a firm use independent channel partners?

What channel design models are available to assist channel

planners in making critical decisions regarding channel network
This lecture will also cover a five-stage model for executing
channel design processes.

Distribution Designers are expected to first map the channel strategy;

then segment the customer base;

explore possible channel configurations;

select the channel structures that best optimize channel customer service

and cost objectives; and,

finally, select channel members, define the boundaries of channel power,

manage channel conflict, and achieve strategic collaboration.

The most critical in choosing a particular channel network is
the degree of functional dependence involved.

Is the channel to be characterized as purely transactional, free from

channel dependencies, or is it based on a relational dependence
among channel partners?

What are the required capabilities and costs of dealing with each
network entity and how are they to be woven together?

What is the distribution of power among channel players: who

wields the most and who the least power?

What are the strengths and weaknesses of the competition and

how are existing channels responding to the initiatives of these
1 EXPLORING CHANNEL
SYSTEMS
When crafting a network channel, strategists have a choice of four
types of systems

1. Transaction-based systems
2. Limited channel system
3. Federated network system
4. Partnerships and Alliances

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1.1 TRANSACTION-BASED
SYSTEMS
There is minimal-to-no dependency between channel trading
partners. Such systems, in fact, are formed for the
performance of an often non-repeated transaction.
The products or services are normally confined to commodity
products or very expensive durable goods, such as machinery
or other processing equipment, and the services rendered are
usually customized around a unique event.
Once the transaction is completed, the likelihood of continued
interaction is remote.

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1.2 LIMITED CHANNEL
SYSTEM
Its similar to a single-transaction system in that businesses
only engage with other firms to capture a marketplace
opportunity. Once executed, buyers and sellers do not seek to
form extensive dependencies.
The objective of such channels is achieving best selling price
and short delivery time, and their longevity is directly
dependent on the ongoing usefulness of the arrangement.
Limited channels are defined (Opportunistic behavior i.e.,
stockist)
There is little or no loyalty in a limited channel, minimal effort
to build collaborative partnerships, and there is minimal
desire to improve channel efficiencies. Each firm is free to 11
1.3 FEDERATED NETWORK
SYSTEM
It is formed by businesses that acknowledge mutual
dependencies and actively seek to integrate individual core
competencies, resources, and market opportunities on a long-
term basis.
By pooling together the specialties of each channel member,
this network realizes levels of efficiency, profitability, and
customer value that could not be achieved otherwise.
Each participating member perceives the relationship as fair
and equitable and that they will financially and competitively
benefit in the short- and long-term from the arrangement.
It enables channel partners to compete as a unified delivery
system( Examples: Walmart, Toyata, Nestle, Coke, etc
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1.4 PARTNERSHIPS AND
ALLIANCES
•Partnerships arise when two or more firms integrate core
competencies and resources in the pursuit of an emerging
market opportunity. (Maqbool & Calson, Orange line train)
•Each participant in such an arrangement agrees to surrender
some of its independence to achieve long-term benefits
arising from cooperative marketing, operations, and
information sharing.
•A serious drawback of a partnership is the inability of the
relationship to withstand conflict stemming from differences
in operations or go-to-market strategies.

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1.4 PARTNERSHIPS AND
ALLIANCES
•When businesses agree to move to the next level of cooperation
by jointly undertaking to improve performance, cost effectiveness,
and competitiveness, this type of federated network is called an
Alliance. (Example: Nokia & Microsoft)
•While it can be voluntary, most alliances are centered on
contractual agreements. Examples are franchises, dealerships,
and warehousing and transportation service agreements.
•Contracts provide network partners with a sense of permanence
where risks, profitability, and accountability are shared legally.
•This type of federated delivery network describes about 80 % of
today’s consumer market.
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2 NETWORK
CONFIGURATION
Configuring a channel network has a significant impact on
performance because and it may affect:
Flexibility to adapt to marketplace changes
Number of facilities needed
Location of facilities
Total production,
Inventory levels
Transportation costs
Capacity of the channel
what inventories and customers are assigned to each channel
node
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2.1 REASONS FOR CHANNEL
NETWORKS
Normally there is often a lag between the time customers order a
product or service and when it can be delivered, companies must
establish distribution channels to facilitate their ability to reduce
customer wait time and costs.
Companies establish distribution channels to meet the challenges of the
following critical drivers:
1. Customer service
2. Relocation
3. Flexibility and scalability(measurability)
4. Product diversification
5. Rationalization (Eliminating unnecessary assets)
6. Decentralization
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3 CHANNEL NETWORK
DESIGN PROCESS
The purpose of the channel network design process is to
ensure the channel configuration optimizes customer service
at the lowest operating cost. Effective channel network
design involves:
1. Design of the best channels in terms of service and cost
2. Channel design implementation
• The channel design consists of following major steps:
1. Mapping the business strategy to basic channel alternatives
2. Segmenting customers to match channel service outputs
3. Review of possible channel configurations
4. Channel network selection.
5. Channel implementation, is concerned with managing 17
channel power, conflict resolution, and adaptation of
 Channel Network Design
Process

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3.1 MAP CHANNEL
STRATEGY
The first step in supply channel design is mapping the business strategy
to alternative channel structures.
Companies with strategies emphasizing cost leadership tend to locate
production plants and distribution centers at least-cost locations,
regardless of where their markets are.
Strategies focusing on responsiveness tend to locate facilities close to
the markets they serve, even if this means selecting high-cost locations.
The goal is to be able to react quickly to the changing needs of
customers.
Allocating too many resources to a location risks poor utilization, while
allocating too little results in poor responsiveness.

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3.2 SEGMENT CHANNEL
•This step is usually perceived as segmenting customers by profitability, age,
average purchase, or some other dimension.
•Linking customer preferences with service outcomes
Customer preferences include:
1. Determining customer needs: documenting what customers value the
most.
2. Customer behavior: utilizes technology tools to reveal the experiential world
of customers. Document how brand and service experiences impact from
customer’s perspective
3. Customer profitability: Divides customers into segments by profitability.
More importantly how this information is used for long-term customer loyalty
and not purely as a way to devise strategies focused on just selling more
products.
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3.2 SEGMENT CHANNEL
Channel service outputs includes:
1. Bulk-breaking: selling just the right quantity of products as
demanded by the retailer.
2. Spatial convenience: shrink time and geographical distance
between producer and buyer, by locating products and services
close to the customer
3. Waiting and delivery time: the longer buyers wait, the lower the
price or shipping charge they receive.
4. Variety or assortment: the more products that are sourced from a
single supplier, the less the cost involved in searching,
purchasing, transportation, and merchandizing.
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3.3 CHANNEL
POSITIONING/CONFIGURATIO
N
Following options are available for channel
configuration :
1. Producer Storage with Direct Delivery
2. Producer Storage with Drop Ship
3. Producer with Extended Channel Networks
4. Aggregator with Extended Channel Network
5. Aggregator with e-Business Network

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3.4 CHANNEL SELECTION

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CHANNEL STRUCTURE
 3.4.1 CHANNEL SELECTION
ISSUES
Macro level issues: Micro level issues : Site issues:
• corporate objectives • local taxes, culture, and • facility cost and size
translated into markets and climate • availability and
competitive positioning accessibility of
• labor, costs, wages, and transportation modes
• customer service-level goals union strength
• proximity to highway
• global economic conditions • cost and availability of systems
utilities • communications
• country-level political stability
• local environmental infrastructure
• government regulations regulations • local taxes and fees
• location of markets • government incentives • environmental regulations
• exchange rates and currency • community resources 25
risks
3.4.2 METHODS FOR
LOCATING CHANNEL
NETWORK FACILITIES
1. Factor-Rating Method
2. Center of Gravity Method
3. Location Break-Even Analysis
4. Linear Programing

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3.5 CHANNEL
IMPLEMENTATION
•This step is concerned with the management of four
major functions:
1. Selection of channel partners
2. The nature and distribution of channel power
3. Managing channel conflicts
4. Achieving strategic channel collaboration

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3.5.1 SELECTION OF
CHANNEL PARTNERS
Number of years in business
Financial stability
Depth of product variety
Relationships with possible competitors
Growth and profit history
Level of cooperativeness and collaboration
Service reputation.
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3.5.2 ROLE OF CHANNEL
POWER
The issue of getting, using, and keeping power is of the
utmost importance to channel leaders.
The very basis of an effective channel network is the
interdependence of members and how power is to be
exercised to maintain viable, working relationships where
each member creates strategies and performs actions that
support the cooperation of all members in the pursuit of both
individual company and aggregate supply channel value.
Without channel power, the tendency of individual members
to maximize their own profit is very high

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3.5.3 MANAGING CHANNEL
CONFLICT
Conflict can arise between players at the same level in a channel, at
different levels in a channel, and between two or more channels that sell
within the same market.
Delivery networks by nature are difficult to change, conflict between
channel players can easily erupt. Conflict could arise over a decision to
drastically change the channel, such as Dell’s decision in the mid-1990s
to abandon altogether its retail stores in favor of a purely Internet-driven
business format.
Progressive supply channel networks consider conflict not as a negative,
but as a force for change. Since revenue growth and profitability is
directly linked to a company’s ability to manage their delivery network
partners, identifying and quickly resolving conflict is essential to ongoing
channel success.
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3.5.4 ACHIEVING STRATEGIC
CHANNEL COLLABORATION

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REFERENCE
Distribution Planning and Control: Managing in the Era
of Supply Chain Management (3rd Edition) David Frederick
Ross, Springer 2015

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