MANAGING B2B CHANNELS AND SUPPLY CHAIN
Supply Chain Management
Critical to the success of an organization is its ability to maximize customer value whilst minimizing costs in doing this. Very few companies deal directly with end-customers whilst at the same time performing all task in-house to deliver value to that end-customer. We know that a variety of companies are involved in this process, these all represent a supply chain. Fundamental to SCM (supply chain management) is the responsiveness of a supply chain and the integration of all organization that are part of it. To realize this potential requires a close relationship that involves information sharing (strategic, product development point-of-sales transaction and customer data).
SCM performance is underpinned by the following goals:
- waste reduction
- Time compression – through improvement information flow, but also reduced cycle time
- Flexible response – faster adjustment to changing market
- unit cost reduction
An important contributor to meeting these objectives is ERP (enterprise resource planning), which integrate different processes such as sales, forecasting, procurement, operations and customer service. SCM is the mechanism for the integration along the supply chain, logistics management covers the coordination of activities that contribute to the forward and reverse flow of information, goods and services between the point of origin and the point of consumption. These activities can include: Transport (in-outbound), warehousing, product handling, order fulfillment and inventory.
Logistics management is increasingly an important element in business marketing strategy because:
- The significant cost savings which can be achieved through improved logistics performance.
- The explosion in product variety that in turn heightens the complexity of handling the movement of products.
- Improvements in information technology such as web-based logistics systems, uniform product codes and electronic transfer of order and payment data, which increase logistical efficiency.
Reaching and satisfying Customers: Third-Party Involvement
Few organizations have the resources to deliver superior value to all customers in all locations. So at some point a company has to decide whether to involve third parties in helping to reach and satisfy customers. Traditionally, the composition of routes to market has been approached from a linear/hierarchical perspective, with the principal company deciding on the type of intermediaries to use.
In complex situations a company may choose the deal with the customer directly. This could be used for products and services alike, allowing a company to have complete control. The challenge for an organization comes when it wants to enter new markets with which it is unfamiliar. In such situations a company might rely on a sales agent. These representatives act as a link between the supplier and end-users, make contact with the customers, introduce the supplier’s capabilities and act as a mediator in the formulation and presentation of product offerings to customers and the negotiating and handling of contracts. Common in the use of independent sales representatives is payment by commission for order actually won by a supplier. Be aware that this form of payment can create problems, for example, how is the customer ‘maintained’ by the agent after he won a deal, this has to do with customer relationship management.
Uniform product offerings
Where risk/uncertainty is lower and involves a more standard product offering, the organization has less intention to have control over all exchanges with the customer. The marketing organization’s expertise centers on the design and efficient production of products that match end-customer needs.
To make these available to customers, a company that produces tangible goods would use distributors. They can act as a key link between a company and its end users. Distributors income is derived from a margin on the price they bought it from the supplier, these costs have to be made for initiating and handling all exchanges with end-customers. Activities associated with these exchanges include:
- Modification and assembly
- Product supply
- Service and repair
This works for physical products, however not for service-based products that require the physical presence of the service operation in close proximity of its customers. Where the product is essentially standard the company can use franchising, which is a form of licensing where the franchisee gets the right to perform business in a specific manner, by, for example, using their name and brand.
From single to multiple routes to market
IT companies used to sell products via direct sale channels, using their own sales force. However, changes in the market caused problems for IT companies. So the companies developed multiple routes to market in order to make use of the new opportunities in the market. Manufacturers’ representatives (agents) and Value-Added Resellers (VAR) became important intermediaries in the IT industry.
A pluralistic multi-channel system
In this system a company uses multiple routes to market, each organized that they are responsible for a separate group of products and in doing so targets quite distinct market segments.
A monolithic multi-channel system
In this systems the company uses one structure, consisting of direct and indirect channels to reach the customers, with each channel member adjusting the functions it performs according to the segment that it is dealing with.
Coordination: handling channel partners
Whatever the structure and functioning of the routes to market used by an organization, a number of factors have to be taken into account to ensure the effective management of channel operations and the relationships with other parties in the channel system. These include:
- Selection of channel members
- Support provided to channel partners
- Means of controlling channel behaviour
- Dealing with channel conflict
- Selection of channel members
Before a company can make a selection decision, it has to be able to find potential intermediaries. Sources used for identifying possible channel members include trade sources and the intermediaries themselves. A particularly useful means of finding potential members is via trade fairs and exhibitions. Selection will normally depend on a partner’s resources, product and marketing capabilities. It needs to know if a company has enough resources to support its marketing plan. Also, the company has to ensure that an intermediaries product range complements its own, that it has to necessary physical facilities to handle stock and perform some light manufacturing or assembly (in case of customization or postponement).
- Support provided to channel partners
In addition to recruiting intermediaries, a company has to develop programs of activity to support channel members, including methods of motivating and training intermediaries as well as reviewing intermediaries. Incentives and behaviour to encourage the intermediary can include:
- Financial incentive (attractive commission rates, bonuses)
- Territorial exclusivity
- Provision of supplier resources (sharing market information, market communication support, and training of intermediary or staff
- The working relationship approach to intermediary dealings (such as joint planning or strategy for a region)
While the above represents a variety of ways in which a supplier might try to motivate channel members, those actually used would depend on the requirements of the intermediary themselves.
Given the potential contribution of intermediaries to a supplier’s position in target markets, the evaluation of channel member performance is important. Evaluation should allow a company to spot weaker intermediaries, to identify gaps in necessary capabilities (offering training to help close gaps) and where necessary to terminate contracts. It might be expected that criteria and actual measures would be agreed by both parties. However, research has shown us that sales volume and revenue were the only measures against which mutually agreed target were set. Not every intermediary is willing to cooperate, powerful intermediaries may be unwilling to participate or may at best contribute infrequently to supplier reviews of channel performance.
- Channel control: power, contracts and trust
The mechanisms by which activities between various channel partners are coordinated are key concerns, and interest has been devoted to determining the contribution of power, contractual and trust-based means of controlling inter-firm behaviour. Of these three means of organizing routes to market, the one which has attracted considerable attention in channel research is the means and effect of a single organization using its position of power to control the activities of other channel members. The ability to do this occurs as a result of the more powerful organization having more resources that are valued by the less powerful channel member. Power lies not only with suppliers but also with intermediaries. Particularly where they have large volume requirements and provide suppliers with significant market coverage and access to a fragmented and dispersed customer base.
The use of power in channel relationship can be viewed negatively of one party is forced into acceding to the demands of the more powerful party. It can also lead to conflict in relationships where coercion restricts the ability of the weaker organization to achieve objectives that it might seek from involvement in a channel relationship.
An alternative to one organization from using its position of authority to coordinate activities in a channel relationship is for companies to use contractual arrangements as the principal means of control.
Rather than using power or contracts to control actions, coordination might be trust-based, where companies develop norms – patterns of behaviour as a result of repeated interaction and ongoing dealings with channel partners. One of the principal mechanisms for facilitating such relationship norms is through collaborative communication between channel members. This consists of:
- A high frequency of interaction across all communication media
- Extensive two-way communication consisting of ongoing dialogue between supplier and intermediary
- The use of formal policies guiding communication behaviour
- The use of influence tactics that place priority on common goals
Whilst collaborative communication reflects the apparent shift in many industries from competitive to collaborative relationships between suppliers and intermediaries, it is not necessarily suited for all market or relationship conditions.
- Channel conflict
Whatever approach is used to coordinate activities, conflict between channel parties is inevitable and can vary from minor disagreements to significant disputes that can lead to discordant relationships. The principal cause of conflict include the following:
- Differences in objectives
- Differences in desired product lines
- Multiple routes to market (frustration because intermediaries are restricted targeting certain customers because the principal company wished to deal with those customers directly)
- Inadequate performance
What, then, can channel members do to avoid and manage conflict? Frequent communication is also important in avoiding and managing conflict. Where an intermediary is not reaching targets, training could help improving performance. Where companies use multiple routes to market, conflicts can be avoided by partitioning markets between the various intermediaries based on geographic area, industry application, and customer size or product group. For this to be effective, channel members have to agree to the basis for the partition and operate according to their individual allocation. A supplier can also try to eliminate conflict by taking control of the channel relationship; this might be via forward integration or by using power or contractual arrangements such as franchising.