Channel Strategy

The design of the logistical program to serve a given channel structure depends on the channel strategy of the enterprise. The channel strategy is based on the broad principles through which the firm expects to achieve its distribution objectives for the target market. Depending on the nature of the product, industry practices and market trends the enterprise may formulate the channel strategies to serve the end customers. The channel strategy decision can be examined in light of the following views:

1. Length of the Channel

This is more concerned with the levels of channel structure. The decision depends on whether the sales are directly made to the customer or use a large number of intermediaries to reach the final consumers. The decision is based on market reach, distribution cost and the degree of controls on the channel members. The firm may have its own channel outlets wherein there is a limitation on investment in infrastructure. However, there is full control on distribution activities in the distribu­tion channels owned by the firm. Showrooms and retail chains are examples of captive distribution channels where the activities are under full control. Here, the programmed logistics can be pre­planned and executed in close coordination with control channel inventory. The other option is the contractual system such as franchising, wherein a high degree of control can be exercised on channel activities and logistics programs organized to support those activities. In both the above systems, the firm is in direct contact with the end customers. The limitations of these two systems are the huge investment required in creating the infrastructure and limited coverage of the market. The third option is to employ independent intermediaries such as wholesalers, stockists, distribu­tors, dealers, agents and retailers. The advantage here is that the firm gets ready-made infrastruc­ture to operate from, without any investment. The intermediaries are widely spread and thus a wider market coverage is possible. Undoubtedly, they are easily accessible, but the disadvantage is that firms lose on the degree of control. The firm does not have a direct interface with customers in this system and will have to think of a system for information linkage with the customers. The degree of control on the channel inventory in this system is loose as compared to the previous two systems discussed above. The failure probability of the logistical programs designed for this distri­bution system is high because of the absence of cohesive linkages in the channel structure.

2. Channel Breadth

The decision on the breadth of channel depends on market coverage. Consumer goods, snack foods, newspapers, confectionary and garments are mass-consumed items that need a wider distribution channel for building market share. Profits are generated through volume sales, which are possible only if the product is available at the point of demand that has both time and place utility.

The decision on channel breadth depends on the product purchase frequency, the ease with which the customer would like to acquire it, market coverage to build market share and buyer behav­iour. Logistics programs for a wider channel network require the support of a logistics network to coordinate activities such as order processing, warehousing, packaging, transportation, inventory management, and so forth. The control becomes more complex for mass-distributed consumer prod­ucts covering national or global markets. Information technology (IT) and modern means of commu­nication are playing a significant role in the efficient and effective control of these complex activities.

3. Marketing Strategy

This is another dimension to the channel selection, particularly the channel breadth selection. For building market share, a wider market coverage is required and hence intensive distribution will support the objective. However, to support the differentiation-based marketing strategies for focused customer group, distribution channel exclusivity will help the firm to exercise full control on the distribution task and logistical activities in order to achieve the objectives. Exclusivity will also assist in offering customized pre- and post-sales service to the focused customer group to build trust and confidence in the product and the firm. In the exclusive channel structure, there is a need and scope for customized logistics programs, as the firm’s marketing resources are deployed for the focused group of customers who bank on the service rather than the price.

The effectiveness of the channel depends on the following two factors:

1. Degree of control on intermediaries
2. Backup supply efficiency

The degree of control has a direct relationship with the compensation the channel members receive for the distribution task they perform for the firm. This is to be backed up with an efficient goods supply to make goods available in the desired quantity as and when required. So, frequent deliveries in small lots may have to be made. This could mean an increase in the transportation cost, but it will be more than offset by a significant reduction in the incidence of inventory-carrying cost on the system.

Source: Sople V.V (2013), Logistics Management, Pearson Education India; Third edition.