Chapter 3

Supply Side Channel Analysis:

Channel Flows and Efficiency Analysis
 Key Topics for Ch. 3

I. Review: Three Examples of Service Output Demand

I. High Tech Product
II. Peapod (Online grocery shopping)
III. Charles Schwab

II. Channel Flows

III. Channel Efficiency Analysis: Efficiency Template

 SERVICE OUTPUT DEMAND TEMPLATE
SERVICE OUTPUT DEMAND:

SEGMENT
NAME/ BULK SPATIAL DELIVERY/ ASSORTMENT/ OTHER SOD(s)
DESCRIPTOR BREAKING CONVENIENCE WAITING VARIETY
TIME

1.

2.

3.

4.

5.

INSTRUCTIONS: If quantitative marketing-research data are available to enter numerical ratings in each cell,
this should be done. If not, an intuitive ranking can be imposed by noting for each segment whether demand for
the given service output is high, medium, or low.
 Ex 1) B2B CHANNEL SEGMENTS FOR A NEW HIGH-TECH PRODUCT
Possible Service Lowest Total Responsive Support/ Full-Service References and
Cost/ Pre-Sales Post-Sales Segment Relationship Segment Credentials Segment
Output Priorities Info Segment
References and Credentials 5 4 6 25
Financial Stability and 4 4 5 16
Longevity
Product Demonstrations & 11 10 8 20
Trials
Proactive Advice & 10 9 8 10
Consulting
Responsive Assistance 14 9 10 6
During Decision Process
One-Stop Solution 4 1 18 3

Lowest Price 32 8 8 6

Installation and Training 10 15 12 10

Support
Responsive Problem Solving 8 29 10 3
After Sale
Ongoing Relationship with a 1 11 15 1
Supplier
Total 100 100 100 100

% Respondents 16% 13% 61% 10%

= Greatest Discriminating Attributes = Additional Important Attributes

IDEAL CHANNEL SYSTEM FOR B2B SEGMENTS BUYING A
NEW HIGH-TECH PRODUCT

Manufacturer
(New High Technology Product)

Associations,
Pre-Sales Events,
Awareness
Efforts
Dealers Third-
TeleSales/
Sales TeleMktg Party
Supply
VARs
Out-
Internal Support
source
- Install, Training &
Post-Sales Service Group

Lowest
Responsive References/
Full-Service Total
Support Credentials
Cost

Source: Reprinted with permission of Rick Wilson, Chicago Strategy Associates, 2000.
 Example 2) PEAPOD GROCERY SHOPPING STEPS

Who Performs This Step In:

Shopping Process Step A Standard Grocery A Peapod Shopping

Store Shopping Trip: Experience
Plan what to buy (prepare Shopper Shopper
shopping list)
Travel to grocery store Shopper PEAPOD

Walk aisles of store Shopper PEAPOD

Pick grocery items one by Shopper PEAPOD

one
Check-out process Shopper PEAPOD

Bag groceries Shopper PEAPOD

Transport groceries home Shopper PEAPOD

Unpack groceries Shopper Shopper

 THREE CHANNEL SEGMENTS FOR GROCERY SHOPPING

Segment's Relative Importance of Service Output

Range of Service "Branded Products "Low "Fast/Efficient
Outputs Demanded Delivered" Price/Comparisons" Purchase Process"
Purchase process easy HIGH Moderate HIGH
to find, select & buy
Purchases are VERY HIGH Low Low
delivered to home
Information on product Low HIGH Low
usage/ needs planning
Fast and efficient HIGH Low VERY HIGH
buying process
Information on Moderate VERY HIGH Low
comparing and
choosing
Ability to see, touch Moderate Moderate HIGH
and inspect products
Absolute lowest prices Moderate VERY HIGH Low
Experience provides Low VERY HIGH Low
social interaction
Place sells specific VERY HIGH Moderate Moderate
brands desired
Percent who are 44% 23% 31%
heavy Internet users

Source: 2000 Chicago Strategy Associates. Used with permission of Rick Wilson.
 THREE CHANNEL SEGMENTS:
VALUE OF HOME DELIVERY
On a 10 point scale
(1 = lowest importance and 10 = highest importance)

Low Price and Home Delivery

Efficiency Segments Segment
Importance of home
delivery in creating ideal
grocery shopping 1.8 7.4
experience…

Improvement in having
groceries delivered to
your home would make 3.8 6.7
shopping more ideal…

Source: 2000 Chicago Strategy Associates. Used with permission of Rick Wilson.
 Example 3) SCHWAB: SERVICE OUTPUT DEMANDS
FOR MUTUAL FUND INVESTORS
Bulk-Breaking Spatial Delivery/Wait Assortment/ Pre-Sale Service
Convenience Time Variety

Ease of initiating
transactions and Initiation/ Amount of
SOD defined as: Minimum transfers execution time Assortment of investment
investment between fund (including funds offered to advice required
amount families and between fund investors before sale of
consequent families) mutual fund
transfer costs

DIY - Varies High High High Low

Sophisticated
Investor

Service- Varies Medium High High High

Demanding
Sophisticated
Investor

Unsophisticated Varies (likely to Low Low High High

Investor be smaller)

Source: Carmichael, Trent, Bill Norris, Rob Rozwat, and Emiko Taguchi (1996), "Charles Schwab OneSource: Channel Audit."
Used with permission of the authors.
 SCHWAB: SERVICE OUTPUTS SUPPLIED BY
DIFFERENT CHANNELS FOR THE MUTUAL FUND INDUSTRY
Bulk-Breaking Spatial Delivery/Wait Assortment/ Pre-Sale Service
Convenience Time Variety

Ease of initiating
transactions and Initiation/ Amount of
Minimum transfers execution time Assortment of investment
SOD defined as: investment between fund (including funds offered to advice required
amount families and between fund investors before sale of
consequent families) mutual fund
transfer costs

Direct Sales by High (within High (most

Mutual Fund Medium/High Low family) families offer a Low
Family Low (between variety of funds)
families)

Traditional Low Low Medium/High High High

Brokerage and
Investment
Advisors

Mutual Fund High High High (both within High Low

Supermarket and between
families)

Source: Carmichael, Trent, Bill Norris, Rob Rozwat, and Emiko Taguchi (1996), "Charles Schwab OneSource: Channel Audit."
 FIGURE 1.2: MARKETING FLOWS IN CHANNELS

Physical Physical Physical

Possession Possession Possession
Ownership Ownership Ownership

Promotion Promotion Promotion

Negotiation Negotiation Negotiation

Consumers
Financing Financing Financing Industrial
Producers Wholesalers Retailers
and
Risking Risking Risking Household

Ordering Ordering Ordering

Payment Payment Payment

Commercial Channel Subsystem

The arrows above show flows of activity in the channel

(e.g. physical possession flows from producers to wholesalers to retailers to consumers).
 Allocating Five Marketing Functions in an
Exhibit 3.1 Automobile Channel*
Physical
Function
Transporte Transport
Supplier Manufactu ers Dealers Transport Custom
s rs rer ers er
Warehous Warehous
Title Function
es es

Suppliers Manufactur Dealer

er s Custom
Payment er
Function
Suppliers Banks Manufactu Bank Deale Banks
Custom
rer s rs
er
Information
Function
Transport Transport
Suppliers Manufactu ers Deale Transport Custome
ers rs ers Banks
Warehous rer Warehous r
es Banks
Promotion es Banks
Function
Manufactu Advertisin Deale Custom
Suppliers Advertisin
rer g Agency rs er
g Agency
12
©McGraw-Hill Companies, Inc. 2002
 MARKETING FLOWS IN CHANNELS

Each flow carries a cost. Some examples of costs of various flows are given
below:

Marketing Flow Cost Represented

Physical possession Storage and delivery costs

Ownership Inventory carrying costs

Promotion Personal selling, advertising, sales promotion,

publicity, public relations costs, trade show costs

Negotiation Time and legal costs

Financing Credit terms, terms and conditions of sale

Risking Price guarantees, returns allowances, warranties,

insurance, repair, and after-sale service costs

Ordering Order-processing costs

Payment Collections, bad debt costs

 Example 1: CDW’S PARTICIPATION IN VARIOUS CHANNEL FLOWS
Channel Flow CDW’s Investment in Flow
Physical (a) CDW has a 400,000 sq. ft. warehouse.
possession (b) CDW ships 99 percent of orders the day they are received.
(c) For CDW’s gov’t buyers, CDW has instituted an “asset tagging” system that lets buyer track what
product is going where; product is scanned into both buyer and CDW databases, for later ease in
tracking products (e.g. for service calls)
(d) CDW buys product in large volumes from mfgrs., taking in approximately eight trailer-loads of
product from various suppliers every day. Loads are received in bulk, with few added services.

Promotion (a) CDW devotes a salesperson to every account (even small, new ones!), so that an end-user can
talk to a real person about technology needs, system configurations, post-sale service, etc.
(b) Salespeople go through 6½ weeks of basic training, then 6 months of on-the-job coaching, then a
year of monthly training sessions.
(c) New hires are assigned to small-business accounts to get more opportunities to close sales.
(d) Salespeople contact clients not through in-person sales calls (too expensive), but through
phone/e-mail.
(e) CDW has longer-tenured salespeople than its competitors.

Negotiation (a) CDW-G started a small-business consortium in 2003 to help small firms compete more effectively
for federal IT contracts. What CDW-G gives the small biz partner: lower prices on computers than
they could otherwise get; business leads; and access to CDW’s help desk and product tools; CDW
also handles shipping and billing, reducing the small biz partner’s channel flow burden. What the
small biz partner provides: access to contracts CDW could not otherwise get.

Financing (a) CDW collects receivables in just 32 days;

CDW turns its inventories 2x per month;
CDW has no debt.
Risking (a) “We’re a kind of chief technical officer for many smaller firms”:
(b) In April 2004, CDW was authorized as a Cisco Systems Premier (CSP) partner, in serving the
commercial customer market.
 Example 2: PEAPOD SHOPPING AND FULFILLMENT
PROCESS: ORIGINAL CHANNEL STRUCTURE

ACTIVITY: FLOW (performer):

1. Shopper connects to Peapod system:
 shops ORDERING (shopper)
 Places order
 Specifies 90-minute delivery window

2. Peapod server receives order, places in ORDERING (Peapod)

queue to shop PROMOTION (Peapod, via data storage)

3. Order is transmitted to professional

Peapod shoppers in the Jewel food store ORDERING (Peapod)

4. Order is shopped inside Jewel food PHYSICAL POSSESSION (Jewel 

store* Peapod)
*Out-of-stocks are replaced with second
choice if shopper has specified one during
the online shopping step.
Continued on next slide
 Example 2: PEAPOD SHOPPING AND FULFILLMENT
PROCESS: ORIGINAL CHANNEL STRUCTURE
ACTIVITY: FLOW (performer):
FINANCING (Jewel  Peapod)
RISKING (Jewel  Peapod)
5. Peapod pays Jewel for order OWNERSHIP (Jewel  Peapod)
PAYMENT (Peapod  Jewel)

6. Peapod packs order in temperature- PHYSICAL POSSESSION (Peapod)

appropriate delivery containers OWNERSHIP (Peapod)
RISKING (Peapod)

7. Peapod delivery person delivers

order to shopper:**
 unloads bags at shopper's door PHYSICAL POSSESSION (Peapod 
 accepts payment Shopper)
 accepts coupons (if any) OWNERSHIP (Peapod  Shopper)
** If errors are discovered in the PAYMENT (Shopper  Peapod)
order, Peapod assumes responsibility for
correcting them.

PHYSICAL POSSESSION (Shopper)

OWNERSHIP (Shopper)
8. Shopper unloads and puts away groceries
 Example 3: SCHWAB: IDENTITIES AND ROLES OF
COMPANIES INVOLVED IN “PRODUCING” MUTUAL FUNDS
Investment
Advisor (product
design)

Fund Administrator Fund Distributor

(management, (underwriting,
administrative services manages the
to fund) marketing and
Mutual
MutualFund
Fund promotion functions)
Family
Family
("Producer")
("Producer")

Transfer Agent (maintain

Custodian (asset custody,
records of fund ownership,
safekeeping, transfer)
process and record share
purchases and
Flows Performed by Various Entities: redemptions)
Investment Advisor: promotion (through portfolio design)
Fund Administrator: negotiation (through management of administrative processes)
Fund Distributor: promotion (through performance of selling and marketing tasks)
Custodian: physical possession, risking (through responsibility for safekeeping of shares)
Transfer Agent: ordering, payment (through responsibility for processing orders and recording share
purchases/redemptions)
FIGURE 4.4: SCHWAB STRUCTURE OF MUTUAL FUND DISTRIBUTION CHANNELS
Producers (including all entities in Figure 4.3):
"Independent" Fund "Direct" Mutual Fund Company "Indirect" Mutual Fund Banks & Trusts
Managers (Fidelity, Vanguard, T. Rowe Company (Bankers Trust, Northern
(Kaufmann, Gabelli, Price) (Putnam, Kemper, Franklin) Trust)
Wasatch)

12b-1 Fees: 0.25- Sales Commission: Sales Load or 12b-1

0.35% Fees

Mutual Fund
Intermediaries: "Supermarket" Registered Investment Brokers Retail Bank
Advisor (RIA)

Annual Fees: 1.0-1.5% Annual Fees: 1.0-

Annual Fees: 0.9-1.25%
Annual Fees: 1.0-1.5% Annual Fees: 1.0-1.5% Loads: 3.0-5.0+% 1.5%
Loads: 3.0-5.0+%
Loads: low to high Loads: none to low Advisory Fee: 1.0- Loads: 3.0-5.0+%
Consumers: 2.0% Advisory Fee: 1.0-
3.0%

Unsophisticated Investor
Do-It-Yourself Investor
Service-Demanding Investor
 FIGURE 3-4: THE BULLWHIP EFFECT

Consumption Customer Retailers Wholesalers Manufacturers Suppliers

Source: Based on the lecture notes of Enver Yücesan at INSEAD.

 The Efficiency Template

I. Purpose

II. Firm Perspective (cf. SOD)

III. Focus: Benefit Versus Cost of Each Channel Activity

[Link] a Template for Each Channel

V. Include End-Users in the Analysis

[Link] your exercise,

 FIGURE 3-3: THE EFFICIENCY TEMPLATE

WEIGHTS FOR FLOWS: PROPORTIONAL FLOW PERFORMANCE OF

CHANNEL MEMBER:
COSTS BENEFIT FINAL 1 2 3 4 TOTAL
* POTENTIAL WEIGHT* (end-user)
(High,
Medium, or
Low)*
PHYSICAL 100
POSSESSION*
*
OWNERSHIP 100
PROMOTION 100
NEGOTIATION 100
FINANCING 100
RISKING 100
ORDERING 100
PAYMENT 100
TOTAL 100 N/A 100 N/A N/A N/A N/A N/A
NORMATIVE N/A N/A N/A 100
PROFIT
SHARE***
* Entries in column must add up to 100 points.
** Entries across row (sum of proportional flow performance of channel members 1 through 4) for each channel member must add up
to 100 points.
*** Normative profit share of channel member i is calculated as: (final weight, physical possession)*(channel member i's proportional
flow performance of physical possession) + … + (final weight, payment)*(channel member i's proportional flow performance of
payment). Entries across row (sum of normative profit shares for channel members 1 through 4) must add up to 100 points.
 TABLE 3.APP3A-1
BUILDING MATERIALS COMPANY EFFICIENCY TEMPLATE FOR
CHANNEL SERVING END-USERS THROUGH RETAILERS:
(UNDISGUISED DATA)
WEIGHTS FOR FLOWS: PROPORTIONAL FLOW PERFORMANCE OF
CHANNEL MEMBER:

COSTS BENEFIT FINAL Mfgr. Retailer End-user TOTAL

POTENTIAL WEIGHT (Contractors)
(High, Medium,
or Low)

PHYSICAL 30 High 35 30 30 40 100

POSSESSI
ON
OWNERSHIP 12 Medium 15 30 40 30 100
PROMOTION 10 Low 8 20 80 0 100
NEGOTIATION 5 Low/Medium 4 20 60 20 100
FINANCING 25 Medium 29 30 30 40 100
RISKING 5 Low 2 30 50 20 100
ORDERING 6 Low 3 20 60 20 100
PAYMENT 7 Low 4 20 60 20 100
TOTAL 100 N/A 100 N/A N/A N/A N/A
NORMATIVE N/A N/A N/A 28% 39% 33%* 100
PROFIT
SHARE
 TABLE 3.APP3A-2
BUILDING MATERIALS COMPANY EFFICIENCY TEMPLATE FOR
CHANNEL SERVING END-USERS THROUGH RETAILERS: RANK-
ORDER DATA (0-3)
WEIGHTS FOR FLOWS: PROPORTIONAL FLOW PERFORMANCE OF
CHANNEL MEMBER:

COSTS BENEFIT FINAL Mfgr. Retailer End-user TOTAL

POTENTIAL WEIGHT (Contractors)
(High, Medium,
or Low)

PHYSICAL 30 High 35 2 2 2 100

POSSESSION
OWNERSHIP 12 Medium 15 2 2 2 100
PROMOTION 10 Low 8 1 3 0 100
NEGOTIATION 5 Low/Medium 4 1 2 1 100
FINANCING 25 Medium 29 2 2 2 100
RISKING 5 Low 2 2 2 1 100
ORDERING 6 Low 3 1 2 1 100
PAYMENT 7 Low 4 1 2 1 100
TOTAL 100 N/A 100 N/A N/A N/A N/A
NORMATIVE N/A N/A N/A ? ? ? 100
PROFIT
SHARE
 TABLE 3.APP3A-3
BUILDING MATERIALS COMPANY EFFICIENCY TEMPLATE FOR
CHANNEL SERVING END-USERS THROUGH RETAILERS :
TRANSFORMED RANK-ORDER DATA

WEIGHTS FOR FLOWS: PROPORTIONAL FLOW PERFORMANCE OF

CHANNEL MEMBER:

COSTS BENEFIT FINAL Mfgr. Retailer End-user TOTAL

POTENTIAL WEIGHT
(High, Medium,
or Low)

PHYSICAL 30 High 35 33 33 33 100

POSSESSION
OWNERSHIP 12 Medium 15 33 33 33 100
PROMOTION 10 Low 8 25 75 0 100
NEGOTIATION 5 Low/Medium 4 25 50 25 100
FINANCING 25 Medium 29 33 33 33 100
RISKING 5 Low 2 40 40 20 100
ORDERING 6 Low 3 25 50 25 100
PAYMENT 7 Low 4 25 50 25 100
TOTAL 100 N/A 100 N/A N/A N/A N/A
NORMATIVE N/A N/A N/A 32% 38% 29% 100
PROFIT
SHARE