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Roberto Vona » 13.Management of Vertical relationships in Distribution Channels

Lesson Content

Learning outcomes

To provide an overview of logistics for businesses

Lesson content

Channel member power; coercive and non-coercive sources of power.
Channel-internal conflictuality: origins and effects.
Conciliation, compromise and co-operation.
Historical evolution of relationships within distribution channels.
Expansion of the value chain through systemic vertical co-operation.
Channel-internal conflictuality and the strategic/tactical value of relationships between operators.
Effects of a vertical integration strategy for manufacturers and obstacles to its success.
Contractual organisations.
Trade marketing and re-engineering of distribution channels.
DPC/DPP technique and its utilisation to maximise output along the whole chain.
Key Account Management.
Possible future evolution.

Types of Intra-Channel Conflictuality

“The power of a channel member is represented by his/her skill in controlling the variables which underpin the operational and strategic choices made by another operator at a different level in the channel; such power thereby reduces the level of control which the dominant agent initially exercised for his/her original choices.”
[El Ansary e Stern, 1992]

Types of Intra-Channel Conflictuality

Significant variables in the Distribution Processes

Historical Overview

Pre Industrial Revolution:

Very fragmented productive sector;
Lack of specialised trade operators.

Post industrial Revolution:

Channel Leadership left up to the merchant.

Technical Development:

Vertical integration downstream from industry (brand loyalty).

Historical Overview (cont.)

Change in customs:

Modernisation of distribution sector;
Increase in distributors’ negotiating power (store loyalty).

Currently:

Conflict between industry and distribution in various sectors;
Partnership with no recognised leadership.

Channel and Value of Use

A channel can be considered as an extension of a value chain, which oversteps the boundaries of a manufacturing company so as to reach the end-user. The channel creates a value surplus in those cases where there is a positive difference between the marginal utility of an acquisition (including goods and services, and the relative production cost. There will always be a “useful” value (value of use) so long as the consumer is available to sustain a precise monetary sacrifice (price) in order to have in exchange a specific product. Value of use created in the channel can be maximised by co-ordination and co.operation, thus activating an “evolutionary spiral” at the base of those processes which spread the innovation. This type of approach is based on the modification of inter-company buyer-seller relationships, in favour of co-operation in the various functional areas. Models such as Direct Product Profitability enable focus to be put on the contributions of single products to overall channel income.

Map of collaborative intra-channel relationships

Structure of power and features of relationships

Power in distribution channels

The main factors obstructing the adoption of vertical integration strategies, with reference to distribution activities, can be classified in one of the following three “incompatibilities”:

Existence of gap between the various operating stages of the channel;
Heterogeneous nature of the processes to be integrated;
Managerial skills not always adequate.

Franchising

Downstream from manufacturing activities we can observe the widespread use of managerial solutions related to the management of distribution flow based on contractual regulations. In recent years there has been an exceptional development of a particular form of control of relationships relating to vertical systems of sales, regulated by legal mechanisms: franchising. This contractual form is an alternative to vertical integration which favours the spread of innovations through the “low cost” channel, provided it is possible to establish between franchisor and franchisee a climate of co-operation, which recognises the respective roles they play in the system.

Advantages and Disadvantages

Downstream from manufacturing activities, we can observe the widespread use of manegerial solutions, related to the management distribution flow based on contractual regulations. In recent years there has been an exceptional development of a particular form of control of relationships, relating to vertical systems of sales, regulated by legal mechanisms: franchising. This contractual form is an alternative to vertical integration, which favours the spread of innovations through the “low cost” channel, provided it is possible to establish between franchisor and franchisee a climate of co-operation, which recognises the respective roles they play in the system.

Trade marketing

A radical change in the industry’s basic philosophy wih regards to management of relations with commercial enterprise, may be summarised in the following ways:

Avoid taking potentially discriminating initiatives which might jeopardise distribution;
Keep trying out new vertical co-operation projects;
Implement a marketing information system, which would enable utilisation of new methodologies relating to the programming and control of distribution processes;
Upgrade commercial organisational structures in line with changes that have taken place in the distribution system.

Efficient Consumer Response programme

In recent years, some large manufacturing and retail companies operating in the mass consumer market so as to protect the market of their brand products, have carried out a critical review of all productive and distribution activities, named ECR (Efficient Consumer Response), the aim of which is to make the whole channel more efficient. This programme has yielded experiments in the context of the sub-project known as CRP (Continuous Replenishment Program), which aims to verify the realistic applicability of the producers’ automated procedures which aim to replenish stock levels in the distribution centres, based on real-time exchange of data.

Effects on Market Development

Direct Product Cost and Direct Product Profitability is a useful management tool for the measurament of the degree of potential gross income for each of the products in any given assortment.

It is also an important quantitative support tool for encouraging development of collaborative vertical relationships of a channel, centred on the objective appreciation of intra-channel performance. The model was originally drawn up by the FMI (Food Marketing Institute), together with McKinsey, and enables the attribution of direct “production” costs to single referents, after classifying them into categories (“productive” factors) and in cost centres (stages of “elaboration”), with the aim of estimating “the utilisation quota of the various productive factors for each product by means of the charge basis which best reflects such consumption.”