Transcription on Distribution Channel Mapping, by Dr. Bixby Cooper, PhD
Hello. In this session we’re going to talk about the process of distribution channel mapping. Now, distribution channel mapping can be a part of a formal channel design and evaluation process. In mapping the distribution channel what we’re trying to do is to get a better understanding of the current way that end users, their requirements, are being fulfilled by our distribution channels.
So it’s certainly important to us in terms of, of understanding what’s going on so that we can think about possible alternatives. But also channel mapping, it may be very useful from the standpoint of just better understanding what’s happening in your business.
I would venture to say that there are many, many organizations that truly do not understand how their product gets into the marketplace. And, what I mean by that is, if they haven’t gone through the process of channel mapping, there are things that may be going on the distribution channel that they are totally unaware of.
An example, I have a friend who’s a golfer. He loves to play golf and this is story where I’ll have to omit the names of different companies involved. But he purchased at a retail store here in the United States a particular model of a brand new driver that was made by one of the leading golf equipment manufacturers. And, in using that new driver one day, the shaft of his driver broke. And so he contacted the manufacturer, who has an 800 number for these kinds of situations, and told them about the shaft breaking and he wanted it to be repaired.
The manufacturer asked him about the model number on the driver that he bought here at a store in the United States. Well, it turns out that that particular model of golf club was not supposed to be available in the United States at all. It was only authorized for distribution in Asia, and yet somehow, some way, it had been diverted from its intended destination back to the United States and available for sale in stores here.
So there’s some value for, to be involved in a company from time to time, embarking on the process of channel mapping in which they develop, literally, a picture of the current channels they’re using to reach all of their end users’ segments. Now, what it’ll require first of all is identifying all of the end users that are being served and then what I call isolating the paths that are being used to reach each segment.
And you specify the flows and the functions that are performed in each path and who is doing these things. What is being done by the firm itself, and what is being done by other organizations? And finally, what I call specifying the economics at each stage and each path. What is the volume of business that’s moving in each path? What are the revenues? What are the margins? What are the discounts? What are the costs?
Now that probably all sounds pretty vague. What in the world am I talking about? So let’s take an example of trying to look at the efficiency of the existing channels. Now, if you really want to do a complete job of this, it would be helpful to not only map your own firm but to try to map your competitors.
How are they getting to the end users? Are they doing it the same way, or do they have some other ways that they are using to reach the end user? And if you’re starting from new, you might want to look at how the end users are currently served by others.
And then finally, if you looked at the extend channel map back into a total supply chain map as plan include your supply base, that may well be a useful exercise as well. Now you say this sounds very, very vague. What am I talking about?
Well, so let’s take a look at an example of a food processor and the distribution channels that are used. Now, this is a channel map that I’ll be the first to tell you that’s it’s a very simplified one because just from the standpoint of presenting it to you, there would be so much detail involved that it would be very difficult to describe.
So what I want you to get from this session is more of an understanding of the process and how it’s useful, and realize that in real life in doing this in a company you’re going to end up with something that looks much, much more complex and detailed than this.
Well, it’s a typical food processor. If I look at end users, I may identify several different end user segments that have different requirements. On the one hand, there are end consumers, those people who as I’ve said are buying for their own or family consumption, family use.
On the other hand, there’s an entirely different type of end user. They are generally referred to in the food business as the “institutional users.” This includes such buyers, such end users as schools, school systems, providing school lunches, restaurants and restaurant chains, hospitals, who have large feeding operations. Many, many companies have their own feeding operations for their employees as well. Another type of end user is military installations.
So what I’m suggesting to you is that the process of mapping begins with identifying all the different types of end users. I’ve used kind of common terminology to describe some of the types. I haven’t got an exhaustive list of the types. Furthermore, within each type I’ve described there would be – could be –further segmentation, for example, restaurants. Well, there are the national restaurants chain that buy in one way vs. the solely, the single location, solely owned restaurant that buys in an entirely different way.
So again, I want to emphasize that this is merely an example to think about this process of channel mapping. But one other thing channel mapping helps me do is understand better who are the end users so that I can think more clearly about what kinds of service outputs are they looking for.
And then what I’ve done in the diagram is I tried to draw some of the different channels that exist for the food processor. For instance, the typical food processor – not all of them but the typical one – may frequently use some combination of brokers or agents to help in the distribution channel, particularly in the food service end of the business.
They may also use national, their own national account sales force to call on various food service distributors in the institutional market, or for military installations, there’s actually a very specialized distributor called a military distributor.
Meanwhile, for the consumer marketplace, we may use a national account sales to call on full-service wholesalers or have a company sales force that calls on smaller wholesalers of different types or calls directly on retail chains and stores.
Once again, there are some channel participants who are not shown here. I’ve not shown the transportation companies that are involved, any warehousing companies, or things of that sort.
Now, but a channel map is more than just a picture. It’s just the picture is not enough to understand what’s happening in the distribution process. You also have to think about what happens in each link of the distribution channel.
So here, I’m now focusing in on just one of those channels shown in the previous slide. And I want to focus into the linkage between the manufacturer and the food service distributor, and what is the nature of the transactions that occur between those organizations.
Well, on the one hand, the manufacturer typically sells to the food service distributor at least in pallet quantities or unit loads, frequently in full truck loads. There may be a few items that the food service distributor buys in case quantities. Typically – and I’m using some very broad averages here – but typically the manufacturer delivers to the food service distributor within four days of receiving an order.
Again, typically the manufacturer sales force calls on the food service distributor at least monthly. The manufacturer provides training for the sales forces. The manufacturer may provide a rebate for the food service distributor’s efforts in trade promotion.
I say here, that they take orders between 8 a.m. and 5 p.m. Well, in today’s world, quite honestly, they take orders 24 hours a day via computer exchange, but generally there is a cutoff time and that in any order that is received after a particular time of day, say 5 p.m., is not going to be actually processed until sometime likely the next day.
Still in this manufacturer to food service distributor things are done such as the manufacturer offers credit to the distributor frequently a 2% discount for payment with 10 days, or the net would be due within 30 days. (If a) Manufacturer has a minimum order size; (the) manufacturer may provide certain sales support called “missionary sales” for large distributors. As a really general gross statement or average statement, gross margins for manufacturers run in the 35% to 40% range. Selling expenses for the manufacturer’s run in the 15% range. Their logistics and distribution expenses run around 8% and they turn their inventory about 6 to 8, the manufacturer turns inventory about 6 to 8 times per year.
Now that’s fairly lengthy description of some of the things that occur in that particular linkage of the distribution channel. But one of the things that might be done, even at this point in time, is for you or your company to compare yourself to major competitors to see if this linkage for you is working the same way that it’s working for one of you competitors. Are there differences in the functions, differences in the costs, differences in the margins between you and your competitors?
Now, if you think about the food service distributor to restaurants, and here I’m talking more of the single-unit or very small chain, as opposed to the large chain restaurant; whereas, the distributor purchases in pallets or unit loads and orders in one-half truck to full truck loads, the distributor sells primarily in case quantities. So they’re performing a break-bulk function. And for some items, they may actually break cases open and, and sell individual units rather than require the restaurant to buy an entire case.
The distributor provides storage of dry, refrigerated, and frozen product. The distributor will generally deliver to the restaurant, next day, so you’ll receive an order one day, deliver the next day. The distributor generally provides credit to the restaurant.
A typical distributor or typical distributor location serves roughly a 200-mile delivery area. That’s about the extent of an economical delivery area in this particular industry. They do have a minimum order size generally, but that minimum order size may be as little as $50 or $100, certainly nothing like the minimum order size that the manufacturer requires of the distributor.
The average gross margin for a food service distributor runs in the 14% to 16% and their expenses run 13% to 15%, and sales and logistics are the primary expenses the distributor incurs.
So, what I’m trying to describe here is, I’m trying to get an understanding at each link in the distribution channel. What actually happens? What work is being performed? How much work is being performed? What are the costs involved? And what are the margins that are being charged or earned to try to cover those costs and expenses?
And, I have to always keep in mind that any of these functions, any of these flows that occur in the channel, there are alternatives. For physical possession, the manufacturer, instead of using wholesalers and, or using a distributor could use a private warehouse. Instead of using the distributor to deliver, they could use a private fleet, or they could use a contractor, a public warehouse, or common, or contract carrier or integrated service provider. There are alternatives that exist.
To do the promotional and selling flows, I could use sales force or distributor; I could use the retailer. I may use agents. Maybe telemarketing would be a better alternative.
The financing flow: instead of each company offering credit, maybe we get a bank involved or use factors in the distribution process. So there are alternatives that may exist to perform any of these activities.
Now, when it comes down to actually thinking about alternatives and alternative channels, you know, it’s a creative process. It’s what I could refer to it as social science, not rocket science. And back to questions that are very fundamental. Are there segments of the business that are being overserved? Can any of link map links be avoided? Are any of them more costly than they need to be? And there it’s a creative process and, and you’re thinking outside the box and you might ask yourself, well, is there any analogy I can think of?
And one place I saw that we can see this work very well is in what – the office supply business. The office supply supermarkets were actually initiated and started by people who originally worked in the supermarket business.
And what happened is they looked at how the office supply distribution channels were working at that time. And at that time office supply distributors, there were many, many, many of them. And you’d have an office supply distributor in every – multiple distributors in every town – whether, even in small towns, there were office supply distributors that were full-service distributors.
They had sales force that went out and called on every office in their market, and so they had sales force that went out and called on every small doctor’s office, dentist’s office, law office, what have you. They maintained large inventories. They delivered; and they were delivering incredibly small quantities, to these small one- and two-person offices.
And so people in the supermarket industry looked at that and said now, “Wait a minute, there’s got to be a better way because office supplies from the standpoint of the end user were incredibly expensive.”
And they developed the notion of the office supply supermarket, the Office Max, Staples, Office Depot, where – say we’re not going to perform a lot of the service outputs that the traditional channels performed. We’re going to actually shift a lot of that to the end user. We’re not going to have sales force that goes out and calls on the two-person law office. We’re not going to have a sales force that goes to every doctor’s office, every dentist’s office. We’ll set up a supermarket where they can come to us and we’ll offer them a tremendous variety and assortment. We’ll put the work on them.
By the way, they didn’t offer credit either at the office supply supermarkets. They’re gonna say, “We’re going to have the end user participate more fully in the flows and functions of this distribution channel.”
And the cost savings for the end user were significant and substantial. But it just represented an entirely different way of thinking about the distribution channels and the distribution fulfillment for office supplies.
And, so the whole idea here is that by what happened, is that those executives from the supermarket business really started looking at the distribution channels in a different industry and came to the conclusion that their knowledge and their expertise in the supermarket industry could be applied to an entirely different kind of industry. And it ended up revolutionizing that entire distribution channels in that entire industry. So, if you can think that creatively by understanding the way things are currently being done, you may have the opportunity to revolutionize your industry as those people did that one.