Sales and Distribution Management

Channel Integration : Overview

In a VMS, one of the channel members may own the others, influence the others due to better bargaining power, or develop a contractual arrangement with the different channel members. The three types of VMS's are administered, contractual, and corporate. An administered VMS is similar to a conventional distribution system except that there are greater inter-organizational relationships and sharing of an overall objective. Contractual VMS consists of independent firms operating at different channel levels and forming a system on a contractual basis. Contracts direct the channel members to cooperate with each other for mutual benefits. Franchising is one of the best known forms of this system. The other popular forms of contractual system are the retailer-sponsored cooperative organizations (RCOs) and the wholesaler sponsored voluntary organization (WVOs). In a corporate VMS, one of the channel members exerts complete control over the rest of the channel partners and everyone follows the objectives and procedures as dictated by this dominant channel member.

The benefits of VMSs include improved profitability, better control on the product quality, increased efficiency in inventory management, increased ability to respond to changing market needs, better economic control, improved marketing know-how, decrease in costs leading to better competitive advantage, stability in operations, and reduction in risks arising from competitor actions. Another principal benefit that prompts many companies to vertically integrate is differentiation.

A new concept that has emerged is value-added partnerships. In this form of integration, small firms come together and form a system. Here, each participating channel member performs a single channel function at a particular channel level. A horizontal marketing system is another approach that has gained widespread support. It is an arrangement within a distribution channel in which two or more firms at the same channel level work towards a common goal. In this system, the participating organizations usually operate in different segments and are unrelated. The advantage of this type of arrangement is that the firms pool together resources and skills the others do not have, with the objective of exploiting the available market opportunity. Most companies operate through a strategic alliance or a joint venture.

Hybrid channel systems develop when organizations begin to use a number of channels to sell their products. These channels include a direct sale force, direct mail, telemarketing, catalog selling, and retail selling. The advantages of using hybrid channels include better product promotion, reduction in transaction costs, increase in market and customer coverage, and the benefit of developing a customized approach to selling and distribution of products. Designing hybrid systems involves identifying the tasks required to fulfill the desired objectives and then segregating the selling tasks and assigning them to the respective channels. Designing hybrid systems involves determining the channel characteristics, identifying the channel mix properties and selecting the number of channels that will bring about the desired outcomes. To effectively manage the hybrid channel system, the manager must be able to identify the source of any conflict, assess its magnitude, observe the reaction of customers and channel members, and analyze the time needed to solve the conflict. Modern information systems have enabled organizations to effectively manage the hybrid channels and avoid overlap of activities and draining of resources.

Chapter 19 : Overview