Leading practices in effective vendor channel management strategies

¶ … channel management practices that have been developed via thorough research and analysis of the world's leading companies?

Channel management is a process that entails managing the relationship between a vendor and the third parties used by them to get goods and products into client's hands, while making sure that the post-sales services and support are still of high quality. A channel can be either a one- or two-tier relationship. In the one-tier relationship, a vendor is selling products directly to a reseller; in the two-tier relationship, a vendor is selling to the third parties indirectly through a distributor. Effective channel management can help to greatly increase revenue and profit margins for vendors through creating incentives for channel partners to promote or market their own branded services and support; it is also useful to be able to achieve the right overall pricing for the end users[footnoteRef:2]. [2:

KPMG. (2011). Leading practices in effective channel management. 1]

It has been noted that top companies utilize the following methods when it comes to developing channel management policies and strategies. First, top vendors create and align their channel strategies, sales, and vendor-centered post-sales services and support offerings with their corporate goals. This can entail defining the partnering approach; informal vs. formal partnerships; or multiple regional partners vs. A couple of international partnerships, with the first and the second tier relationships. It is in this stage of the process that vendors can decide if other channel partners will be mainly concentrated on sales or solutions. Second, vendors identify and define their sales model and its impact; this enables them to make sure that their goods and services are properly assigned to the proper channels. For example, whether a single or two-tiered relationship, the products have been allocated to the Original Equipment Manufacturer (OEM) or vendor distribution channels. Third, vendors can profit by creating and modeling specific and effective marketing and incentivizing programs (such as volume targets, special pricing, price protection, etc.) to achieve the desired behavior. This often involves drafting clear and well defined program terms and conditions, and claims and reporting verification and payment systems. Fourth, vendors design service and support programs to facilitate value-added distributors (VADs) and Value-added resellers (VARs) to sell their own brands of services or vendor-branded products and to provide after-sales services to the end-consumer[footnoteRef:3]. Lastly, effective and competitive vendors design and implement channel partners policies such as: [3:

Ibid 4]

Defining reporting verification requirements (e.g., POS)

Identifying and stating the channel segments (direct vs. indirect)

Programs and expectations targeting reduction of counterfeiting and gray marketing

Notifying through circulars and other modes of communication, the expectations of compliance to the related laws and regulations and the expected professional and ethical behavior

Defining periodic reviews to ensure compliance and to show the significance of having a level playing field for all the vendor's partners

Requiring submission of periodic reviews to efficiently monitor the quality of service and support [footnoteRef:4] [4:

Ibid ]

ibid]

Bilateral control methods arise in the interests, activities or joint initiative of both channel partners. An important mode of bilateral control entails shared expectations regarding the behavior and conduct of the channel members in terms of working together to reach mutual goals. The core of such expectations is anchored on; flexibility so as to cope with market uncertainty, sharing of both benefits and burdens between the partners, sharing of information, collaborative communication, etc. These practices create a social environment in which seeking of mutual interest is encouraged and individually motivated activities and conduct is discouraged. Shared commitment and interdependence can act as an effective basis for a two-way channel control. Interdependence incentivizes each party to regulate and monitor their own conduct. Jointly shared dependence is the best environment for adaptable, long-term channel relationships. In such partnerships, the need for power over other parties tempers the inclinations towards seeking of self-interests and encourages mutually beneficial activities / conduct. Trust or in other words the extent to which partners believe the other, will act in the best interest of the relationship; this also promotes successful bilateral relationships. Mutual trust can provide the foundation for conflict resolution and reduction, better performance effectiveness and the feeling of satisfaction in the current engagement. Mutual trust destroys the fear that the other party will act in a way to jeopardize the partnership. If both parties trust each other, each of them possesses the confidence in the other's reliability and integrity and expects the other party to act in a responsible manner. Legal instruments can also be utilized to control the partnership. Exclusive distributions, vertical restrictions and other similar instruments can be employed to align and incentivize channel members' behavior and conduct[footnoteRef:10]. [10:

ibid]

a. Consideration of legal issues. Two legal cases have of late grabbed headlines due to the high-tech distribution channels and their exclusive dealing and tying arrangements. Tying is whereby a manufacturer makes the increase the demand of a product by making it conditional on the buying or rather purchase of a second product. For instance when the department of Justice brought the case against Microsoft, they accused them of tying their Operating System (OS) to their browser. Tying may also be in the form of (bundled) rebates that allow buyers discounts for specific products, if the buyers bundle the purchase with other products of that firm. Exclusive dealing involves arrangements that restrict a reseller to sell only one manufacturer's goods. Apparently, such arrangements are aimed at ensuring sufficient service; however antitrust consequences also arise if large firms use their power of dominance to limit or restrict customer's access of to the competitors' products and services[footnoteRef:11]. [11:

During the 1990s, as competition intensified and markets became international, the challenges and obstacles associated with getting the product or service to the right place at the right time and the cheapest possible cost also got a little more challenging. Companies started realizing that it was not sufficient to just improve or better efficiencies with the company, but the entire supply chain has to be improved and made a bit more competitive. The comprehension and implementation supply chain management (SCM) of has grown into an important requirement for increasing profitability and staying globally competitive[footnoteRef:12]. According to the Council of Logistics Management (CLM)[footnoteRef:13] SCM is strategic and systemic coordination of conventional business functions and tactics within a particular organization and across all businesses within the supply chain for the sole aim of bettering the long-term performance of the individual members supply chain or the supply chain in its entirety[footnoteRef:14]. SCM has been defined particularly to recognize the crucial nature of coordination between the members of the supply chain and to better the performance of the whole supply chain and to explicitly state the two objectives of SCM: to better the performance of an individual firm and to better the performance of the whole supply chain. [footnoteRef:15],[footnoteRef:16] The main objective of the SCM is to link both information and product flows across the supply chain as an instrument for effective competition[footnoteRef:17]. [12:

Choon Tan, K., Lyman, S.B., & Wisner, J.D. (2002). Supply chain management: a strategic perspective. 614-631.] [13:

Council of Logistics Management (CLM). (2000). What it's all about. Oak Brook, IL: Council of Logistics Management.] [14:

Somuyiwa, A., & Adebayo, T. (2013). Firm's competitiveness through supply chain responsiveness and supply chain management practices in Nigeria. 42.] [15:

Childerhouse, P., & Towill, D.R. (2003). Simplified material flow holds the key to supply chain integration. 17-27] [16:

Feldmann, M., & Muller, S. (2003). An incentive scheme for true information providing in supply chains. 63-73.] [17:

Li, S., Ragu-Nathan, B., Ragu-Nathan, T.S., & Rao, S.S. (2006). The impact of supply chain management practices on competitive advantage and organizational performance. 107]

Proprietary Channel Management Model is built to help:

Define and identify the right partners who can provide adequate support for vendor strategies while benefitting from each others strengths in the market.

To assign the best role for that partner with the vendor to help carry out important objectives such as portfolio solution, sales pipeline and delivery capability.

Evaluating the terms and conditions, this is to be done by the partner and vendor to guide the relationship

To create a sales plan that matches the sales programs and norms of both the vendor and the partner

Develop in consultation with the other two parties, action plans to guide all aspects of the partnership (marketing, sales, delivery, etc.) that can regularly be tracked or monitored

Design standard methodologies for the market that leverage the partners' services to cut the time taken to market

Establish common standards to monitor the relationship and serve as a reporting method to the management of the vendor.

Monitoring systems helps vendors to know potential red flags including unique customers, inefficient support performance, below target attach rates, sales in/sales out discrepancies (compared to inventory) and incomplete reporting sales spikes. Vendors track these red flags based on the severity. Vendors usually utilize scorecards to quickly ascertain and evaluate different variables to identify risks and enable remedial action to be taken. This basically allows for a continuous review of ongoing performance so as to ensure compliance. Top vendors also design programs to monitor their channel and self-report on elements such as support, quality of services and inventory. Lack of such reviews may lead to conflict with the vendors' desired objectives e.g. leakage of product to the gray market. Partners can be selected for review using a rotational basis or based on risk-ranking approaches. Clear management steps can also be set by partners complete with consequences to deal with issues such as under-performance, deliberate manipulation or counterfeiting practices[footnoteRef:18]. [18:

KPMG. (2011). Leading practices in effective channel management. 8]

The following observation activities are usually utilized by the leading corporations:

Utilization of information diagnostics so as to identify the red flags that are linked to misuse of incentive programs or possible mistakes.

Establishment of a strong "risk ranking" procedure, that records different data (level of revenue, place, invention, support performance, attach tempo, kind of customers, sales spikes, etc.) so as to choose review partners.

Utilization of third parties to conduct a channel partner evaluation (see chart) which includes a comprehensive examination of POS data vs. The actual sales data obtained from the specific partner, support and service performance, as well as other analytical and substantive processes (both on-site and off-site) with the aim of distinguishing misreporting and other contractual infringements.

A well explained consequence management policy (with support from every part of the corporation) which considers possible problems and assists to make sure there is consistent and equal treatment of the partners.

Promotion of training for its internal teams in addition to its partners so as to communicate and make clear the expectations of team work to guarantee channel compliance[footnoteRef:19]. [19:

Ibid ]

Conclusion

One of the major hardships of channel management is maintaining a successful relationship with the channel partners. Efficient supply chain management (SCM) is now a promising valuable means of securing competitive gain as well as enhancing the performance of an organization. This is because competition no longer exists between organizations, but amidst the supply chains. This research imagines and enhances the channel management aspects of SCM practice (customer relationship, tactical supplier partnership, degree and quality of information sharing, and adjournment) and examines SCM practices, organizational performance and competitive benefits. This research points out that greater degrees of SCM channel management practice may result to better competitive benefits in addition to enhanced organizational performance. Dynamic channel management is quite essential to assist sellers in the reduction of risks, improvement of revenue, and driving of complete value-add solutions to their partners and eventually to the customers. It can assist to make certain that they are trading with the correct partners and driving the necessary behavior, which can be of advantage to both parties. A planned procedure may also assist in the inducement of complete, precise, and timely reporting that is required by the internal users. In certain instances, the sellers obtain returns on investment from their programs and also giving a timely and inevitable return services and capital for partners. Dynamic channel management also assists in upholding the honor of the channel via clearly demonstrating that action will be undertaken whenever sellers point out possible problems or misreporting by their partners. Lastly, dynamic channel management may assist in the development of revenue and protection of margins by lessening these risks and assist the sellers in being watchful concerning gay products, unauthorized support and services, as well as fake market sales which may ruin the authorized channel. Eventually, a genuine partnership between the seller and the channel form the foundation of successful channel relationships.

Recommendations

Completion of a due diligence procedure or a comprehensive channel partner vetting can assist in the reduction of risks natural in a partnering agreement. Sellers may be capable of pointing out and suitably responding to promising channel partners having a past of poor performance or partners who take part in unlawful business practices. For example, a seller may sustain considerable fines if its channel partner is found selling products in a restricted country. In addition, possession of the correct penalty terms in the agreement can provide some form of protecting through the providing the seller with a chance to end the partnership immediately upon violation of the partnering agreement. A strong due diligence procedure is usually made up of partner identification, selection, and assessment. The procedure should be structured such that it offers considerably more information concerning the promising channel partner than what is normally present via simple financial checks[footnoteRef:20]. This procedure may include collecting facts on possession and their other linked parties, support and service qualifications, credit checks, and market intelligence via channel press and other affiliations. Additionally, certain sellers carry out pre-contract evaluations so as to examine the ability of the potential partner to meet reporting, performance targets, and other contract necessities. Due diligence evaluations basically include: [20:

KPMG. (2011). Leading practices in effective channel management. 5]

Comprehension of the controls and procedures associated with the proposed business,

Discussion of the general sales and development approach of the potential partner.

Evaluating the likely partner's accounting, ERO and CRM systems, and reporting abilities (such as Electronic data interchange (EDI) abilities, etc.).

Evaluating the likely partner's support operations and services and related procedures.

Evaluating inventory controls (both reporting and physical such as serial numbers).

Getting background data on the corporation ownership and associated parties (to ensure that there will be no cannibalization of the existing channel).[footnoteRef:21] [21:

Ibid ]

Several sources such as Dun and Bradstreet should be utilized and other paid and publicly accessible sources.

Other areas of consideration during the on-boarding of a new partner are:

Acquiring commitment or agreement by partner to the seller's business, for example marketing plans, training, etc.

Establishing and implementing working procedures for daily business or relationship management (such as foundation of market development for instance joint vs. solo, quarterly business incomes, etc.)

After the partner has been chosen, effective on-boarding procedures should be supported by satisfactory technology for instance setting up EDI and other techniques of reporting to obtain data needed to supervise and reward the performance of the channel partner. Automatic procedures have been established by the leading sellers to authenticate and pay incentive programs assertions or develop means through which the channel partner can be supervised, gauged, and rewarded as suitable for both support and product-service performance.

Lastly, the definite contracting procedure happens, providing the seller with a chance to control the daily business and also implement the required terms and conditions (through the utilization of an audit clause)[footnoteRef:22]. [22:

Ibid 6]