Chapter 14Chapter 14

Evaluating Channel Performance

1414Major Topics for Ch. 14•What is Channel Performance?*

•Scope and Frequency of Performance Evaluations*

• Channel Performance Audit

•Key Criteria for Performance Audit*

•Applying Evaluation Criteria

•Recommending Corrective Actions

•Extra Topic: Micro Channel Performance*

1414What is Channel Performance?*

I. Channel Performance: The extent to which the channel members meet the desired channel goals.

II. Dimensions of (Macro) Channel Performancea) Efficiency: Productivity; Profitability

b) Effectiveness: Stimulation of New Demand (ex: online channel); Customer Satisfaction (ex: Walk in clinic)

c) Equity: Easy Access and Opportunity

Ex) U.S. versus Japan; L.A. and Indian Reservation

1414Scope & Frequency of Scope & Frequency of Channel Performance Evaluations Channel Performance Evaluations

DependDepend on* on*

1. Degree of the manufacturer’s control over

channel members 2. Relative importance of channel members

3. Nature of the product

4. Number of channel members (channel intensity)

1. Degree of the manufacturer’s control over

channel members 2. Relative importance of channel members

3. Nature of the product

4. Number of channel members (channel intensity)

14141. Degree of Control1. Degree of Control

Control that a producer,manufacturer, or franchisor has

over members is based onstrong contractual agreements

Control that a producer,manufacturer, or franchisor has

over members is based onstrong contractual agreements

Channel managercan demand a great deal of

information on memberoperations

Channel managercan demand a great deal of

information on memberoperations

Manufacturer lacksstrong market acceptancefor its products & strong

channel control based oncontractual commitments

Manufacturer lacksstrong market acceptancefor its products & strong

channel control based oncontractual commitments

Manufacturercan exert little control

over channel members

Manufacturercan exert little control

over channel members

14142. Importance of Channel 2. Importance of Channel MembersMembers

Evaluation of channel members is more comprehensive for manufacturers who sell all of their

output through intermediaries

Evaluation of channel members is more comprehensive for manufacturers who sell all of their

output through intermediaries

Because the firm’s success in the market is directlydependent on the channel members’ performance

Because the firm’s success in the market is directlydependent on the channel members’ performance

Why?

14143. Nature of the Product3. Nature of the Product

The more complex the product, the broader the scope of evaluation

The more complex the product, the broader the scope of evaluation

For products of very high unit value, thegain or loss of a single order is

critical to the manufacturer

For products of very high unit value, thegain or loss of a single order is

critical to the manufacturer

+

14144. Number of Channel Members4. Number of Channel Members

Manufacturers who useintensive distribution

Manufacturers who useintensive distribution

Channel memberevaluation may

be cursory

Channel memberevaluation may

be cursory

Manufacturers who usehighly selective

distribution

Manufacturers who usehighly selective

distribution

Channel memberevaluation is

comprehensive

Channel memberevaluation is

comprehensive

Performance Evaluation versus Performance Evaluation versus MonitoringMonitoring

1414

Performance Evaluation

Day-to-DayMonitoring

Overall performancereviews that give

management a complete& objective analysis ofdistributor operations

Appraisals that assist management in

maintaining currentoperating control ofdistributors’ efforts

1414Channel Performance Audit*Channel Performance Audit*

Three Phases of Channel Performance Audit

1. Developing evaluation criteria Channel goals

2. Periodically evaluating the performance against the criteria

3. Recommending corrective actions

1414I. Key Criteria for I. Key Criteria for Channel Performance Audit*Channel Performance Audit*

• Sales performance of channel members

• Inventory maintenance of channel members*

• Selling/Service capabilities of channel members*

• Attitudes of channel members

• Competition faced by channel members*

• General growth prospects of channel members*

14141. Sales Performance1. Sales Performance

Criteria channel managershould use to evaluate sales data:

1.

Comparisons of thechannel member’s current

sales to historical sales

2.

Cross comparisons ofa member’s sales with

those of other members

3.

Comparisons of thechannel member’s sales

with predetermined quotas

14142. Inventory Maintenance2. Inventory Maintenance

1. Total level of channel member’s inventory2. Shelf or floor space devoted to inventory3. Shelf or floor space relative to competitors’

inventory4. Breakdown by particular products in units & dollars5. Comparison of figures with channel members’

estimatedpurchases of related & competitive lines

6. Condition of inventory & inventory facilities7. Amount of old stock & efforts made to move it8. Adequacy of channel member’s inventory control &

record-keeping system

Key Criteria for evaluating member inventory performance:

14143. Selling Capabilities3. Selling Capabilities

Manufacturer who obtains sales recordsfor channel members’ salespeople should

examine the following factors:

1.

Number of salespeoplethe channel member

assigns to manufacturer’sproduct line

2.

Technical knowledge and competenceof channel member’s salespeople

3.

Salesperson interestin manufacturer’s products

Ex) CISCO

Attitudes

44

Negative ones often addressed after they have contributed

to poor performance

4. Attitudes of Channel Members4. Attitudes of Channel Members

Should be evaluated independently of sales data

Not usuallyevaluated unless

sales performanceis unsatisfactory

14145. Competition5. Competition

Channel manager should consider two types of competition:

1.

Competition from otherIntermediaries(Inter-store)

2.

Competition fromother product lines

carried by the manufacturer’s ownchannel members

(Within-Store)

6. General Growth Prospects6. General Growth Prospects1144

Key issues for evaluating channel member growth prospects:

1. Past performance2. Overall performance3. Expansion or improvement of organization4. Level of growth and qualification in personnel5. Management, age, health, or succession

arrangements6. Adaptability & overall capacity to meet market

expansions7. Member’s estimates of its own medium- & long-range

outlooks

II. Applying Evaluation CriteriaII. Applying Evaluation Criteria1414

Three Approaches

1. Separate performanceevaluations on one or more criteria

2. Multiple criteria combined informallyto evaluate overall performance

qualitatively

3. Multiple criteria combined formallyto arrive at a quantitative index of

overall performance

1. Separate Performance 1. Separate Performance EvaluationsEvaluations

1414

Commonly used when the number of channelmembers is very large & when criteria arelimited to no more than sales performance,inventory maintenance, & possible selling

capabilities

Cf) PQD in purchasing performance evaluation

2. Multiple Criteria Combined 2. Multiple Criteria Combined InformallyInformally

1414

Operational performance measures obtained

Managerial judgment usedto combine performance measures

Qualitative judgment made aboutoverall channel member performance

14143. Multiple Criteria Combined 3. Multiple Criteria Combined FormallyFormally

5 Steps1. Criteria & associated operational measures are decided on

2. Weights assigned to each of the criteria

3. Each member evaluated is rated on each of the criteria

4. Score on each criterion multiplied by weight for that criterion

5. Weighted criterion ratings summed to yield overall performance rating for each member

1414III. Recommending Corrective III. Recommending Corrective ActionsActions

Channel manager should attempt tofind out why members have performed poorly Correction and enforcement

1. Develop concrete & practical approaches to actively seek information on member needs and problems

2. Programs of member support must be congruent* with member needs & problems

3. Constraints imposed by interorganizational setting of marketing channel must be understood

1414Dimensions of (Micro) Channel Member

Performance*a) Sales Performanceb) Financial Performance*c) Reseller Competenced) Reseller Compliancee) Reseller Adaptationf) Reseller Growthg) End-Customer Satisfaction*

Three Dimensions: Capability, Behavior, Outcome

1414Measures of Channel

Member Financial Performance

a) Strategic Profit Model*(a) Profit Margin(b) Asset Turnover (Turnover Ratio)(c) Return on Asset(d) Leverage Ratio(e) Return on Investment

b) Economic Value Analysis: After-tax operating profit - total annual cost of capital (equity & debt)

RETAILER TYPE

MAIN FOCUS ON MARGIN

OR TURNOVER?

BULK-BREAKING

SPATIAL CONVEN-

IENCE

WAITING & DELIVERY

TIME

VARIETY (BREADTH)

ASSORT-MENT

(DEPTH)

Department store (e.g., May Co.)

Margin Yes Moderate Low wait time Broad Moderate/ Shallow

Specialty store (e.g., The Gap)

Margin Yes Moderate Low wait time Narrow Deep

Mail Order/ Catalog (e.g., Lands' End)

Margin Yes Extremely High Moderate/ High wait time

Narrow Moderate

Convenience store (e.g., 7-Eleven)

Both Yes Very High Low wait time Broad Shallow

Category killer (e.g., Toys "R" Us)

Turnover Yes Low Low wait time Narrow Deep

Mass Merchandiser (e.g., Wal-Mart)

Turnover Yes Low Moderate wait time (may be out of stock)

Broad Shallow

Hypermarket (e.g., Carrefour)

Turnover Yes Low Moderate wait time

Broad Moderate

Warehouse Club (e.g., Sam's Club)

Turnover No Low Moderate/high wait time (may be out of stock)

Broad Shallow

A TAXONOMY OF RETAILER TYPES*

The Strategic Profit Model

Asset Turnover:Net sales/

Total Assets

Profit Margin:Net Profit/Net Sales

Return on Assets:Net Profit/

Total Assets

Leverage Ratio:Total Assets/

Net Worth

Return On Investment:Net Profit/Net Worth