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Distribution Channels

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Distribution Channels
Understanding and Managing Channels to Market

JULIAN DENT

London and Philadelphia

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Publishers note Every possible effort has been made to ensure that the information contained in this book is accurate at the time of going to press, and the publishers and author cannot accept responsibility for any errors or omissions, however caused. No responsibility for loss or damage occasioned to any person acting, or refraining from action, as a result of the material in this publication can be accepted by the editor, the publisher or the author. First published in Great Britain and the United States in 2008 by Kogan Page Limited Apart from any fair dealing for the purposes of research or private study, or criticism or review, as permitted under the Copyright, Designs and Patents Act 1988, this publication may only be reproduced, stored or transmitted, in any form or by any means, with the prior permission in writing of the publishers, or in the case of reprographic reproduction in accordance with the terms and licences issued by the CLA. Enquiries concerning reproduction outside these terms should be sent to the publishers at the undermentioned addresses: 120 Pentonville Road London N1 9JN United Kingdom www.koganpage.com Julian Dent, 2008 The right of Julian Dent to be identied as the author of this work has been asserted by him in accordance with the Copyright, Designs and Patents Act 1988. ISBN 978 0 7494 5256 8 British Library Cataloguing-in-Publication Data A CIP record for this book is available from the British Library. Library of Congress Cataloging-in-Publication Data Dent, Julian, 1957 Distribution channels : understanding and managing channels to market / Julian Dent. p. cm. Includes index. ISBN 978-0-7494-5256-8 1. Marketing channels. 2. Business planning. I. Title. HF5415.129.D46 2008 658.7 88--dc22 2008011173 Typeset by Saxon Graphics Ltd, Derby Printed and bound in India by Replika Press Pvt Ltd 525 South 4th Street, #241 Philadelphia PA 19147 USA

With love to my wife, Jan, and to our children, Laura and Ian

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Contents
Preface Acknowledgements Part 1 1 Introduction and why business models matter x xii 1 3 3 5 6 9 9 11 16 18 20 23 25 25 25 32 35 35 36 37 39

Introduction Who this book is for What do we mean by business model? How this book is set out Why business models matter Distribution matters Challenging business dynamics Business models are key to value propositions A structured approach to positioning your value proposition Be careful with comparisons Distributors and wholesalers

Part 2 3

The role of the distributor Distributors/wholesalers Customer role core functions Supplier role core functions How the distributor business model works Role denes business model Prot is a very small number between two very big numbers Managing working capital is a balancing act The measures that matter and how to manage with them

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Margins and protability Multiple margins Gross margin and value add Margin mix or blended margin Contribution margin Net margin and operating margin Working capital Working capital management Supplier credit Inventory Customer credit Working capital cycle Productivity Earn and turn Contribution margin return on inventory investment Returns on working capital Sustainability Sustainability longer-term business health Return on net assets and return on capital employed Return on invested capital Value creation Managing value creation on an operational basis Managing growth Growth dynamics Internally nanced growth rate formula Economies of scale protability Economies of scale working capital management Risks of growth diseconomies of scale

41 41 41 44 48 53 57 57 58 60 63 65 69 69 71 74 81 81 81 83 84 90 93 93 94 95 99 100 101 101 102 107 111 114

10 How to sell to distributors What we mean by selling to distributors The sales process Managing the account relationship Some rules of thumb for making compelling business cases Summary

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Contents

Part 3

Final-tier trade channel players

117 119 119 122 127 130 136 139 140

11 The roles of the nal-tier trade channel players The nal-tier trade channel players The possible roles of nal-tier trade channel players Matching channel roles to channel players Different roles command different compensation models Customer advocates and sell-with players Sell-with players and strategic alliances Applying this framework to your industry sector or channel 12 How the business model of the nal-tier trade channel players works Role denes business model Services come from people, either directly or indirectly (eg web-delivered) Managing a service business Service-based business model Overview of service business model measures 13 Sales and utilization Sales Utilization 14 Gross margin and recoverability Gross margin Recoverability 15 Working capital management The cash-to-cash cycle Improving working capital 16 Value creation and growth Value creation and improving the numbers Managing growth the integrated product and service business model 17 How to sell to nal-tier trade channel players What we mean by selling to nal-tier trade channel players Segmenting the nal-tier trade channel What the nal tier looks for in a vendor

141 141 142 143 159 160 163 163 171 177 177 182 185 185 188 193 193 199 203 203 204 206

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What the nal tier looks for in a distributor Managing the account relationship Some rules of thumb for making compelling business cases Selling with the nal tier in an advocacy role Conclusion Part 4 Retailers

215 219 221 224 226 227 229 229 233 237 237 243 245 248 251 251 255 260 263 267 267 268 268 272 276 283 288 291 291 295 301 313

18 The role of retailers Retailers and retailing Catalogue and online retailing 19 How the retail business model works Role denes business model Earn and turn Layout and planogramming Ranging and merchandising 20 The measures that matter and how to manage with them Sales (or takings or revenues) Margins Direct product cost (DPC) and direct product protability (DPP) Turns and productivity 21 How to sell to retailers What we mean by selling to retailers The sales process Retailer challenges and their implications for suppliers Impact of the internet Managing retail relationships at a strategic level Managing retail relationships at a tactical level Selling in to the retailers buying cycle and open-to-buy Should you deal with retailers direct or through a wholesaler? Summary Key ratios Glossary of technical terms Index