Evaluating Channel Performance Measurement of Channel Performance Performance

Evaluating Channel Performance

Measurement of Channel Performance • Performance may be define as‘ the sum of all processes that will lead managers to taking appropriate actions in the present that will create a performing organisation in the future’ • or in other words, ‘ doing today what will lead to measured value outcomes tomorrow’ 2

• Macro or societal perspective • Micro or managerial perspective

Macro • Does distribution cost too much? • Are there people who are disadvantaged by the current distribution system? (inner city & rural areas) • How do channel members at various levels of distribution compare, in aggregate, in terms productivity per employee? • Has productivity been increasing more rapidly in manufacturing, wholesaling, or retailing?

Measuring channel performance Performance Measurement Performance measures Effectiveness Equity Efficiency 5

Performance Measurement Channel performance Effectiveness : Providing the required service most cost effectively. a. Delivery : A short term, goal oriented measure of on time delivery e. g – Number of times the order was serviced OTIF. b. Stimulation of demand: What are the efforts made by the channel member to increase customer base or increase the usage of the product. example: The cross marketing effort of Khimji & Sons, Kalamandir & Panda enterprises in Marriage season. Selling Maruti through Nalco Co-operative by Orbit Motors. 6

Performance Measurement Channel performance Equity : Extent to which marketing channel serves problem ridden markets and market segments, such as disadvantaged or geographically isolated consumers. Examples: Providing sales & after sales service to remote places like Malkangiri by CD distributors ( even at credit ). Higher freight Payout by the manufacturer & greater effort by distributor. Providing After sales service to the Coke ( NCFC ) refrigerators required tremendous training effort & investment in infrastructure. 7

Channel performance Performance Measurement Efficiency: Output / Input 1. Productivity : The efficiency with which the output is generated from the resources and inputs. Operational efficiency. a. Manpower productivity: Productive call % Sales volume per call b. Productivity of vehicle: Number of outlets covered 2. Profitability: Essentially financial efficiency w. r. t R. O. I. a. Stock turns & margins b. Control on overhead costs c. Cost & use of funds 8

Performance Measurement Measuring performance of marketing channels Normally tracked by H. O. 1. 2. 3. 4. 5. Productivity tracking of manpower ( call reports, DSR ) Profitability tracking ( branch level contribution / prod. Mix ). Market Penetration tracking ( Network expansion objectives ). Market share tracking ( ORG studies, internal reports ). Budget Vs actual. Internal data analysis. Dependence on market research. Objectivity of measurement. 9

Micro Question here focus on profitability & cost relative to figure out • Which channel member are solid run • Which channel seems to produce highest returns • Which suppliers/intermediaries will help the firm generate the greatest end user satisfaction • which of the marketing flows is best performed by specific channel member

Managerial point of view • We look at how an individual channel member should go about evaluating its own performance • How the channel member (Manufacturer)will evaluate the performance of another channel member (wholesaler) • How an individual channel member might measure & compare the various channel it employs

Measuring financial performance • Cost, revenue, & distribution channels can be used by a firm to determine the relative profitability and financial performance of channels • As a result of the financial analysis one or more appropriate managerial action may be taken. May be seek operational changes that would result in changes in profitability. Changes in frequency of sales calls, the size of minimum order, promotional expenses might lead to changes in profitability.

Distribution channel segmentation (a) Corporate Profitability Channel segmentation Direct channel Product A Product B Indirect channel Product C Product A Product B Product C (a) Segmentation analysis by channel & product category

(b) Corporate Profitability Channel segmentation Direct channel Territory segmentation West East A B Indirect channel C A B Product segmentation West C A B (b)Segmentation analysis by channel, territory and product category C

Revenue Cost Analysis • Revenue and cost associated with each segment must be analyzed – Direct selling cost – Indirect selling cost – Advertising – Sales promotion – Transportation – Storage and shipment – Order processing Identify the cost associated with serving specific channels, territories, and products

Contribution margin approach • CMA requires all cost be identified as fixed or variable according to behavior of the cost • Income statement in the CMA method of analysis can be prepared that identify probability for each segment by determination of fixed, variable, direct and indirect cost

Contribution Margin Income Statement By Channel Segment Health care channel Revenue Less: Variable Cost of goods sold Variable Gross Profit Less: Variable direct cost Gross segment contribution Less: fixed direct cost Net segment contribution Less: indirect fixed cost Net profit Net segment contribution Retail channel Total company 100, 000 42, 000 58, 000 6, 000 52, 000 15, 000 37, 000 150, 000 75, 000 15, 000 60, 000 21, 000 39, 000 37% 26% 250, 000 117, 000 133, 000 21, 000 112, 000 36, 000 76, 000 41, 000 25, 000 30. 4%

Net profit approach • Net profit approach to financial assessment of segments requires that all operating costs be charged or allocated to one operating segment. all of company's activity exists to support the production and delivery of goods & services to customer. Furthermore most of the costs that exists in a firm are, in fact, joint or shared cost. In order for the true profitability of a channel, territory, or product to be determined, each segment must be charged with its fair share of these costs.

Profits by commercial distribution channel Gross profit Selling expenses Commissions Advertising Catalog Co-op advertising Sales promotion warranty Sales administration Cash discount total General & Admin expenses Operating profit Operating margin Contract Industrial suppliers Government OEM Total commercial 27371 10284 136 2461 40256

Strategic profit Model • SPM is an analytic tool frequently used to determine ROI in a business firm. It is a tool that incorporates both income and balance sheet data and demonstrates how these data relate to each other to result in RONW (return on net worth)& ROA (return on assets) Strategic objective of a firm is ROI

Gross margin Sales (-) Net profit Cost of goods sold Net profit margin % ÷ sales Net profit/ net sales Total expenses Variable expenses (+) Return on net worth Financial Leverage = Net profit/net worth Return on assets x Total assets / net worth Fixed expense % Net profit/ total assets Sales Assets turnover Inventory ÷ Net sales/ total assets Strategic Profit Model Total assets Current assets (+) Accounts receivable Fixed assets (+) Other current assets

• Net profit margin- is defined as % net profit divided by net sales how ever net profit margin actually measures the proportion of each sales rupees that is kept by firm as net profit • Asset turn over- is a ratio of total sales divided buy total assets. It actually measures the efficiency of management in utilizing assets. Its shows how mush money in total sales volume is generated by each dollar that the firm has spent. • Leverage – the result by multiplying net profit margin percentage times asset turnover ratio in return on assets(ROA). For OR, ROA is a critical measure of performance because it especially tells how well they have used all the resources at their disposal to achieve profit