THE ECONOMICS OF CHANNEL STRATEGY

The Chemical Industry is changing. Global competition, emerging markets, demand uncertainty and increasing costs are affecting your business more than ever. During these times, there is an even greater need to focus on profitability. This requires innovation, marketing and execution. To focus on these key drivers, you must eliminate complexity and allocate resources to meet key-customer needs. The right channel strategy can help eliminate noise from small customers, reduce complexity costs and thus improve profitability.

SEGMENTATION

Before examining the economics of the most common channel options, it is important to understand the small customer segment by exploring a typical example within the specialty chemical segment. The "A" customer segment typically represents the top 20% of customers and 80% of the total sales. Meanwhile, the "B" customer segment is the next 40% of customers and 15% of sales. Finally, the small or "C" customer segment typically represents the last 50% of customers and 5% of sales.

TRANSACTION COSTS

A typical specialty chemical product line has 500 customers, $100 Million in revenue, 25% margin and 4500 transactions. The "C" customer segments typically has a higher margin but it doesn't always tell the whole story. To calculate the actual profit, the variable costs or "cost-to-serve" must be taken into consideration and is typically estimated at $500.

CHANNEL OPTIONS

Consider the advantages and disadvantages of the common options to serve small customers. The 4 most common channel options are regional distribution, national distribution, direct inside sales and direct outside sales.



OPTION 1: DIRECT OUTSIDE SALES

Using a director outside sales channel leads to a 10% profit for the “C” customer segment. 10% is still not bad and this segment is profitable. But if a customer places an order for $2,000 then you are losing money. 1 out of 3 small customers will place an order for less than $2,000. However, this channel strategy has profitability potential with aggressive business rules such as higher minimum order quantities, tier pricing discipline, made to order SKUs, lengthened lead times, etc. in order to reduce costs.

 

OPTION 2: DIRECT INSIDE SALES

Using a director inside sales approach actually causes expenses to go up. The order fulfillment, supply chain and back office costs still remain. And in many instances, the SG&A savings is offset by the additional expenses related to process development, technology and employee training and retention. This option has higher profit potential assuming:

  • Invest in your people, provide leadership and create a career path
  • Implement technology to support business process and improve productivity
  • Implement business rules to further reduce variable costs
  • Improve all account raw margins above 20%.
 

OPTION 3: REGIONAL DISTRIBUTION

In this option the expenses have dramatically reduced, but there are other inherent costs. Highly complex relationships with many regional distributors require a large number of resources to provide direction, create transparency and manage relationship. Costs will increase significantly as this will inevitably lead to a duplication of efforts and resources.

 

OPTION 4: NATIONAL DISTRIBUTION

This option has very high profitability potential assuming:

  • The distributor is externally focused to meet key supplier and customer needs
  • There is a partnership that encourages joint strategy efforts and information exchange
  • There is an exclusive relationship that will drive product focus and market development
  • The distributor reduces complexity to allow you to innovate, cut costs and redeploy resources
So, which channel strategy will return the highest profitability for small accounts? It depends. Choose the option that best meets your needs. But, before you decide...

 

...CONSIDER A 5TH OPTION: CHEMPOINT

In addition to the decline in costs, consider the potential profitability gain from utilizing a partner that will provide Joint Strategy Execution, Product Line Focus, Customer Transparency and Market Development. The need for profitability growth and simplicity has led to a new distribution option.