Dynamics Of Channel Health

The IT distribution model has seen interesting changes over a period of time.

It evolved as a two-tier model during 1980-1990 period involving manufacturer to

dealer and dealer to end-customer business. As time progressed, the years after

1990 witnessed the onset of multi-layered distribution.

The two-tier model survived for a long time because MNC manufacturers were

remotely located and distributors were adding immense values like inventory

planning, market mapping, stocking, pricing, promotions, service support, local

logistics and credit lines to channel.

MNCs JUMP INTO THE FRAY



It was in the mid-nineties that overseas manufacturers realized the need for

local presence in India and opened up liaison offices to monitor the business

expansion in the Indian sub-continent. Now it was these liaison offices which

were adding values like market mapping, inventory planning and promotions.

As further time passed by, multi-tier distribution took centerstage with

small resellers getting into IT business. The home segment started coming up and

thus brought along systems assemblers.

R Manikandanis DGM (Sales and Mktg), LG Electronics India Ltd.

The late 90s witnessed many brands setting up Indian offices and expanding to

various geographical locations. These offices were equipped with local manpower

and started offering tailor-made promotions. They started investing on building

up infrastructure for service support either through their own service centers

or outsourced centers.

These service centers became handy to support the SOHO/home segments which

began experiencing increased penetration. Recognizing the importance of these

segments, the manufacturers further strengthened their presence by going the

last mile in value-addition and provided for local logistics.

Systems assemblers started gaining momentum from 2000 onwards and were

recognized as the most important link in the value chain. Around this time,

channel health became a primary concern owing to a three/four-tier distribution

model.

Change in mindset



Simultaneously, the Indian IT market witnessed a change in end-customer´s

mindset. The home customers who were not brand-conscious, expressed willingness

to pay premium for known brands.

Customers cha-nged their single-brand approach to accepting multiple brands

and assembled PCs in a big way.

Price-conscious customers turned to value-for-money offers. Instead of just

buying a box, customers started looking for values like warranty, delivery, TCO

and other finer points.

MANUFACTURERS OWN UP RESPONSIBILITY



The result was that manufacturers came forward to own up responsibility for

their products and yet offer competitive prices.

The channel had to cut their margins to accommodate the multi-tier

distribution and to provide for increased demand by customers on

value-additions.

At this juncture, the Indian IT distribution market started witnessing a

paradigm shift in channel. The box movers started transforming themselves into

VARs, turnover lost its charm and bottomline became more important.

Systems sellers migrated to solutions providing. Resellers expanded their

portfolio by adding service support. Brand loyalty took a dip and the channel

started offering multiple brands by default.

VOLUME SELLING TO QUALITY SELLING



Manufacturers began re-aligning themselves by changing their approach from

volume selling to quality selling. They reinforced pricing discipline.

Broad-basing of the channel was taken up and channel was educated on portfolio

management. A strict watch was kept on demand and supply situation and sincere

attempts were made to ensure healthy channel margins.

But more was required to be done to maintain channel health and here the key

challenges were: over trading; price instability; credit exposures; and

over-stocking. A closer look at these four attributes reveals that all these are

inter-related.

Given these attributes, an important question that needs answer is: How could

manufacturers help the channel to maintain its health?

First of all, they need to ensure that their incentive schemes are

objectively driven and broad-based. Vendors have to minimize the warranty

exposure on the channel. They need to provide special incentives to distributors

to enable broad-basing of products.

DANGERS OF OVER-TRADING



Vendors need to strongly discourage over-trading which predominantly takes

place on account of high-volume products that are generally vulnerable.

Over-trading takes place when these products carry along with them heavy

schemes.

Several things happen as a chain reaction to over-trading:

1. Partners face poor/zero/negative bottomline and bad debts;
2. they get insulated from other partners in business owing to volatile price
   
   points;
3. distributors get exposed to undue credit problems;
4. there is an overall reduction in volumes for principals;
5. loss of channel confidence on the product line.

Over-trading also leads to price instability, which is harmful to channel’s

health. The instability in prices primarily results because of price

undercutting; excess stocks with the channel; frequent price revisions; large

scheme money; special deals and cross bundling from distributors.

Thus, vendors need to take every care that there is no over-trading to ensure

the good health of the market. They need to introduce more mystery incentives

than open-channel incentives. Price under-cutting should be disallowed and more

importantly, vendors should encourage well-spread billings across a month.

MEASURES FOR CHANNEL’S HEALTH



What measures should the channel take to maintain its own health? A constant

effort to move one layer up the value chain would help partners to venture out

to greener pastures. Partners should try branching out into retail segment, with

a clear focus on portfolio management.

Partners should have a well thought out strategy for products. They should

have entry-level pull products for top line and high-end products for bottom

line. Channel partners need to overcome the temptations of indulging in

overtrading and price undercutting. Minimizing warranty exposure and cutting

down on overheads would go a long way in maintaining a healthy bottom line.

In conclusion, to maintain the good health of the channel, every layer of the

value chain needs to re-align in the coming months and years. Understanding the

dynamics of the business and latching on to the paradigm shifts that take place

is indeed going to be the key.

Also, the acceptance of the fact that, both, manufacturers and partners hold

equal responsibility to maintain the channel health would go a long way.

R Manikandanis DGM (Sales and Mktg), LGElectronicsndia Ltd.