How decisions on your sales channels lead to strategic supply chain design requirements

This article will analyze the complexity resulting from the coexistence of several different sales channels. It is precisely this complexity that continues to be the cause of supply chain performance issues. As a basis, you can check the previous articles from the 10-part series about the root causes of the supply chain performance gap that started with a summary and headed right to the root causes - product portfolio complexity, speed of innovation, and new types of competition.

First of all, we should clarify our definition of a sales channel: It is a way of bringing products or services to the market to purchase them. A sales channel can be direct if it involves a business selling directly to its customers. It can be indirect if an intermediary, such as a retailer, distributor, or dealer, is engaged in selling the product to customers. The term sales channel is thus differentiated from the distribution channel, where the corresponding deliveries, i.e., logistics services, are considered.

Does your business face a sales channel conflict?

In total, the following 13 types of sales channels can be distinguished:

• Personal Selling: Salespeople are responsible for selling. This model is mainly represented in the (complex) B2B area.
• Sales Outsourcing: The sales activities are transferred to one or more partners.
• Retail: Classic trade through sales in physical branches.
• Automated Retail: Automated trading such as through the use of self-service shops or vending machines.
• eCommerce: Digital sales channels such as online stores that are accessible via websites or apps. In-game purchases, for example, also belong to this category.
• Resellers: Companies that source and resell products. No value contributions are made to the products. Trade, export, import, and eCommerce fall into this category.
• White label: selling products without a brand. Resellers do the branding.
• Direct Marketing: The sale is initiated via direct contact by phone or email.
• Value Added Resellers: Companies that add one or more additional features to purchased products.
• Original Equipment Manufacturer: In this model, individual parts are supplied by suppliers to the OEM who produces the finished good.
• Wholesale: The wholesale channel focuses on supplying retailers or eCommerce in the upstream area of the supply chain.
• Import & Export: Concentration on importing or exporting to foreign markets.
• Agents: The sale is carried out through authorized intermediaries who act on a commission basis for a company.

Companies often pursue a combination of several sales channels, which carries the risk of a so-called sales channel conflict. Such a conflict arises when sales channels compete with one another. For example, there is a negative effect if, in addition to an established dealer structure, there is an eCommerce sales channel that leads to internal price conflicts between partners and shifts market shares. Last but not least, a consistent supply chain strategy is required to avoid such difficulties.

What are the implications for supply chains according to your sales channel strategy?

This raises the question of the supply chain implications in the context of various sales channels. The number of sales channels existing today and their divergent requirements on the supply chain already illustrate the inherent risk of a performance gap. In particular, it becomes transparent that the inventory structures within a supply chain are determined mainly by the established sales channels. While some channels in combination with a regional focus tend to require central warehouses or warehouse clusters (e.g., regional eCommerce), there are strongly decentralized inventory distributions, especially with a high number of sales markets (e.g., in traditional retail) or an international set-up. This increases the relevance of the optimization of network inventories (multi-channel inventory optimization).

In addition, the coexistence of several sales channels implies a clean separation of well-defined supply chain segments. This point addresses which products are sold, planned and stocked via which channel and how. Established trading companies, in particular, have faced the challenge of mastering the change in the direction of modern sales concepts in recent years. Let us consider the following examples from retail:

1. The German Otto Group, with a long tradition in the mail-order business, has completely given up the classic catalog business and successfully switched to online shops. This example shows a clear sales channel focus. Switching entirely to an e-commerce model enabled Otto Group to expand the number of brands and diversify its business tremendously, currently operating 34 different brands and the respective online shops and product portfolios.

2. The MediaMarktSaturn Retail Group, as a German electronics retailer, relies on a bilateral strategy and operates in numerous markets and online shops. There is also a distinction between the two brands MediaMarkt and Saturn. Thus, the sales strategy is realized through the conscious use of several sales channels.

3.    Amazon Marketplace functions as an eCommerce sales platform for new or secondhand products. Amazon operates as an online marketplace for third-party sellers where they gain access to Amazon's customer base. Thereby, Amazon can provide a massive variety of products without even having to invest in additional inventory. On the other hand, Amazon is experimenting with setting up their physical retail stores and acquired Whole Food in 2019, a food retail chain in the U.S. This demonstrates the channel mix Amazon is setting up and managing.

4. In addition to the examples from the retail sector, the following example from the automotive industry illustrates well the changes happening: while the regular sales model of the automotive industry is marked by car dealers, Tesla is breaking new ground. Tesla sells its cars online and operates a few car dealers in upscale downtown locations. On the one hand, this reduces the need for staff, and there is a reduction in complexity through the clear sales channel focus. On the other hand, eliminating an entire supply chain stage has a margin effect for Tesla - the dealer margin of external partners is eliminated.

The above examples demonstrate potential supply chain issues that may come up in a multi-channel sales environment. There may be a demand shift between channels, cannibalization effects, different speeds of growth, etc. This will affect the supply structures that, in many cases, are tailored to meet the needs of one sales channel but are not supporting other sales channels well. We have discussed this above using the example of local vs. central inventory structures. Cost structures, prices, and hence profitability will be different for various sales channels. The same is valid for investment requirements and cash-to-cash cycles. A bricks-and-mortar-based sales channel requires investments in buildings and store equipment, rental, and personnel costs, vs. an online store will require investment in the website and e-commerce store system.

How strategic sales channel decisions can relate to business model adaptations

Let's have an insight into one of the most offensive and commonly known sales strategies: ‚Lock-in' is what scientists call a highly successful strategy for strategic sales: the basic product is temptingly cheap, the follow-up costs are confusing and gigantic. Gillette is considered the grandmaster of the lock-in effect and the first company to apply the strategy in 1901, which is why the effect is called 'Razor and Blade'. With a lot of marketing and patents, Gillette was able to keep the prices of its razor blades high despite competition offering cheap alternatives. The biggest coup came in 1999: the 'Gillette Mach 3' blades were a quarter more expensive than competitors such as Wilkinson. The handle, however, building the basic product, is cheap and still a big seller. Gillette achieved a gigantic company valuation when bought by Procter & Gamble in 2005 with $ 57 billion. Furthermore, the company had already purchased the German electronics manufacturer Braun in 1967 and transformed its Oral B electric toothbrush into another super-lock-in.

This example shows quite clear how close sales channel strategy and business model innovation are related and dependent. Companies need an overall strategy of reaching their customers most effectively, gaining and maintaining market shares, and managing internal complexity - not only throughout supply chains.

Sales channels based on an e-commerce model and online store collect data about customers, customer behavior, conversion rates of customers and products, etc. This data can be used to optimize supply chain planning, for instance, in demand forecasting. It can also assess the effectiveness of sales initiatives and campaigns and rationalize the product portfolio. Furthermore, this data can be exploited for advertising and any other activities that require insights into customer actions and preferences – and can even be provided to partners in the value chain, creating a separate revenue stream. For instance, the German steel distributor Klöckner is transforming its business to a digital model, bringing together steel manufacturers, other steel distributors, and companies using steel products in their manufacturing processes. Via its digital platform, Klöckner provides digital services like ordering, material properties and specifications, value chain automation, and operational excellence. Klöckner also invites others to contribute to the platform, leveraging their digital assets and know-how. So Klöckner is transforming its business model from a steel distributor with major sales channels being telephone, email, fax, and sales reps to a digital model covering all aspects of selling, buying, and using steel products.

What are the ways of improvement for your business?

Various aspects must be taken into account so that companies can build an optimal sales channel strategy.

The first step is to create transparency. An end-to-end supply chain analytics system is needed to represent all sales channels and providing visibility on the customer demand coming through these channels. Also, the supply side needs to be mapped, indicating potential supply constraints, non-matching inventory structures, supply and transportation routes, etc.

The structure of the sales channels should match the corporate and supply chain strategy and thus reflect the demand needs and purchasing preferences of the customers. Equally, we face the challenge of reducing the "necessary" channel complexity to a level that we can coordinate. We can reach that by focusing on the most profitable sales channels, with a realistic evaluation of the associated sales channel complexity. This includes the analysis of the parties involved, costs, and qualitative aspects that have, for example, image relevance. In this way, Apple achieves a great marketing effect by placing stores in unique or significant locations. Therefore, this sales channel has a far greater effect than simply looking at the corresponding sales per se. As a result, a sales structure should be sought that circumvents the problem of a sales channel conflict or creates a positive effect across all channels, as illustrated by the example of the Apple stores.

Furthermore, sales channel complexity shows that we must strongly adapt the supply chain and, in particular, its segments with corresponding supply structures and inventory policies to the respective sales channel structures. Above all, digital solutions support this to establish inventory distributions and segment-based strategies. Solutions that consistently link analysis and implementation of measures, including success measurement, are beneficial here. Read in our upcoming article how the complexity of the supplier network influences the supply chain performance gap.