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Living and Thriving With
Channel Master Customers
Channel master business is good. Everyone likes increased volume. But the impact of this business can be bad for the bottom line.
The Channel Master
A channel master is the king pin of the channel. It has the power to dictate how business will be done, pricing, product and anything it wants to dictate. Manufacturers want the business of the channel master due to the very large volume it represents and the reality that if you are not part of the channel master's plans, you will lose significant opportunities. How can manufacturers meet the demands of the channel master and preserve their business?
Channel masters are defined as the major players in a channel. Often they can be a major retailer, for example, Wal-Mart, Home Depot, or McDonalds. But they can be a large distributor (Sysco in food service) or manufacturer (General Motors or Dupont). With a channel master in place, the realty is that the other members of the supply chain must play by the channel master's rules, or not play at all.
The power of the channel master is derived by its buying power. Is Wal-Mart an important customer? Wal-Mart is the single largest customer for Disney, Kraft, Revlon, Gillette, Campbell Soup, RJR and others. What share of US products does Wal-Mart sell in different categories? In dog food they sell 36%, disposable diapers 32%, photographic film 30%, toothpaste 30% and pain remedies 21%. If you sell these products, can you afford not to be part of the Wal-Mart channel?
The reality is that the channel master has the power to demand or "suggest" and the manufacturer has no practical option but to say "thank you." Exceptions exist, but only for those manufacturers who have the brand power to make their product a "must have" for the channel master.
Demands of the Channel Master
Channel masters have the volume and the control to allow them to demand or suggest how business will be done. Most channel masters dictate how partners will do business with them. For example, suppliers must receive their orders using a certain technology and format. Channel masters may demand specific information is sent as part of the order process, for example, advanced shipping notices or certificates of analysis.
Many channel masters decide the prices that will be paid for products and often the promotional programs. The channel master may charge the manufacturer for stock-outs or short ships or even late shipments. The channel master dictates how product is to be packed and shipped. The channel master may require the manufacturer to provide special packaging or even special products.
Thriving - Play by Their Rules
To gain and maintain the channel master's business, a manufacturer must play by the channel master's rules. Remember, they demand or suggest and your options are limited, mostly to saying "thank you". To meet their demands means the right systems and business processes, often established to meet the demands of the specific channel master.
Many manufacturers are involved with multiple channel masters. Since the different channel masters have different rules, these companies must build customer interfaces and business processes that can look different to the different channel masters plus one version for their other customers. Core systems can be the same if the connections can match the demands of the channel masters and other customers and the core systems have the functions to service the various needs of various customers. Since each channel master will change its demands over time, the manufacturer must build a business infrastructure that can easily and quickly change with demands.
Flexibility in both operations and systems is required to meet the ever-changing demands of the channel masters. Often, a manufacturer has a challenge keeping up with the changes and setting priorities from how to change systems to logistics to which product to run first.
Thriving - Deal with Margin Erosion
Margin erosion is the real impact of the channel master. While the volume opportunity offered by the channel master is great, they also set pricing, product, and service requirements. The manufacturer is dictated many of the variables that make up profit margins. As volume increases, the unit price usually decreases as the cost of the product and service increase. The final result is the real impact on the business, margin erosion. The manufacturer has few options. Of course it could refuse to meet the demands of the channel master and pay the price (lose the business) or do something about the eroding margins.
Margin erosion can either be accepted or addressed. Since volume, price, product, and service requirements are set, the manufacture must reduce the cost of providing the product and services demanded by the channel master. To address margin erosion, address cost. Systems must play a key role in both identifying cost reduction opportunities and providing business processes that will reduce the cost of products and service.
Channel master business is good. Everyone likes increased volume. But the impact of this business can be bad for the bottom line. A manufacturer must proactively build the ability to satisfy the channel master's demands and continually search for cost reduction to maintain margins.
Many more articles in Logistics & Supply Chain in The CEO Refresher Archives