Interpretation of channel flattening

“The competition model of most domestic companies is low-level, which is the so-called price competition. When this method becomes mainstream, everyone will consider compressing channels to achieve cost advantages.” Canadian Procurement Management The remarks by Wang Dayong, chief consultant of the association's China, may explain why "channel flattening" has become a popular word in recent years.

In the view of another channel management expert, Wang Chenghua, Director of BearingPoint Consulting, many factors, such as the development of the Internet, the development of logistics networks and the maturity of terminal channels, are promoting the development of "channel flattening" The expansion of the internal sales structure brought about by flattening will pose a huge challenge to the company's channel management capabilities.

The "Special Discussion" column of the CEConlines website recently organized a discussion among website users on the issue of "channel flattening", and received positive responses from users. We asked these two experts on the issues that everyone is concerned about.

Flattening is the compression of the sales hierarchy

What does "channel" mean in the context of "channel flattening"?

Wang Dayong: When the scale of the enterprise becomes larger and the market coverage is relaxed, it cannot complete the sales independently. At this time, agencies such as general agents, dealers, and distributors must be used to participate, and there will be more levels. Therefore, "channel" is a hierarchical state of sales in a sense. Of course, "channels" can also have a narrow understanding. Many companies need organizations to help them export products. Such "partners" are also called "channels". But now it is more inclined to be understood as "leveling", and only this understanding will involve the issue of "flattening".

Wang Chenghua: Channels are part of the supply chain. The supply chain has two ends: one end is mainly undertaken by the purchasing department and planning department of the factory before the factory is manufactured; the other end is the part between the factory and the customer after the product is produced, which is generally undertaken by the sales company. Simply put, the problem in the supply chain after it becomes a finished product is the problem of the channel.

Channels have five main functions: marketing, logistics, sales, service, and financing. In the early stage of the product entering the market, the marketing function of the channel is more important, and companies need to educate the public to accept their products. When the market gradually matures, the logistics function of the channel will be larger. Now logistics companies are developing very fast, and they not only provide distribution, but also provide services. For example, Toshiba computers are repaired by UPS in the US instead of taking them back to Japan. Therefore, a few years ago there was such a discussion abroad: Will the channel die? If the marketing and sales functions are not strong, it is very likely that the channel will be replaced by a logistics company. In addition, the financing function of the channel is rarely talked about, but in fact, there are two places in the channel that have a great impact on financing: inventory and accounts receivable.

How do you define "channel flattening"?

Wang Dayong: I personally understand that "flattening" is the compression of the sales level. It is important to note here that "flattening" cannot be equated with "direct selling". If there are many levels of "direct selling", it will not be flat.

Wang Chenghua: I think there are two main meanings. First, the compression of the layers from manufacturers to consumers, from the original layer-by-layer agency, to the development of direct transactions between manufacturers and retailers (Direct to Retail). This process has been ongoing. Of course, some industries are actually more stereotyped. For example, in the automobile industry, its channel model is basically "automobile manufacturer-logistics company-4S store". This model was formed in the United States in the 1960s and 1970s, and it has hardly changed until now.

Other industries, the fastest-changing industry is the high-tech industry. Taking mobile phones as an example, the models we saw a few years ago were basically national agents, provincial agents, city-level agents, county-level agents, etc. The most basic one was two or three layers, and then we went to the final distributor. . But now it is a bit like the channel model of automobiles, and many manufacturers are directly supplying them to specialty stores.

The second level of meaning refers to changing the sales model of the terminal. Usually, the new terminal sales model appears in the form of direct sales.

What are the main manifestations of "channel flattening"?

Wang Dayong: Including telemarketing, B2B and B2C e-commerce, and direct sales.

Wang Chenghua: From the first meaning of flat, the main form of expression is Direct to Retail. In the mobile phone industry in the United States, this ratio is 60%-70%, and in China it is 30%. In another sense of flatness, there are several trends or attempts: 1. There will be more and more direct sales stores, direct sales stores or brand stores, but they will not become mainstream, because manufacturing companies are not retail companies after all, and the retail industry is In another industry, the most important thing for manufacturing companies is to do brand publicity and promotion; 2. Online sales, which are related to the company's operating model and the company's determination; 3. Telephone sales.

The degree of flatness varies by market

Which industries are suitable for a flat sales model?

Wang Chenghua: This is related to the life cycle of enterprise products and the maturity of the market.

If the product is high value-added and relatively profitable, everyone will tend to make a simple solution. When the profit is very large, the company generally does not pay much attention to whether the efficiency of the channel is very high, and whether the profits eaten by the channel merchants are a lot. The flattening trend of PCs, mobile phones, and cameras seen today has a lot to do with their life cycles. When the product is popularized, the profit margin continues to decrease, and the manufacturer's sales force, the entire channel, and terminal sales have all undergone a process of recombination.

In addition, relatively speaking, the larger the volume, the easier it is to flatten. As far as I am familiar with the auto industry, if a car company only sells a dozen cars in China a year, it will definitely find an agent instead of building its own channels.

Wang Dayong: Whether the channel is flat is also related to the type of market the product is aimed at. Generally speaking, the market is divided into two types: the enterprise market and the consumer market. The former faces institutions, the latter faces individuals and families. Obviously, the number of customers in these two markets is completely different, and the number of customers in the enterprise market is far less than that in the consumer market. Products for the enterprise market generally have relatively large targets, such as medical equipment, tires, engines, etc., and the annual consumption of a single customer will also be relatively large. In this case, it is still advantageous to operate in a "direct selling" way.

In addition, there are some consumer goods companies, such as Daphne, they have many specialty stores, and they have "shop-in-shop" in Jia_Love. This is related to the wider product line of Daphne. If they only produce children's shoes, can they still open a franchise store? I see pressure! Because the audience is too small.

But Daphne has captured 80% of shoe consumers when making women's shoes. Men buy very few shoes. I only buy two pairs of shoes a year, but my wife buys several pairs of shoes a year, and the spending power is different. Daphne produces both fashionable shoes for young people and more solemn shoes suitable for white-collar workers, with wide coverage. Therefore, it chooses this flat operation model to support its survival and to build a brand. This product has a high gross profit margin and a large volume, so it can take a flat franchise route.

The advantages and disadvantages of flattening depend on management

What benefits and negative effects will "channel flattening" bring to enterprises?

Wang Dayong: "Flattening" is just a voice, not every company needs to be flattened. Many companies want to flatten, but can't achieve it, so it is still a multi-level marketing model. One of the advantages of "flattening" is that it can reflect the price advantage, because the more layers, each company wants to profit from it, plus their own operating costs, the price of products that fall into the hands of consumers will be higher. After the compression level, there will be a price advantage. Second, after "flattening", it can be closer to the market and customers, so that what consumers need, how they evaluate and reflect on the product can be quickly fed back to the enterprise, and the sales department can quickly Get a glimpse of what the consumer's attitude is towards a market, product or service. At the same time, it can also better feel the changes in competition and changes in demand.

On the other hand, after "flattening", the number of partners in the network will be compressed, which poses a new challenge to the ability of enterprises to cover the market: how can they face such a limited level? market? Can the supply be supported smoothly?

Therefore, "flattening" has advantages and disadvantages, and the key depends on the management mode of the enterprise.

Dell is a typical flat model, it has no channels, point-to-point, we all buy things directly through online orders. The association corresponding to Dell is hierarchical. Now Lenovo's tentacles have reached the county and township level, which means that it has at least three layers. Dell's direct-to-customer price advantage enables faster access to customer information and understanding of customer changes. However, the grasp of customers is not necessarily better, especially in the market state where there are many non-market-oriented behaviors, many rely on relationship marketing, and Dell's model is difficult to deal with. Lenovo's model has many partners and a rich social network and relationship network, which makes it easier to achieve large-scale sales. Both companies are surviving very well. Who do you say is good and who is bad? Each has its pros and cons!

In addition, the way of "direct sales" seems to be flattened and the end sales are smoother, but the risks are great and the investment is also great. From the perspective of supply chain operations, when there are more intermediate levels in "direct selling", inventory will become a problem. Each level may require an inventory reserve to cope with changes, which will enlarge the inventory of the end-of-sale network and bring pressure and risk to the operating cost of the enterprise. Especially in industries where the value of products such as IT and communications changes rapidly, the pressure is even greater.

At present, the home appliance industry has formed a peculiar phenomenon - "channel", that is, home appliance hypermarkets in turn restrict production enterprises. However, if home appliance companies take the franchise route, there may also be problems, because it is difficult to satisfy consumers' "comparative" shopping psychology. He can't compare prices right away, so it's hard to make up his mind to make a purchase right away. In home appliance hypermarkets, you can easily compare more than a dozen brands.

Wang Chenghua: As I just said, the reason why the channel exists is its financing function. When manufacturers sell products to dealers, they recover the value of the products sold, increase their own liquidity, and no longer need to bear the inventory costs of these products. Therefore, the existence of intermediate channels relieves the financial pressure of manufacturers to a certain extent and reduces the operating risks of manufacturers.

But our customers have calculated that if it is a mature flat model and the entire inventory and accounts receivable are well controlled, although the manufacturer has to bear all the costs in the sales process, the sum of these costs It is still possible that under the agency model, the total cost borne by the dealer and the manufacturer is less.

So, after the entire channel is straightened out, flattening saves money. Because most of the money is spent on inventory. The biggest issue of supply chain management is how to reduce inventory and ensure that there is no shortage of stock on the shelf. This is a contradiction, but there are ways to balance it.

What requirements does "channel flattening" place on the internal management of enterprises?

Wang Chenghua: You often see that when a company is implementing flattening, the internal sales structure is expanding, so this itself has a balance problem. Flattening requires companies to improve their management capabilities through technical means. In the past, you might only have to manage dozens or hundreds of distributors, but now you may have to manage many more of your own storefronts.

Wang Dayong: From the perspective of "direct selling", the control power of the enterprise will be strengthened, but the management scope will be expanded, and the management difficulty will be increased. Moreover, after the flattening, the amount of tentacles will be reduced, so the control and influence of the enterprise on the market will also be reduced, and the control of the terminal will consume more resources, which may lead to an imbalance of internal resources. At the same time, due to flattening to achieve the goal of reducing inventory, it will also trigger the requirement of rapid response, including the effective configuration of information systems, which will place higher requirements on enterprise management, which cannot be achieved by ordinary enterprises.

In addition, the organizational structure of the enterprise has to be adjusted. It used to be multi-level, CEO, vice president, director, deputy director, manager, deputy manager, supervisor, deputy supervisor, there may be seven or eight levels, and finally the salesperson. The issuance of orders takes a long time, and the middle will be distorted. After the market information is captured, it will be distorted and transmitted slowly, and the situation will change long after the decision is made. There is a close relationship between channel flattening and organizational flattening. After the terminal is flattened, the internal organizational structure of the company must be flattened, and the two must match.

Flattening is easy to change quantitatively and difficult to qualitatively change

Will "flattening" become a trend?

Wang Chenghua: I think there are many factors driving this trend, such as the development of the Internet, the development of logistics networks, and the maturity of terminal channels. Therefore, relatively speaking, enterprises can have this resource to directly face terminal sales. From the perspective of the general environment, the company's profit pressure is now much greater than before, and everyone is considering how to most effectively improve the utilization rate of capital. We have seen that many multinational companies no longer use agency companies in China, mainly because: first, with the expansion of their market share in China, large companies have to do their own marketing and no longer need to rely on agencies; second , the lower market is more mature, and you can face distribution companies with less risk; third, the risk of recovering more profits is decreasing.

We often say that the Earth is getting smaller. From the time of transportation to the transmission of information, everyone feels that the earth is getting smaller, and the flattening of the channel is part of the smaller earth. As the Chinese market matures and develops, and the volume of the market is enlarged, part of the normalization and rationalization of channels may be flattening. From the perspective of the general trend, "flat" is certain, but what kind of structure is adopted depends on the respective situation of the enterprise.

Telephone and online sales will gradually increase with the needs of consumption, the establishment of the consumer credit system, and the acceleration of social rhythm, but the traditional retail model will still occupy a large proportion. It will take some time for Internet and telephone sales to reach the level of foreign countries, which is related to our population density. Relatively speaking, online sales and telephone sales are more popular in countries with small population density. In addition, with the development of large-scale retail terminals, the Wal-Mart effect will gradually emerge. That said, direct deals between manufacturers and retailers will become increasingly important.

Wang Dayong: From a quantitative point of view, flattening may be a trend. However, the operation of enterprises is restricted by the environment and cannot be accomplished by imagination. The inertia of the enterprise is also difficult to break, so the possibility of qualitative change is not large.

For example, e-commerce, facing the enterprise market, it is difficult to reflect the value in the short term. What about the consumer market? If the price of the product is high, who dares to buy it online? Big targets and non-standard items, such as clothes, are hard to sell! How to define color? How to determine whether the size is suitable or not? Only some standardized products with relatively small value, such as CDs and books, have no risk, so people can buy them online with confidence. Therefore, it depends on the product, and some products are difficult to market through the Internet.

If direct sales are adopted, it depends on whether the business model and management system of the enterprise have reached a state sufficient to support zero inventory. This is the dream of every entrepreneur, but whether it can be realized depends on whether you have this ability, whether you have enough resources, and whether you dare to take this risk!

ZOE ZHENG is an assistant writer and editor for World Manager Magazine.

Interpretation of channel flattening

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