Thursday, December 2, 2010

An Example of How Business Operates


As part of general business knowledge and how business operated, here's an example of how companies sell through various sales "Channels"
 
The term "Channels" is used frequently in reference to sales and marketing, but what does it have to do with Purchasing? The answer is simple. Every Company has their Sales Channels or the methods by which selling occurs on behalf of the company. For example the following is a list of some examples a supplier may:

Sell direct to: 
  • Original Equipment Manufacturer, Where the Product will become part of the OEM's product
  • Value Added Reseller. There the Product will be added to reseller's product to create solution
  • Distribution
Sales may be by:
  • Direct sales by the Suppliers own sales force.
  • Direct Sales by a Supplier owned or controlled Subsidiary.
  • Sales by a Manufacturer's representative, Broker of Agent that is authorized by the Supplier
  • Sales by Supplier via the Internet
Distributors can:
  • Resell to retailers or end customers
  • Sell in conjunction with value added services they provide
Most companies have a variety of different sales “channels” involving both direct and third party sales of their products. The Supplier or its Subsidiaries make direct sales to the customer. Companies may have direct sales to Major Customers (dedicated or named accounts). For example, a company may have customer accounts where there are teams focused on selling Products on an OEM basis. Direct sales by Supplier are usually made to large Original Equipment Manufacturers (OEM’s), large Value Added Resellers (VARS) and may be made direct to major customers. More recently direct sales are also being made through cost effective models such as Internet sales. In locations where the Supplier didn’t have sufficient business to warrant direct sales staff on their own, they may conduct a form of direct sales through manufacturer’s representatives who will sell on their behalf for a commission. If you are buying and a manufacturer’s rep is involved, they are adding cost to your purchases so if possible, its always better to deal direct. For any sales that the Supplier doesn’t want to focus it selling resources directly on they will use Third Party Sales Channels such as Distributors or Value Added Resellers.

Independent third parties who will sell to target markets are also called Channels. With the advent of outsourcing, some Suppliers may not sell any product direct and have all sales be managed through distributors who function as their logistics and order fulfillment arms. When a Supplier sells through channels, the Supplier effectively controls what the Channel does and what you will get

Channels are important to the Buyer as they have an impact on the terms you can negotiate and the price you pay. For example if you purchase from a Supplier subsidiary two things happen. Their price needs to include the amount of overhead and profit they need to make for the subsidiary. The transfer price (how much they paid the Supplier to buy the product), will also control the price they can sell to you at. This limits how much they can discount. The second impact is your agreement is with the subsidiary, not the Supplier. There is no privity of contract with Supplier so the promises are being made by the Subsidiary who is solely responsible.  

For purchases from other channels, as they are getting a price or discount from the Supplier which they are locked into, they can only pass on a part of what they get to you. If a distributor gets a 30% discount from the Manufacturer, the lowest price they will sell it to you for is that, less their contribution to their profit and overhead. The same restriction applies to terms such as acceptance or warranty. They can pass on the supplier's standard terms or warranties, but anything more than would require specific agreement by the supplier or you would need to look to the channel's resources and assets to stand behind the commitment.

Suppliers will look at your business volumes and importance to them as a Customer and will determine what channel is appropriate for sales to you. If they are willing to sell direct they will also determine what sales tier they will place you in.  For example if you are a tier 1 OEM customer, you will normally get their best pricing and terms. The tier the place you in based on your value to the impacts both the price you will pay and terms they will offer. If they will only deal with you through Internet sales, the price is the price and their sales terms apply. If they refer you to distribution, that impacts the price you pay, the terms you can get and who is making the commitments to you.

We’ll talk about this in more detail later.