What Is Channel Effectiveness Risk?
Channel effectiveness risk is the risk that poorly performing or positioned supply chains or distribution channels may threaten a firm's capacity to effectively and efficiently interact with suppliers and inhibits the ability to access current and potential customers and end users.
An organization’s supply chain and distribution channels encompass the network of resources and processes involved in producing and delivering final products; from procurement of raw materials and their transformation through manufacturing to the distribution of finished goods to end customers. The supply chain and distribution channels are considered a company's link to its suppliers and access pathways to both current and potential new customers. Control over these channels in many cases amounts to control over the business relationships with the firm’s suppliers and ultimately, consumers.
To succeed, an enterprise must commit to product availability, price and delivery date at the time of order entry. If the raw material is not immediately available to be processed and later shipped in the form of finished product, the enterprise must know when it will be available and allocate it appropriately to the customer.
Another challenge in the current digital economy is performance. The competition likely has an online presence and the barriers to switching vendors almost instantaneously are rapidly eroding. To deliver at this level of performance, all participants in the supply chain and distribution channels must act collectively as one seamless fulfillment process.
A Shift From The Industrial Age To The Information Age
Supply chain and distribution channel management has been evolving for decades. The tools to achieve efficiency gains have often been available long before mainstream adaptation. Often, the reason for the postponement of their adoption has been high growth rates, which can substitute for inefficiency in bringing results to the bottom line.
Today, however, the economy is driven by the customers of global and virtual markets and has dramatically changed the rules. Companies have started focusing on implementing entire suites of solutions (including customer relationship management, supply chain management and supplier relationship management) designed to optimize each phase of the supply chains and distribution channels. These solutions enable companies to streamline and transform key business processes into one dynamic, fully integrated, end-to-end channel—the “Value Chain.”
Before the internet, the value of an enterprise was generally based on its physical assets. Such companies controlled inventory costs through vertical integration, owning everything from raw material to finished goods, with a large chain of intermediaries along the distribution channels.
Due to such practices, they were also more supplier-oriented, meaning that the supply chain was more focused on the supplier relationships and their requirements (make-to-stock), as opposed to the customer relationships and their requirements (make-to-order). The focus on suppliers resulted in the establishment of better contracts; however, many companies failed to closely align themselves with what customers truly wanted and when they wanted it.
Using network technology innovations, value chains are enabling significant restructuring of the traditional enterprise as well as the time dimensions of these channels. Concurrent information sharing models are being used to improve inter-enterprise process planning and execution.
These models work by using internet technology to join together multiple enterprises. These enterprises share access to systems to support inter-enterprise process planning and execution. Robust application-to-application decision making, which will be the hallmark of the leading and commercially scalable partnerships, will require the closed-loop collaborative capabilities concurrently available only through the value chains powered by the internet technologies.
These collaborative ventures are beginning to enter contingency planning, which enables more efficient multi-enterprise responses to potential upsets in demand and in the value chains. As enterprises move from small-scale collaborative prototypes to full-scale inter-enterprise initiatives, the capabilities of the infrastructure must also become more robust.
Meaningful collaboration starts with the alignment of strategic decisions among all involved parties and continues seamlessly to the end-consumer’s purchase. This new paradigm must support a spectrum of relationships that have advanced beyond using the purchase order and invoice as the primary documents of commerce.
See the full report for a table summarizing some of the changes mentioned above.
BUSINESS RISKS RELATED TO CHANNEL EFFECTIVENESS
Sources of channel ineffectiveness and their corresponding impacts are as follows:
- Inefficiencies or lack of productivity may add unnecessary costs to the bottom line as a result of poorly designed or inappropriately planned infrastructure of the value chain.
- Under-utilized resources (or systems) may be present within an organization, resulting in significant overhead costs but minimal productivity.
- Dependence on a relatively costly or hard-to-manage franchised dealer network may occur in a period when customer preferences are changing rapidly or alternative distribution channels are opening up.
- The process can be inefficient in satisfying valid customer/policyholder requirements, resulting in higher costs than competitors.
- Inefficient distribution processes or mechanisms will greatly inhibit distribution channel effectiveness in the overall value chain.
- If the underwriting process and interface with distribution channels are ineffective, production success may be impacted.
- Poor or inadequate policy and endorsement issue processes may deter production.
Download the entire report to find more information on this material, including:
- A table summarizing the shift from the Industrial Age to the Information Age
- Management practices and performance measures
- Critical success factors to address changes brought by the internet with the new business model
This information is a sample from KnowledgeLeader’s Channel Effectiveness Risk Key Performance Indicators (KPI). Here are momre related resources on KnowledgeLeader: