Risk versus reward: The balancing act of distribution channels
As companies grow they increasingly rely on their sales channel management as a key component to their campaign-to-cash process and overall strategy. Despite the sound approach of utilizing channel sales, the exposure to risk becomes a serious factor, especially for companies in the consumer goods and technology sectors.
While distributors help companies drive customer demand and provide technical support and other value-added services to customers, the reliance on channel partners puts companies at risk. By leaving distributors in charge of developing customer relationships, companies retain limited or no direct contact with customers. Therefore if a channel partner relationship falters, so does product demand and sales.
An example of a company that understands this well is Cyprus Semiconductor, which relies on many distributors to assist with creating customer demand. The following is from Cypress Semiconductor’s 10Q:
“We continue to expand and change our relationships with our distributors and see an increase in the proportion of our revenues generated from our distributor channel in the future. Worldwide sales through our distributors accounted for approximately 70% of our net sales in Q1, 2011. We rely on many distributors to assist us in creating customer demand, providing technical support and other value-added services to our customers, filling customer orders and stocking our products. We face ongoing business risks due to our reliance on our channel partners to create and maintain customer relationships where we have a limited or no direct relationship. Should our relationships with our channel partners or their effectiveness decline, we face the risk of declining demand which could affect our results of operations. Our contracts with our distributor may be terminated by either party upon notice.”
Despite these very serious risks, Cyprus Semiconductor’s worldwide sales through the distribution channel increased to approximately 75 percent in fiscal 2012. This is unsurprising. Utilization of the channel is an effective means to increase one’s footprint and capture market share. This means of growth is a calculated risk. When organizations employ channel sales to increase their footprint and capture market share, degradation of the channel can happen at any point in the supply tunnel and can be further compounded with the use of the channel model being utilized downstream, from components to product to consumer.
This risk-versus-reward paradigm has boosted channel reliance in the semiconductor, consumer electronics, mobile device, pharmaceutical, medical device, and software markets. As semiconductors play into the wireless device space, we see that this vertical also utilizes a robust channel approach. According to a recent CIRP report Best Buy, Target, Wal-Mart, Costco, and Amazon make up 32 percent of all mobile phone sales.
Unfortunately, most organizations don’t give much thought to how to amend the approach to channel operations in a way that will reduce risk. Many executives see this level of risk as simply the cost of doing business. But it doesn’t have to be.
For technology and consumer organizations preparing for expansion, it’s important to ask and answer these three questions to better protect channel processes and long-term revenue streams:
- How is the CFO identifying and protecting at-risk revenue?
- How can we transform the process-driven tasks of channel contracting into strategic business initiatives?
- How are we using data and analytics in our channel processes to make data driven decisions?
These questions force the organization to step back and look at processes and operations in a different way. Implementing change can be challenging, so it’s important that even tactical changes be driven by more compelling strategic initiatives. Rather than relying on gut, emotion, or “we’ve always done it this way” decisions, take a more analytical look at channel operations to drive meaningful change, reduced risk, and successful outcomes.
Not knowing the answer to even one of these questions can impact not only your organization, but also every organization that is interdependent on you in the supply tunnel.