Value-Driven Channel Strategies

Reg Goeke

One of the most perverse assumptions embraced by many manufacturing firms is that value at the point of production naturally translates into value at the point of consumption. This is one of the reasons why many Lean and Six Sigma professionals apply their improvement tools to processes that lead up the value chain to the acquisition of materials to be used in the manufacturing process, but fail to apply those same tools down the value chain through the very channels that distribute their goods and services to the end users. Value at the point of production is a necessary, but not sufficient, condition for the delivery of value at the point of consumption, which means that manufacturers must understand what constitutes value at the point of consumption and must partner with their distributors to ensure the delivery of superior value at that point of consumption.

Value at the Point of Consumption

Consider, for example, a manufacturer of farm tractors. The manufacturer employs the latest tools and techniques to design a tractor that includes the features most desired by customers. Lean principles are applied to ensure the most cost-effective acquisition of materials. Six Sigma tools are used to ensure the highest standards of quality in production, at the lowest possible cost. From an engineering and manufacturing standpoint, the tractor epitomizes superior value at the point of production. But market share and revenues are falling precipitously, leading the manufacturer to wonder if he’s missing something in the actual delivery of value to the farmers who are buying and using those tractors.

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Applying the metrics of customer value to recently acquired survey data, the manufacturer discovers that Quality is driving nearly two-thirds of the farmer’s perspective on value, with Price accounting for only one-third. A closer examination of the factors critical to quality, however, reveals that only 40 percent of "quality" is represented by tractor features themselves (Machine Operation, Machine Productivity, Machine Reliability). Most of what farmers think about as quality is coming from the channel of distribution—dealers—and these include elements of dealer service, sales processes, training on how to use the tractor, ease of ordering and timely delivery (see Figure 1). The biggest surprise, in fact, was that the most important Quality driver was dealer-based, and only tangentially related to design or production.

With that surprise in hand, the manufacturer needed to know how he (and his distributors) was performing on those value and quality drivers. The Competitive Value Matrix provided the radar screen, showing exactly where his brand stood relative to key competitors. The picture was not a pretty one: His brand (XYZ) was being viewed as a poor value provider—despite all the effort to assure a top quality tractor coming off the assembly line. In fact, when compared with Competitor 1, XYZ was suffering the effects of a very substantial value performance gap.

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The next step was to determine the basis of that value performance gap. On the surface, it was obvious that the gap was based on both Quality and Price, and the Quality gap was by far the more substantial one. Decomposing the Quality gap into its components revealed that most of the quality disadvantages were dealer-based. In fact, XYZ was at parity or better on both Machine Productivity and Operation, but had significant disadvantages associated with the channel of distribution—notably on Dealer Service, Dealer Sales, Trial and Training, and Ordering/Delivery.

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Value at the Point of Distribution

XYZ was now faced with a momentous decision: how to best improve the delivery of quality and value from dealers to the farmers. The traditional approach would have XYZ putting in place a new set of dealer standards, creating rewards and penalties associated with meeting those standards and ultimately just getting rid of those dealers that failed to improve. But that approach had been tried before—with little or no success. Indeed, that approach just served to irritate dealers, driving them to carry competing brands of equipment. Instead, XYZ determined to find out why dealers were failing to provide superior service, sales, training and so forth. Was it possible that XYZ’s dealers were not doing their best simply because they were no longer getting good value from their relationship with XYZ? If so, what would XYZ have to do to improve the value in the dealer/manufacturer relationship?

The first step of the new approach was to learn more about the drivers of value from a dealer perspective and, specifically, to find out what factors dealers considered to be critical to quality in driving the value of that relationship. Applying the metrics of customer value to dealer survey data revealed that Quality, again, was the primary driver of value. The big surprise, however, was that only 17 percent of Quality from a dealer perspective was being driven by tractor quality. More than 80 percent of Quality was defined in terms of people and processes, such as providing a Partnering Relationship, having good Supply Processes, having efficient processes associated with Billing and Invoicing, etc. The bad news, from a management perspective, is that these were the very things that XYZ was ignoring while focusing all of its attention on tractor design and quality.

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As is the case with many manufacturers, the dealers carrying XYZ’s brand were also carrying other brands. In some cases, these other brands were in product categories that complemented XYZ’s products but, in others, they competed directly with XYZ’s brand. Was it possible that the dealers were receiving greater value in their relationships with other manufacturers? If so, what impact would that have on their willingness and ability to convey the value of the XYZ brand to local farmers? To answer those questions, XYZ turned to the Comparative Value Matrix (the radar screen) to find out how dealers viewed XYZ’s value delivery in comparison to alternatives.

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Three other manufacturers had invaded XYZ’s dealer network in recent years, and were competing for "share of shelf" at the front of dealer outlets. Although XYZ’s value delivery was regarded as roughly equivalent to two of those alternative suppliers, one of them was clearly providing a superior value proposition to dealers. An examination of sales trends clearly revealed that Competitor One’s superior value position had translated into an increased share of the dealer’s total sales, largely at the expense of XYZ.

To figure out how to turn this situation around, XYZ needed to know precisely where to focus improvement efforts. Which CTQs would provide the greatest opportunities to add value to the dealer/manufacturer relationship? What processes should XYZ focus on? What people skills required more improvement? By breaking down the components of quality, XYZ learned that they most needed to focus on developing more of a Partnering Relationship, improving the Supply Process and better management of Billing and Invoicing.

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A further examination of specific performance gaps revealed a variety of improvement opportunities:
  • Partnering Relationship
    • Demonstrating knowledge of the dealer’s local business environment
    • Providing help in growing the dealership
    • Providing effective inventory management programs
    • Providing business planning and management assistance
  • Supply Process
    • Shipments being error free
    • Quality of parts supply program
    • Providing consistently good product availability
    • Shipments arriving without damage
    • Shipments easy to set up and put into inventory
  • Billing and Invoicing
    • Providing accurate invoices
    • Resolving billing issues quickly
    • Providing invoices that are easy to understand

Creating and Delivering Superior Value: From Production to Distribution to Consumption

The key take-away from these two perspectives on value was that XYZ needed to enhance the value it was providing its dealer network in order for those dealers to ratchet up the value they were delivering to farmers. Application of a Cause and Effect Matrix enabled XYZ to improve key processes associated with equipment supply, and with Billing and Invoicing. In order to develop a better Partnering Relationship, XYZ’s management team concluded that they really needed to help their dealers generate more revenue and increase their profitability. And what better way to do that than to bring the metrics of customer value directly to the individual dealers, helping them to use those metrics to improve their local value position, leading to increases in market share and profitability. By helping dealers to identify and enhance their local value propositions, XYZ learned a great deal about the business environment in which each dealer was competing. And by helping each dealer develop competitive marketing plans, XYZ provided the business planning and management assistance necessary for those dealers to grow their business by delivering superior value to their customers. A true win-win-win situation.