FEDA News & Views

Channel Mapping continued As your managers and their counterparts use your channel map to discover opportunities for profit improvement, a broader set of managers in both companies will develop comfortable patterns for working together. not tracked across multiple depart- ments. Consequently, the hospital's CFO managed the hospital's inventory very tightly, but had no way to understand the essential trade-offs with other important costs. When the team com- pleted the channel map, it became crys- tal clear that by increasing hospital inventories slightly on low-value items, both the supplier and hospital could reduce their expensive handing costs enormously. As another example, the work team was surprised to find that the order pat- tern for steadily-used products was very erratic, and this was causing very high costs. They decided that the simplest solution was to set up a standing-order process, in which the supplier would ship a predetermined amount of the steadily-used products to the hospital every week. The hospital could alter this standing order if needed, and receive the product promptly. This radically lowered the inventory and handling costs for both channel partners. It also had other important benefits. Because the standing orders covered the same high-volume products each week, the supplier could pack the products on the pallets in the way that was best for the hospital, usually put- away order. This made the shipment very fast and convenient to receive and handle. This seemingly small change was a huge benefit for the hospital's personnel, and they strongly supported the new process. Continuing Process, Continuing Value Channel mapping is not a one-time event. It should become a core com- ponent of your profitability manage- ment process—especially for the key accounts in your "sweet spot." This is how you secure and grow your islands of profit; it is one of the most important 34 FEDA News & Views arrows in your quiver. Every element in the process is huge- ly beneficial. As you work with your key customers on the channel map, your managers will develop close, trusting relationships with their customer coun- terpart managers. This trust is immense- ly important; it is the precondition to later change management and a huge barrier to entry. As your managers and their counter- parts use your channel map to discover opportunities for profit improvement, a broader set of managers in both com- panies will develop comfortable pat- terns for working together. They will have many opportunities for informal talks, in which they will get to know each other's deeper hopes and con- cerns. This will naturally lead both to work together to develop new ways to create mutual value. In this way, channel mapping, which starts as a way to develop operating effi- ciencies, transforms naturally into a core element of an extremely produc- tive strategic partnership. When you achieve this, both you and your cus- tomers will strongly and steadily grow your market share and profitability for years to come. And remember, you can develop the same ultra-productive rela- tionships with your key suppliers as well, harvesting huge profit and strate- gic benefits for years. Upstream or downstream, channel mapping is the key to ongoing success. u About the Author Jonathan Byrnes is a senior lecturer at MIT, where he has taught at the gradu- ate level and in executive programs for nearly 20 years. He also has authored several articles and books, including Islands of Profit in a Sea of Red Ink. For more information, email him at jlbyrnes@mit.edu. MAP & MRP continued from "two or three" major distributors, say Szafranski and Hatco's Whiteley. Both manufacturers, however, have been successful in stating the case and have avoided litigation. Both see an industry with more pricing policies in its future. Enforcement, however, still remains the hard-to-ignore weak link, according to critics who say many suppliers leave it up to distributors to police themselves. "Maybe the policies are a little bit lax so manufacturers can say they have a policy, but still allow those sales to fall through," surmises Szafranski, who pre- dicts that, as time goes on, suppliers will rely less on dealers reporting infrac- tions and more on true enforcement. Calling MRP the "wave of the future," Whiteley is even more daring in his pre- diction. "The industry is searching for solutions to the margin problem and the problem is driven by the fact that we're in a very mature industry, an industry that has a tremendous amount of capacity that far outstrips the poten- tial demand," he begins, now concen- trating on the framework of his defense. "It's an industry that's charac- terized by hypercompetition—includ- ing intrabrand competition—and the natural reaction to that is margin pres- sure and pricing pressure until margins and prices are driven below a sustain- able level and below a level where the industry can continue to provide the services needed to differentiate prod- ucts. As a result, you will see snippets of the following outcome. The strong will survive, and you will see a lot of consolidation and a lot of companies going bankrupt. Or, you will see people gravitate toward some form of intra- brand governance that allows margins to be made. The only form of that I have seen is MRP. "MAP, which is a step in the right direction, encourages people to charge the right price but falls short. MRP draws a line in the sand and says we insist you make money. We insist you protect the integrity of our brand. We insist that you make enough margin to enable you to provide value-added serv- ices that we think are necessary for our brand to succeed and survive." u

• Cover