A Decision-Making Framework For Manufacturers Evaluating Their Channel Strategy
Published January
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Purpose Of The White Paper
A medical product manufacturer’s distribution channel is a critical component of its go-to-market strategy. Companies may choose to partner with commercial healthcare distributors to ensure that customers have fast, convenient access to products. Others may opt to distribute directly to their healthcare provider customers, taking on responsibility for product storage, delivery, and logistics.
This resource is designed for manufacturers who are evaluating their channel strategy. This may happen for various reasons:
- The manufacturer uses different channels for different products, and wants to consider whether to consolidate its channel strategy
- The manufacturer is evaluating its overall current go-to-market strategy
- The manufacturer is assessing its current distributor cost/benefit scenario
- The manufacturer is looking for ways to improve service levels to customers, and/or customers are demanding changes
- In light of the recent pandemic experience, the company is looking for ways to improve resilience while maintaining efficiency
What is the optimal way to get these activities done, so that the right products are in the right place, at the right time? This tool is designed to help manufacturers answer that question for their own businesses. The goal is to determine the model that provides the best service, at an appropriate cost, contributing to the company’s and its customers’ strategic and operational success.
An evaluation of distribution channels should include a consideration of:
- Customer preferences and required service levels
- The manufacturer’s objectives and capabilities
- Specific functions required to get product to customers, and what channel can best perform each function
This tool allows manufacturers to examine those functions and compare the costs and benefits of managing them in-house to those of outsourcing them to distribution partners.
Note that how much these functions costs can vary depending on who performs them – for example, a healthcare provider located in an urban area will likely have much higher per-foot space costs than a distributor warehouse in a suburban business distribution. However, the functions are universal and these categories of costs are incurred by any party (manufacturer, distributor, or provider) that carries finished goods. Almost all of these activities must be performed regardless of the channel selected to perform them.
Strategic Considerations When Evaluating Channels
A manufacturer’s channel strategy should be based on maximizing value rather than simply minimizing costs. This resource lays out cost factors that may play into the decision, but ultimately the strategy should be designed to help the company provide high service levels to provider customers, win and keep business, and grow the bottom line.
Manufacturers evaluating their strategy should begin with understanding their customer’s needs and expectations, and by considering their own products and markets.
Key Distribution Functions
Receiving And Storage
Meeting the ups and downs of customer demand for products requires having inventory on hand in the supply chain. Inventory may be maintained at the manufacturer’s facility, held by a commercial distributor, stockpiled at a customer location, or some combination of these.
Order Processing And Fulfillment
Manufacturers must engage in order fulfillment activities regardless of the distribution channel they choose, but the level of effort and investment differs greatly between models.
Outbound Transportation And Delivery
Once product is manufactured, it must be delivered either to a distribution center or directly to a healthcare facility.
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Billing And Credit Management
Credit management includes assessing customer creditworthiness, invoicing customers, and importantly, assuming the risks associated with extending credit. The cost of managing and executing group purchasing organization (GPO) contracts can also be included in this function, or evaluated as a separate function.
Returns And Customer Service
Support before and after the sale is critical for healthcare customers. Products need to be exchanged or returned, product recalls are sometimes required, and questions have to be answered promptly and correctly.
Information And Data Services
Providers look to their vendors not just for products but for data – about things like their overall spend, product utilization, purchases on contract, and much more.
Sales And Marketing Support
A manufacturer’s channel strategy and its sales and marketing strategy should be complementary. Manufacturers who self-distribute are more often those with high-dollar physician preference devices who want maximum customer control. Manufacturers that use distributors benefit from making their products more widely accessible to customers, and may receive some level of sales and marketing support as well, in terms of lead identification, demand generation, or both.
What Channel Support Do You Need?
As noted earlier, a manufacturer’s channel strategy should be based on maximizing value rather than simply minimizing costs. The analysis of how to maximize value starts and ends with the customer’s needs, while also taking into account the nature of the manufacturer’s products and markets.
Distribution Channel Analysis Guide
The chart beginning on page 13 of the full PDF summarizes some of the factors manufacturers should consider when evaluating their channel strategy. Because customer expectations and needs are paramount, those are listed first. The chart also outlines the costs that the manufacturer (and/or the provider) would have to take on if it moved from a distributed to a direct model. Those costs should be compared to the costs of using distributors, including distributor margins, channel fees, investments in preferred vendor programs and other sales and marketing support, early payment incentives, and other channel costs.
The “costs” column breaks out cost categories for particular functions, regardless of which trading partner performs them. For manufacturers that want to compare total costs of each channel option, bear in mind:
- Distributors sometimes help manufacturers find prospects from among the many thousands of potential customers in a fragmented market.
- The manufacturer’s sales force (or specialty distributors) may be most appropriate for customer contact and demand creation.
- Capital products with high-dollar values, financing options, and installation may be challenging to sell through distribution.
Don’t overlook opportunity costs. For instance, if a manufacturer owns a warehouse and the space is completely paid for, the value of that space should still be factored into the calculation since the building could be sold or otherwise deployed.
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