So now we're turning our attention to the supply side of the channel equation, and we're trying to determine what channel members are needed to do what functions air flows in order to create the channel benefits that customers want. The best way to do this is through what we call a flow analysis or a function analysis. And hear, what we want to do is we want to identify what are the channel processes activities that are needed to create the channel benefits of financing education, package size, delivery, transportation, etc. Well, clearly, you need some sort of financing function in order to help with savings. Another thing you might need is you might need a company to help deliver those packages as well. You need someone to help with educating customers. Maybe you need some promotion or advertising of this option to help customers. Along with education, this might include some sort of advising or hand holding for customers. You need someone to perhaps break bulk, And to create the package sizes in the variety in the assortment that you need. You need someone also to take possession of the goods and to hold it or to store it, okay? So here's a number of flows and you could add to this, you could subtract from it, etc, but for the purpose of our discussion, let's just go with this. So now we've identified what processes need to happen in order to create the channel benefits we desire. The next question asked at this point is, who's going to do it? Who's the channel member that will do each of these? Well, we know so far in our channel, we definitely already have CEMEX, they're the channel captain, and they have to be there. We know from the case that there are dealers there. And here on this issue let's just restrict our consideration to the young gun dealers. The case talks about the fact that there are corrupt dealers, but there are also a set of dealers known as young guns that are up and coming, and want to do business honestly and those really are the dealers that we would prefer to work with. So let's keep them in there as a potential channel partner. The case also talks about TANDAS. Now, TANDAS could be a part of the channel system because they do help with saving and financing. Of course, another channel partner that you would need for financing might be banks. Now, as we think about these channel partners on the columns, and let's now ask ourselves which of these channel partners should do each of these flows or functions. For example, some acts, as has very deep pockets, so they might play a role in financing along with banks in TANDAS. Delivery might be something that's covered by dealers and might also be that you need a transportation company independent of the dealers to do that as well. Now, education and advising you would also hope that the dealers would do this. But dealers might also decide to bring in specialists people who specialize in drywall or in roofs or things like that. But well, for now, we'll just for the purpose of our discussion we'll put it there with dealers, we'll add the question mark to say maybe they need to bring in additional participants as well. But you would expect that they would sort of be the first touch point to do this. Now, the promotion, the marketing and the advertising of the opportunity and the assistance to help build houses better and faster could largely fall to CEMEX. Although you might also say that the dealers could play a role of that, could play a role in that locally. Now breaking bulk is something that you might ask of each manufacturer supplier. CEMEX of course, could break its own bulk, and it might also be that they assist dealers in doing that as well. And finally, possession in warehousing you would probably need to be done by the dealers or another company that only warehouses altogether. So you see, at this point we have a number of different channel members. These air the central ones, but you could add in a column for a warehouse company, you could add in a column for a distribution transportation company. You could also add in a column for consultants such as people who specialize in panels, drywall, roofs, etc. Now, what's important to remember here is you look at this flow analysis is there's there is a cardinal rule that needs to be followed, and that rule is that you can never eliminate the rows off this analysis, but the columns are definitely flexible, movable, and interchangeable. And that's because the flows represent the work that absolutely must be done. Whereas the columns do not have to necessarily be done by a specific firm. Those things are flexible as long as the work gets done. So at this point, it's worth stepping back and asking yourself who's really doing the bulk of the work here and who's not. If we were to for example, just sum up, what you would see here is that the dealers are doing most of the work in terms of creating the channel benefits the customers desire. CEMEX is probably doing the next most amount of the work, whereas the TANDAS and the banks do a little less, okay? Why do we ask this question? This question is particularly important because of the equity rule. Remember the equity rules? The equity rules says that you should pay channel members what they're worth. In other words, the channel member who does the most work should be receiving the bulk of the resources or budget for the cost of going to market and for these flows and processes that are being performed. So this means that dealers in this scenario are doing the bulk of the work and therefore they should be receiving appropriate margins for this. CEMEX is second and they would receive the next largest share of margins. So all of this is helpful for helping us to understand who does what part of the work, how to organize it, how to deploy it and how they should be compensated. Now, you also want to ask yourself a couple of questions here, at this point, you want to ask yourself if your CEMEX are you comfortable with the fact that you have all these young gun dealers doing the bulk of the work? Because the more work than anyone channel partner does will imply that you are dependent upon that channel partner. In other words, they have a lot of power over you. So the young gun dealers are able to influence a range of functions delivery, education, promotion, breaking bulk, and possession and warehouse. Are you okay with that? So if any channel member specializes in one particular function, so in this case you can see that the dealers have 100%, almost 100% specialization in possession and warehousing and education advising and delivery. Whenever a channel member has that kind of specialization power, you have to ask yourself whether or not you're comfortable with that level of dependence on them. Because what often happens, as you know, basic economic theory tells us that any firm that's a monopolist loves the monopoly price, in other words the price as high as they can to maximize their profits. So you want to be careful about a holdup potential with this particular channel member. Now there are a couple of ways that you can safeguard against that. And one thing that you can do is to basically keep that channel member very close to the chest. In other words, to form strong bonds with them and to create incentives so that they don't cheat you and to create incentives to ensure that they act in a way that is mutually beneficial. So let's put up a list of how you might do that.
