So the next step is to address who will do the work? Well in order to answer this question, we need to add a column for each of the channel members. And in these columns we want to reflect what percentage of each function is being completed by each channel member. So each row should sum to 100% because all the work must be done. If one member does more of it, another member can do less. Now in order to get a sense of how much work of the channel each channel member is doing, we take a weighted average of the column. The weights come from this aqua blue column, so for the manufacturer it does 100% of the technology work, but the relative importance of this function is only about 10% compared to other functions. It might pay for some of the marketing costs and that's very important. So this amount of work is weighted accordingly. And this is how we get to the 15% in the manufacturer's column. We can refer to this as a weighted share of total channel system costs that are borne by the manufacturer. Now let's think about these numbers. The first question to ask ourselves, is which channel member is doing most of the work? Yes, it's the board producer who's doing more than half the work of the channel across four different functions. The panelizer is second with 30% and the tech manufacturer does the lease. Another relevant question to ask is who is the channel captain? In other words, which firm is orchestrating the design and execution of these functions? Again, this would be the board producer as it controls most of the effort in this channel. Now, at this point you might say, but this whole design is the manufacturer's idea. And yes, that's true. The inception of this plan is started by the manufacturer. But once in place, it will be the board producer who becomes responsible for its execution. Now fortunately in this case, the incentives are aligned. It turns out that the board producer has a keen interest in developing relationships with its downstream customers and this product could put it in good position to form stronger bonds with builders. The next aspect to consider is where specialization might exist. So whenever you see that any particular channel member does 100% of the function, then that channel member is a specialist. The question to ask is whether this channel member is the best member to play this role. In the case of the manufacturer, probably yes as no other channel member can create the technology that's needed. But is it okay if the panelizer completely controls the compliance function, would dependence on them be acceptable? Well, the reason why we ask this question is also to raise the issue of whether there are alternative channel members who could do the work. If there are, maybe we don't want to be solely dependent on one and we should split the work. These are the kinds of questions that need to be asked. Another consideration is whether this table reflects a zero based channel design which is the equivalent of channel Nirvana? Is this configuration the most cost effective or are there opportunities to decrease costs further? Maybe there is another firm who can do something more cheaply. Now one rule in this spreadsheet is that columns can always be added and subtracted, but rows cannot. The work has to be done, but who it's done by is always open to discussion. If another channel member is added, would this increase or decrease the service levels or channel benefits being created to downstream customers? And finally, we need to consider the equity rule, because the power of this analysis is that it can assess exactly that. The equity rule maintains that channel members should be compensated for the proportion of costs or value they create for the channel system. In this case, we have determined the board producer will take on 55% of the costs. In that case, it should also be receiving roughly the same percentage of profits earned. The equity rule is how you can convince channel members to accept their share of the joint channel pie. Now, this analysis provides a rationale that is difficult for them to argue with. And it provides, a great starting point for a heart to heart discussion. So we see that the available concept of a zero-base structure may seem like pie in the sky, it at least identifies for us what needs improvement, in terms of flow performance, as well as channel structure and design. Again, many companies fail to think like this and it creates havoc in their channel strategy. Let's wrap up our session on channel functions with some perspectives. You might be thinking, wow, this is overwhelming. But I will tell you that even if you only use this framework as a means to direct your thinking, you are still better off than not doing it at all. So even if your cost estimates are not precise or exhaustive, this kind of thinking can still be tremendously beneficial. Now, maybe you're thinking I have no idea what my partner's costs are. Well that may be true, but you can start the conversation with an estimate. You might not know exactly how much they pay for transportation but you might know what the industry standard costs is for that. Or you might use some analog, like ask for a quote from a transportation firm. It is important to share some of your costs in order to be credible to your channel partner and to begin the conversation. Seek better information about their costs. When your partner understands that you're trying to grow the pie for both parties, you'd be surprised how motivated they will be to share their own information with you. And that, my dear friends, is the framework for how to get your channel members to do more for less. See you next time.
