GINO SA Distribution Channel Analysis

M600 Case Report

Table of contents

EXECUTIVE SUMMARY 1

PROBLEM/OPPORTUNITY 2

SWOT ANALYSIS 2

Jeevana J Adusumilli | #1192298 | M600 Case report | 2

ALTERNATIVES

Accept Feima as Jinghua’s customer 3

Develop Feima as OEM 4

Reject Feima 4

ALTERNATIVE ASSESMENT 4

RECOMMENDATION 5

IMPLEMENTATION/ACTION PLAN 5

CONTINGENCY PLAN 6

Appendix-A 7

Appendix-B 8

Appendix-C 9

Appendix-D 10

EXECUTIVE SUMMARY:

Gino SA is one of the largest burner manufacturers and exporters in the world and enjoys up to 14%

market share with its product mix. The key issue that could potentially grow or break the brand is

choosing between an OEM proposal from Feima and agitating its well-established distribution channel,

especially Jinghua. The company further aims to grow its annual unit sales by 20%, industrial sales by

200 units, build two OEM & end user channels by improving service standards. After an in-depth analysis

into Gino’s internal and external factors that may influence its strategic goals for the future, the report

identifies three alternatives that could potentially address all the concerns. Weighing each alternative

across key factors; investment, unit sales, channel development, brand image, customer service and risks


involved, it is found that continuing Feima as Jinghua’s customer and offering its requested discount is

the best fit. Since the accepted additional discount will eat into Jingua’s profit margin reducing it by 13%,

Gino is suggested to take a 1% hit to its transfer price for Feima account. This brings the company closer

to its annual unit sales goal. The distributor channels are aligned by implementing a service charge as a

percentage of public prices of industrial, commercial and spare parts to increase their revenue by 3.6%

and profit margin by 3%. This new fee, along with a customer feed back component will be implemented

on purchases made from March 2000. The plan optimizes the existing channel, reduce its power but also

instigate service standards, spares stocking and motivated industrial unit sales. It also attracts OEM

channels, which base their purchase decision on availability of spares and service. To reduce the cycle

times that may have forced Gino to lose industrial sales, it will open a warehouse in South China and

employ a sales force of 36 individuals that work toward acquiring new channels, increasing unit sales and

promoting the brand image. The plan aims to achieve its aim by December 2000. In the event that Gino

fails to achieve its unit sales by August by more than 20% and distributor shirking continues, the

company moves toward contingency plan. Where distributors will be offered product volume discounts

and sales force assigned new sales targets. With the new push strategy, the regional sales managers will

closely monitor sales performances to ensure Gino’s success.

PROBLEM/OPPORTUNITY: The impending issue concerning Gino SA is the choice between Feima’s

OEM businesses, which may lead to frayed relationship with existing distributor, Jinghua that constitute

40% of revenue in China and Fiema as Jinghua’s. In the event that the company chooses to accept this

proposal Gino SA needs a pricing strategy for potential OEM’s including Feima. Although Jinghua is not

believed to leave Gino SA, any action that Zhou may perform is bound to influence Gino SA’s brand

equity and recognition in the market and other distribution channels that it plans to build further in the

next three years. Further the company aims to open two OEM accounts, develop more distributors and

assist through marketing and technical support, increase annual industrial burner sales to 200 units, and

over all sales to 15,000 units.


IMPORTANCELow High

UR

GE

NC

Y

Low

Increase Industrial Sales Increase overall unit Sales Improve service and spare supply

Hig

h Develop OEM channel Optimize Distributor channel Build brand image

Feima Proposal

SWOT ANALYSIS:

Strengths Gino SA benefits from global presence, well-established channel network and strong brand

reputation. In-house production capability adds to the competitive advantage for the company to enjoy a

substantial price gap from competition of up to 30% and significant contribution margins (30% -

Industrial, 25% - Commercial, less than 20% - Domestic). The company also sustains a 14% domestic

range market share. As one of the largest burner manufacturers and exporters, Gino SA banks on

reputable employee base (technical and marketing) that is motivated by its compensation structure.

Weaknesses Excessive reliance on oligopolistic distribution channel for meeting the sales targets leaves

Gino SA with little to no power in managing its product flow and after sales services. Shirking amongst

distributors in stealing sales from other provinces and reluctance to stock Industrial burners is leading to

an opportunity loss of at least 50 units. Opportunities Increasing demand (20% higher in the next five

years) in Industrial range has remained an unexploited market for Gino SA despite lower comparative

offering price (10-20%) due to lack of brand image in the segment. Threats Political influence of local

manufacturers leading to increased output and selling power may lead to reduced profit margin within the

next five year time period. Declining growth in western markets forces Gino SA to bank on developing

markets like China to meet the sales targets.

ALTERNATIVES:

1. Accept Feima as Jinghua’ customer: This alternative proposes to continue Feima as a distributors

customer with new pricing (appx-b). This allows Gina a 2% increase in profit margin, and brings it closer to


achieving the unit sales volume budget including industrial burners for the next three years. In order to

address reduced Jinghua’s profit margin to 4%, Gina will offer the additional discount through reducing

the transfer prices for Feima account by 1%. Further issues concerning distributor channel conflicts, a

service fee of 5% (of commercial, industrial & spare public price) for appointments, which include

burners post warranty (one year), installation and start of commercial and industrial burners added to

contract price would be implemented. This will further increase the distributor’s revenue by 3.6%(appx-a) as

opposed to revenue being lost due to excessive contract discounts and encourages industrial and

commercial products. This further increases services standard & spares stocking in the channel. Gino will

supplement its existing channel with a penetrating sales force to attract OEM’s by promoting its products

at design institutes and trade shows. Focusing on the industrial segment, the company will establish a

warehouse in the Southern part of China assisting major industrial market handled by Wayip, which

accounts for 38% of Gino’s industrial sales to compensate for stocking issues. Gino will continue to

leverage its current brand image as well as acquire new accounts. Advantages: Increase in unit sales.

Relationship with distributors strengthened. Improved service standards. Industrial burners emphasized.

New OEM accounts. New distribution channel established. Reduced cycle time. Decreasing power of

distributors. Disadvantages: Loss of potential OEM. High investment.

2. Develop Feima as OEM: With this alternative Feima will be developed as an OEM with its proposed

pricing, since it is a leading boiler manufacturer in Northern China and constitutes major portion of

revenue in that area. This increases Gino’s profit margin by 2%. A slab based price mix is introduced for

all potential OEM’s (appx-d) to ensure OEM referencing in the future. In order to compensate for the

distributor dissatisfaction, a service fee will be implemented as in alternative 1 that increases their

revenue by 3.6%. Also Gino will support its existing channel with an integrated advertising campaign

targeted at industrial burners to create a brand image through global consumer culture positioning.

Advantages: Increased unit sales through Feima. Brand image and potential end-user channels built.

New OEM channel developed. Decreasing distributor power. Disadvantages: Disappointed Jinghua.


Fear in distributor channel may lead to poaching and exits. Industrial stocking remains a challenge.

High marketing investment. Longer cycle times.

3. Reject Feima: Under this option, Feima proposal will be rejected to ensure distributor channel’s

cooperation. But an in-house sales force will be developed that will concentrate on acquiring OEM’s and

end users through design school presentations and tradeshows. Further, a warehouse will be established

in Southern part of China to encourage industrial sales across the country. Gino will remain as a budget

manufacturer leveraging its current brand perception. Advantages: New OEM and end user accounts.

Relationships with distributors remain undeterred. Industrial segment sales promoted. Shortened cycle

time. Disadvantages: OEM account lost. Guaranteed unit sales lost. Distributor power remains. High

investment.

ALTERNATIVE ASSESSMENT: The alternatives are weighed across investment, unit sales, brand

image, customer service, channel development and risk factors. Investment defines cost of upfront capital

(including warehouse, marketing and sales force expenses). Unit sales define the comparative projected

increase in units towards meeting the company sales targets. Brand Image contributes to the unit sales by

positioning Gino as a culturally associated, budget product in domestic and a reliable brand in its

industrial segments. Further customer service takes spare parts and technical assistance into account

toward escalating distributor revenue and future sales for OEM channel and industrial products. Channel

development weighs contribution of each alternative into efficiently diversifying Gino’s distribution

channel. Risk factor takes into account the possibility of fraying distributor relationships due to the

decision made in the designated alternative.


RECOMMENDATION: Alternative 1 poses to be the most strategic fit for the current situation and future corporate goals of Gina.

Despite the high capital warehouse and sales force expense (appx-d), this alternative is bound to motivate

existing channels to build new OEM and end user channels with Gino’s in-house sales force and promote

spares sales/stock and service. Which further structure consumer confidence in the brand leading to

development of industrial segment. In addition a warehouse built in Southern China, which accounts for

26% profit margin and 38% of industrial sales as opposed to Central China with 35% industrial unit sales

contribution (appx-a), will ensure stocking with most profitable product mix for Gino to invest in. The risk

of disturbing the existing distribution channel being negligible, this plan ensures increase in unit sales

through Feima and new channels underway bringing Gino closer to its sales targets with additional 28

industrial and 1299 commercial/domestic to be sold annually (appx-c) in order to meet its target.

IMPLEMENTATION/ACTION PLAN:

The implementation is carried out in 2 phases (appx-c). Phase 1: This phase will last from March to July.

During first month, Feima will be issued the additional discount and distributors, a new contract of

service charge to be implemented for new purchases starting March 2000. This ensures distributor

satisfaction and further a customer feedback component with each service (form to be mailed to Gino) is

added which allows Gino to recognize any technical or service issues the customers may incur during the

appointment. A sales force of 36 individuals (9 per region) is recruited and field trained. The warehouse

establishment procedure is underway in this period. From April to July the sales force is assigned sales

targets of 1299 units of domestic/commercial burners and 28 industrial burners, which is the differential


Decision Criterion

WeightsAlternative 1 Alternative 2 Alternative 3

(Accept Feima as Jinghua’s customer)

(Develop Feima as OEM)

(Reject Feima)

Investment 0.1 2 3 3Unit Sales 0.2 5 4 3

Brand Image 0.1 3 4 3Customer Service 0.2 5 5 1

Channel dev. 0.2 3 4 3Risk 0.2 5 1 5Total 4.1 3.1 2.8

amount to reaching the annual unit sales target. Sales teams will approach design schools and trade shows

to pitch their sales with a fully functional warehouse setup by June. This phase ensures the stocking of

industrial burners and further in assisting the regional distributor in reducing cycle times and increasing

sales. Phase 2: In the end of July, sales force performance and distributor service standards are assessed.

Necessary adjustments to the sales targets and distributor service contract are made. This will compensate

for any discrepancies in unmet roll over sales targets from the previous period. In the next five months the

push strategy will continue and periodic feedback is collected to track progress. An assessment of sales

performance is conducted in the end of December.

CONTINGENCY:

Contingency plan (appx-c) comes into force at the end of July 2000 in the event that the sales targets are

missed by more than 20% and distributor shirking continues despite the service fee contract. This plan

banks on increasing the existing sales force by 9 new individuals, expanding each region to 12 members

in the first one-month. The push strategy continues, with monthly sales budgets (of 520 (1560 total)

commercial/domestic burners and 12 (36 total) industrial burners per region) as opposed to annual and a

quarterly review by Sales managers of the concerned regions. Also, in order to motivate the sales staff,

commission based compensation system is introduced to ensure unit sales. Distributor dissatisfaction will

be addressed with a volume-based discount on transfer price (appx-c). The volume scales are structured to

encourage distributors to sell more as well as avail the discounts on their current sales performances. The

contingency plan promises Gino SA in reaching its corporate goals in the remaining short period.


Appendix-A


Appendix-B


Appendix-C

Implementation/Contingency plan:

Phase Timeline Objectives1 March

2000(1 month)

• Announce and implement service charges for all future accounts• Form sales force of 36 by region (9*4 regions)• Launch warehouse establishment in Southern China• Sales force training with targets for each region being 1299(433

per region) commercial/ domestic & 28(10 per region) industrial burners, 1 OEM & 1 end user account per region.

Apr-Jul(4 months)

• Fully operational warehouse to stock all segments (June)• Sales force presentations in design schools and tradeshows.• Collect periodic feedback from customers through sales force• Asses sales force and distributor performance• Analyze feedback from customers and distributors

2 Aug-Dec(5 months)

• Form new targets if necessary• New service contract if necessary• Continue push strategy

ContingencyAug

(1 month)• Form new targets (of 520 (1560 total) commercial/domestic burners

and 12 (36 total) industrial burners per region)• Recruit 10 new sales members and assign new targets• Announce volume discounts for all distributors

Aug-Dec(5 months)

• Asses sales force and distributor performance• Analyze feedback from customers and distributors• Monthly review of sales performance by sales manager• Continue push strategy

Proposed Contingency discounts for distributors

Product Range Target Price Dealer GinoPrice Discount

Domestic 1-4000 301 301 0%4000-4500 301 286 5%4500-5000 301 271 10%

Above 5000 301 256 15%Commercial 1-900 1084 1084 0%

900-1300 1084 1030 5%1300-1600 1084 976 10%

Above 1600 1084 921 15%Industrial 1-15 7831 7831 0%


15-20 7831 7439 5%20-30 7831 7048 10%

Above 30 7831 6656 15%

Appendix-D

Proposed OEM pricing

Product Range Base Price OEM GinoPrice Mark-up

Domestic 1-750 3,708 4,450 20%750-900 3708 4252 15%

900-1050 3708 4079 10%Above 1050 3708 3896 4%

Commercial 1-40 13355 16026 20%40-60 13355 15358 15%60-80 13355 14691 10%

Above 80 13355 14028 4%Industrial 1-15 96478 115774 20%

15-20 96478 110950 15%20-30 96478 106126 10%

Above 30 96478 100337 4%

Ware house expenses

Cost Year 1 Year 2Setup cost $200,000 0Operation $360,000 $360,000Capacity $5,000,000 $5,000,000

Expected Rev* 5560000 5560000Gross Margin 720,000 920,000

* Computed assuming Gino will reach its 15000 annual sales targets


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GINO SA Distribution Channel Analysis

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