1. Background Samsung Group is a South Korean multinational conglomerate company headquartered in Samsung Town, Seoul. Samsung was founded by Lee Byung-chull in 1938 as a trading company. It entered the electronics industry in the late 1960s and the construction and shipbuilding industries in the mid-1970s.
Since the 1990s Samsung has increasingly globalised its activities, and electronics, particularly mobile phones and semiconductors, has become its most important source of income. In the first quarter of 2012, Samsung Electronics became the world's largest mobile phone maker by unit sales, overtaking Nokia, which had been the market leader since 1998.
Since 2001, Samsung expanded its business to the Chinese market. Although the Chinese market is huge, it is fragmented and unbalanced in economic development between city and countryside, east and west. Therefore, the distribution channels have always been a perplexity to foreign manufacturers and sometimes even to domestic manufacturers in many industries, including the mobile phone industry. Before the year of 2010, Samsung mainly depended on agencies for exporting its products into the China market.
More specifically, Samsung delivered different models of mobile phones to the Chinese national agents, such as EagleTec, Fortune Telecom Holdings Limited, Aisidi Limited Company, Newland, Telling Telecom Holdings Limited and so forth, and then such national agents would to distribute the products to the provincial agents.
The responsibility of provincial agents was to deliver the products to different wholesalers and retailers for selling to final customers. It could be seen that the distribution channel of mobile phone was highly complex as there were many steps by flowing a product from manufacturers to final customers and Samsung was not responsive towards the market.
However, in order to maximize the profit, Samsung China mobile phone division had decided to restructure the mobile phone distribution channel in December, 2010. Instead of only depending on the distributors for the selling of its mobile phone, it has begun to cut the number of its agencies in China and carried out a plan step by step for seeking a flatter and broader distribution network.
This was done by directly supplying its mobile phones to the bigger household appliances retail store chains like Suning Appliance Co., Ltd and GOME Electrical Appliances Holding Ltd. The strategy of direct supply system mainly covered the market of the first-tier cities such as Guangzhou, Shanghai, Beijing and the capital market and other markets. For the peripheral regions such as the county and township market, Samsung still has to make sales through distributors.
In this research, I am going to focus on studying Samsung’s mobile distribution network in the first-tier cities of China.
2. Distribution network Since 2010, Samsung has used the direct supply platform for the first-tier cities. Under the new distribution network, household appliances retail store chains such as Suning Appliance Co., Ltd, GOME Electrical Appliances Holding Ltd, China Paradise Electronics Retail Ltd, Five Star Appliance Co., Ltd, Dphone and so forth directly purchase phone products from manufacturers Samsung and enjoy more preferential prices and policies. Moreover, Samsung also deliver its mobile phone to its exclusive shops for sales, which is the shops operated by Samsung and exclusively sell its own products, including mobile phones.
This distribution network of Samsung mobile phone belongs to Retail Storage with Customer Pickup. It is often reviewed as the most traditional type of supply chain, inventory is stored locally at retail stores. For customers who want to buy Samsung mobile phone, they could walk into such retail stores and then directly pick it up at the there. The below is the diagram of such distribution network:
With this type of distribution network, it has its own performance characteristics in both the cost factor and service factor. The analysis is as follows:
Inventory As the retail stores have to storage the inventories, this increases the inventories costs because of the lack of aggression. For fast-to-very fast-moving items, however, there is marginal increase in inventory even with local storage.
Transportation Transportation cost is much lower because inexpensive modes of transport can be used to replenish product at the retail store. As Samsung has a large control of the distribution channel, it could choose the most cost-effective way to deliver goods from factors to the retail stores, thus decrease the transportation cost.
Facility and handling Facility costs are high because many local facilities are required. There is also an increase in handling cost for online and phone orders. Using such distribution network, Samsung may have to build more facilities in manufacturing products and so it could be more responsive to the orders from retail stores.
Information A minimal information infrastructure is needed if customers walk into the store and place orders. Some retailer stores may have their own website and allow customers buying online. For such retailers, they have to spend extra costs because they need to develop information infrastructure to provide visibility of the order until the customer picks it up.
Response time Good response times can be achieved with this system because of local storage. For customers who want to buy a specific mobile phone, they could immediately pick up their products and do not need to wait for delivery.
Product Variety Product variety stored locally is lower. For example, the phone products of Samsung include feature phones and smart phones, and each type of phones has many different models. It is impossible for the retail store to provide all models of phone products for customers to buy. They may only sell the popular or newly launched one. Product availability
Product availability is also lower. It is because retail stores are responsible to keep the products and it would be very expensive by providing high level of product availability would be. We can imagine that if the retail stores keep a large volume of phone products in their warehouses, it would need more administration or a larger physical space, which in turn increase the costs.
Customer experience Customer experience depends on whether or not the customer likes to shop. For example, if the workers of the retail stores carry with good attitude and speck politely to customers, this would increase customers’ satisfaction in that retail store. Moreover, if the retail stores could always precisely forecast the customers’ demand for the phone products, this would lower the possibility of out of stock and increase customer experience. Time to market
Time to market is the highest with this distribution network because the new product has to penetrate through the entire supply chain before it is available to customers. For example, if Samsung design and launch a new model of smart phone, the products could be bought by customers sonly because no distributors are needed to allocate the phone products. The steps of flowing a mobile phone from factory to customers could be decreased.
Order Visibility Order visibility is extremely important for customer pickups when orders are placed online or by phone. It is also trivial for in-store orders.
Returnability Returns can be handled at the pickup site and so the returnability is fairly good in using this distribution network. For example, if there are customers find any problems in their phone products within a specific date, they could go to the stores where they buy for return a new one. The retail stores could then directly return the problematic products to Samsung.
3. Comments All in all, the distribution network of directly offering phone products to retailers is a great strategy and it brings with many advantages.
Firstly, it decreases the channel levels and thus lower the costs incurred in distribution. According to the experts’ analysis, such distribution network could save about 40 percentages of distribution costs. This costs that saved could be used for the developing of sales and services network. Also, it increases the support to the retailers by offering them more preferential policies and benefits.
Secondly, it facilitates the cooperation between Samsung and the large appliances retail store chains and thus strengthens the control over the retail terminal. Under the new distribution network, Samsung has the chance to directly negotiate with the retail terminal. This increases Samsung’s bargaining power with the retail terminal and reach a situation that both Samsung and retailers could both mutually benefit.
Thirdly, Samsung does not need to care about the requests from agencies and this allows the company to have a better management. Under the original distribution network, retailers may report much complaints and dissatisfaction against Samsung through agencies and have different requirements. In order to satisfy the requirements of retailers, agencies would also request Samsung for physical and monetary assistances. Under the new channel system, Samsung does not need to communicate with many different agencies, it allows the company to solve problems directly with retailers.