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Channel Optimization in Complex Marketing Systems Author(s): Marcel Corstjens and Peter Doyle Source: Management Science, Vol.

25, No. 10 (Oct., 1979), pp. 1014-1025 Published by: INFORMS Stable URL: http://www.jstor.org/stable/2630763 . Accessed: 24/05/2013 09:26
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MANAGEMENT SCIENCE Vol. 25, No. 10, October 1979 Printed in U.S.A.

CHANNEL OPTIMIZATION IN COMPLEX MARKETING SYSTEMS*


MARCEL CORSTJENSt
AND

PETER DOYLE$

Channel optimization in multiple-channel systems is a basic problem in marketing and one which has not received much attention in the literature. A model is presented which simultaneously solves three distribution decisions-the manufacturer's choice of channels (channel strategy), the number of outlets to operate within each channel (channel intensity), and the pricing structure between channels (channel management). The general form of this model is not solvable by conventional programming techniques because it is intrinsically nonconvex. The paper shows-how signomial geometric programming can provide a theoretically attractive and practical solution procedure. The model is estimated and solved on a real-life case study and the important managerial and theoretical implications are discussed. (MARKETING-DISTRIBUTION; PROGRAMMING-GEOMETRIC; CHANNELS)

1. Introduction This paper presents a model for optimizing the manufacturer's allocation of resources among a set of alternative distribution channels. This is a problem which is of central importance in marketing, but it is one which has proved insoluble by conventional programming procedures. Here we show that geometric programming can now provide a theoretically attractive and practical method for resolving it. Specifically, the paper presents a model which simultaneously solves three distribution decisions-distribution strategy, distribution intensity and distribution management. Distribution strategy refers to the manufacturer's selection of channels to serve designated end markets. Distribution intensity is the decision on the number of outlets to be operated within each of the channels selected. Distribution management is the manufacturer's use of price and other marketing mix variables to influence the performance of the units. constituting each channel. The fact that many manufacturers today buy and sell through multiple channel structures has not received much attention in the literature. Perhaps the most important reason for this is that any practical profit maximizing model for a manufacturer employing simultaneously several channels is too complex to be optimized by conventional nonlinear programs. In addition, writers in the area have assumed that multiple channel systems are either rare or ineffective (e.g. [10, p. 659]). In fact, as shown below, even the single channel optimization problem-how to select one channel from among two or more alternatives-has not been modeled in a way suitable for practical estimation and application. As has been noted elsewhere [19, p. 225], there has been relatively little research into distribution models which seek to maximize the profits of the firm. Multiple-distribution channels have become increasingly important, however [33]. One reason is the spread of vertically integrated distribution channels as manufacturers have integrated into wholesaling and retailing. Three motives for such investments have been the desire to secure market share, to better control the operations of intermediaries selling the manufacturers' merchandise and to use excess funds gener* Accepted by Donald R. Lehmann; received December 12, 1978. This paper has been with the authors 3 months for 1 revision. tINSEAD, France. *Bradford University, England.

1014 0025- 1909/79/25 10/ 10 14$01.25


Copyright?B 1980, The Instituteof ManagementScimensc

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ated in the business. Such integration invariably leaves the manufacturer with multiple channels as the acquired outlets are rarely sufficient to employ the full manufacturing capacity. A second group of reasons for manufacturers operating multiplechannels is the internationalization of business and the segmentation of domestic markets. A manufacturer designs a channel of distribution to serve a particular target market segment. As the manufacturer seeks to grow or diversify his risks by operating in more than one market, inevitably new channels of distribution have to be created. In this common type of multiple-channel system we can assume that the manufacturer aims to allocate resources between channels in a manner which maximizes his profits subject to certain operational constraints. If we assume there are K channels available to the manufacturer and for each channel i there are Ni possible outlets through which the manufacturer can sell his output Q, then the manufacturer needs to make three decisions. First, how many of the set of K channels to select. Second, for any channel selected how many of the Ni possible outlets to employ. Third, what proportion of output Q should be sold through each channel. The problem is complicated because as Kotler [19, p. 68] reminds us, one must assume that in practice the effects of marketing decision variables are both nonlinear and interactive. Here, for example, increasing the number of outlets will eventually produce diminishing returns and increasing efforts in one channel will partly be at the expense of other company channels. Optimization will take place subject to a number of operational constraints. The level of sales output Q of the firm will be strongly affected by the selection and management of the distribution channels. In the short-run, however, there will be some capacity constraint (Q*) which imposes an upper bound on potential output (the model can be operationalized without this constraint). Second, there will usually be control constraints which reflect the behavioral relations among members of the channel. There is an extensive marketing literature drawing attention to the conflicting objectives and activities of manufacturers, wholesalers and retailers within a channel. Given a choice, channel managers will prefer channels over which they have significant control, which are adaptive to a changing market environment and which are subject to limited risks. Reflecting increased concentration in retailing and consequential retailer power, a common control constraint for a manufacturer is to avoid being dependent upon any single channel for more than a given fraction of sales. A third type of constraint which has to be built into a realistic distribution model is system inflexibilities which limit the amount of adaption and discretion a manufacturer has over any channel system. Some channels will be closed to him (e.g. he may not be able to sell through Sears), others will have output restrictions. For example, it may not be realistic to assume that sales through existing outlets could be doubled. Fourth, in any programming algorithm there are technical constraints such as nonnegativity requirements to ensure practical solutions to the optimization problem. Finally, there may be other ad hoc constraints in any specific company situation. 2. Review of the Literature

The problems addressed in this paper have not yet been solved in the literature. An impressive amount of research has been devoted to economic analyses of vertical market systems and the impact of middlemen on the performance of these systems [6], [7], [8], [26], [30]. However these have been purely theoretical and given no attention to operationalization and estimation. In addition, they have focused on the macrolevel rather than on the resource decisions of the individual firm. In suggesting management tools for determining distribution strategies, researchers

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have eschewed optimizing methods in favor of simpler alternatives. Freimer and Simon [14], Richman [31], O'Meara [28] and Roberto (quoted in [19, pp. 294-296]) among others recommend rating scales for choosing the best channel from among several alternatives. Basically, this method calls upon management to list the major factors that the company should consider, assign weights to reflect their relative importance, rate each distribution strategy on each factor, and determine the overall weighted factor score for each strategy. This type of method is subject to a number of obvious weaknesses: failure to use information about the market, problems of correlation between factors and factor weights, no estimate of revenue, costs and investments under each strategy (see [1], [19]). In addition, it can only be used in single discrete choice situations and cannot handle the more general distribution problems discussed here. Simulation is one approach to these problems, but there are few examples. Balderson and Hoggatt ([5], see also [28]) developed a large-scale simulation of channel structure in one industrial market but it did not specifically deal with the problem7-of distribution strategy. Kotler [19, p. 296] quotes a simulation of alternative distribution strategies by Vialle, although the details of this model have never been published. Optimization models are even more rare. The most quoted study is that of Artle and Berglund [2] which analyzed a single-channel decision with profit and cost as criteria. The choice examined was between a direct sales force channel and the use of a wholesaler to distribute the manufacturer's products. While this study provides a useful start, it suffers a number of major limitations. The system it deals with is oversimplified (2 wholesalers and 10 customers); no insights are given into the estimation of the relevant demand functions, and no consideration is given to how channel effectiveness may be modified by changing the reward system (e.g. influencing wholesale margins). Bucklin [10] and Montgomery and Urban [25] have sketched extensions to the former analysis but both leave their models in embryonic states and suggest that the computational complexity of these general models would prevent their practical application. Little work has been done on the problem of distributionintensity-given a channel selection, how many outlets should be operated in that channel. Bucklin and Ellis [11] have developed a simple empirical model for a manufacturer of clothing to determine the optimum number of retailers to be employed in a given market area. Hartung and Fisher [17], in an important paper, synthesized a Markov model and nonlinear programming techniques to determine the optimal number of service stations that an oil company should build in any particular metropolitan area. None of the optimizing models have integrated in an operational manner distribution management variables: methods by which the manufacturer can attempt to influence the effectiveness of his distribution outlets. Such methods include priceprofit margin incentives, advertising and promotional allowances. The relative lack of normative channel models in recent years reflects the shift in emphasis in the literature to studying channels as behavioral systems. Here the emphasis is on how behavioral interactions among channel members affect the conduct and efficiency of the channel. Rosenberg and Stern [32] describe conflict as a "permanent and inherent element in channel systems characterized by behavioral interdependence." A considerable literature now exists describing power and leadership in channels, the sources of channel conflict, its effects and how conflict can be managed. For recent reviews see [13], [15], [18]. This work provides an important additional perspective omitted in the economic approach to distribution theory. Unfortunately, as most of the reviewers observe, the behavioral literature has not so far been integrated into the normative work. The control and system inflexibility

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constraints in our model are an attempt to reflect certain of the more important behavioral restrictions under which managers operate. 3. A Case Study

The approach described in this paper arose from a manufacturer's evaluation of future distribution strategy. This actual case study will be used to illustrate the development of the model, methods of estimating the parameters and the solution implications. The company was a manufacturer and retailer of high quality candy. It sold through multiple-channels. The most important channel was a group of 132 wholly-owned specialist candy stores. Next in importance were approximately 50 other retailers who sold the company's candy on a franchise basis. Third, were export sales: the company sold to distributors in a number of European countries, who in turn, sold to retailers there. Finally, the company sold to a small number of high class domestic retail chains under the retailers' own brand labels. The main dilemmas facing the company were which channels to concentrate upon, how many outlets to develop within any channel and what margins to seek in each channel. In general, there appeared to be an inverse relationship between unit gross margin and channel growth. Thus while sales through company-owned outlets offered the highest margins, growth was relatively low; private label sales through other retail groups offered high growth but little profit. A second general point was cannibalization between and within the channels. While the company served a broad geographic area and sought to avoid closely proximate outlets, expansion of sales in any one outlet will, at least partly, be at the expense of the others. Besides new stores, price was the main instrument affecting demand. Advertising and promotional expenditures were low. Retail candy sales are highly fragmented across thousands of stores, consequently market shares are small. One result is that competitive reaction is not usually a factor in pricing decisions. Finally, optimization was constrained by certain control motives of management. In particular, they did not want any particular channel to be a dominant buyer. 4. Model Specification

While the study had the general brief of evaluating the distribution strategy of the company, when the framework of the marketing environment and corporate objectives and constraints emerged, a nonconvex programming problem resulted. Very few optimization techniques exist that can handle nonconvex problems. As we show below, only the most general type of geometric programming (signomial programming) can effectively handle the structure of this broad class of problems. The problem formulation starts with the conventional normative model of the manufacturer seeking to select a distribution policy which maximizes profits, subject to the relevant constraints on the decision variables. The objective function, i.e. the manufacturer's total profit is composed of a set of demand and cost functions. To avoid an unnecessarily restrictive model specification and to allow for nonlinearities and interactions, general polynomial forms are postulated for both the demand and cost functions. Such functions are both intuitively and empirically appealing. Intuitively managers find it easier to think in terms of elasticities than marginal effects. The assumption of constant elasticities is usually reasonable over the feasible range of the decision variables. Empirically, we expect diminishing returns and interactions among components of the marketing mix rather than linear, additive affects. For such reasons polynomial forms have long been the most popular specification in empirical research on general marketing mix models e.g. [20], [29].

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The total demand structure is thus specified as follows:


K K

Q=

. -i=1

n a1((p)16i

j=1

(Pj)a (Ni)Ei.

(1)

Here /,3 represents the direct elasticity with respect to price (pi) for an average outlet in channel i; S. refers to the cross price elasticity between channels i andj, and Ei represents the economies (Ei> 1) or diseconomies (Ei< 1) from increasing the number of outlets (Ne) within channel i. From economic theory we expect that the absolute value of /8i faced by the manufacturer will increase by expanding the number of intermediary levels in a channel [22], [23]. The cross price elasticity S. formalizes the notion of multiple channel cannibalization. Note that 6ij is not necessarily equal to Sji. The demand function also incorporates a nonlinear effect,cEi,for the number of outlets selected in a particular channel on total demand. This parameter characterizes within channel cannibalization, whereas S. represents between channel cannibalization. Hartung and Fisher [17] suggest Ei> 1: the promotional impact of concentrating more stores in an area may benefit existing stores in the channel. The total cost structure is specified as follows:
K

TC=
i= 1

oi(qi)v(NJ) *

(2)

Here, vi represents economies of scale in the cost function. If vi < 1, the average cost curve is decreasing. Parameter Tris the possible economy resulting from increasing the number of outlets in channel i, e.g. unit savings in buying, transportation and production costs. Finally, as noted earlier, four constraints are relevant to the maximization of the objective function. First, the capacity constraint:
K

qi(Ni )< Q

(3)

where Q* is the corporate production capacity constraint. Second, the control constraint ensures that sales through any single channel are limited to some discretionary percent, z, of production capacity: qiNi < ZQ* (4)

Third, the system inflexibility constraint limits the optimal values for the decision variables, Ni, the number of stores opened in a channel, and pi, the price charged to that channel to within feasible ranges. That is,
NiL < Ni < NiU and pL
< P<pU

(5)

where superscripts L and U refer to the lower and upper bounds of the decision variables. Note, if the manufacturer does not wish to be constrained to using all K channels, then the lower bound of Ni may be set equal to zero and the upper bound to plus infinity. Finally there are the nonnegativity constraints which ensure reasonable solution values: qi >?; Pi 0 O and NI > O for all i. (6)

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5.

Signomial Geometric Programming

The model developed in the previous section can be summarized as follows:

Maxi

at(p)(fi+)

| Ij (pj)YJ(Ni)
j= 1

subject to
i=l

iaci(pi) 1i
K

j=l
j#1

(pj) "(Ni)N

(7)

tai(p)fi
NIL <

j=1 j=#

(pj)6u(N.)Ei ? ZQ<

for all i, for all i, for all i.

NJ < NJU Pi < Pi < PiU

Because of the particular nonconvex structure of our model, it is not solvable by traditional optimization techniques. The linear programming procedure obviously cannot be employed because neither the objective functlon, nor the constraints are linear. Conventional nonlinear programming techniques are not suitable either because of the generalized polynomial functional forms in both the objective function and the constraints. The prototypical (posynomial) geometrical programming technique described by Balachandran and Gensch [3] can handle polynomial functions. However, this method imposes two restrictions on the problem formulation: the set of polynomials have to be posynomial, and all the constraints have to be of the "less than" type. This structure of the posynomial geometrical program can be transformed into a convex program for which global optima are guaranteed [12]. The posynomial functional form requirement, however, is a rather severe limitation to the applicability of the prototypical (posynomial) geometrical programming technique to our model and to marketing systems problems in general. For a maximization problem for example, the posynomial limitation implies that the signs of all or all but one of the polynomial terms (i.e. a product of one or more variables) is negative. Especially in the context of system optimization, this condition will never be satisfied, because these systems (e.g. multiple products, multiple markets, multiple channels) can be decomposed into components (single product, single market, single channel), each of which has its own revenue and cost function. This implies a series of positive (revenue) terms and a series of negative (cost) terms in the objective function for system optimization, i.e. a signomial polynomial. One approach to this problem of noncompatibility of system structure and optimization tools has been to simplify the structure of the model in such a way that it becomes solvable by existing procedures. Thus, functional forms can be linearized, or at least be made convex, or even transformed into a posynomial. These forced problem formulations are not always very realistic and usually lack managerial relevance. Especially for the optimization of marketing systems this is an important problem. Because of the cross effects between components of the system, generalized polynomials are central to modelling the objective functions of the system.

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General (or signomial) geometrical programming (SGP) can handle these problems since it places no constraints on the structure of the objective function or on the type of constraints. As described in the Appendix, the solution procedure for SGP is based upon a transformation of the signomial program into a "reversed program." The branch and bound algorithm of Gochet and Smeers [16] can then be used to find a global optimum. 6. Parameter Estimation and Problem Solution To solve this type of programming problem estimates are needed of the set of demand and cost functions. In principle the data for these estimates can be obtained from time series or cross sectional observations, experimental methods or subjective procedures. While statistical estimates based upon objective data are the classical approach, in practice satisfactory data are rarely available for this type of problem (see [21], [27, pp. 251-277]). There are four common reasons for this. First, few` companies have seen the value of systematically recording over time information on all the relevant variables (prices, competitive activity, distribution, etc.). Second, use of conventional budgeting methods and rules of thumb mean there is commonly a lack of variability across and within channels in the key marketing instruments to statistically estimate their effects. Third, generating the data by experimental methods is usually viewed by managements as both too costly, time consuming and problematical. Finally, the marketing environment since the mid-1970s may have been subject to such significant shifts that past observations are seen as of questionable relevance to the future business environment. For these reasons, the estimation of the parameters here relied heavily on the judgments of managers as well as on observed data. The three senior managers directly responsible for marketing and distribution planning in the company cooperated in the study by providing feedback on the reality of the model formulation, the choice of variables and by giving explicit probability estimates where necessary to estimate the effects of changes in these variables. Since within channel homogeneity is important in the model, the first step in the estimation was to split the largest, most heterogeneous group of stores, the whollyowned outlets, according to size, to form two groups. The cost functions for each of these five channels were then straight-forwardly estimable from cross sectional data on channel costs. The parameter Ti representing the impact of increasing the number of outlets had, however, to be subjectively estimated because of insufficient variability
TABLE 1

Regression Coefficientsand t-valuesfor Demand Functions:

Qi= a,(P0PY'
Channel Large own stores (1) Small own stores (2) Franchising (3) Export (4) Private a,i 16.03 (3.10) 1613.5 (4.42) 0.43 (6.18) 323608.6 (3.31) 699.42

J (p1)5u(Ni)Ei
I

i=

i#ii

/A
- 1.1 (-4.26) - 0.95 (-11.35) - 1.13 (-10.76) -.1.14 (-12.65) - 1.84

ail

ai2

6i3

8i4

8i5

Ei

0.25 (3.9) 0.04 (0.59) 0.64 (1.6) 0 (0) 0.79

0.44 (1.7) 0.22 (2.87)

0 (0) 0 (0) 0 (0)

0.53 (2.7) 0.29 (3.53) 0.79 (6.15) 0 (0)


-

0.95 0.98 0.93 0.90 0.76

0.18 (5.9) 0 (0) 0.51

0 (0) 0.33

label (5)

(9.61)

(-8.3)

(1.9)

(2.1)

(3.2)

(0)

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CHANNEL OPTIMIZATIONIN COMPLEX MARKETING SYSTEMS TABLE 2 Regression Coefficientsand t-values for Cost Functions:
TCi =,wi(Qi) (Ni)
pi Ti

1021

Channel Large own stores (1) Small own stores (2) Franchising (3) Export (4) Private label (5)

"i

1881.83 (157.80) 1819.21 (71.23) 1431.34 (61.11) 1702.32 (20.81) 1585.04 (14.34)

0.92 (57.11) 0.96 (34.45) 0.95 (20.23) 0.89 (7.241) 0.90 (8.67)

0.95 0.90 0.98 1.05 1.01

over the time period to objectively estimate this important scale parameter. The managers, therefore, were shown individually how to judge the impact on the current level of average costs of 10 per cent changes in the number of retail outlets making up the channel. Managers appeared to have little difficulty grasping the idea behind the probability estimates, and the low variance of the estimated parameters (Table 2) indicates a high degree of agreement among them. Initial insight to formulate the demand equations were obtained from a broad study of the candy market, the company and its competitors. Management agreed that price and the intensity of distribution were the two variables which had the dominant impact on company sales. Advertising and promotional expenditures were relatively small. Being sold through thousands of stores, retail candy sales were highly fragmented so that market shares were small and competitive retaliation was not usually a major factor in marketing mix decisions. Again, inadequate variability between and within channels meant that it was impossible to estimate the main and cannibalization effects of price movements and changes in the number of outlets in any channel via classical statistical procedures. To provide a basis for subjective estimates previous price and channel-volume changes were plotted and studied with the managers. In the light of these data, a session was held to consider the likely implications of greater price and channel flexibility in the future in terms of demand and cross-elasticity effects. Following the discussion, individual judgments were elicited on the impact of 10 per cent price changes on sales of the typical outlet in that channel and on sales of other channels. Since the model assumes a constant elasticity demand function, this procedure enables an estimate of the average outlet demand functions. The parameter Ei was estimated from judgments of the incremental effect of additional channel outlets. Regression analysis was used to transform the judgments of managers into parameter estimates (Table 1). All but one of the coefficients are statistically significant and the signs are in the hypothesized directions i.e. negative own price elasticities and positive cross price elasticities. All except the larger own outlets have price elastic demand curves (6 > 1), which is again intuitively appealing. The larger price elasticities on channels with multiple intermediary levels (3, 4 and 5) are consistent with the Machlup and Tauber result [22], [23]. Note that for channels one and two (ownoutlets) the price is identical to that paid by the final consumer; for the other channels the price is that charged to the intermediary and so excludes the latter's mark-up. The cost function is shown in Table 2. The output coefficients (/3 < 1) suggest economies of scale across all channels. On the other hand, increasing the number of outlets is

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MARCEL CORSTJENSAND PETER DOYLE TABLE 3 Problem Constraints 1. Production Capacity: 2. Channel Control: 3. System Inflexibilities: Q* = 10, 416 Tons qiNi < 0.60Q* for all i 1600 < p, < 1600 < P2 < 1200 < p3 < 1400<p4< 1300 < p5 < Pi > 0 Ni > 0 2000 2000 1600 1900 1700 and 40 < NJ 6 40 < N2 < 30 < N3 < 7<N46 4 < N5 < for all i for all i 100 120 70 20 12

4. Nonnegativity:

judged as leading to a less than proportionate increase in costs (T < 1) for the first three channels. The actual constraints, imposed on the objective functions by management, are presented in Table 3. The branch-and-bound procedure reached a solution vector after 720 iterations, although the convergence was almost complete after 200 iterations. The solution met the constraint set to within 10 per cent (for the most binding constraint).
Existing levels of decision variables NI N2 N3 N4 N5 P1 P2 P3 P4 P5 66 66 50 9 5 1866 1866 1450 1640 1500 Model Predictions 61 90 31 16 7 2000 2000 1592 1900 1700

We show above the model results compared to the existing levels of the decision variables. An appreciation of the significance of these differences can be noted by introducing the model-predicted variables into the profit function and comparing the results with those from the existing decisions. The new gross margin increases from 24 to 33 per cent and absolute profit from ?4.1 million to ?6.6 million. Even allowing for possible bias from measurement and model specification errors which are difficult to trace in the model, these results make the method of obvious interest. To persuade management to adopt decisions in the direction of those predicted by the model it is necessary to explore more intuitively how the profit improvement is expected to occur. Improvements came about from changes in distribution strategy, channel intensity and pricing policy. Three of the channels were oriented towards increased investment, two for marginal disinvestment. Larger own stores proved to be more profitable than the smaller own stores, due in large part to their lower price elasticity and their ability to sustain customer franchise against expansion in alternative channels (see Tables 1 and 3). Franchising, on the other hand, was scaled for less investment. These smaller outlets, carrying a weaker corporate identity, proved less resilient to competition from other channels. Export and private label business were

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geared to expansion. Both these channels were relatively new strategies for the company and appeared to offer good opportunities for profitable growth. The pricing results lead to a recommendation for higher prices in each of the channels. This was in line with earlier independent recommendations from the company's management consultants. The company had traditionally employed costplus pricing methods and did not utilize demand elasticity considerations in its pricing formulas. Overall, the logic of these findings has been accepted by management and strategy will be adapted broadly along the lines discussed. Under these policies, more outlets will be employed in total but with the average outlet expected to sell lower volumes at higher prices. Again this is intuitively reasonable in terms of retailing strategy, because new outlets add trading areas from which growth is obtainable at higher price levels than from growth through existing outlets. 7. Managerial and Theoretical Implications

The central task of management is to allocate scarce economic resources among alternative uses. The present model provides a practical tool to assist managers in optimizing resource use in channel planning. This is an important area because channel decisions are costly, complex, long term and not easily reversible commitments. Given a willingness to make estimates of the relevant demand and cost functions the model provides output on the most significant channel decision areaswhich channels to select, how intensively to use them and how to influence their behavior. The model is open to further development and evolution. Issues of channel power and conflict can be explicitly modelled. For example, the control constraint can be reformulated as a decision variable to investigate optimal levels of dependency between manufacturer and channel members. In particular, over a longer time period improved estimation of the parameters is possible by tracking the model's predictions and comparing the observed results (see [21]). Theoretically, the model is interesting because it does appear capable of significant generalization. It can be generalized to include other marketing mix variables besides price, provided the demand function can be estimated (for some ideas on this problem see [3], [21]). It also offers potential for research in marketing system optimization in general. This is a long existing unresolved need in the marketing literature, mainly because of the absence of adequate solution methods. The general geometric programming method suggested in this paper can be developed to handle complex system structures and sophisticated system interactions. Appendix Signomial GeometricProgramming The solution procedure for SGP is based on a transformation of the signomial program into a "reversed program." To simplify the notation let:
K

f(p, N ) and

=
i=1

(i

+n

j=1

H (pj)6fY(Ni)

j#i

g(p, N ) =

i= 1j,l

w ai ?(pi)

iI

(pi)

(Ni

)i.

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Transforming our model (7) into a form suitable for SGP results in the following formulation: Define a new variable xo, such that the objective function becomes: Max x0 where xo < f(p, N) - g(p, N) < f(p,N). orxo+g(p,N) Define another new variable xl such that: xo + g(p, N) < xl < f(p, N) orx x- I+xl -g(p,N) 1. < 1

and x 'f(p,N)>

The objective function can now be formulated as: Min xo subjectto: x -lxj 'g(p,N)<
xV-Y(p,N)>

1,

(1)

1.

The additional constraints, except for the nonnegativity constraints, are then normalized in such a way that they become of the "less than" type, i.e. (3) becomes: (Q*)-f I a1(p)1i
i=1
K K 17 (pj)iy(Ni)Ei< 1.

j=l ji#i
K

(4) becomes:
(ZQ*)
-

a1(p1),i
j=#i

(pj)"ij(Ni )Ei

1.

(5) becomes: (N.L.)(Ni)-'


(piL)(pi)-l

< <

1 and (Ni)(NiU) 1 and (Pi)(PiU)

< 1, < 1.

Based on this result a branch and bound method developed by Gochet and Smeers is used to find a global optimum of the signomial program [16]. Gochet and Smeers [16] show that by approximating the reversed constraint ("greater than") from the outside, we can approximate the reversed program by a prototype geometrical program. Then, a branch and bound scheme is used to improve on this approximation which guarantees convergence to the global optimum. If the actual convergence towards the global optimum is not obtained in a reasonable number of iterations, the branch and bound procedure can be stopped. The final result of the branch and bound algorithm can then be used as a starting value for an existing convex programming method. This procedure will then generate the global optimum in a more economical way. Finally, to check the validity of the globality of the optimum, an ex-post analysis can be performed by using different plausible starting values and by verifying the resulting solutions.'
'The authors would like to express their gratitude to W. Gochet and V. Srinivasen for their invaluable advice and comments on this paper.

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CHANNEL OPTIMIZATION IN COMPLEX MARKETING SYSTEMS

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