A product in the innovation stage benefits from direct selling, which allows the maker's own sales force to educate customers on the benefits of the new product and explain the nuances of its application. A new product's first salesman is usually the inventor himself. Valve-industry history is rich with stories of early inventors/salesmen - Fisher, DeZurik, Mason and Neilan - peddling their newfangled automatic valves. Although valve technology now is generally mature, you can still find this kind of salesperson in the back aisles of trade shows, hawking what could become tomorrow's breakthrough.
The graying of the industryIf an inventor is lucky, his product enters the growth stage. The demand for his new device eventually surpasses his production capability. So he hires more salesmen, with an accompanying leap in his fixed costs, or finds commissioned manufacturers representatives, which affects only his variable costs.
Most valve manufacturers have taken the latter route at this growth stage, which occurred decades ago for most types of valves. Many representatives in the valve industry have engineering backgrounds and provide outstanding value to the end user in terms of application and product knowledge. The cost of this value is 10% to 20% commission built into the price paid by the customer.
As products move into the highly competitive stage of maturity, the cost of representatives becomes more and more burdensome. At this point, the technology is well-known, and the customer requires little help in choosing and using the product. His greatest need is in acquisition logistics and transactional assistance.
Enter the nonexclusive distributor, who can best serve this function at the lowest additional cost. The distributor serves as both the order taker and supply house for fast delivery. The manufacturer sets volume/ discount levels to include his expected profit margin and sells to anyone capable of moving his product. Hybrids known as "selective" distributor networks try to minimize the overlap of outlets in exchange for brand loyalty.
Other variations on the distributor theme, such as integrators and national supply franchises, have emerged to concentrate buying clout. Compared with the representative channel, application assistance is usually limited. However, the distributor's average markup of only 5% to 10% brings the street price of goods down considerably for the end user.
When products finally reach the decline stage of the product life cycle, customers become few and far between. Distribution returns full circle to the factory-direct sales channel. This occurs for several reasons, including the fact that few representatives or distributors have an interest in slow-selling, technically obsolete products.
Likewise, customers are unwilling to pay premium prices for products being replaced by superior, less costly substitutes. The manufacturer is left with the final milking of profit and eventual burial of the tired product line. Stubborn customers (and we thank them) often extend the life and increase the profitability of the past-prime but faithful product design.
Where valves fit inThe valve industry has many examples of generic valve types at various stages of maturity. Innovations are the trickiest to spot because of their limited visibility. One product that fits this category is a one-piece valve and actuator promoted at the recent Instrument Society of America show in Houston. Its Italian inventor has contracted with an agent to promote and market his product directly to end users. Other emerging products include some high-pressure, double- acting diaphragm actuators, alternate material control valves and smart instrumentation.
Control valves are in the late growth stage of the product life cycle, so their channel of choice is the manufacturers rep. Manufacturers continue to refine and differentiate the basic rotary and linear control valves, extending their stay in this stage. But even with these enhancements, control valves remain on the cusp of change to the more cost-effective distributor channel.
Manual valves have long been in their maturity and are delivered to the market almost exclusively by distributor networks. The resulting competition has created great values for the end user. The direct channel best serves the contracting manual globe-valve market. With shrinking demand and rising costs, it is the most cost-effective means to deliver the highly mature product.
A relatively new notion is the concurrent use of all the classic channels of distribution within one company. Valve manufacturers have begun to experiment with this concept, known as multichannel distribution.
Historically, a company's cash cow has driven the channel of preference to the detriment of other products. For fear of upsetting the well-established distribution network, the manufacturer has avoided any dabbling in other channels.
But well-managed companies always have products at various stages of the product life cycle. The more active the R&D function, the more likely the existence of emerging, growing, mature and declining product lines. The ability to distribute each product line through its most effective channel for the entire product life cycle is a very powerful competitive advantage.
Manufacturers that have had success with multichannel distribution have first established functional independent channels. Beginning with the direct selling channel, companies must build strong sales staffs who are highly trained to assist and educate the end user on applications. An aggressive manufacturers rep network delivers growth products to the customer. Contracts are exclusive; the rep is paid a commission.
Finally, a broad-based distributor network is necessary to deliver mature products, which are frequently warehoused for fast delivery at the lowest cost to end users. Contracts (if they exist) are nonexclusive buying agreements usually based on purchase volume, with the distributor earning whatever profit he can.
The secret to effective multichannel distribution is a clear sales policy with regard to each of the company's products. All three channels are given access to all products. Available profit to the channel will vary by category.
An added benefit is that the customer can draw the product through any channel he chooses. A customer who needs a good deal of assistance in selection and application may appreciate and be willing to pay extra for the representative's expertise. On the other hand, the individual looking simply for a replacement component will find the best price through the direct factory channel; if fast delivery is essential, the slightly higher price of the stocking distributor may be fine.
We ain't seen nothing yetSeveral megatrends are rapidly reshaping the future of distribution. These three trends will rapidly converge early in the next millennium to dramatically change the nature of distribution:
- The advent of the computer and the Internet. No single event has ever threatened to upset the traditional distribution apple cart more than the Internet. What amazon.com is doing with books has already put manufacturers of all types on notice. Anyone making a living between the maker and the end user should be alarmed. Internet commerce is the ultimate direct-selling system, with no product immune from its reach. Sales robots will soon be making electronic deals with purchasing robots in cyberspace. The Internet will find its place late in the maturity stage as products become commodities. Manual valves are ripe for this metamorphosis now.
- The ever-increasing velocity of change and consequent shortening of the product life cycle will affect the entire chain: The manufacturer must speed up R&D. The hand-off from factory to representative will happen in months rather than years. The representative must be on constant alert for changes and increase his principal turnover. The distributor must know when to surrender a line to electronic commerce.
- The merging of large-company mass production and small- company specialization will shrink the number of niche markets and allow big companies to act small. Computer-based design and manufacturing systems allow customers to get the best of both worlds: the low cost of economies of scale and the variability of custom-made products. The effect on distribution will be to shrink the niche manufacturer base and create greater competition for principals among sales agencies.
End users: the big winners?All of this spells good things for the end user. He will be able to buy high-quality, specialized goods with fast delivery at prices assured to be the best in the world. For the manufacturer, the future holds constant struggle to achieve the lowest global delivered cost, maintain leading-edge product technology and master high-speed, flexible business systems of all types. And the salesman must find ways to add value to the product beyond merely quoting prices, taking orders and expediting delivery.