(Editor's Note: The following is excerpted from a speech given by Robert Vick at ASA's Vendor Member Div. (VMD) breakfast meeting, held Sept. 29 in conjunction with the annual ASA conven-tion and ISH North America trade show.)

When the VMD Executive Council talked about choosing a controversial topic, we have many to choose from. But we decided that one involving the manufacturer/supplier's relationship with the wholesaler would create the most interaction. Consequently, that's how we arrived at the title of this morning's topic: “Is the Traditional Relationship Between Manufacturer/Supplier and the Wholesaler Becoming Extinct?”

Since this is the VMD breakfast, I will talk from the manufacturer/supplier point of view, even though there are wholesalers in the audience. And since there has become such a blur between the definition of a manufacturer and a supplier, I may occasionally refer to the term “manupplier” to represent them both.

I was asked to be the moderator because it was important to have someone who has been in our industry long enough to remember how the traditional relationship between manufacturers and wholesalers used to be. I accepted because I figured that there wouldn't be too many in the audience that could remember whether what I said was right or wrong.

What The Relationship Used To Be Like

When I first got in the PVF/PHC business, I thought that there could not be a better business to be in. One of my early assignments was in New York City where two of my competitors had their corporate headquarters on Park Avenue. Everywhere you looked there was demand for my product. How could you work in New York City and not love our business?

In those days, as I was learning about the industry, I perceived the manufacturer's relationship with the wholesaler to be one of a win-win relationship.

Generally, those manufacturers that sold through distribution aligned themselves with one or two wholesalers in a trading area. In exchange, the wholesaler didn't carry competing lines. If my wholesaler got the order, then I got the order. Also, there wasn't much foreign competition, and if my price was out of line with a competitor it was never out more than five percent, not the 40 or 50 percent that you see today.

The breadth of most product lines being offered by manufacturers seemed narrow by today's standards, but it filled the contractor's needs. Consequently, most manufacturers could supply to the wholesaler everything that was required in a product category. So there wasn't any need for wholesalers to have overlapping suppliers, either from a pricing or product line standpoint.

As a manufacturer's salesman, I would spend my days making sales calls with the wholesaler's salesman. All information that we gathered was shared information because we were true partners in our business model.

The wholesalers' line card usually listed a product category, and then one manufacturer's name under that category. That manufacturer's name was all that you needed to say. If the category was valves, then all that was listed under the valve category was just a single manufacturer's name.

Remember that even back then, many manufacturers had already been in business nearly 100 years, and their names and their products were well-known throughout the industry.

Business back then appeared simple, and there was a sense of shared prosperity between manufacturers and wholesalers.

But what I didn't realize at the time was that a lot of what I saw happening was happening out of economic necessity - not necessarily from a desired business partnership.

Manufacturers Ruled

When the PVF/PHC wholesale distribution companies began to proliferate in the late '50s and '60s, they desperately needed the support of manufacturers. Manufacturers were generally much larger than wholesalers and had national recognition, while the wholesalers were smaller and generally limited to a handful of regional locations at best.

Wholesalers needed the manufacturer. Not only did they need him for his products, but more importantly, for brand name identity. They needed his brand identity in order to get the recognition and credibility that they desired in the marketplace. You had to have the “right” lines in order to be seen as a real player by potential customers.

In exchange for the manufacturer's product and brand identity, the wholesalers provided the manufacturer with greater profits by assuming much of the marketing cost - the cost of selling the product, inventorying, shipping and collections, etc.

The wholesaler's purpose, as seen by the manufacturer, was to play a cost-transfer role, thus allowing the manufacturer to improve his profits.

Because of this mutual economic need, the wholesalers developed their closest relationships with their upstream suppliers, not their downstream customers. Manufacturers enjoyed this relationship and the resulting position of power that it brought with it. And they used this power to establish the rules of the game.

Power Shifted To Wholesalers

Well, that's how I remembered the way the traditional relationship used to be. Today, it has changed dramatically. The seat of power has shifted from the manufacturer to the wholesaler. And we, as manufacturers and suppliers, need to be keenly aware that the shift has taken place.

When I first started doing the research for this talk, I met with six wholesalers to see how our industry could get back to the old-fashioned win-win relationships that I had remembered. I thought that I would be embraced and overrun with their suggestions.

I can't tell you how shocked I was when each wholesaler at the meeting said that they had no intention of ever going back to what they saw as “my good old days.” The good old days were only good from the manufacturer's point of view. They said that the business model for manufacturers and the one for wholesalers was entirely different, and that manufacturers still don't understand the wholesaler's side of the equation.

I suddenly realized that the perfect partnership that I remembered was not shared by everyone. In the minds of these six wholesalers, the floodgates of change had opened and there was no going back.

Wholesalers today are finding themselves empowered and independent of the traditional manufacturer's dominance. And this empowerment is the result of years of change that has taken place one baby step at a time.

As I began to compile a list of changes that would have influenced the shift of power to the wholesaler, the list literally became endless. But without question, there were some changes that stood out more than others, beginning with:

  • The beginning and rapid growth of buying groups. Before buying groups, each wholesaler stood on his own when dealing with suppliers. In their minds, it was David vs. Goliath. Buying groups have given the independent wholesaler a rallying point, but more importantly have provided him leverage in negotiating with the manufacturers. It has put the smallest wholesaler on par with the largest.

  • The consolidation of hundreds of independent wholesalers into a handful of mega national companies. This has created wholesalers of tremendous financial and national strength, as large or larger than any manufacturer that they buy from. The 900-pound gorilla not only exists on the wholesaler's side, but now there are a lot of them, and they are capable of doing whatever they want to do.

  • Technology advancements. Wholesalers can use the Web to compare pricing and product features quickly. They have instant access to data and have likewise improved their operations, making them less dependent on the manufacturer's know-how.

  • The proliferation and acceptance of imported products. Imports, once shunned by our industry, are now considered quality products selling for significantly less than what was considered the traditional price level. Over the years, imports have penetrated all facets of our daily lives, and most products that the consumer buys are assumed to be imported whether they are or not.

  • The retail invasion. Retail took the manufacturer's time and effort away from managing his relationship with the wholesaler. With some retailers opening a new store every day, this potential windfall to the manufacturer strained his allegiance to the wholesaler. It also opened the door for reprisals from the wholesaler, driving the wedge deeper.

  • Wholesalers name-branding their own products. The wholesaler no longer needs the traditional manufacturer's name or product. In many cases, the wholesaler's own brand identity now trumps that of the traditional supplier in the mind of the customer. Soon, if not already, manufacturers may find their largest customer becoming their largest competitor.

    A New Look At “Win-Win”

    So where does all this change leave us today?

    First, to answer the original question proposed in today's title, I believe the changes that have taken place over my business career have brought the traditional manufacturer/supplier relationship with the wholesaler very close to the end of its life cycle.

    And in reality, the win-win traditional relationship that I remembered may never have truly existed in the first place.

    You have to remember that profit is a zero sum game. It is the difference in what it costs to make a product and what you can sell it for in the marketplace. If one channel partner makes more profit, then the other makes less. Therefore, the expectations of a true win-win relationship are unrealistic.

    Today the wholesaler's closest relationship is with his customers, not with his suppliers. This is just the opposite from when I began my business career. This change has taken place because now the wholesaler can make this choice. His dependency on specific manufacturers for survival is no longer required. His business model is not having to be altered to fit the manufacturer's mold. The wholesaler's customers are now choosing him, not the product lines that he represents.

    Secondly, when you look at a manufacturer and wholesaler relationship “Manufacturers are from Mars, Wholesalers are from Venus.”

    This isn't necessarily bad. It is just the way the world is.

    Basically what this means is that we have always had different approaches as to how we go about making a profit. We must recognize and manage these differences. We need to have a better understanding about what the other person does and what contributions each makes.

    Manufacturers can eliminate the wholesaler, but not the work that they perform.

    There are ways in which we can understand each other better. I strongly recommend that you read the Indian River Consulting Group's book titled, “Working at Cross-Purposes, How Distributors and Manufacturers Can Manage Conflict Successfully”.

  • Understand how your channel partner makes money, and be honest and open in your communications.

  • Invest time and money into the relationship and be open to change.

  • Do not ignore the situation; manage conflicts quickly.

  • Realize that it is not just about the relationship anymore; it is about economics.

    It's Not Personal; It's Business

    Of these four, the last one to me carries the most eye-opening weight. If you are a manufacturer or a supplier and you do not add sufficient value in the supply channel, then you are not going to get the business. It's no longer about the golf, it isn't about the lunches, it's about the economics.

    My presentation has concentrated primarily on the changes that we've seen between manufacturers and wholesalers and the shift of power that has gone along with it. But, ironically, when you talk with wholesalers, many will tell you that the shift of power is already moving to the contractor and the builder. It is this group that is becoming empowered and their ability to influence the supply channel will bring even more changes.