Manufacturers Direct - The Supply Chain Dilemma
Let me address this dilemma by using a “Catfish Parable.” As you may know, catfish are bottom feeders. They feed on algae and prefer “dead stinky bait” rather than better, live alternatives. Most are sleek and quick.
Many manufacturers constantly flirt with the idea of going direct. Some do it on a limited scale. If they can cut out the middleman, profits can be greater. Some manufacturers may think of their distributors in the same vernacular as the catfish - slick, quick, and eager to feed on the almighty dollar. They say distributors “bottom-feed” on rebates, discounts and special promotions, preferring lowered prices (i.e., dead stinky bait) as opposed to the hard work of selling value. Manufacturers believe some distributors have grown large and lazy, demonstrating the “Cadillac and Boat” syndrome. “I have all I need, a Cadillac and my fishing boat, so why break my neck trying to capture even more market share?”
After spending more than 40 years in the distribution business, I must admit that I have run into a few distributors who fit that description. But they are the exception, not the rule. Most distributors work very hard, and are honest and loyal to their manufacturers. They recognize that they are only as good as the support they receive from their manufacturers. But they also recognize the reciprocal nature of the relationship. In other words, the more support that distributors give manufacturers through investments in market share growth, then the more support they will receive from the manufacturers.
Distributors are not bottom feedersDistributors provide tremendous value. Most manufacturers understand this and will openly admit it, although some do so begrudgingly. Manufacturers who truly operate in a partnership relationship not only acknowledge the distribution value, but they seek to leverage that value at every opportunity. What value does distribution provide? The value can vary by industry and product, but it includes some if not all of the following:
- Financing - Extending terms to the end user
- Coverage - Maximizing market penetration
- Consolidation of orders - Handling many small accounts that would
not be cost effective for the manufacturer to handle
- Service - Defined in numerous ways from Just-In-Time, same day/next
day ship, consignment to job site trailers, and twigs based on market demands
- Repair services
- Demand creation/Advertising
Some manufacturers don’t acknowledge this value openly and live in a “Love-Hate” relationship with their distributors. They can’t live with ‘em and they can’t live without ‘em. Of course it’s true that a few distributors deserve this negative opinion. There are those who have made fortunes simply because they had products with exceptional brand equity in exclusive or selective territories that required nothing more than answering the phone to get rich. This was especially true before this latest economic crisis hit. Some of these distributors have failed to reinvest in their business, putting personal needs ahead of business needs. Then when the end of the product life cycle nears and cutting-edge distribution is required for new product introduction and support, the commitment, desire and competence on the distributor level is often lacking. These circumstances just fuel the fire of manufacturers’ low opinion of distribution. Fortunately, we believe these scenarios make up only a small minority, so we need to work to change any negative generalizations.
Different PerspectivesWe should recognize that there is a different business mindset between the distributor and the manufacturer. By understanding the two perspectives better, each party can work toward an improved partnership relationship.
The manufacturer prefers to have a contract with point-of-sales information. Their contract would state, you will do “this,” and if you don’t, “these” are the consequences, and by the way, our deal can be cancelled with a 30-day notice. On the other hand, the distributor prefers a partnership covenant that says if you do “this,” we will do “that,” and together we will grow market share.
Naively, throughout much of my distribution career, I believed that I was a customer of the manufacturer. I bought their product and resold it. I did not comprehend the concept of not being their customer until 1998. I was two months on the job as COO of a $400 million distributor. The first time I met our major supplier, a pump manufacturer, was at a cocktail party. I was talking to their vice president of sales. I had done my homework and knew our company was on their Top 10 account list as we had purchased more than $1 million of product from them the year before. I made a comment to this vice president about our company taking pride in being one of their Top 10 customers. I expected at least a smile, kudos, or just a grateful nod. He looked at me in disbelief and with a rather firm, arrogant voice said, “Rick, you are not a customer - you are a distributor!”
At the time I was offended by his attitude but have since come to realize that in the eyes of the manufacturer, distributors are not customers. They are simply a link in the supply chain. Ideally, they are channel partners. Manufacturers have huge capital demands to cover high fixed costs. Their call to continually increase market share is essential, yet distributors sometimes get frustrated with the volume-driven needs of their manufacturers.
Creating the DilemmaIncreasingly, manufacturers have little choice but to explore all opportunities to capture market share, and distributors can become just one vehicle in the supply chain.
Many manufacturers even seek out the opportunity to service some major customers direct. This creates the supply chain dilemma. Transactional Web sites on the Internet are playing an ever-increasing role in the supply chain. Add in manufacturers reps, integrators and catalog houses, and you begin to understand the confusion and noise that can exist due to the numerous channels. This can, and often does, frustrate distributors. They believe in themselves and prefer market exclusivity - a phenomenon that is dying off in most industries.
What worries Distributors?Distributor rationalization is becoming a hot topic in many manufacturer executive staff meetings across North America. Most manufacturers believe they have too many distributors. Mass retail complicates this situation and dealing with the service demands of the big-box retailers is still a major headache for the manufacturer. If a manufacturer sat down today and designed his distribution model from scratch, odds are very high that few would retain their existing channel structure. Distributors know this and often feel threatened by it. However, just as profit covers many sins, performance covers most frustrations. Manufacturers like big purchase orders, increased sales and market share growth. Distributors like exclusivity, rebates, co-op funding, technical support and innovative, creative manufacturing partners.
When both partners get what they want, it’s a match made in heaven, and matches like this do exist. However, many more require constant nurturing. Both partners have to work at it.
Distributors and manufacturers often disagree on what is important to the customer. Distributors believe the manufacturer is out of touch and the manufacturer believes the distributor is not providing adequate coverage and developing market intelligence. Manufacturers believe the intelligence that distribution does gather is highly biased. Manufacturers recognize that channel rationalization can be a good thing for their long-term relationships with distributors who are willing to be true partners and operate within the bounds of what is good for both. A garden cannot flourish without pulling the weeds.
Partnership ReinventionDistribution will always play a role in the channel. Manufacturers just can’t do what distribution does. But distributors must recognize that change is upon them. They, too, must adjust to the evolution taking place in the supply chain. The remaining distributors have the opportunity to reinvent the relationship and create a model that is mutually beneficial to both parties.
Manufacturers and distributors should follow these five principles to reinvent that partnership.
1. Communicate - Perception becomes reality. If all the cards aren’t on the table, people tend to envision circumstances that are much different from reality. This creates a feeling of mistrust. Be open about topics such as coverage. Are you in a growing or mature market? Brand equity - how much really exists? Competitive reality - be honest with each other.
2. Customer Satisfaction - This is the number one priority. Unhappy customers, regardless of who is at fault, result in lost market share. Create a joint formal satisfaction review program. The longevity of your partnership depends on market share growth. You can’t grow market share if you are losing existing business. This process will also support your strategic sales initiatives. Create a formal review process that is built on trust, respect and mutual goals.
3. Strategic Sales Initiatives - Jointly develop a sales strategy by territory that uses basic sales effectiveness principles, including targeting, goal setting, action planning and a performance review process.
4. Collectively align your resources to create competitive advantage in your market. Look for the dysfunctional low-hanging fruit on both fronts. Eliminating the stupid things both parties do will automatically improve performance.
5. Identify and implement a true sales effectiveness process that is relevant to your market, your customers and your sales force and that supports your strategic sales initiatives.
In reality, distributors are really no more like catfish than manufacturers are like barracudas. However, that doesn’t mean that either side is perfect in managing their relationship with each other. A true partnership is one that both parties work on continuously and it is the only way to solve the supply chain dilemma. Base the partnership on the assumption that you have determined the right partners. Once that occurs, then you must build the partnership on trust, honesty and integrity.