Channel Management - Indian River Consulting Group https://www.ircg.com/blog/category/channel-management/ Indian River Consulting Group specializes in helping distributors and manufacturers accurately diagnose problems and identify risk-bound alternatives so they can take their next steps confidently. Call us to learn more at 321-956-8617 or contact us now. Fri, 29 Apr 2022 21:02:09 +0000 en-US hourly 1 https://wordpress.org/?v=6.1.1 https://www.ircg.com/wp-content/uploads/2021/04/favicon.ico Channel Management - Indian River Consulting Group https://www.ircg.com/blog/category/channel-management/ 32 32 3 Strategies for Distributors to Weather the Supply Chain Crunch  https://www.ircg.com/blog/business-strategy/3-strategies-for-distributors-to-weather-the-supply-chain-crunch/ https://www.ircg.com/blog/business-strategy/3-strategies-for-distributors-to-weather-the-supply-chain-crunch/#respond Tue, 22 Feb 2022 16:00:36 +0000 https://www.ircg.com/?p=12115 The supply chain is now the equivalent of a wild pendulum with sporadic oscillations.

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As we’re all aware: The supply chain is no longer as dependable as it used to be. It’s now the equivalent of a wild pendulum with sporadic oscillations.  

Demand is also fuzzy and seems to be ever-changing. Think about the start of the pandemic, when there was a massive shortage of masks and gloves. People were doing some really interesting things to find and stockpile these supplies. Now companies give away masks and gloves because they have so much backstock. It’s the same scenario that’s going to play out in the automotive industry. Right now, there’s a shortage of chips. Manufacturers are still making cars while they wait, so once they have the chips, there’s going to be overstock of vehicles and companies offering major deals and incentives to buy a new car.  

The current challenge is inflation. There are steep increases across the board. Because of inflation and an uncertain supply chain, manufacturers are hearing the same refrain from their distributors: “You have to stop passing the price increases because I can’t pass them on to my customers” or “When are you going to deliver product to me?” 

It’s obvious that the exaggerated pendulum of a supply chain will be with us throughout this year and potentially into 2023. So how do distributors deal with the consequences and resulting inflation? 

In an inflationary environment, you have to watch closely for changes and, when you recognize a change, react quickly. You must be ready and able to make changes within the day or hours – not weeks. Being agile determines whether you succeed (and survive) an inflationary period. 

How Distributors Can Respond 

Distributors need to be closer to their supply chain partners. Share more data and look for the best price. The companies that are more aligned with their suppliers are the most successful during unpredictable times. 

Get customers to behave differently. You have to figure out what the customer really needs and provide that, which might go against what they “want.” For example, although the cleaning industry is a recession-proof industry, it’s still supply-chain-dependent. Distributors can tell their customers not to schedule orders for rush delivery. You could say, “I’ll deliver 80% of your A items monthly and cover the cost of the freight, and you can add to that order any time you want, but you can’t change the order without a 30-day notice.” 

Here’s another example from the healthcare industry: A hospital called their distributor and requested 80 respirators, but the distributor could only provide 20. Although the hospital was insistent, the distributor remained strong and said, “I can only provide 20, but I’ll give you 20 every month, and you can start to backfill the rest.” 

Use the features and parameter settings in your ERP system. Most distributors have dynamic scheduling and safety stock; however, many of them don’t actually use these features. If a distributor is using their inventory management system to its fullest potential, over 75% of the line items they order from suppliers should be computer generated. That means no human touches on those orders; they’re automatically being sent.  

Most distributors have about 30% of their orders being computer-generated because it’s hard for some employees to let go and let the technology run that part of the show.  

Surprisingly, you don’t have to buy more or new software to be successful: You just need to utilize what you paid for more effectively. If you don’t know how to use your systems, make sure your staff gets the proper training.  

If distributors follow these steps, roughly half of the supply chain crunch and resulting problems would disappear. You can weather wild swings in the supply chain pendulum. You just have to be agile and ready with the right tools and strategy to respond. 

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The 7 Deadly Sins of Manufacturer Channel Management https://www.ircg.com/blog/manufacturing/the-7-deadly-sins-of-manufacturer-channel-management/ Wed, 20 Jan 2021 05:38:29 +0000 https://www.ircg.com/the-7-deadly-sins-of-manufacturer-channel-management/ Manufacturers have many valid reasons to change channels in an updated go-to-market strategy. We know, as it is a core part of our consulting practice. But it may be unnecessary to make expensive and disruptive changes to a channel design when the easy answer may be to simply stop committing one of the deadly sins I outline below.

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The 7 Deadly Sins of Manufacturer Channel ManagementManufacturers have many valid reasons to change channels in an updated go-to-market strategy. We know, as it is a core part of our consulting practice. But it may be unnecessary to make expensive and disruptive changes to a channel design when the easy answer may be to simply stop committing one of the deadly sins I outline below.

As you read through these seven deadly sins of channel management, assess your own performance.

Ask the key stakeholders to privately rank the sins based on the company’s level of guilt.

Then meet and discuss any differences in views.

No. 1: Failing to have enough channel conflict

The first principle in channel design is that the manufacturer must sell to customers the way that they want to buy. If they want to buy through distribution, through the Internet or any other place, a manufacturer must incorporate those channels into an aligned go-to-market strategy. When you don’t have channel conflict, it’s a strong indicator of poor market coverage. Coverage definition: Do all the potential customers of your product see you in the way you wish to be seen?

The redneck definition of a channel: The manufacturer makes the hotdog while the channel provides the bun and the condiments – but remember the customer just wants lunch.

The channel is part of the customer experience of that brand. In other words, the brand goes beyond just the product itself. Sometimes a customer doesn’t need full service. Sometimes they just want something cheap because they don’t need service, so you can unbundle it and give the customer choices. It is a rare case today when an analytically developed channel design recommends a single channel to market.

The goal of channel management is to manage the conflict, and not avoid it. That may mean selling through Amazon in addition to distribution – but at slightly higher price – so that the customer who can’t get a part on a Sunday, can still order it on Amazon and get it in one day – maintaining that customer’s brand loyalty. That benefits the entire channel.

The best test for this is an evaluation from the senior sales executive with respect to two aspects of channel conflict:

  • Do we have enough channel conflict, which indicates effective market coverage?
  • Are we managing the channel conflict or is the conflict managing us as we react?

No. 2: Failing to have clear published rules of engagement to manage channel conflict

To manage channel conflict successfully, manufacturers must share guidelines that remove uncertainty with channel partners. Reducing uncertainty increases distributors’ willingness to invest in growing your line.

Clear rules of engagement avoid situations where a distributor might feel betrayed by a manufacturer suddenly going direct. Instead, a manufacturer should outline specific conditions under which they would take business direct; everybody should know in advance what those conditions are and what would trigger a change. Typical practices state five to eight factors for taking business direct, and any three in play make the decision.

The goal: giving distributors enough confidence to invest in growing a manufacturer’s line because they know they won’t have the rug yanked out from underneath them. When they have enough certainty around how a manufacturer will behave, trust is established and maintained. And please, never change those conditions retroactively.

This is easy to self-test because perceived or real betrayals are eternal in everyone’s minds. Because they are so memorable, take time to list the significant events you have inflicted on your distributors over the past three years. If there are no events that are remembered, then your guidelines are clear.

No. 3: Failing to let the field manage channel conflict

While headquarters needs to manage national relationships, they won’t be as effective at the local level. If fact, a worst practice is to change priorities or direction to the field, telling them to invest more effort with a location of a national distributor. Channel conflict must be managed in the field and all the channel partners need to see that their local contact makes powerful decisions. This enhances their market power. The reason is simple: The local rep is responsible for aligning and working with the best channel partners to maximize growth and share in their assigned geography or market.

If local reps have been ignoring locations of national distributors it is almost always because they are weak, whining and not in the local rep’s group of most desirable partners. Unless the product is a pure commodity, the rep can’t have every distributor location representing the product. National distributors bring significant value to the industry in the form of innovation. The national distributor often knows the location is underperforming as well and often asks suppliers to help improve performance. This is best ignored when the real issue is weak local management, and the distributor executive doesn’t welcome this feedback.

The right response for many of these situations is the VP thanks the distributor for the feedback and states that they will take corrective action (assuming a candid conversation was inappropriate); the VP calls the rep, shares the story, and clearly leaves any change in priorities up to the local rep.

To self-test this sin, ask the field sales team to rate the frequency of time their priorities are changed by corporate around local branches of national distributors on a high to low scale. Ask the same to the sales executives and compare the scores. There is often a large difference and the reasons should be discussed.

No. 4: Failing to have adequate personal relationship transparency that creates trust and lowers relationship friction

The ability to share information without the coloring of negotiation helps ensure effective alignment around real growth opportunities on both sides. Loyalty goes both ways, and the resultant trust has significant economic value to both. It dramatically lowers resource misalignments and reduces surprises and even conflicts while supporting mutual investments in growth.

The fact is that there is not enough trust – and far too many games. As a result, a distributor or manufacturer often does things that don’t make sense because they’re trying to comply with rules that don’t make sense.

If there’s trust, a distributor can outright say: “You’re not competitive on that product, so I don’t want to put a lot of effort into it.” And a manufacturer can say: “We’re working on it, but where can we grow? Let’s both find something specific to invest in that helps both of us.”

It is critical that the manufacturer behave based on their position in the distributor’s overall resale volume. Any manufacturer that isn’t in the distributor’s top 20 suppliers in descending order should very rarely require annual planning from them. Their appropriate role is to be easy to do business with.

On the other hand, national distributors are investing millions of dollars in their innovation efforts and are much further ahead of most of their suppliers. A level of trust would open some potentially powerful doors to collaborate.

To test your trust level, consider the differences in tone and transparency between two discussions about the distributor, where the only difference is whether the distributor is present or not for the conversation. There is high trust if there is no difference.

No. 5: Failing to make small channel changes to keep up with market changes and instead letting them accumulate, resulting in misalignment

The cost to fix a major channel realignment is a lot larger than the costs of tackling the little hiccups as they go. We often act as a marriage counselor to get a manufacturer and their distributors to talk transparently with each other. It’s better than letting the issues build. If I have relationship issues with my wife, and ignore them, we both start to hate each other. The divorce is ugly; it would have been easier to speak truth to each other along the way. The same is true with channel partners.

So why isn’t there more trust?  The reasons are simple. Start with the manufacturer’s sales force. They have one mission: Make the number. This runs deep in their DNA. Now some market change occurs that requires a small policy or practice change. Every one of these changes threatens one or more existing channel partners who could potentially retaliate. If retaliation can be avoided the probability of making the number is higher. Kicking the can down the road is fine at the time, but when these accumulate the manufacturer loses market power with the channel and end-user customers.

One of the early signs that this is a deadly-sin issue is the sales force increasing the frequency of their complaints about channel partners doing bad things.

No. 6: Failing to shift some channel compensation from scale and takeaway power to the actual value a distributor provides

Think of the margin that a distributor earns as compensation paid by the manufacturer to provide services to the manufacturer’s customer. Most distributors have customer repurchase rates well over 80%. Since customers are buying the same products again, they do not require active selling. On this repurchase rate volume distributors are simply providing a transaction management service to an existing customer base – or market-serving, rather than market-making.

Manufacturers need to hang onto as much channel power as they can, because if they don’t and let power migrate through the distributors, the distributors are able to extract more and more price concessions. Unfortunately, many manufacturers make the mistake of discounting based on distributor takeaway power, which gives up all control of the brand to the channel partner – meaning, the bigger the distributor, the more suck-up behavior.

The result: You end up compensating distributors that are trying to commoditize your brands because a lot of business is channel-led versus brand-led. Brand-led means the customer is looking for the brand first and will find the best place to buy it. Channel-led means a customer is choosing the distributor or other channel first and will buy whatever brand that channel offers. That’s why private label works really well in channel-led business.

Much of the MROP market is channel-led, which means brands get commoditized. In many cases, the big distributors end up switching the customer out to their private label. This can often double or triple the margin earned by the distributor.

The most common cure for this deadly sin is the introduction of functional discounting.

No. 7: Failing to compensate market-making activity differently than market-serving activity

Manufacturers almost always undercompensate channel partners for market-making and overcompensate them for market-serving. If you measure overall growth of distributors, and don’t look into the drivers of that growth, this may be occurring.

For example, the growth provided by the large distributors is often driven by acquisitions, which is accurate from an accounting perspective, but often very wrong. In many cases the national acquired an existing distributor so the manufacturer lost that business, and their revenue was simply reported under the acquiror. It is often instructive to go back five years and restate growth rates when these losses are factored in.

Gross margin dollars are the means that manufacturers compensate distributors for provided services. Serving the established repeat customer base (market-serving) should be optimized to minimize the cost to serve, and maximize customer retention. As compensation is removed from this provided routine service, the money can be invested in some combination of expanding the customer base, expanding the share of wallet, displacing a competitor, capturing a new market segment or any other strategic objective.

Changing the flow of distributor compensation requires metrics and processes that must be designed and put in place before any implementation.

Remember that poor channel design or channel management is often the root cause of low revenue growth. At times it can place your sales team into a gun fight with a knife.

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Manufacturer Pandemic Channel Challenges: How to Deal with Special Requests from Distributors https://www.ircg.com/blog/channel-management/manufacturer-pandemic-channel-challenges-how-to-deal-with-special-requests-from-distributors/ Tue, 13 Oct 2020 02:35:45 +0000 https://www.ircg.com/manufacturer-pandemic-channel-challenges-how-to-deal-with-special-requests-from-distributors/ The pandemic has produced no shortage of articles telling you that the world has changed, and we should all prepare for the “new normal.” While the “new normal” will undoubtedly change many aspects of business, waiting for it does not address the problems and demands of today.

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Manufacturer Pandemic Channel Challenges How to Deal with Special Requests from DistributorsThe pandemic has produced no shortage of articles telling you that the world has changed, and we should all prepare for the “new normal.” While the “new normal” will undoubtedly change many aspects of business, waiting for it does not address the problems and demands of today. This is especially important for the relationship between manufacturers and distributors and the special requests that will come as a result of uncertain times over the next 24 months.

We put together a list of challenges associated with distributor special requests and best practices for addressing them. While every situation is different, these steps can help you navigate your own distributor/manufacturer relationships.

Big Picture

The economy will come back, and the drama will pass. Different markets will see different recovery rates. If you are serving the manufacturing industry, some are already in their recoveries and some will be forced to wait it out until early 2025. Why the large range? Simply put, it depends on what end-user markets their products serve and support. Those that sell to the hospitality, entertainment and recreation markets will have a long wait.

Action Step: Evaluate your distributors by the end-markets they serve to determine their time to any reasonable recovery. This will have an impact on how you will or will not support their requests. While all distributors serve a range of markets, the majority have a market focus or sweet spot. This only needs to be approximate for the decisions that will be made over the next 24 months.

The second key idea when thinking about the big picture is that the major growth driver over the next 24 months will not be the economy. This will follow the pattern we saw in the Great Recession where share shift became a much larger driver than core economic growth. Share gains between 2008 and 2011 were made up of acquisitions, incumbents exiting the market and customers changing suppliers. Often distributors changed their alignment with their strategic suppliers, as well. The whipsaw aftershocks of supply chain disruption have loosened and will continue to loosen what were stable trading relationships.

Action Step: Reevaluate your go-to-market strategy to ensure that you can react quickly to the opportunities created by the pandemic. Because things are moving much faster, speed is a weapon. At a minimum, build a list of distributor partners you may want to change or upgrade. Make sure that your list has a sober assessment of their survivability through the cycle. If the list is already built, your reaction time will be much quicker when an opportunity arises.

Receivables

Those manufacturers that continue to be myopically sales-driven will probably have one or two significant write-offs over the next 24 months. Remember that everyone is dealing with increases in their receivables, and for distributors it may be significant. Many manufacturers with distributors on Vendor Managed Inventory (VMI) platforms accidentally loaded up their channel partners in March and April. It created cash flow issues for the distributors and effectively shut down ordering as they bled the inventory in a dramatically weakened market.

Manufacturers will need to make some accommodation and provide support to their distributors. The way to answer whether you do this is to decide if you are playing a short game or a long game. Both are legitimate depending on your strategy.

If you are playing a short game, hold the line on terms and let the strong survive and the weak perish. The only risk in this, and it is probably a small one, is that you may lose a distributor you wish to retain because one of your competitors has decided to use receivables as a competitive weapon to upgrade their channel partners. The swap goes something like this: The competitor offers extremely attractive terms but requires a changeout of shelf placement and promotion with some kind of deal-breaker fee.

If you are playing a long game you are trying to perfect your set of distributor partners at the point of a market recovery, not today. You supply some relief to the distributors with strong balance sheets that are driving your growth. You should create policies and make decisions on who and how you will help, and who you won’t.

Remember that every company that will end up in bankruptcy is persuasive in the months before the end asking for extended terms and relief. Those that provide it will have to deal with write-offs.

Action Step: Use an early credit-risk monitoring service, knowing their limitations, and build a list of your distributors and segment them by survivability risk. Make sure that your sales force is involved and understands the consequences of failing to share emerging concerns early enough to avoid a write-off.

Price Concessions

In any recession assets are reduced in market value. When supply exceeds demand there is always a fair amount of frothy and knee-jerk discounting. Most of this happens in the early part of the downturn and then things settle again. This pattern will repeat in the economic aftermath of the pandemic.

If a firm has an unrealistic stretch goal and the sales reps are driven into a frenzy this discounting can easily exceed what may actually be required by the market. When a customer is getting quotes from multiple distributors, it is their responsibility to their employer to push for a lower price. In the distribution industry there is an old saying that the dumbest competitor in the market controls pricing.

Even if you have solid market-based analytics to determine pricing, you will still be subjected to brinksmanship as large orders are shopped around. An intelligent business must sometimes say no to an order.

Action Step: Examine your sales activity monthly. Make sure that you are losing an occasional order on price. Expect it and manage it, because the fear of losing an order in a weak market drives most discounting when salespeople are involved in setting prices. This emotional fear causes more discounting than what is required by the market. If you are not losing the occasional order, your margins are too low. It is a cosmic law.

Remember that the desperate folks who took business from you on the basis of price will likely fail to maintain the same service levels and fill rates. As a result, some of that business will come back.

Acquisitions

As a starting point in any major disruption, be sure that every potential acquisition target is reminded of your interest. Don’t pay 2019 multiples and realize that probable purchase prices are likely to decline over the next year, independent of uninvested private equity capital sitting on the sidelines. Playing out an acquisition strategy in these times will be another blog, but there is a very specific issue around an unintended consequence now.

If you have open distribution this is not an issue. Open distribution simply means the more the merrier. If your go-to-market strategy relies on selective or single distribution then acquisitions create both a significant risk and also an opportunity. If you acquire a competitor or a firm that is complimentary, the probability is that they have their own distributor network that is coming along for the ride. You are challenged to merge and rationalize these two networks.

We have been supporting clients in this area for a long time and have observed the following:

  • The acquiror distributors survive much better than the acquiree distributors.
  • The rationalization process is normally driven by the senior sales executives in the acquiror firm. Their selection criteria are fuzzy or non-existent, so existing relationships and purchase volume carry the day.
  • Whether we are consulting or arbitrating in a termination contract dispute, we have found that the senior sales executive has a very hard time defining the criteria for choosing one over the other. The typical approach is to tell the two distributors to fight it out and the best will survive. This fails to look at the value each distributor brings to the supplier. Some are very good at market serving while others are good at market making. Every manufacturer should value both, and this could be a selection criterion.

Action Step: Create a few simple distributor criteria that are aligned with your strategy. Then get every sales representative to present their ideal lineup of the best distributors for their area of responsibility, including their rationale. This helps define a true North when faced with the time pressure of integration.

Most importantly, treat distributor integration as a core element of any acquisition so it is done on the front end and not left to the last minute and dumped in the lap of the sales team. The right way is to be public with both sets of distributors about the timeline and process on integration. The worst thing to say is that nothing will change.

If you are faced with consolidating two distributor networks, it is a perfect time to seriously consider adding Amazon or another digital channel.

Where to Go Next

None of the situations above are bad in and of themselves. Instead, they present opportunities for manufacturers willing to take advantage of them. For example, if you have been discussing a channel realignment or go-to-market strategy change. Now may be a perfect opportunity as forces outside of your control continue to have their impacts.

Remember, in uncertain times, speed matters. The more you can prepare now for special requests, the better you will be at reacting with speed and decisiveness. The firms that will win will often be nothing more than the first movers, willing to take a risk.

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Price Increases & Cost Reductions: A Recipe for Channel Conflict – or Harmony? https://www.ircg.com/blog/channel-management/price-increases-cost-reductions-a-recipe-for-channel-conflict-or-harmony/ Fri, 19 Jun 2020 23:51:15 +0000 https://www.ircg.com/price-increases-cost-reductions-a-recipe-for-channel-conflict-or-harmony/ As we face ongoing shocks to the economy, everybody in the value chain will face the same challenges: Some price increases won’t stick, some cost reductions won’t be enough, and businesses that are undercapitalized will continue to fail.

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Price Increases and Cost Reductions A Recipe for Channel Conflict or HarmonyAs we face ongoing shocks to the economy, everybody in the value chain will face the same challenges: Some price increases won’t stick, some cost reductions won’t be enough, and businesses that are undercapitalized will continue to fail. Many will negotiate extended terms before they file. And as customers try to navigate their own challenges, many will change distributors and even brands.

Those companies that make it through this pandemic will have earned or changed their reputation, for better or worse, based on their actions. Price increases and cost reductions were one of the earliest and most persistent actions taken in the channel.

Those firms driven by strategy rather than short-term earnings considered the long run when making price and cost decisions.

Price Increases

Whether they like them or not, distributors and customers recognize the need for price increases when their upstream partner needs them for survival.

With channel harmony in mind, here’s how a supplier acting strategically implements price increases:

  • A good price increase announcement is genuine and presents a truthful case.
  • It isn’t done too early as a “just-in-case my profit is affected,” because if you do that, you are telling channel partners that, “It is all about me and you guys figure it out on your own.”
  • No one knows if extra costs due to productivity declines during social distancing will be here long term, so smart distributors and manufacturers will acknowledge the uncertainty and the goal of rescinding related price increases when possible, similar to the fuel delivery surcharges in the 70s.
  • Alternatives are provided that could get rid of the need for an increase. For example, put boundaries on minimum order size, order frequency, direct digital links or other factors that reduce the need for the increase.
  • An advance notice period must allow for delivery shipments that are backordered.

Cost Reductions

A distributor has three options when faced with a price increase from a manufacturer: Pass it along, absorb it by cutting costs, or absorb it and dilute profit. It is harder for distributors to pass on price increases than it is to do a cost reduction. In a distributor’s business model, a high percentage of their cost structure is variable. A manufacturer has few variable costs, and because so much is fixed, they will find it relatively easier to do a price increase.

A distributor that is stressed will first go to their strategic suppliers and ask for some support. They will simultaneously try to develop a plan to set some customer price increases. Most will want to wait until they believe that the increase will stick – along with their key customers. If they can’t wiggle out, then a cost reduction is next.

A cost reduction in the form of a layoff or furlough means that fewer people are doing the same work, so service levels will most likely decline. Because of mistakes and responsibility transfers, a cost reduction is often also a cost transfer to potentially both the upstream and downstream channel partners. These are often material as many executives overestimate the amount of available discretionary energy in their workforce.

  • When pay cuts or furloughs are used, does the team understand the criteria for when they go back to normal? Employee uncertainty reduces productivity and often the best people are the ones who leave.
  • Does the organization have confidence in their leadership and their new normal sales plan? Many distributors are well down the road on their own sales transformation efforts.
  • A manufacturer with a realistic plan will know which distributors to support.

How does this all fit together?

Any disruption of the scale we are seeing with this pandemic lowers switching costs between channel partners. With a bit of humility, companies can gain share from those that are overconfident, complacent or arrogant.

  • Decide whether your firm is playing a short game or a long game.
  • Be genuine and consistent in your behaviors and how you choose to make exceptions.
  • Decide what you want your upstream and downstream channel partners to say about you when you are not around. Behave to make it so.

A combination of trust and honesty adds significant economic value to the channel. For example, a customer that can’t handle the price increase will come back to the distributor with the problem and potentially pitch some other ways to stay together.

This same trust and honesty can turn cost reductions into channel partner discussions on how to work together to lower the cost to serve, the cost to acquire and the cost to use. What if these collaborations became part of the new normal?

In simple terms, this starts at the top with the right values. Time will tell, as this is going to be a bumpy ride.

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Manufacturers: What’s Happened to Your Market Access? https://www.ircg.com/blog/business-strategy/manufacturers-what-s-happened-to-your-market-access/ Thu, 17 Oct 2019 22:43:56 +0000 https://www.ircg.com/manufacturers-what-s-happened-to-your-market-access/ We know market access starts with coverage, but do all your potential customers see you how you want to be seen?

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Manufacturers Whats Happened to Your Market AccessMost industrial manufacturers go to market through traditional distributors to serve the MRO market. Some customers are sold directly, often large end-users or OEMs. Recently, many have also become involved with an web-direct channel.

We know market access starts with coverage, but do all your potential customers see you how you want to be seen?

Over the past several years, B2B customers have been changing how and where they source products. A short list of factors driving this change includes:

  • Buyer demographics that are trending younger
  • Decreased value placed on personal relationships
  • Increased price transparency due to technology

The growing transparency in pricing has also uncovered many cross subsidies that, when exposed, break. This results in reliable integrated supply chains that commoditize product differences and increase competitive intensity with new competitors entering the market.

These forces have placed pressure on every channel partner in the industrial product value chain. As an analogy, consider that the manufacturer makes the hot dog, and the channel provides the bun and condiments. All the customer wants is lunch and their mantra is, “If you are just going to sell me a product, do it for less.” They aren’t concerned with how you deliver the hot dog; they just want it fresh, hot and fairly priced. 

It doesn’t end there. Distributors are just as affected as the manufacturers they represent.

To deal with rising competitive pressures, falling margins and rising costs, many distributors are turning to private label.

The large distributors are leveraging their takeaway power with suppliers. And we’re seeing a rash of merger and acquisition activity. The large players in the market have shifted their growth focus to acquisitions to supplant their GDP-based organic growth rate. The acquirors stop investing to sell more products and instead divert resources to acquisitions. Those being acquired also have stopped investing to grow, pulling cash out to put in their personal estates before a sale.

Through all of this, most have 25% of their gross-margin dollars invested in customer-facing selling expenses. At the same time, they try to get into the service business to make their customers sticky, which as we know is a tricky proposition.

Adding a bit more complexity, Amazon Business has achieved multiple billions in B2B revenue in a few short years. It appears that they are just getting started, but they have their own growing pains to handle such as fake five-star reviews and the proliferation of third-party resellers. Given industry fragmentation, most distributors haven’t noticed as Amazon simply reduced the industry growth rates by a small percentage. The industrial distribution market’s revenue alone in 2018 was $465.4 billion and grew at 13.6% from 2017, according to 2019 MDM Economic Benchmarks for Wholesale Distribution.

Lessons in disruption from Walmart

This has left many manufacturers behind the power curve, and many remain hostage to their own history. Success is not about doing the same things better, rather it is about doing new things. There are lessons from recent history for those who are playing the game to win for their shareholders. Back in the 90s, Walmart told suppliers that they wouldn’t accept paying manufacturers’ rep commissions on their purchases. They wanted those dollars as they had automated all replenishment activity. At the time, many thought it would be the end of the independent rep business model. (The manufacturer rep model is entering a robust growth phase after some major disruption, but that is a different blog topic.) The net result was that it created a two-tier commission structure, a base rate for servicing existing purchasers (zero at Walmart) and a higher rate for creating a new customer. The channel terms used to describe these are market-serving and market-making.

Why talk about Walmart in a B2B blog? Manufacturers had a tried-and-true tool that worked for years, but it doesn’t work anymore. Manufacturers provide discounts on the front end or back end for distributors to buy faster. The idea is that the manufacturer could buy mindshare with the distributors through price discounts and it would result in revenue growth, and hopefully share growth, as well. Distributors would do their best to sell this linkage to their suppliers and many would make large end-of-year purchases to get the rebates offered. Sophisticated distributors have ERP tools that let them maximize rebate income with strategic share shift.

Distributors provide coverage and, most importantly, they uncover critical selling events (CSEs) when a competitor fails to meet a customer requirement. There are over 200,000 sales reps working for industrial distributors in the U.S., and no manufacturer can provide the same market coverage with their own sales force. Distributor sales reps take these CSEs to their trusted supplier partner, so the channel needs to be nurtured and managed. (What they don’t do is actively sell to displace a happy customer’s current incumbent suppliers. It was and continues to be a fantasy. It doesn’t make business sense in distributor’s go-to-market models.)

The problem: Extra discounts no longer move the growth needle for manufacturers.

So can some of the discounts be pulled back?

The answer is, “It depends.” There is always the implied threat of competitive displacement and retaliation, but for many the answer is “Yes, they can.” To understand the actual risk and make an informed decision, manufacturers must understand the economic benefit to the distributor. For many, it is much harder to retaliate than to threaten. Imagine what happens when a customer calls to order a product from a supplier that the distributor is trying to hurt.

Do they take the order to keep the customer happy, or do they run a small risk to substitute another brand? Does the inside or field sales rep care what the corporate product manager wants them to do? It’s critical to also recognize that there is a labor cost in lowered sales productivity. The point is that the risk can be assessed and used to make the best decision possible.

The bigger question is not about taking discounts back, but rather where to invest available funds to generate growth. This answer is attainable, but it takes letting go of outdated beliefs and requires information gathering. There are three components of market access that include:

  1. Analyze the market to identify where the real growth opportunities lie. This often involves some behavioral segmentation based on customer buying behavior and value proposition design.
  2. Identify the firm’s selling costs including: selling, rebates, distributor gross margins, advertising, promotions, trade shows, etc. As consultants, when we do this for clients they are always surprised at the scale of their investment. Once the list is complete, identify areas where the investment is wasted activity and build a plan to reduce or eliminate them.
  3. Reallocate the recovered costs in the second step to areas of growth opportunity.

As a note, the distributor gross margin is compensation provided by the manufacturer for performing services to the manufacturer’s customer. This is easy to describe, but hard to do as it requires a fair amount of analysis in areas that are new to many industrial manufacturers. The net result, however, is higher growth with no increase in costs.

The common outputs for many that are going through this analytical process include:

  • Compensating distributors for services provided rather than takeaway power
  • Getting out of the intensive transaction pricing activity and many of the routine special pricing authorizations
  • Redeploying the manufacturer’s sales force to market making, while still placing much of the business through aligned distributors to save the transaction costs
  • Taking a large position in Amazon and other Internet resellers, but placing the volume through aligned distributors at a price point that protects the existing channel partners
  • Getting the manufacturer’s supply chain staff to work with their counterparts at the distributor to reduce the total working capital in the channel

These ideas are just a start. The bottom line is that it is time to do something different. But it will take data to determine the right steps to take. Just like we put off cleaning out the garage because it isn’t quite enjoyable, this effort is dependent on serious and professional analytics. The answers are relatively easy once the analytical work is complete. Skipping this step, or doing an amateur job of it, significantly increases the risks of change.

Welcome to the new age of channel design. Perhaps those that figure it out first will gain share from those that don’t.

The post Manufacturers: What’s Happened to Your Market Access? appeared first on Indian River Consulting Group.

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Your Channel Partners Are Talking … Are You Listening? https://www.ircg.com/blog/channel-management/your-channel-partners-are-talking-are-you-listening/ Fri, 24 May 2019 02:56:52 +0000 https://www.ircg.com/your-channel-partners-are-talking-are-you-listening/ Just as with any other relationship, when distributors and manufacturers break up, poor communication is often to blame.

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naw logo blogsJust as with any other relationship, when distributors and manufacturers break up, poor communication is often to blame. In research, we learned that long before the break up, the channel parties were sending signals that something was wrong. But either those signals were misinterpreted, or they were just ignored all together.

All relationships have conflict. But most of that can be resolved by talking openly – and by listening.

Read more in my latest guest post for the National Association of Wholesaler-Distributors: Your Channel Partners Are Talking. Are You Listening?

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Are Scorecards Upping Your Game, or Sidelining Your Supplier Relationships? https://www.ircg.com/blog/channel-management/are-scorecards-upping-your-game-or-sidelining-your-supplier-relationships/ Thu, 21 Feb 2019 06:47:18 +0000 https://www.ircg.com/are-scorecards-upping-your-game-or-sidelining-your-supplier-relationships/ Supplier scorecards can be a highly useful tool that directly drive profitability. Or they can spark friction and permanently fray relationships between distributors and suppliers.

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Scorecards Upping Your Game IRCG Blog

Unfortunately, many distributors take the confrontational approach, hammering a supplier on shortcomings rather than congratulating them on successes.

Ultimately, that can result in manufacturers satisfying only the base requirements for doing business, because they have no incentive to do more. And it fails to accomplish scorecards’ original purpose: driving sales growth, increasing efficiencies and improving processes.

In a recent MDM article, Indian River Consulting Group Associate Consultant Justin Stewart outlines strategies for scorecard success, including:

  • Focus on long-term, rather than short-term results and performance.
  • Identify metrics that are key business drivers.
  • Review your approach to scorecard reviews.
  • Emphasize trends and progress toward sales goals rather than occasional missed deadlines.

Read the full article on MDM now: Are Your Scorecards Putting Suppliers on the Defensive?

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Why Old-School Distributor-Manufacturer Meetings are a Waste of Time https://www.ircg.com/blog/channel-management/why-old-school-distributor-manufacturer-meetings-are-a-waste-of-time/ Wed, 04 Oct 2017 18:42:03 +0000 https://www.ircg.com/why-old-school-distributor-manufacturer-meetings-are-a-waste-of-time/ If you’re a distributor, you’re going to disagree with your suppliers from time to time. If you’re starting to deploy your sales force more strategically (See: 3 Reasons the Field Sales Role Must Change), these disagreements are even more likely to come up. If you’re reducing your cost to serve by moving some customers to an inside sales model, for example, suppliers with mandates on outside sales representation may take issue.

Regardless of the reason for disagreement, the No. 1 tool at your disposal is to change the dynamic of the distributor-manufacturer meeting.

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If you’re a distributor, you’re going to disagree with your suppliers from time to time. If you’re starting to deploy your sales force more strategically (See: 3 Reasons the Field Sales Role Must Change), these disagreements are even more likely to come up. If you’re reducing your cost to serve by moving some customers to an inside sales model, for example, suppliers with mandates on outside sales representation may take issue.

Regardless of the reason for disagreement, the No. 1 tool at your disposal is to change the dynamic of the distributor-manufacturer meeting.

This is how most of the worst joint-planning meetings go: The independent rep or sales district manager comes in with a PowerPoint presentation that gives you updates on upcoming products and other things, and tells you that you’re missing your numbers. And the distributor brings nothing to the table other than to say, “if you would just do X, Y and Z, everything would be great.”

That’s the old-school way of doing things, and it’s just wasting everybody’s time. What should happen instead is that when a manufacturer comes in for a joint meeting, the distributor gives a presentation to the manufacturer telling them what’s happening in their markets, including market economics and updates on major accounts. Ideally, this distributor knows five to 10 times more about the market than the supplier does. If they do, when the vendor rep comes out for a visit, they can give them a bunch of information and a PowerPoint presentation with data that the vendor can take back to their boss to effectively negotiate on the distributor’s behalf.

If you want a true channel partnership, you need to carry your own weight in the relationship. I talked more about this during my recent Modern Distribution Management webcast, The Changing Role of Field Sales, available on-demand in the MDM events archive.

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