How manufacturers can evaluate and optimize their distributor networks
Manufacturers are always struggling with whether or not they have the right distribution plan. They want to understand if they have the right number of distributors and if the distributors that they have can meet their needs. At Indian River Consulting Group we recommend a four-step process to help manufacturers properly evaluate and optimize their distributor network.
This optimization plan addresses channel strategy for mature vs. growing brands and coverage options from national vs. regional distributors, among other issues. The plan’s scorecard provides a roadmap for future supplier/distributor decisions.
We will talk more about the four-step process and scorecard later. First, let’s look at how manufacturers got here.
Manufacturer A used to have six distributors in Chicago and now they have 15 . . . how in the world did that happen? Depending on the industry, one of the main culprits of coverage creep is consolidation. Regional and national distributors get larger by buying independent locations. Some of these locations were authorized distributors for a manufacturer’s products and some were not. As these regional and national distributors grow, more power shifts from the manufacturer to the distributor. As the distributors get more powerful, it becomes more and more difficult to say no when they add a previously unauthorized location to the distribution network.
Another cause of coverage creep is “pull through” by customers. A manufacturer has a customer who is finally interested in using its product, but guess what? Its favorite distributor is not an authorized reseller. The manufacturer wants the business, and authorizes a new distributor. That may be the only customer the distributor ever sells the product to, but now the manufacturer has a new customer/distributor to deal with.
Coverage creep also comes from the annual push for increased sales. Without clear direction, some salespeople will try to find additional sales by adding more distributors. Each one may not account for a lot of sales, but collectively they may get the sales rep close to quota. They also add to administrative costs. Everyone knows this strategy has limits and may backfire.
If coverage creep adds unwanted or unneeded distributors, what can manufacturers do about it, and should they care? Yes, manufacturers absolutely should care. Assuming the manufacturer’s products hold at least a primary or secondary position in a distributor’s business, manufacturers who are chasing sales end up with essentially open distribution where almost anyone can sell their product. What they really need is a selective distribution strategy, which was the original plan.
To assess your own firm’s situation, take this short quiz:
Question 1: Are your products at least secondary in a distributor’s business?
There is a rule of thumb about coverage and how important your products are to a distributor. The more important your products are to the distributor in the overall scheme of things, the fewer distributors you will need, because the ones you have will be focused on selling your products. Conversely, the less important or more easily duplicated the product is, the more distributors you will need to achieve your sales goals.
Question 2: Are you in a growing market?
If you are fortunate enough to be in a growing market, you should have selective distribution with authorized locations. Growing markets typically require distributor investment to support the product and customers. With a growing brand, you want to make sure your distributors can make money by investing in and selling your brand.
Question 3: Do you have a well-established brand?
If your brand is well established and has value in the marketplace, you have the right to be selective in your distributor network. Well-established brands open doors for distributors and their salespeople, and for other products. You can also hitchhike less popular brands in your own portfolio if you are providing select distributors with well-known brands.
Question 4: Are your brands profitable?
If your brands are not price competitive and your distributors are always looking for better pricing, you are entering the dangerous territory of commoditization. Your distributors will only negotiate so long before moving to more popular, more profitable, and better-established brands.
Question 5: Do your salespeople tell you that you have too many distributors?
If the salespeople are telling you that you have too many distributors, you probably do, because they will do anything to protect sales volume. Properly trained and incentivized, no one is better able to answer this question than those sales reps in the field. They are trying to manage sales and territory coverage every day. Additionally, with the proper tools and guidance, the sales reps can help you find the right distributors.
Now that you have taken the quiz, do you care if you have too many distributors? After looking at your answers and based on your product offerings, should you care? If you do, the following is an optimization plan that we have seen successfully implemented to help organizations like yours efficiently manage their distributor network.
Indian River Consulting Group Distribution Optimization Plan
Before you start down this path, you have to believe the following:
- Senior management must manage the optimization plan. A taskforce can help with the plan and field salespeople who know the distributors should provide input, but this is a strategic initiative for which senior management must take the lead role. Additionally, field salespeople may let personal relationships hinder objectivity.
- Field salespeople are responsible for growing market share in their territory and should be able to manage against market share goals.
- Field salespeople have the authority to implement optimization plans without being undermined by management.
- Field salespeople and customer service reps receive education and training on how to implement the optimization process.
If the optimization process is in alignment, it provides a win for the sales rep, the distributor and the company.
If you are a believer, you are halfway there. The rest is about setting direction, providing guidelines and supporting your sales organization as they go through this process.
Step 1 – Get Input and Support
It is critical to get input and support from several functional areas in your organization. A good way to accomplish this is to put together an optimization taskforce comprised predominantly of sales and customer service people. The taskforce should also include people from marketing and marketing communications, finance, IT and legal.
The marketing department will support the optimization efforts in part by providing appropriate programs that will pull sales through the existing distributors rather than letting them go to the “terminated” distributors. Marketing can also help communicate the optimization project to the internal and external world. Finance should support the effort with financial data for each territory as well as credit history for each distributor.
IT will need to support the field sales force with critical information needed from sales and finance. It is important, no, make that critical, that the legal department approves the criteria for terminating distributors. Administratively, the legal department will determine your responsibility to terminated distributors and see that the proper paperwork is forwarded to all terminated distributors. All departments will have the responsibility to act as communication agents and champions of the optimization process efforts internally.
Use the taskforce to define the plan, gather pertinent data in support of the plan and put together a timeline of tasks to be completed and by whom. As outlined above, each of the taskforce members will have responsibility for some tasks.
Step 2 – Decide Whom to Optimize
Optimization should take at least two rounds of culling in order to select the key distributors. Selecting distributors in the first round can be pretty easy because your sales force probably has the list of the key distributors in their heads, if not on paper. What you are looking for in the first round is the low-hanging fruit, the distributors who act more like brokers or agents of your product and provide very little value in the selling process other than product availability and price. This is a good place to start to develop optimization criteria. For example, an optimization taskforce we worked with recently decided that if an existing distributor failed to meet any of the following criteria, it was eligible to be rationalized in the first round (remember, it’s still senior management’s decision with field sales reps’ input):
- The financial strength to support, grow and invest
- A succession plan in place to assure continuity
- The necessary physical facilities/equipment to support their customer base
- Integrity in all dealings
- A qualified and adequate sales force for the product line
- The right amount of inventory
- A location which is of strategic importance
In this example, because of the criteria, the manufacturer got a much larger list of potential distributors to be rationalized than they expected. This helped it get a good start on a final number of distributors that made sense for its products. Remember, the optimization/rationalization process is as much about getting the right distributors as it is about terminating the wrong distributors.
After thoroughly educating and training each and every member of the sales force and customer service organization about the plan and the criteria, prepare a termination letter with the blessing of your legal department. These letters should be sent from the corporate legal department and should be sent certified. There is nothing more embarrassing than having a rationalized distributor not receive this letter, and hear about the termination from an outside source. This also could prove legally challenging. Because franchise and distributor agreement laws differ from state to state, your legal department may find that you need different termination letters for distributors in different states.
During this step, the taskforce will also have to devise a list of items that will come up when the salespeople meet with rationalized distributors. Here is a quick checklist of some of the items on the list:
- What do we do about orders in the pipeline?
- What do we do about existing inventory?
- What about credits or warranty work due customers?
- What about A/R owed by the distributor to us?
- What will be our message when the distributor asks, “Why did you pull the line from us?”
- What will be our message when the distributor asks, “Is there anything we can do to get the line back?”
There may well be hundreds of questions that need to be asked, answered and communicated to everyone in the organization who touches the optimization process. A well scripted set of answers is critical because your message has to be consistent.
A word about national and regional distributor organizations:
These national and regional distributor organizations may be the companies that caused some of your over-distribution issues to begin with, and some of them probably sell a lot of your product. You have to determine what will happen with their locations that do not meet the initial criteria. Even though they fall into the same bucket, are they treated any differently from independents that do not support your efforts to effectively manage your territory? That depends on a couple of things. The criteria in Step 2 and Step 3 should apply to all locations; you cannot abdicate your authority and responsibility to a channel member to put together the best coverage of your product. That said, the senior management of these national organizations might have power to get underperforming distributor locations up to speed. Conversely, not getting everyone up to speed will affect your credibility with other distributors. If you bend the rules, beware of false promises and have a specific plan to address issues. Remember, national and regional distributors will always say, “give to all of my locations and we will support.” You have to be willing to have some difficult conversations with larger distributor organizations in order for an optimization plan to have any credibility and any chance of success.
Step 3 – Tighten the Criteria
The first set of criteria was subjective, a bit more art than science, and should have resulted in eliminating the obvious candidates. If you do not do anything else, you will be ahead of the game. However, the next step refines the process to a combination of art and science. The science comes from data; the art comes from how the sales force uses the data to work with the distributor.
Continuing with our previous example, the taskforce devised the following performance measures, each with a different weight:
- End of year sales (from finance) Highest weight
- Profitability of distributor (from finance) Next highest weight
- Number of certified customers supported (from sales rep) Next highest
- Products inventoried (from sales rep) Second to lowest
- Exclusivity/brands carried Index (from sales rep) Lowest weight
Each distributor receives a numeric value for each category. For example, the profitability could range from -2% to +10%. The value is then multiplied by the assigned weight (which could, for example, range from 1 to 5) to determine a numerical score. You compile all of the values on a spreadsheet and then rank the distributors in a territory based on the values. The distributor with the highest total value ranks No. 1, etc. The result is a scorecard ranking of your distributors.
Here is a possible scenario: you have eliminated several distributor locations that did not meet the “must have” criteria in the first step. Those candidates were obvious, but you still have too many distributors in a large trading area and they all meet the “must have” criteria. What criteria do you use to make the next cut? What facts do you need to help with the decision? This is one of the values of the scorecard.
The scorecard will not tell you how many, but it will give you a much more objective view of how your existing distributors stack up against each other. For example, if you have six distributors in a large trading area, and your knowledge of the territory says five is all you really need, you need to objectively decide which one will be eliminated. After entering all the data in the Scorecard for your territory (or trading area), you will have ranked the distributors accurately from most desirable to least desirable. The basis for the ranking is the values you have determined to be important. You will know who ranks sixth and thus who would be the most likely candidate for termination.
Step 4 – Use the Scorecard to Manage Existing Distributors
Once you have optimized the number of distributors in each territory, then the real value of the scorecard becomes even more evident. It can help your field salespeople manage existing relationships more professionally. You have decided what values you are looking for from distributors (in the previous example it was sales, profit, succession plans, customer coverage, inventory/customer service and exclusivity/commitment). Your performance values are the ones that you want to maintain and monitor. These are the areas that you want to manage in the distributor relationship. Now you have a quantitative way to do that. Your field salespeople can use the scorecard with their distributors on a regular basis to monitor progress and constantly reinforce to your distributor partners (and to your sales force) what you expect from distributor partners.
Followed carefully, this optimization plan will help manufacturers clean up their distributor network and enhance future supplier/distributor relationships. In addition, utilizing this plan will help surviving distributors succeed with your products by:
- Providing a focused scorecard outlining responsibilities and expectations
- Allowing distributors to profitably sell your products
- Providing a roadmap for future supplier/distributor decisions