George F. Brown, Jr. and Atlee Valentine Pope discuss issues that can arise in manufacturer-distributor relationships, and how best to tackle them to achieve CoDestiny success stories.
A recent consulting project involved a significant relationship between a manufacturer and a distributor that had shown significant signs of deterioration. Both firms were important to the other, and their relationship included numerous success stories over several decades. But, as one executive in the distributor organization stated: “Our recent interactions are filled with tension. I honestly no longer believe we want to be in the same room with one another. It’s just unpleasant.”
A different executive from the distributor organization defined his principal concerns as falling in two categories: “The biggest issue is poaching customers. We’ve had two large customers that were sweet-talked into buying directly from the manufacturer. And how did they do it? Price. They gave them a price that was lower than what we pay them. Not just lower than our price to the customer, lower than our cost from the manufacturer. Those are the issues – poaching and pricing.”
The manufacturer’s executives, unfortunately, also identified problems that were adversely impacting the relationship. One executive from the manufacturer provided the following comments: “First, we’ve always known that this distributor was going to have a catalog including other brands in our category. But now they have their own private label, and they are on a path to overlapping most of our SKUs with this private label. Second has been a deterioration in services. They are our largest distributor and the market’s perception of us is influenced by how well they do as well as how well we do. They don’t recognize this and sometimes even blame us for a problem when we had nothing to do with it.”
A different executive from the manufacturer organization focused on what she believed was the core problem: “We aren’t making much money through this relationship. The economy of the past few years has caused some real problems in several of our key markets, and it’s been a tough time all around. But what they seem to want is more price concessions from us, more co-op dollars, and for us to hold more inventory. Never once have they come to us to discuss how we can get margins back to a decent level.”
We firmly believe that manufacturers and distributors can sustain positive CoDestiny relationships that reward the shareholders of both companies. Normal everyday tensions won’t go away, but they should never become the defining element of the relationship. For manufacturers that sell through distributors, we offer three important recommendations as to how to move these relationships in the direction that will eventually yield “CoDestiny success stories”.
Relationships must make business sense
Never forget that these are business relationships. Unless they make business sense to both partners, they are doomed to failure. Therefore, focus from the start on how to create and capture value – for both parties – in the relationship. Think hard about the three routes to value creation – increasing volume, realizing a better price point, and taking costs out of the system. Manufacturers and distributors must regularly discuss what they can do that will achieve one or more of these contributions.
Two of the routes to value creation – increasing volume and realizing a better price point – have to be addressed by the manufacturer and distributor as a “team”, as success depends on whether they can identify a way to win with more end customers and against competing “teams”. Are there new customer segments that can be reached? Are there ways of serving existing customers in different purchase settings or motivating different uses of the products? Is there a way to raise the bar in terms of services to win customers over from the competition? Can they motivate customers to move up the “good-better-best” spectrum?
The remaining option for creating value, taking costs out, has to be looked at from a systems perspective that goes far beyond what each of the firms can do on its own. Over and over, we’ve seen examples where the possible savings from creative approaches have dwarfed any gains that could have been achieved by even the most aggressive price negotiator. Manufacturers and distributors have to map the costs associated with their relationship and the cost to serve in their markets, and figure out where they can increase efficiency and take the savings to their bottom lines.
Manage the relationship
Second, be attentive to the factors that drive success in all business relationships – fundamentals like trust, knowledge, familiarity, and energy. Recognize that strong implementation skills are important – most relationship “horror stories” are the product of poor implementation via quality problems, late or missed deliveries, unresponsive customer support systems, and other such shortfalls. Both parties to the relationship need to bring innovative ideas about how to become successful, focusing here on business systems, sales processes, and information technology in the areas that connect the two firms.
Managing conflict, and making sure that “normal everyday tension” doesn’t escalate, is part of the relationship management process. At the top of the list of conflict themes is margin management. If both partners don’t find the relationship to be a profitable one, the focus immediately shifts to fighting over margin between the two organizations. Sharing the accountability for mutual profitability is the key priority in building these relationships.
Unhealthy relationships are often characterized by distrust about end customers. As the example provided here illustrates, the channel organization typically fears that the manufacturer will “cut them out by going direct”, especially as an end customer begins to buy more and more. And the manufacturer fears that the channel partner will try to “substitute another product or even their private label brand”. We believe that the way to ensure stability in terms of end customer planning involves explicit discussion and never allowing end customer ownership become the elephant in the room that no one is willing to mention.
A final important element of relationship management returns to the topic of implementation. Best-in-class relationships have a dashboard through which they monitor how well the organizations do, as a team, in meeting the key needs of customers for quality, delivery, service responsiveness, and other metrics. They use that dashboard to solve problems and ensure that they are viewed by end customers as reliable and predictably on top of the challenge at all times. Their perspective is focused on the end customer, not on who’s at fault, and their approach to problem solving is getting the job done, not avoiding responsibility because it’s the other party’s fault.
Make service delivery a strength of the relationship
Success with end customers requires a focus on the services that are important to them. In many instances, end customers value services from both the manufacturer and from the distributor. The manufacturer, for example, might provide technical services linked to the products they are supplying. The distributor on the other hand, might provide services involving the integration of products from multiple manufacturers that they represent. Successful relationships between manufacturers and distributors involve attention to both categories of services. The role each organization plays with respect to the end customer and the coordination of services to ensure that they are effectively and efficiently delivered must both be managed to avoid duplication, inefficiencies, or competition between the two organizations.
Manufacturers and distributors must work together to put into a place an explicit plan for how the two organizations will collaborate effectively in delivering services to the end customers. They must understand each organization’s roles and responsibilities, and how the services from the two organizations, in combination, will meet end customer needs and provide a superior experience relative to competing teams of other manufacturers and their channel partners.
Sometimes higher service costs are self-supporting, as a result of increased volume or better pricing. But sometimes service spending that makes sense must be financed within the relationship, and, in those instances, good decisions require a return to the point made earlier: manufacturer-distributor relationships (and service action plans) must make business sense.
Service action plans also offer great potential for innovations that the two firms can make. Among the major success stories we’ve observed recently are ones that involve developing new ‘e’ systems for actions that range from ordering to post-sale support that were applauded by end customers as contributions that made them better off and that took costs out of the system for the manufacturer and distributor at the same time. Similar success stories have been associated with new approaches to inventory and logistics and with life-cycle MRO support. Services can become a differentiator, and also a source of added profits for the manufacturer-distributor team when they incorporate new ways of addressing traditional customer needs.