Deteriorating relationships

DISCORD between manufacturers and distributors is draining industry profits, according to consultant Robert Nadeau. But opportunities exist for companies that resolve those conflicts and adapt to a changing market.

Speaking at the NTEA convention in Orlando, Nadeau talked about what he has learned from surveys of manufacturers and distributors in a variety of industries. His firm has been looking at the relationship between manufacturers and distributors for the past 15 years.

In 1996, the company decided to conduct research to identify and define factors that can turn the management of a sales distribution channel into a formal discipline.

“While you are beating one another mercilessly for nickels and dimes on the top line, you are bleeding dollars off the bottom line because of redundancies and inefficiencies,” Nadeau said.

In 1997, Nadeau's company sent out 10,000 surveys to manufacturers and distributors in every industry that had an SIC code. The company also got input from trade associations.

Based on the results of the survey, the major complaints manufacturers had regarding their distributors included:

  1. Lack of sales and marketing capabilities.

  2. Lack of inventory.

  3. Commitment to the relationship.

Nadeau said distributors also had their own grievances with the manufacturers they represent. The top complaints were:

  1. That the manufacturer sells direct.

  2. Poor territory management. This typically translates into the belief that the manufacturer has too many distributors in a territory. Furthermore, the distributor believes that the manufacturer has no specific policies or direction for the territory. Instead, decisions appear to the distributor to be made on the fly by the manufacturer's rep based on the sales numbers for the quarter.

  3. Poor communication. Nadeau said communication between manufacturers and distributors has dropped 20% since 1997, despite an explosion in e-mail and other technologies designed to make communication easier.

  4. Incomplete or late delivery, the result of poor communication, and having the inventory in the wrong place. “That's one reason why parcel-delivery and air-freight companies such as Federal Express have been growing at an annual rate of 30% or more since 1997,” Nadeau said. “No inventory is being stored near points of consumption. I would like to show you how to reduce that bill unless you like paying $100 per pound to fly stuff that you could put on a truck.”

Peak performance

Nadeau listed eight key ingredients for getting the most from a manufacturer-distributor relationship:

  • Clear understanding of industry conditions

  • Clearly defined goals and plans

  • Greater customer sensitivity

  • Defined roles and responsibilities

  • Required knowledge and skills

  • High-quality, two-way communications

  • High levels of commitment

  • High levels of cooperation.

“The train usually comes off the track with the first item,” Nadeau said. “You can't define goals and plans or anything else if you don't know what's going on.”

Nadeau said the truck body and equipment industry suffers from an exaggerated sense of uniqueness.

“You are not different,” Nadeau said. “Your industry is governed by the same dynamics and principles that govern the Mary Kay lady.”

My customer the distributor

Manufacturers commonly make the mistake of viewing their distributors as customers, Nadeau said.

“Distributors may like being viewed as customers of their manufacturers, but they aren't — they are channel intermediaries. There are customer/end-users in the marketplace, without which neither the manufacturer nor the distributor have a reason to exist.”

Most relationships between manufacturers and distributors lack direction and accountability. This means that manufacturers and distributors do not know why they are in business together.

Poorly functioning relationships produce unnecessary channel costs, Nadeau said. Channel costs — the largest of which is inventory — get shifted back and forth between manufacturers and distributors.

The ultimate customer is the one person in the channel that will not accept unnecessary inventory. That is why just-in-time inventory has grown, Nadeau said.

Nothing changes

When it comes to the relationship between manufacturers and distributors, nothing changes, Nadeau said. If anything, relationships have deteriorated in recent years.

To validate his 1997 survey and to identify trends, Nadeau's company conducted a similar survey in 2001. More than 2,000 manufacturers and distributors participated. The result — the same concerns expressed in 1997 were the top concerns in 2001.

“No one fixes the roof when the sun is shining, and most of the time between 1997 and 2001, business was good,” Nadeau said. “No one was thinking about using the distribution channel as a source of a competitive advantage. Most people were looking at the distribution channel to keep decent numbers going.”

The top distributor complaint in 2001 was excess distribution — too many people selling truck bodies. Distributors also complained about the performance of the manufacturer's rep.

“Distributors are looking for support and guidance from their manufacturers' territory representatives, but the rep usually only provides the distributor with a browbeating and a threat to set someone up across the street if the distributor does not make his numbers,” Nadeau said.

Nadeau pointed out that the turnover rate among territory reps is huge and that the discontinuity is extremely costly. But if the manufacturer has a unified plan for the territory, the disruption can be minimal when a rep leaves and a new one takes his place.

Barriers to harmony

Nadeau's research uncovered four main barriers to improved working relationships:

  • Lack of commitment to the relationship
  • Lack of trust
  • Failure to understand changes in the marketplace
  • Insufficient investment in people and technology.

By far, the first two factors were cited most often — and they are related to one another. As Nadeau said, “If you don't trust the other person, how can you be committed to relationship?”

Nadeau defines commitment as “the extent to which each party displays a willingness to invest their resources (time, money, and people) toward the accomplishment of a common goal.

Trust, he says, is “the confidence that develops when the actions of both parties (manufacturer and distributor) support a common goal.”

When a common goal does not exist, neither does trust. “Without a common goal, the actions of the other party are always perceived as a threat,” Nadeau said. “Having a common goal is the thing that drives the train.”

Goals are not used to set quotas, Nadeau said. They define why the two parties are in business together, what they plan to accomplish, how decisions will be made, and how the performance of each party will be measured.

“Manufacturers don't truly understand the purpose of the relationship,” Nadeau said. “They think a distributor is just a place to put inventory. They don't understand that a distributor is a strategic asset that should be managed to establish a profitable and defensible competitive position. Sometimes fewer distributors who are committed to a common goal and working a plan are a better resource than a bunch of distributors who do not trust you.”

Making plans

Nadeau's company also quizzed these manufacturers and distributors about their plans.

“How do the manufacturer and distributor plan to differentiate themselves from their competitors in an industry where everyone looks the same?” Nadeau asked.

When asked if they have plans for accomplishing their goals, 85% of the manufacturers and 83% of the distributors said no.

Plans accomplish several things, according to Nadeau. Among them:

  • They define how the two parties will compete in the industry. Will you compete on price? Will you compete on quality?

  • They state how the two parties will meet the needs of their mutual customers. When manufacturers treat their distributors as customers, confusion results. “Never forget that the purpose of the channel is to capture and keep customers, not distributors,” Nadeau said.

Making changes

Nadeau pointed to several areas where manufacturers and distributors could make changes

  • Competitive strategy

  • Capabilities

  • The relationships between manufacturers and distributors

  • Customer relationships.

The channel of distribution is probably the easiest to change, Nadeau said. It is simply a matter of two parties sitting down and identifying ways to work together more effectively.

Instead of concentrating on gaining market share, manufacturers and distributors should focus on generating wealth. The objective should be to make as much profit as possible on every transaction, Nadeau said. Increasing volume is nice, but not mandatory.

Nadeau predicted that the companies in this industry that can be profitable in the future will get closest to the customers, mine the information they gather, and use that information to collectively make decisions.

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