Overcoming Roadblocks in Distribution

MANUFACTURERS and distributors need to work together to provide their customers with high-quality products in an efficient manner.

This was the message from Robert Nadeau, director of research at the Industrial Performance Group. Relationships between manufacturers and distributors were the focus of a seminar by Nadeau at the National Truck Equipment Association convention in Indianapolis, Indiana.

"In business, all the decisions are made at the top by the people who know the least about the market," Nadeau said. "Utlimately, the customer at the bottom says `nobody talked to me.'"

Manufacturers use distribution channels because to shift every cost and risk to someone else, he said. However, the primary function of any distribution channel should be to meet customers needs and expectations for product, service, and delivery in a manner that is profitable for everyone involved.

Nadeau's company works with 850 manufacturing organizations either as consultants, in association work, or when conducting surveys, Nadeau said. A couple of themes run throughout decisions to manage distribution channels.

"Most decisions about selecting and managing the distribution channel are emotionally charged and low on fact," Nadeau said.

Long-Standing Relationships

In most distributor-manufacturer relationships, there is a low level of formality, Nadeau said. The structure, management, and compensation in most distribution channels in the United States has not changed since 1945.

"But the truck equipment industry has probably changed a lot in that period of time," Nadeau said.

If you are not aggressively planning for the future when managing relationships in the distribution channel, it will eventually lead to high conflict and low performance, he said. The manufacturers may think you're the bad guy and try to work around you.

"They'll have distribution, direct sales, they'll cherry pick your accounts, they'll do all kinds of strange things," Nadeau said. "I'm going to give some rhyme or reason for why this silly business happens."

The manufacturers get out of synch with what is happening in the marketplace, he said. Then a marketing genius who has never talked to a customer is relied on to solve the problem.

Manufacturers have some common complaints have about distributors, Nadeau said. Constant price concessions asked for by some distributors take away the motivation to sell.

In a just-in-time mode, asset management always puts distributors in a rush when asking for deliveries from manufacturers, he said. Inventory is a big issue.

Inventory Management

The number one complaint distributors have about suppliers is that manufacturers are selling direct, Nadeau said. With e-commerce, if a distributor in Arizona has a webpage they have the world as their territory.

"Those boundaries are very nebulous and gray and in some cases manufacturers do take a lot of the top OEM accounts direct," Nadeau said. "But distributors should rest assured manufacturers make no money on these because large customers always leverage suppliers against each other. In these cases, the manufacturers make all their money on distribution sales."

Distributors always say the manufacturers don't understand their business, he said. It is true because distributors are in a margin business and manufacturers are in a volume business.

"It's like matter and anti-matter," Nadeau said. "Manufacturers have an incentive to keep the plant running. While distributors make as much profit as possible on each transaction."

When something goes wrong, the distributor gets the call from the customer not the manufacturer, who is often the last to know, he said. If a distributor doesn't get a complete order from a manufacturer, it can be the kiss of death.

Manufacturers and distributors both lose if there are any conflicts, redundancies or inefficiencies in the distribution channel, he said. Get over it, because customers at the end will take their business to another supplier.

Distribution Channel Problems

In the United States, the average migration rate of customers is 10% a year, Nadeau said, quoting a Harvard University research study. At the end of your distribution channel, you're losing half of your customers every five years.

"Most of you probably don't even know why," Nadeau said. "And if the demand in your industry is relatively flat, single-digit growth, you have to work hard to just break even."

But the study didn't go into why customers leave, so Nadeau did more research. The number one reason customers switch to another supplier is indifference.

Most people would guess the number one reason is price, he said. Only nine percent of the customers you lose this year will go somewhere else for a better deal. If you've got a customer or a salesperson that are price sensitive, get rid of them.

"If it was just about price, we'd all be driving Yugos to Wal-Mart and fighting for polyester golf clothes," Nadeau said. "Price is the only point of differentiation you have if you don't know how to sell on value."

A study by Michael Porter a business graduate of Harvard University, determined that most companies lack a strategic plan, Nadeau said. But this is very important because industries, products and distribution channels run through life cycles.

Product Lifecycles

"Products are introduced, go through a growth period, reach maturity, and decline when they're no longer capable of delivering value," Nadeau said. "It is not time but factors that drive these product lifecycles."

The infusion of ideas often comes from a new management team outside of your industry that brings new blood, he said. Businesses in an industry will raid competitors for management teams.

"Most industries are incestuous," Nadeau said. "This leads to an exagerated sense of uniqueness."

But industries are driven by the same dynamics, he said. The relationship between supply and demand can radically alter the basis of competition in an industry,

"It never ceases to amaze me that as demand flattens, there is always a group of investment bankers somewhere willing to finance a new plan," Nadeau said. "This leads to excess capacity."

Consolidation in industries happens in several ways, he said. Customers form buying groups where they consolidate to leverage against supply chains. Distributors consolidate to protect their position in the distribution channel.

"If they get big enough, they can create exit barriers for their customers and entry barriers for the manufacturers," Nadeau said. "Or the manufacturer can become the 1,000-lb gorilla and beat on the supply chain until products are delivered the way they want."

Industry Growth

This dynamic is taking place in the truck equipment industry, he said. Following WWII, most American industries were in the introduction phase.

Roles between manufacturers and distributors remain largely undefined, Nadeau said. A low level of conflict exists, and any problems are hidden by the good performance of that industry.

"It is inevitable that every industry hits maturity," he said. "Every company that competes in this industry has access to the same inputs including labor, financing, and materials."

These inputs have to be used in the most efficient manner possible, he said. The industry leader will take market share away from competitors who are less efficient. But the rest of you will retaliate in-kind and compete across the same dimensions.

"If all the suppliers are getting better and cheaper, distributors have the opportunity to select only the highest quality products that are the most price competitive," Nadeau said.

What happens at this level is that selling shifts to order taking, he said. If products are sold on price alone, the salesperson needs no knowledge to sell.

"An order taker just goes to the customer and says mine is better and cheaper," Nadeau said.

Order-Taking Versus Sales

The problem is that customers will always expect products that are better and cheaper, he said. They will demand superior quality at rock-bottom prices.

"Problems start to manifest themselves at this phase," Nadeau said.

The basis for competition in an industry has to shift from price to value, he said. Customers often reach this conclusion before suppliers when they form buying cooperatives.

"It's not about price, but about delivering value to the customer," Nadeau said.

Informally managed distribution channels are at a disadvantage, he said. The truck equipment industry is at this point.

"The most common and detrimental mistake a manufacturer can make is treating distributors like customers," Nadeau said. "Distributors are distribution channel members, teammates, and don't meet the criteria to be customers."

Manufacturers lose contact with the marketplace when they treat distributors as customers, he said. A manufacturers responsibility does not stop when they deliver the product to the distributor.

Needs of Distributors

Distributors needs are very different than those of real customers, he said. Distributors are in a margin business and customers are often companies such as contractors or public utilities.

Manufacturers should view distributors as teammates or partners in the distribution channel, he said. Structure the relationship so everyone in the distribution channel knows their responsibilities.

"The biggest inefficiencny in a distribution channel is the joint sales call," Nadeau said.

A distributor's business is driven by margins, he said. Margins can be increased by reducing costsand the two primary costs for most distributors are inventory and personnel.

Asset management should be practiced by distributors, he said. Inventory costs should be driven back up the channel to the supplier. The biggest complaints about distributor performance in any industry are inventory management and sales and marketing capabilities.

"This basically says the distributor is managing their assets," he said.

Manufacturers should set mutually beneficial goals with their distributors, Nadeau said. Develop plans for reaching these goals.

"Working hard and working smart are not planned," he said. "Those are the result of meaningful strategic plan."

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