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Changing Channels, Part 2: Conflicts Blur Line of Sight to End User
By Lindsay Young
As reported in Part 1, tension between manufacturers and distributors has always been there – but the reasons for that tension have changed. Channel partners are navigating a new frontier that includes private-label branding, converging channels, pricing conflicts, the push of big-box retailers and national accounts into their back yards, and a changing customer base. In Part 2 of this article, we address best practices in manufacturer-distributor relationships.
One answer to manufacturer-distributor conflicts, MDM found in interviews for this article, is that distributors must focus on creating value for the customer and the supplier by homing in on core competencies. And manufacturers must find a balance of trade between high-volume distributors, integrated suppliers, big-boxes and smaller independent and niche distributors.
With this comes a responsibility to supply each channel with what it needs – programs, pricing and product to maximize profitability and market share for distributor and manufacturer alike.
"Manufacturers have gotten a lot smarter. Distributors are also getting a lot smarter," says Michael Marks of Indian River Consulting Group. "But it doesn’t necessarily mean smarter about working with each other. There are some very good examples where they have worked together. But there are probably more disasters."
Many manufacturers are trying to manage more complex channels the same as they did five to 10 years ago, perhaps blurring an otherwise clear line of sight to their distributors and end-users. "Manufacturers need to understand their customers’ needs and make sure they get the product, service and support they expect and deserve," says Dan Perry, founder of D.R. Perry and Associates LLC and former president/CEO of Milwaukee Electric Tool Corporation.
Channel Needs
"Customers’ buying habits have changed over the years. In order to reach all of their potential customers, many manufacturers are forced to sell through alternate channels," Perry says.
"The challenge facing major brand manufacturers today is dealing with the major differences in all of the channels they serve while continuing to offer programs and promotions that are fair and consistent in the marketplace. Accomplishing this is critical to achieving a good balance of trade.
"Manufacturers shouldn’t intentionally overload distributors with one or two products where they need adequate breadth and depth in others to support the line." Channel loading, the practice of trying to push as much product to distributors with the hope they will be motivated to sell, is still choking relationships as well as margins.
Distributors need the right mix to get the proper turns and margins to make money on a particular line.
That is compounded as channels proliferate. There are specific and sometimes conflicting needs for retail channels, hardware and home centers, a hardware wholesaler, industrial channels and commercial/residential contracting channels.
Sharing Information
Some innovative manufacturers and distributors have found a way to get past the fear factor of sharing information on the end-user by embracing point-of-sale data collection when it benefits both parties.
It is part of a trend toward demand-driven channels – where products are "pulled down" to the end-user based on actual customer demand data. To facilitate this, distributors and manufacturers are automating warehouses to better track product, sharing point-of-sale and product movement data upstream, and automating orders from distributors to suppliers.
In one way, the transparency allows distributors to document and demonstrate they do add a lot of value to the supply chain, says Adam Fein of Pembroke Consulting.
Though point-of-sale is moving slowly into distribution channels, it has already caught on in retail channels. Hand tool supplier Channellock is leveraging information-sharing within the retail channel. "I think it will find its way into the industrial and professional/contracting side of our business in the near future," says Scott Jonap, vice president for sales and marketing for Channellock Inc., Meadville, PA.
Still, while sharing end-user information may indeed help to increase inventory accuracy and turns, benefiting manufacturers and distributors, many distributors are skeptical – or even cynical. "The problem is where suppliers abuse that privilege," says Mark Yoder, Channellock’s national sales manager.
Point-of-sale can work with trusted partners, says Marshall Jones, president of Marco Supply, a 15-branch building materials distributor in the Southeast. "For example, we may look at who is buying chop saw blades but not chop saws, and work with the manufacturer to design a program to sell chop saws to those particular customers," Jones says. "That benefits both of us. Those are the types of things we can work together on. But there has to be a level of trust."
Distributors and manufacturers also have an opportunity to reduce costs in the channel. Greg Polli, vice president for product management at distributor MSC Industrial Direct Inc., says there are often dual inventories, as well as a lack of standardization with part numbers. "Also, how we buy needs to be examined," he says, "as well as the technologies we use, including bar coding and EDI.
"I think eventually the big guys will sit down and just say, ‘let’s do this.’ More profit will be there if we improve efficiencies. Customers are going to demand it."
Brand Loyalty
Competition is escalating, not only for distributors but also manufacturers who face an ever-consolidating global market. "The quality of imported product is improving," Jonap says. In addition, more distributors have leveraged private label brands, creating more competition and complexity for the branded manufacturer looking for the best route to market.
To build brand, manufacturers will contact potential and current customers with the Internet, direct mail, promotions, show and tell and job-site visits. "The goal is to get that contractor to be a supporter of that brand instead of the distributor," Jones says.
Jones doesn’t blame manufacturers who want to regain their brands’ power by using direct rebates or handing out free tools to the end-user. "I don’t fault them, but it does create tension," he says. "Everyone has it tough. It’s a fine line and a balancing act."
Most of Channellock’s end-user advertising is done through consumer publications, such as Sports Illustrated, Sporting News, Popular Mechanics and sports broadcasting such as ESPN Radio and CBS/Westwood One Radio; this creates brand awareness. Channellock walks that fine line. Jonap says distributors "need to understand that together we share the end-user. They are our ultimate customer. As good marketers we must court them. It is our marketing that creates the partnership."
Many distributors aren’t happy with the "courting of the end-user," as one distributor put it. Still, there are ways to work with and reward distributors for their part in supporting a brand.
"Distributors should market themselves aggressively as a destination for the brands that matter to their customers and proactively tap into manufacturers’ marketing initiatives," says Jeff Campbell, vice president of sales for Irwin and Lenox Industrial Tools, a manufacturer. Depending on the distributor model, this can be reinforced through joint sales calls, showroom merchandising, catalogs, monthly flyers, the Internet, traditional media, user events, inside/outside sales promotions and other vehicles.
Jones argues that manufacturers should create a list of "strategic customers," the distributors who do the heavy lifting for their brands. They support a wide breadth and stock it deep; when there is a new product launch, the "strategic customers" carry the flag. He says it is critical to treat the strategic customer "radically different" from an authorized distributor.
How? He says manufacturers should use price differentiation, extra rep support, and built-in protection from the distributors’ direct competitors who aren’t strategic customers. "The supplier has to shift from making purely short-term bottom-line financial decisions to asking, ‘What is the best way to make my strategic customers want to do business with me?’"
MSC’s Polli has another take.
"Where independent distributors are driving high customer value, they will not be hurt. Where they are not, they are in danger," Polli says. "While we understand and respect the loyalty factor, we do not see this as the responsibility of the manufacturer. This is an issue MSC faces on a regular basis.
"In fact, we see a higher share of the market going to national distributors, specialized distributors and integrated suppliers. We believe those channels have directed their efforts more toward end-user customer value as opposed to what works for manufacturers and/or distributors alone. These areas include cost reduction, service and procurement solutions, technical know-how and productivity gains."
In the Field
"Manufacturers can do a lot to avoid price wars, and other things that happen on a local level that cause channel conflict," Perry says. "The local sales representative can play a huge role in controlling the situation."
"First of all, they need to have the right mix of distributors in any given market. They’ve got to be knowledgeable about what they do. They’ve got to be properly trained, and train distributor salespeople to ensure that the right message reaches the customer. Done properly on a local level, manufacturer’s sales representatives can offer different product mixes and promotions and avoid channel conflicts."
Polli of MSC agrees. "Overall we see field reps as extremely important because we believe that the business relationship is still a key driver of success. If not, we’d all just be directing customers to our Web sites," he says.
Campbell, who spent time as a salesman to distributors, also has strong feelings on the role reps play. He says they must take the time to identify which partners’ objectives are in line with the company’s objectives. Next, sales reps must get on the same page with the distributor from the highest level, including the owner. "They need to ask what their expectations are and what the rep can do to bring value to their business," he says.
Next, they should map out a strategic plan, sharing sales and profitability goals and including discussion on rebates, margins and turns.
"There is very little added value for either side if the sales rep’s main activities revolve around writing orders," Campbell says. "High performing sales reps realize distributors have a lot going on and know the most important role is managing the customers’ categories for them. This is how the sales rep becomes a trusted and valued part of a distributor family."
At the same time, Campbell realizes this isn’t always easy, especially because of high rep turnover.
Adaptable Discount Models
Traditional volume discounting alone is too inflexible in today’s channels, MDM found.
Polli says manufacturers need to offer discounts based on the value distributors provides them. "Too often I’ve seen suppliers offering attractive discount levels to a distributor who are putting little investment/value into the manufacturers’ brands at the end-user customer," Polli says. "Given the low value to the customer, they must price low to win the business. They are able to do this because their low investment means a low operating expense.
"This puts unnecessary pressure on the entire market. If manufacturers would consistently reward distributors for the true value they are driving to their customers, I believe price wars would be lessened and the supply chain would be more efficient for all."
Marks agrees: "Don’t over-compensate your distributors to do a bunch of things the customers don’t value. And don’t under-compensate. Just get everything aligned so that people are doing what you want them to do, and there is a level of dialogue."
Functional discounts are gaining traction as a way to reward distributors for adding value to the supply chain. "Why do I want to pay the distributor to do something that isn’t valued by me or my customer?" Marks asks. "It’s this whole idea of unhooking something from the transaction size or volume."
Campbell notes that some professional end-users are migrating to big-box and national distributors. "We don’t control the end-user," he says. In that vein, Irwin has a responsibility to offer its product where the professional wants to buy it, he says. Still, he and other manufacturers recognize the value of the independent distributor. "Without them we wouldn’t be here," says Jonap of Channellock. "The independent distributor is important to our future." Campbell agrees.
"We support all of our ‘partner customers’ in all channels with sales and marketing support," Campbell says. "We also support independent distribution through our involvement and support of key trade associations and distribution groups."
The key is consistency, Jonap says. He says it’s important that manufacturers communicate openly and create a level playing field for its distributors, regardless of size.
Communication Skills
In the end, a lot of the tension in distribution channels is there because of a failure to communicate.
"It doesn’t make any difference whether you’re a supplier looking for a distributor or a distributor looking for a manufacturer," says Marks. "There were messages sent by one party to the other that the other didn’t hear. Those messages were sent over and over.
"The manufacturer says, ‘Your growth rate isn’t high enough.’ And the distributor says, ‘Well, your product quality and delivery are poor. And so our growth rate is really good considering how bad you are and so our complaint cancels out your complaint so we’re going to ignore you.’" And the two never actually listen to each other.
Marks’ response: Take action. Get together with the senior executive of your trading partner and ask quietly, "Have you been sending us messages that we are not hearing?" Just listen for 10 seconds, Marks says, and you’ll see a dramatic change. Marks found in research that many times factory sales reps do hear the message, but no one listens.
"It’s just across the board," he says. "It’s messages sent that weren’t heard."
Irwin’s Campbell says electronic communication has in some instances deteriorated the quality of communication between channel partners. "I think it’s taken away the personal touch," he says.
"It’s very important to foster those personal relationships. If someone’s not doing that, they are basically just scraping the cream off the top and not able to get down into the real opportunities with their partner. You can’t accomplish that by just using electronic communication."
Jones recommends that a supplier’s vice president of marketing and sales should create a distribution council – formal or informal – with a good mix of noncompeting distributors of different sizes, from different regions, and different loyalty levels. "Ask them what’s working and what’s not," he says.
"If they came to someone like me in my channel, and asked what types of programs would work, they would be able to center them around what we want or need as opposed to what we already have overstocked today. So many programs are cookie-cutter and not really what makes sense to a distributor. Many times distributors throw them out because they are not applicable."
Distributors and manufacturers should sit down, Jones says, and discuss their plans for the year, including core goals and important statistics. "It’s a very small group of manufacturers and distributors who are having those dialogues, but those dialogues are how you create channel alignment," Marks says.
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