The 2020 Mid-Year Economic Update_long

Commentary: Better Partner Segmentation Needed for the New Normal

The new normal is anything but. In spite of recent positive news, the economy is still brittle. Distributors have little flexibility to manage growth over the next six to 12 months – tighter credit, weaker asset positions, sluggish cash flow, fewer people/less talent. To get back on the offensive, companies have to re-evaluate and redefine how they operate across nearly every aspect of the operation. In many cases they have to change longstanding processes to adapt to these new market conditions.

The new normal is anything but. In spite of recent positive news, the economy is still brittle. Distributors have little flexibility to manage growth over the next six to 12 months – tighter credit, weaker asset positions, sluggish cash flow, fewer people/less talent.

To get back on the offensive, companies have to re-evaluate and redefine how they operate across nearly every aspect of the operation. In many cases they have to change longstanding processes to adapt to these new market conditions. Segmentation is one example. Many distributors and manufacturers have segmented customers by volume and SIC/NAICS alone. But shotguns aren’t good enough anymore.

Distributors have to avoid chasing every dollar right now. That requires a discipline that runs counter to the sales-focused nature of most distribution companies. But large-dollar, resource-draining, profit-killing sales can do more to cripple your growth efforts than perhaps any other action in your company. If you damage service levels to core customers while chasing volume alone, you may be playing directly to the aggressive pricing tactics your competitors are using now to gain market share. In the eyes of your best customers, if you stumble, low price becomes a more important factor in the sourcing decision.

Manufacturers, in turn, have to get out of a one-size-fits-all mentality when it comes to managing their distribution. They have to understand each distributor’s value, and create programs to incentivize and reward for that value. Most manufacturers will admit to being over-distributed, but reluctant to fix it for fear of disruption. If they don’t manage the conflict in these market conditions, they risk losing to more focused, strategic suppliers with like-minded distributors. Ironically, to save money, some manufacturers are cutting the key people who manage important distributor relationships. (Read about the impact of The Stanley Works and Black & Decker merger on distributors.)

Conversely, most distributors are spread too thin with too many manufacturers. How many hammer lines do you really need to carry? How effective can you be and what does it cost to support the level of redundancy you know exists in your company? Most distributors need to segment product lines more strategically than on what customers have historically requested.

Think about the value of relationship equity with your best customers, distributors or suppliers right now. How many of your company’s daily activities or processes are putting that equity at risk? That’s my argument for segmenting your partners more carefully for the rebound. Then reconsider how a tighter focus in each area can have a positive impact in the year ahead.

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