This is an exclusive summary of the latest episode of the MDM Executive Briefing webcast series, available on-demand at www.mdm.com/executivebriefing. In this episode, Bob Conti of The Alexander Group and Sales Apex defines partnership, the importance of leveraging strengths and understanding your partner’s motivations, and one tool channel partners can use to uncover profitability opportunities.
The word “partnership” may be one of the most overused terms these days when referencing a relationship between a manufacturer and distributor. Building a true partnership was the subject of the September MDM Executive Briefing webcast episode.
In the program, Bob Conti of The Alexander Group and Sales Apex, says that building a partnership is a big task and recommends distributors and manufacturers start small, working with a limited number of channel partners they already trust.
Companies usually approach channel partnerships from an internal perspective – looking at what they need and how they can get that from their suppliers or distributors, Conti says.
Distributors often want better support, co-op advertising, better prices or customized products for their markets, for example. And manufacturers are often looking for distributors to sell more of their product lines, to sell to new accounts or to focus more on selling value. It all depends on which side you are looking at it from.
For a distributor, a good partnership results in the correct mix of products and services that help them achieve bottom-line results. For a manufacturer, it means a complementary distribution channel that increases sales and improves profitability.
“A partnership means getting these two objectives working together in a harmonious manner,” Conti says.
To do that, you have to understand your channel partner’s motivations. What lies behind their requests or needs? Conti outlined four phases that he says all businesses move through. Motivations depend on which phase a company is in, he says.
Phase 1 is the startup phase of a business, when the focus is on growing as quickly as possible, and exploiting the uniqueness the company brings to the market. For a manufacturer, it might be a new product. A distributor may be moving into an underpenetrated market.
Accelerating growth is the focus in this phase. Manufacturers may see distributors as a quick and efficient channel for growth, and distributors see manufacturers for the products they bring that can help them increase market penetration
In Phase 2, businesses are focused on volume growth. This phase, according to Conti, is the “heyday of any business.” Volume is increasing, and the solution to most problems is to sell more.
Distributors focus on increasing suppliers in this phase, as well as growing their sales forces. Manufacturers are expanding product offerings, as well as distributors.
But price starts to become an issue here, as markets continue to mature and the temptation to discount to gain volume is hard to resist. This has led to systemic problems in the channel. Overall gross margins may be increasing, Conti says, but “the underlying business costs are increasing at an ever faster pace. Something has to give.”
So the company moves into Phase 3, which is a phase of re-evaluation. Distributors start to look at customer and vendor profitability, commission rates for salespeople, and branch effectiveness. Manufacturers look at product and manufacturing costs, and what they are selling their products at to distributors. They want to reduce distributors.
The final phase – optimization – is the most challenging phase for any business, according to Conti. Distributors and manufacturers are looking at repositioning in the market. They are looking harder at unprofitable parts of their businesses.
“No longer do we see the idea that all business is good business,” Conti says. “Instead they say, ‘What business is good business?’” They look at who they are partnering with, and how they cover the market.
Businesses tend to continue rotating through these phases as they build, reposition and
refocus on new markets and opportunities.
So what does this mean for partnerships? Partnership means different things for different companies as they evolve through these phases, Conti says.
“You need to understand the true motivations of your partner and are they the same motivations that you have?” he says.
“If you’re a more mature company in the optimization phase as a manufacturer, and you’re trying to work with a distributor in the startup or volume growth phase in their business you need to understand what their motivations are and they need to understand what our motivations are.”
Conti says companies also must consider that manufacturers and distributors have different strengths and that each channel partner can leverage those strengths to improve profitability.
“Real partnerships start with, what is it you need and how can we help fulfill those needs? Otherwise what happens is those discussions start to revert back to price,” Conti says.
Conti encourages distributors and manufacturers to start small when partnering to build profitability. “Start with one partner that you already have mutual trust with,” he says. “You are going to be sharing a lot of information.”
Assemble a cross-functional team, and work with your partner to create a process map. This is a comprehensive look at how products are created, distributed and sold to the end customer.
“What you’re looking for in this process is to understand where the overlaps are. What is being done by both companies that could better accomplished by a single company?” Conti says.
Get the necessary information to understand where you are making money and where you are losing money.
“It’s not easy,” Conti says. “It takes time to really develop skills and competencies to do this and to do it well. But the payoffs are well worth the effort.”
Many companies have used process mapping internally before working with a channel partner to improve how things are done.
Conti encourages companies to think boldly about how you approach processes, create metrics for measuring success, communicate successes throughout an organization and build off small successes.
“Bring along the rest of the organization and develop these competencies,” he says.