The 2020 Mid-Year Economic Update_long

Why Manufacturers Should Care About Distributors’ Financial Health

Suppliers should work with distributors to improve profitability and mitigate risk.
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One of the most important recent trends is the accelerated interest and involvement of private equity investors in wholesale distribution. Stuart Mechlin's blog on mdm.com focuses on thinking differently by using a Private Equity Investor Framework. He recommends distributors think more like investors to add value to their businesses.

There is one big reason manufacturers should care about how their distributors run their businesses: The supplier does not want to wind up with just three to five large distribution customers.

The supplier doesn’t want to operate in a quasi “dedicated supplier” system with high risk and low profitability. They want to continue to enjoy a healthy portfolio of strong and diverse distribution partners.

National, larger distribution companies are growing. We still operate in a fragmented channel, but the trend is toward fewer, national players who continue to gain scale not only in the U.S. but worldwide.

Smart suppliers want a lot of distribution partners – independents, regionals, nontraditional entrants and so on. They also want their distributors to be growing (as many are) and financially strong and that their distributor partners are profitable and creating additional “distributor” value.

Therefore suppliers need to care about distributors using the best financial tools to do just that – one of the best being the private equity investor framework I’ve been discussing in my blog posts over the past few months on mdm.com. Only then can they continue to reap the rewards and benefits of a portfolio.

Here’s why the portfolio concept is important to manufacturers, as well:

  1. Diversification: More distributors means more diverse geographies and end-users, and in turn greater annual sales volume.
  2. Profitability: Only with a mix of geographies and end-users can a supplier achieve desired levels of profitability. Negotiating with a small group of larger customers (ie distributors) is not a reliable path to profitability. Negotiating leverage is better when you have more options.
  3. Mitigating risk: Economic and marketplace volatility is only going to increase in the future. That’s one trend that is not your friend. Risk management is all about minimizing the impact – negative or positive – of any one customer.
  4. Innovation of products and processes. Large-volume, national, bureaucratic distributors can be innovative. But even better is benefiting from a wider swath of innovation from the talented diverse group of players that our industry enjoys.
  5. Growth: In this slow-growth market share battle that we are in and will be in for the foreseeable future, suppliers need every strong growth vehicle they can partner with.
  6. More fun: The relationship side of our business has proven itself time and time again as one of the reasons we are who we are, and why we enjoy what we do.

Suppliers may ask: What’s the matter with having three to five large distributors for the bulk of your business? They are confident that like Clint Eastwood’s Gunny Highway character in the film Heartbreak Ridge, they can “improvise, adapt and overcome” no matter what the ever-changing environment throws their way. They may not see their roles as getting involved with distributor finances or financial structure, strategy or tactics. They have enough problems of their own.

Or they now have good relationships with the main players, even with the growth of private label brand sales.

All the above are valid. And if a supplier is good, it’s not a bad strategy.

However I know something about dedicated or quasi-dedicated suppliers and purchasing systems from my experience with a previous best practice company. I know something about what makes a dedicated supplier environment sing. I know how much work is involved. I know about the roles, obligations and responsibilities of both sides.

And I have to tell you our environment isn’t it. We are getting better.  Most of us are improving our knowledge, experience and execution especially when it comes to mitigating risk and maintaining profitability in this environment.

For most suppliers across verticals, a better bet is to operate with many strong distributors of varying size, ownership structure and end-users. But they should all share a common thread – a focus on Additional Value Creation. The channel may be more complicated, but it will reap larger rewards.

Here are some examples of what suppliers can do to improve their partnership with distributors:

Make your skills and knowledge of markets and operations available to distributors. Suppliers are huge repositories of knowledge in areas where critical mass gives them an advantage – such as IT, marketing, lean manufacturing and finances. With a little creativity suppliers can share resources and do it within legal and ethical guidelines.

Make process and technology innovation initiatives equal partners to product innovation.  Distributor-supplier process improvements will increase profitability for both sides. Suppliers may be pleasantly surprised with the number of distributor owner-operators who want to have that discussion. Suppliers are great about talking about products, end-user marketing strategy and how they can both sell more. But suppliers and distributors are not so good about discussing the operational side. Discussions with channel partners need to go beyond rebates and pricing; you may find both sides will reap bigger rewards when they use imagination and boldness. For example, how can you use the Web to improve the market share of your best distributors?

Refocus existing relationship vehicles. Across verticals, distributors enjoy excellent buying/marketing groups, industry associations committees and boards, supplier and distributor advisory councils, and individual company boards. They're made up of distributors and suppliers of different sizes, products and approaches to market. But they are all too often way less productive than they should be. Rather than spending time on low-impact activities such as reward/recognition, communication duplication and training that could be done on the Web, members of these forums should primarily be focused on growth, profitability and risk mitigation.

Caring about distributors’ businesses is not just for big suppliers. Any manufacturer can contribute to distributors’ initiatives to strengthen their futures. And they have. Leadership among suppliers is all around us – look for it, adopt it, encourage it and imitate it.

The rewards will be big for both partners.

Stuart Mechlin is a partner with Real Results Marketing. After 18 years in the wholesale distribution industry, including the role of senior vice president of Affiliated Distributors’ Industrial Supply Division, Mechlin is actively engaged in working with distributors, suppliers and technology companies on growth, marketing and profitability strategy/tactics. He is a member of several wholesale distribution company boards of directors. He has worked in such varied management roles as sales, finance, international J-Vs, purchasing and distribution for several public and privately held best-practice companies. Mechlin is also a member of MDM's Editorial Advisory Board. Contact him at stuart@realresultsmarketing.com or connect at www.linkedin.com/in/stuartmechlin.

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