The Top Five Areas of Manufacturer-Distributor
Channel Conflict in the Digital Age
In our recent article on channel conflict resulting from online sales in the B2B sector, we likened the potential conflict to a simile between a “grizzled tom cat and big yellow dog.” Both parties have learned to co-exist as long as they remained outside of each other’s food bowl. The problem, as we’ve come to understand it, however, is that end-customers and the nature of the online transaction play havoc with the defined “food bowl.” That is, past practices in channels of commerce, where one can and cannot get product, service and warranty support, are becoming obsolete. Hence, conflict between manufacturer and distributor, from the online transaction, is a given. In this article, we uncover the top five areas of channel conflict in the digital age and what are most likely the outcome(s).
1) Not Far with the A.P.R.
The area of primary responsibility is a well-known designation in distribution agreements. The concept and practice is to give distributors a defined territory in which to sell their vendor items. In the past, distributors needed exclusive or selective areas to represent their vendors and maintain a “fair” profit on the relationship. The A.P.R. limited excessive distribution and allowed the distributor an environment where they found supporting a particular vendor to be profitable.
The A.P.R. is increasingly anachronistic. First, online buyers want to buy from anyone, anywhere at any time. Territorial restrictions thwart this popular benefit of e-commerce and most buyers don’t see the need for restricted access of supply. Second, the economics of distribution, where protected territories offer a margin buffer to service a “high-cost” vendor are changing. Today, e-commerce takes significant costs out of the buying channel and these costs are not, in many ways, driven by the vendor. They are service costs related to the distributor’s decision to support the new technology. If the distributor won’t invest in rich product content and search options, which increase customer service while bringing the cost-to-serve down, they will be increasingly non-competitive. This decision is theirs to make and has little to do with the vendor. In short, an A.P.R. restriction is counter to the way the online buyer wants to transact and has less and less to do with the cost of service of a particular line.
Finally, policing of the A.P.R. for infractions is almost impossible to do without original and detailed point-of-sale information from the distributor’s order manifest. Too, the inspection process, for A.P.R. compliance, is labor intensive and costly. It is also punitive in nature which doesn’t make for good channel partners.
We view A.P.R.s as, mostly, obsolete. They are for a different set of channel economics of an earlier time.
2) Selling Direct Never Works out for the Manufacturer
The financial bedrock of distribution is the ability to aggregate different parts and pieces for an application where the margin dollars are greater than the fulfillment costs. E-commerce changes many of these economics including:
- RFQs can be done more quickly and accurately online and this includes quotes going directly from the end customer to the manufacturer
- Redundant wholesaler costs of too many sellers and bricks and mortar locations can be reduced through e-commerce
- Manufacturers can offer credit to wholesaler customers at less risk
In the electrical sector, an increasing amount of commercial lighting vendors are selling direct to the customer. Why? The orders are big, shipped direct, and the margin dollars cover the fulfillment costs. Too, the contractors are typically large, their credit-worthiness can be evaluated or the order can be financed by a third-party (read credit card). Additionally, distributor sellers and brick and mortar don’t add much value to these orders. The contractors, many times, know the products better than the distributors do.
In short, we expect to see more sales bypassing the distributor. The concerns for the manufacturer: are the economics of the order sufficient to cover distribution costs and is the customer creditworthy or have a credit card? If the answer to these questions are yes, then selling direct is an option.
3) Up, Up, and Away with the SPA
The SPA or special pricing agreement has become popular as manufacturers sought to fight price competition on a case-by-case basis versus time period or volume discounts. Initially, the SPA decision made sense but, today, many wholesale sectors are little more than “auction pricing” markets. Seven out of 10 wholesalers sell less than 5% of their order volume online.
Many of these orders could go online where they are much more efficient, costing up to 70% less to fulfill than a full sales-supported transaction. Many traditional wholesalers are losing business to competitors that do much of their business online and more efficiently from a digital platform.
We believe that many manufacturers are granting SPAs to technologically challenged distributors whose transaction platform is high-cost and non-competitive. In essence, the manufacturers are subsidizing a high-cost channel from their distributors’ decisions not to engage a modern-day e-commerce effort.
4) Warranty Blues
As online sources grow, the warranty obligations in any geography grow. The problem with warranties is that distributors are good at them and have a history of completing them satisfactorily. Too often, manufacturers expect their distributors to honor warranties, regardless of who sold the product. Distributors who find their warranty obligations increase while losing the sale to an online competitor are rightfully refusing to honor all warranties for a vendor. Unless the vendor compensates the distributor for non-sales warranties, there will be increasing channel conflict from the increase in online sources.
5) The Online Race
Customers are, literally, desiring to go online more quickly than distributors and manufacturers can assemble and trick out a modern-day e-commerce system. Additionally, the system is costly, often running into the millions. Those who move online incur a heavy expense to do so—they want partners that support their online efforts. For instance, we find far too many manufacturers that don’t have well-organized and current product content. In one instance, we found a distributor association, building out their own content, had to photograph popular products of a major vendor as they did not have supporting jpegs. Each party, distributors and manufacturers, will evaluate the future attractiveness of the relationship based on their knowledge of online commerce and their ability to support it. The technologically impaired will lose to the technologically prepared.
Channel conflict will likely increase, at least for a while, until online capabilities, practices, and standards are set. Our forecasts say the next 5-7 years will separate the winners from the losers. Yesterday’s channel policies and their supporting rationale don’t always apply in the digital world. Manufacturers and distributors that accept that online commerce is a way of the future and plan their relationships and policies based on future needs, will avoid much needless conflict over things that, increasingly, don’t matter or make sense to the customer.
Scott Benfield is a consultant for B2B markets. He is the author of six books and numerous research studies on B2B channels. He can be reached at Scott@Benfieldconsulting.com or (630) 428-9311. His firm is located in Chicago and website is www.benfieldconsulting.com.