Managing vendors for profit & peace of mind
By Frank Hurtte
How did it happen? We’re walking through the warehouse and can’t help but notice we have three different brands of left-handed widgets. But, that’s completely OK because there are six brands of hex heads keeping them company. Our financial guy is after us because our inventory levels are growing faster than the national debt. And, even then, we struggle to have everything our customers want. But that’s just the half of it.
Some days our office is the grand central station of the industry. Supply partners, vendors, also-ran manufacturers of the industry and others stand in line to talk never-ending programs, discuss exciting new products, propose training sessions and check your name off their list. Being an all-around nice guy and distributor manager, you clear your desk and shake hands with yet another new regional manager from West Babylon, West Seneca, West Overshoe, or someplace like that. Without a plan, meeting with these guys is both distracting and time consuming.
Managing the companies supplying you with product has morphed into an ever more difficult and time consuming chore. Gyrations in the economics of the markets we serve complicate the situation. Mergers and acquisitions with competitors and vendors creates a swirling kaleidoscope of new challenges. Most distributors barely find the time to manage the sales/customer process. With that in mind, it should be no real surprise that few wholesalers have created a supply side process.
But as the proverbial “middleman,” I suspect we need to spend a bit of time thinking about how we manage the interactions on the other side of our business.
NAMING COMPANIES THAT SUPPLY YOUR COMPANY'S PRODUCTSupply Partner Strategic Vendor Auditioning Supplier Vendor Sold-as-a-service |
All manufacturers are not equal
So far, I have struggled with names to describe companies that provide the products we sell to our customers. And, for good reason. Experience tells me that most distributors use the terms vendor, supplier and manufacturer synonymously. Sometimes, a few of the largest sales volume companies (whatever you happen to call them) get special attention, but even then a plan is lacking.
I believe it wise to change this nomenclature issue. Let’s assign some names to the types of companies that supply your company’s product (see info graphic on rightt).
Successful distributors learned to segment their customers long ago. The best of the best have developed strategies for efficiently managing the resources invested into each type. Top-ranked customers receive expedited deliveries, complimentary access to technical/training resources and other goodies not offered to low-end accounts. But, few distributors have applied the same thoughts to the supply side of their business.
Prioritizing our resources
Managing one of these manufacturers is expensive. First, there are operational issues: maintaining price files, loading descriptions into the ERP system, distributor contracts and, maybe, inventory. Then comes activities like planning meetings, sales training, joint marketing events and managing literature, samples, demos and other sales aids which further add to the cost. Managing the cost against gross margins produced has to be viewed in investment terms. We’re looking for ROI.
Supply partners and strategic vendors
The best ROI comes from investing resources and money into our supply partners and strategic vendors. For the typical distributor, this group accounts for seven to 10 companies and accounts for 70-plus percent of their total revenue.
This group represents powerful opportunity for growth and market expansion. For these two groups (and these only), I recommend rolling out the whole enchilada.
Detailed market planning, joint marketing activities, coordinated e-newsletter content, measured joint call activities and access to your sales force at regular scheduled sales meetings would be natural business builders. But I recommend going a step further.
At the end of each year, the distributor and this small but strategically important group of manufacturers should invest time in mutual review. Distributors and manufacturers create a continuous supply chain to their mutual customers. Eliminating friction and eliminating cost in the flow of products from factory to end customer helps the supply chain become more efficient; both sides benefit from the exercise.
I believe supply partners and most strategic vendors deserve access to point-of-sale and inventory level information. Referring once more to the supply chain, distributors and their important manufacturing partners must share information needed to improve the link to customers. Marketing, product development, and manufacturer understanding of key customer segment needs continue to grow in importance to manufacturers. It’s part of the distributor’s role in the chain to send the right information upstream. But this is a touchy situation.
Let’s digress on this POS and inventory information tidbit. The world is fraught with examples of POS information used improperly. For you manufacturer types, understand this: POS data falling into the wrong hands is dangerous. It’s akin to your own company losing their most important patent. Manufacturers need to be willing to sign onto security agreements with teeth. Nearly a decade ago, three distributor associations (AHTD, PTDA, FPDA) produced documents to protect their members. The documents call for signed security agreements with manufacturer field sales teams, rep firms and folks at the factory. These agreements are still available and I would be happy to provide anyone who asks with a copy. Further, manufacturers must understand POS reports are expensive to produce. In spite of what you might think, setting up reports on most distributor ERP systems requires expensive resources.
Before I leave this topic, a word to distributors. Some of your strategic vendors shouldn’t get POS data. If the manufacturer has a saturation distribution philosophy, shows signs of favoring another distributor or has salespeople, managers or leadership who lack integrity, it’s a no go. Further, under the heading of “if I were you,” I’d be asking if they should be in this list.
For supply partners and strategic vendors, new product additions should be almost automatic. Manufacturers need to get new products introduced to the market quickly and efficiently. A distributor that quickly reviews and acts on new products is critical to providing rapid cash to pay for development, production equipment and other manufacturer expenses. Making the new product work requires the joint calls, joint marketing and all the rest previously mentioned. And Mr. Manufacturer, it requires a safety net for the distributor just in case your fancy chrome-plated widget flops.
Every so often, some special opportunity arises or Murphy’s Law raises it ugly head. When it happens, the manufacturer needs someone to help. A very common complaint from manufacturer sales teams centers on an inability to quickly access someone with decision-making authority. Many times, simple issues are left hanging for weeks as the manufacturer attempts to find the right person to handle the issue. Assigning a member of the distributor’s leadership team to serve as an omnibus person maximizes effectiveness in the relationship.
All the good stuff discussed above is time consuming and expensive. Try to give every manufacturer this treatment and you’ll suffer. For those who make it, welcome to the club. Everybody else? Let’s talk about them.
Sold-as-a-Service
A good customer asks you to supply them something not on your line card. You do and they somehow find their way onto other orders. Most sellers see this type of transaction as easy money. But the transaction probably isn’t all that great for your company. First, you lack leverage with the manufacturer. Make a mistake on an order and your company eats the cost. The small size generally translates into manual interaction on pricing and descriptions. Purchasing is done outside the system. The whole thing is expensive. I suggest you respond accordingly.
First, margins on these products should be high, very high. If your customer wants you to handle the product, they should be willing to pay for it. Further, most salespeople will lecture on the value of “locking out” competitors by bringing this miscellaneous menagerie of stuff into stock. I agree with them most of the time. However, I believe these strays should be quickly converted to products of supply partners or strategic vendors. To facilitate the urgency of doing such, I question the value of commission on sold-as-a-service vendors.
Sold-as-a-service vendors get no marketing play, no planning, no sales training time and certainly no access to management other than booth sessions at association meetings and occasional purchasing review. Remember, we are nice guys. No need to be rude, but at the same time, you don’t have time to meet their new regional manager from West Overshoe.
Vendors
Moving up the food chain, vendors are those busloads of nice folks who represent less than a third of business. And when you cut that last slice of your business pie 50 or 60 ways, the pieces get so small even my wife would approve me having one. You can’t slice your day that small either.
I recommend you categorize this group by asking four questions:
- Does this manufacturer compliment or pull through business from one of my supply partners or strategic vendors?
- Does this manufacturer represent a significant amount of purchases from a key or strategic customer or segment of customers?
- Does this manufacturer have growth potential which could put them into supply partner or strategic vendor status?
- If the answer to questions 1-3 is no, are we sure this isn’t really a sold-as-a-service vendor?
What do vendors get from us? It kind of depends on the answer to the four questions.
Auditioning Suppliers
Careful management of supply partners and strategic vendors builds on a distributor’s core business. It’s like investing in blue chip funds: slower growth, minimal risk, good dividends. In investing, a balanced portfolio works best. Auditioning suppliers are our high-growth, small-cap stock holdings. They’re a little risky but expand opportunity for growth; do your research and limit your exposure for the best results.
In a time when many distributors are evaluating adjoining technologies (PT distributors entering motion control, automation distributors moving into robotics, electrical guys into data com), this type of relationship is becoming increasingly common. Nurturing the relationship is critical, conversely, somehow managing the extent of the resources devoted is key to continued success in the core business.
The most common issues revolve around human bandwidth, lack of early traction and eventual loss of interest by the sales teams on both sides. Sales teams decide to spend time elsewhere. The product line goes nowhere. Magnificent opportunities turn into train wrecks. Managing this group of vendors is different.
Setting and sharing reasonable first-year expectations has a lasting impact on the launch of a new line. Distributors and manufacturers alike are prone to statements like, “this should be a half-million dollar line.” I personally would rather see a plan which lays out sales numbers for the first couple of quarters with a plan describing who the competition will be, why the customer will find value in the product and precisely what customers in the distributor’s territory are most likely to buy quickly. In other words, a target driven approach.
In the early days of launching a new product, nothing drives success like, well, success. If time is invested toward the identification of customers most likely to adopt or convert to the new product during the first year, the line will start to develop selling momentum. Sales people will see need for building skills around the product, because they see a return. Further, early sales success helps justify distributor-based inventory, but often distributors need inventory support to keep momentum.
Manufacturer-based inventory support is critical and often overlooked by distributors and manufacturers alike. If the manufacturer is unwilling to invest in supporting a distributor facing off against competitive organizations with larger and better developed inventory systems, distributors should question the manufacturer’s motives. They are auditioning. And, this point should be well understood ahead of spending more money.
In our discussion of supply partners, we spoke about the importance of an omnibus contact within the distributor organization. The same is true with an auditioning line. An assigned product specialist might substitute for a management champion, but somebody needs to keep the lines of communication going and shoot down problems along the way.
Distributors that segment make money
Time after time, study after case study, we discover distributors that segment their customers are more successful. They prioritize resources, focus efforts, mine out the gold and ignore the slag. It makes good sense. Insightful distributor leaders understand the importance of segmenting suppliers. What is too often ignored is the process required to drive behavior through the entire organization.
Let me challenge you right here, right now. Ask a few co-workers. Who are our most important suppliers and how do we treat them differently? If the answer involves hand waving and many “well, you knows,” chances are they don’t know.
Frank Hurtte speaks and consults on the new reality facing distribution in a post-recession world. Contact him at River Heights Consulting at 563-514-1104 or at frank@riverheightsconsulting.com.
This article originally appeared in the Nov./Dec. 2014 issue of Industrial Supply magazine. Copyright 2014, Direct Business Media.
INDUSTRIAL SUPPLY MAGAZINE
The November/December issue of Industrial Supply magazine features an in-depth cover story about Kimball Midwest. Plus, we're featuring articles by contributing writers Dirk Beveridge, Frank Hurtte, and Mike Marks, as well as interviews with numerous product and distribution industry experts.
