Average Rating: 5.0
Your rating: none

Channel relationships in the new normal

Mitigating increasing channel conflict

by Scott Benfield

Since the Great Recession, there has been a steady increase in channel conflict between manufacturers and distributors. The risks are significant, as the durable goods distribution channel in North America totals some $2 trillion, with the majority of sales coming from domestic brands aligned with domestic distributors. However, the old traditions of working together toward penetrating markets is increasingly in conflict with the ways customers want to buy, their sensitivity to price (cost), and acceptance of goods outside of established brands.

The purpose of this article and our webinar on March 26 will be to explore the reason(s) behind the conflict and what both parties can do to ensure ongoing profitable and growing relationships.

Where Do You Sit?
The adage “where you are coming from depends on where you sit,” applies to the ability of manufacturer or distributor to perpetuate lasting relationships in the New Normal. The white-hot economy of 1999-2007, with the exception of the tech crash in 2001, largely masked fundamental changes in durable goods channels. GDP growth averaged roughly 5% during the period, taking attention away from significant changes wrought by technology and new knowledge. In the post-recession economy, where growth struggles to reach 2%, the changes are not only visible, but are causing significant consternation and require a rethinking of how to joint market or, in some cases, go separate ways. Many rules of channel partnerships formed before the Great Recession no longer apply.

Yesterday’s supply chain included predominantly domestic sourcing, solicitation and customer service through personal contact, and managerial metrics through financial accounting. Today’s supply chain has global sourcing, much buying and solicitation is done through e-commerce, and managerial metrics utilize modern-day cost-to-serve accounting. In our seminars, we find many distributors and manufacturers are working with yesterday’s supply chain configurations, with only 25% or so of distribution companies and 50% of manufacturers receiving orders through an e-commerce platform. Leading firms, however, have global supply chains, robust e-commerce models, significant e-commerce sales and accurate cost-to-serve statistics.

As e-commerce has increased and global supply sources solicit domestic markets, the cost of material and supporting service(s) has come under attack. The end customer uses the Internet and a variety of hand-held devices and apps to check price and availability 24/7. Distributors and manufacturers that don’t recognize the new channel realities are more apt to encounter channel conflict, as their costs are out of line with what end-users are willing to pay. Today’s Generation Y purchasers are more likely to seek suppliers on the web and believe these suppliers to be more legitimate than an outside seller with a hand-shake, business card and no supporting technology. Unless the Generation Y buyer finds value in the sales call, they are unlikely to pay for it, which provides a distinct advantage to non-traditional firms strong in e-commerce.

Searching for a joint solution
Technological and knowledge-based changes in B2B channels have forced manufacturers and their distributors into a corner. Partnerships are in danger if new means of addressing modern day supply chains are not explored.

The area with the most potential for improvement is the outside sales effort. Both manufacturers and distributors are dependent, perhaps addicted, to the personal selling relationship. The idea that more feet on the street will win more orders is outdated. Today’s buyers are increasingly searching the web for suppliers. Manufacturers and distributors must come together to make sure their sellers are adding value. If not, the function should be restructured to provide value or the seller should be removed.

Manufacturers often pressure distributors to add sellers without working to cut supply chain costs and developing a different value proposition. We have seen several manufacturers slash in-house sales efforts and work with key distributors to select a specific sales function for their products while sharing selling costs with their distributor. The general adage for B2B supply chain sellers is “half the feet and twice the ability.” Sellers are becoming more consultative or enterprise-based, often with graduate educations and an ability to converse, in depth, with end-users on a variety of product and managerial issues. Old-school sellers with a modicum of product knowledge and a gregarious demeanor are relics; they don’t have the skills to work with customers on complex supply chain redundancies and product applications to take cost out of the working relationship.

Personal selling, however, is not the only area where costs are being scrutinized. As product differentiation slows, manufacturers have structured various sales promotion and co-op funding for their products. These were attempts to find new buyers, open new segments, and develop brand loyalty among end-users while cementing joint marketing efforts. Today, most products are uber-mature, with only the smallest of incremental improvements. But money is still being spent on sales promotion(s) at the distributor level that fail to cover their cost(s). This expenditure is exacerbated by buying groups that tout marketing events to vendors to justify their value added. Many of the buying group expenditures are wasted also; it would be much more efficient for the channel if these entities would simply tell their manufacturers that their value added is in aggregating smaller distributors that use their collective buying power to squeeze cost out of the vendor base. Foreign, “off-brand” vendors don’t subscribe to the excessive use of these funds and generally come to market with a product cost advantage without these monies tied to the relationship. Non-branded, off-shore foreign vendors have a landed cost advantage over domestic vendors of 30% or so. Roughly 10% to 20% of their cost advantage is in not offering co-op and sales promotion monies for their products. If domestic vendors and their buying groups want to increase the marketing success of their members, they would be much better off helping them with easy-to-use and consistently defined product content for e-commerce. In a recent conversation with an industrial distributor’s director of e-business, we asked how many vendors provided product content that was easy to use and followed their e-commerce specifications. The answer was “one.” The upshot is that many traditional manufacturer channel funds used by distributors for sales promotion are being wasted. They pursue incremental gain for commodity products in a world where incremental gain has little to do with traditional selling or marketing.

Sales promotion is not the only traditional channel practice being questioned in today’s channel. Another is the idea of approved geographies or sales territories for distributors. E-commerce buyers don’t necessarily care where the vendor is located unless shipping costs are prohibitive or significant post-sales service is required for start-up. B2B e-commerce buying standards are set by the B2C world where APRs (areas of approved responsibility) are a non-entity. We’ve met many manufacturers that stubbornly cling to the APR logic and justify it with complex channel costing audits. In the end, however, customers are not tolerant with restricting approved territories and will seek out distributors that sell products without these limitations. Manufacturers, especially those with powerful brands, seem to cling to the idea of approved territories but the economic validity of their decisions lies in yesterday’s channel, where buyers needed post-sales service and high-touch distributors.

Not-so-Tasty burgers
Sacred cows in yesterday’s B2B channels include annual price increases by manufacturers, volume rebates and full-service, local distributors. These practices are sacred cows that make poor hamburger.

For years, manufacturers have launched annual price increases, ostensibly to cover cost increases. For the most part, distributors simply passed these increases on to the end-user. In today’s channel with its hyper buyer power, price increases may bring an immediate end to the end-user relationship. In many instances, base materials that go into finished products have decreased in cost or stalled. The reasons for this are complex but include the over-capacity in plant, property and equipment for global growth and better manufacturing costs through a low-cost pool of global labor. Manufacturers that insist on price increases that aren’t tied to a legitimate cost increase run a growing risk of pricing themselves out of the market. Importing of “off-brands” by distributors continues to grow, and many large distributor companies have qualified supply chain executives who understand how to set up and validate foreign supply sources, and cost-competitive logistic chains. Many distributors have formed alliances that pool resources, go overseas, and set up “off-brand” supply chains. Domestic manufacturers should look at their cost structure for ways to reduce costs for a better price position to their distributors. Redundant channel costs are a good place to start but black-hole product development projects need to be eliminated also. Today, the channel is a plate glass window and there is a decreasing loyalty to manufacturers that don’t get their costs in line with what the end-user requires.

Rebates may have had their place in yesterday’s channel relationship but the idea that one can increase earnings by getting a better rebate is akin to the idea of achieving economic prosperity by increasing taxes without controlling spending. Distributors make money, like most mature B2B companies, by decreasing costs while increasing productivity. This is largely done by deploying new technology and new knowledge. Increasingly, rebates are accounting gimmicks that add limited value to the channel. Rebates are a sensitive issue and real research on them and their use is hard to come by. However, many “off-brands” sought by distributors at a 30% landed cost advantage don’t have rebates, and distributors don’t seem to mind. Our belief is that rebates will be challenged by the channel at large and especially by the end-user who will migrate to the lowest cost producer of comparable quality.

Finally, the idea that local full-service branches with oodles of counter space and lots of local sellers is yesterday’s definition of distribution. In the days before the Internet and electronic media, knowledge and logistics were aided by local sellers and branches. Today, however, knowledge is relayed via the Internet and logistics are increasingly done by companies that specialize in that function. For instance, when it comes to small packages, carriers such as UPS, Purolator and local parcel post carriers can deliver at 50% of the cost of most distributors. Even the counter sale for spot buys is up-ended by same-day delivery and “locker storage” or vending machine dispensing. As a result, we see many local branches being shut down as they are too costly in today’s world.
A world where millions of buyers can search price and availability in seconds, place an order, and have it shipped to any place on the globe is a reality. The technologies of e-commerce, global sourcing and detailed cost-to-serve models is disruptive; not incremental. They demand big changes in manufacturer-distributor channel partnerships and, over time, will drive channel compliance demanded by a new buyer in a new age.

Scott BenfieldScott Benfield is a consultant to distributor and manufacturers in B2B channels. He is located in Chicago and can be reached at (630) 428-9311 or Join us for Scott’s webinar on Channel Relationships in the New Normal on March 26 at 1:00 p.m. EST.

This article originally appeared in the March/April 2013 issue of Industrial Supply magazine. Copyright 2013, Direct Business Media.


Post comment / Discuss story * Required Fields
Your name:
E-mail *:
Comment *: