Delivering for Best-in-Class Wholesaler-Distributors
May 10, 2017  |  ByMark Dancer, NAW Institute for Distribution Excellence Fellow
NAW-Digital Progress Requires Reinvented Channel Partnerships -Distributors in the Digital Era #15

In my conversations with leaders, I frequently find that distributors and manufacturers are adopting and using digital tools for their own benefit, but are not sharing their accomplishments and plans with each other. This reality is bad for both partners, because it can lead to distrust and declining commitment to long-standing partnerships.

 

The way forward is for both partners to understand each other’s new digital capabilities and from there, to drive new channel programs offered by manufacturers and new supplier expectations put forward by distributors. The failure to do so will weaken the partnership, and lead to missed opportunities, declining profits, and perhaps worse, accelerate the loss of share to new, disruptive market players like Amazon. The good news is that there is a lot known about how to design and adapt key elements of the partnership, beginning with the channel programs of manufacturers.

The strongest manufacturer programs for working with distributors are based on a thorough understanding of distributor business models, especially market coverage, functional capabilities and finances (gross and net margins, productivity metrics, etc.) It’s not that manufacturers seek perfect, inside knowledge. Rather, it is critical for a manufacturer to know how a distributor’s capabilities align with product selling and support requirements, brand value and positioning, and growth / share objectives. While every distributor is unique, there are patterns, and manufacturers segment or profile distributors as an essential input for decisions about distribution policy, authorization requirement, channel compensation (discounts and rebates), joint sales initiatives and marketing programs.

The adoption and use of digital tools by distributors are changing the way they do business, and therefore their coverage, capabilities and finances. Websites and e-commerce platforms enable distributors to sell to any customer anywhere, challenging traditional geographic territories and account assignments. Distributors are rapidly gaining digital marketing expertise and, as noted in this article How to Build an Industry-Leading Sales Channel, may soon reach best-in-class sales excellence. Distributors are using digital tools to achieve higher levels of productivity, protect margins, and in some cases, add new, non-distribution-based businesses. For manufacturers, this latter change means that their product’s contribution to the overall distributor’s top and bottom line is not known, making it harder to design appropriate channel incentives.

Ultimately, all this change is good, because benefits flow to end users as improved customer service and higher levels of value add. However, there may be problems for the distributor– manufacturer partnership. I have found that both parties don’t know, or at least don’t understand, each other’s digital investments, strategies and emerging capabilities. Manufacturers are failing to adjust channel management programs to leverage (and reward) new distributor capabilities. On the flip side, distributors are not making their new capabilities known and may be distrustful of manufacturer intentions, assuming their intent is to use digital tools to cut out distributors and deal directly with customers.

Most executives tell me the partnership will endure, but it needs to change to account for the adoption and use of digital tools. There is a sense of urgency for the process of change to begin now. If these discussions and negotiations are delayed, several bad outcomes become more and more likely:

  • Distributor margin erosion. The total amount of discounts, rebates and incentives is often calculated by manufacturers according to a theory known as cost transfer. The idea is to pay the distributor by setting compensation that considers what a manufacturer would pay to perform the activity itself and then transferring margin as activities are performed by distributors. Manufacturers know the value of traditional distributor inventory, logistics, sales and marketing. They don’t know the new value that distributors can achieve through digital tools … and they won’t pay for what they can’t understand.
  • Devolution of top partner programs. Many manufacturers and distributors have programs for their top partners that are based on very close alignment of business objectives, capabilities that fit hand in glove and, most importantly, trust. Going forward, mutual and coordinated deployment of digital tools will create shared advantage, but not without open communication and initiative by both parties.
  • Divide and conquer by disruptors. Amazon (or other disruptors) may gain significant business recruiting distributors and manufacturers to place their products on the disruptor’s online marketplace, but the ability of such disruptors to fully take control of markets is ultimately dependent on decisions made by end customers. Customers that decide to buy from a disruptor are also deciding not to buy from the traditional value chain. Working together, distributors and manufacturers can offer new and improved value for customers and keep their business. Or through inaction, the partners can abdicate their market position and customer loyalty, ceding their business to disruptors.

Without attention, the manufacturer/distributor partnership will wither and perhaps die. With communication (and negotiation), however, new or reinvented partnerships will emerge with new, mutual benefits. Either way, change will come. As is often said when a monarch dies, “the king is dead, long live the king!” It’s up to distributors and manufacturers to decide their fate.

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Mark Dancer, NAW Institute for Distribution Excellence Fellow

Mark Dancer, NAW Institute for Distribution Excellence Fellow

Mark Dancer founded the Network for Channel Innovation to drive awareness, advocacy and excellence for channel innovation, and to enable an exchange of ideas between channel leaders on business transformation, technology adoption, social impact and community engagement. For more than 30 years, Mark has worked with leading companies to achieve channel excellence across a wide range of industries in developed and emerging markets.

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