Guest post by Lindsay Konzak Editor of Modern Distribution Management (MDM) newsletter.

I recently caught up with Lindsay Konzak, editor of Modern Distribution Management (MDM) newsletter. We talked about how things are changing, especially since the downturn in the economy.

She shared with us “Four Trends in Distribution” from the MDM’s 2011 Distributor Landscape Report and what it has meant for the supplier-distributor relationship.

1. How have channel dynamics changed over the past couple of decades, and what has been the impact of the recession on channel relationships?

There has always been tensions between manufacturers and distributors, and the notion of a “partnership” is usually in name only. What drives conflict in the channel? Al Bates, long-time industry expert focused on profitability, wrote in 2004 The Ultimate Disconnect that conflict is driven by different goals – manufacturers want distributors to compete in their territories, while distributors would prefer to have exclusive territory for that brand; manufacturers want attention paid to their brands, while distributors focus on a mix of products to meet end-user demand; and finally according to Al at that time, manufacturers are more focused on sales growth and market share, and distributors are more focused on profitability.

I wrote two articles on the topic of shifts in channel relationships a few years ago based on discussions with distributors and manufacturers. (Changing Channels: Part 1 – Shifts Alter Supplier Distributor Relationships Part 2 – Conflicts Blur Line of Sight to End-User .) In those I highlighted a number of factors that are changing the nature of channel management. These include: the emergence of private label; converging channels in distribution (distributors selling products outside their traditional core); the push into new sales territories (online and off); the rise of integrated supply and national accounts; and finally more powerful consumers thanks to more information available than ever before.

The distributor also has more power in the channel than it used to. In the past, in most sectors it was as one person told me, “sacrilegious” to carry more than one brand. Manufacturers had exclusivity at the distributors they picked. They also wrote most agreements, set policies and decided what the distributor should stock. This has largely changed – some sectors still see this, but for the most part, the distributor – driven by end-user demand for more options – has pulled away from this way of doing business.

I believe the recession exacerbated these shifts.

2.  Let’s discuss the four trends in distribution you recently outlined as part of MDM’s 2011 Distribution Landscape Report and what those have meant for supplier-distributor relationships. The first trend you outline is that customers want more.

We interview dozens of distributors and experts for our annual Distribution Landscape Report and this year nearly all said they are seeing an increase in demand for services. Customers who have pared back staff and resources in response to the recession want distributors to do more for them… The challenge is that many end-users want that increase in service in return for very little – or for free.  

Services include: consultations, VMI or consigned inventory, improved online support, turnkey installations of systems, customer training videos, repairs, green-related services and more technical knowledge services at the counter.

Unfortunately, while adding services tends to make the relationship more “sticky,” so to speak, manufacturers don’t always incentivize or support distributor efforts in this area.

This topic/issue could take us in a number of directions when discussing the supplier-distributor relationship – but the bottom line is this: If manufacturers would consistently reward distributors for value they are driving to their customers, price wars may be lessened. Mike Marks of Indian River Consulting Group – who frequently contributes to MDM – said it this way: “Don’t overcompensate your distributors to do a bunch of things the customers don’t value. And don’t under-compensate. Just get everything aligned so that people are doing what you want them to do – and there is a level of dialogue.”

He points out that manufacturers need to “unhook” discounts or incentives from the transaction size or volume. This is perhaps easier said than done, as many distributors depend on volume-based rebates for profitability at the end of a quarter. But for those who are willing, there are a lot of opportunities for manufacturers and distributors to partner to meet these growing service demands.

3. While the end-user is cutting back, both distributors and manufacturers have shown a reluctance to hire, despite growing demand in some sectors – this is the second trend. What impact has this had on the channel relationship?

Productivity is at an all-time high… current conditions have really raised the bar to find ways to cut costs and waste up and down the supply chain. For example, Lean was already a popular tool for manufacturers; now distributors are taking advantage of this process improvement tool to shave costs and waste out of internal processes.

Smart distributors and manufacturers are working closely to do this, recognizing that there is opportunity to improve profitability up and down the supply chain. Many are also including key end-users in this evaluation process, recognizing that they can not only provide a service for the end-user, but costs can be incurred at the end-user level that affect the entire supply chain.

Bob Conti of Sales Apex and The Alexander Group recently spoke with me for MDM’s Executive Briefing webcast series  about the concept of process mapping. This is one method that can be used to truly understand how things are done. He recommends to start with one trusted partner, and to assemble a cross-functional team to create a process map. This map looks at every step of how products are created, distributed and sold to the end customer.

It seems to me that doing this would really highlight where there are opportunities to improve productivity by cutting out redundancies – and even more importantly, without straining the resources you have.

4. A part of doing things more efficiently is in how you approach inventory management. That is the third trend you outlined – an increased focus on better inventory management, and better planning. What opportunities has this presented for channel partners?

Despite demand growing quite quickly in some sectors post-recession, distributors and manufacturers have been reluctant to increase inventories at the same pace. Instead, many have increased their focus on forecasting – on determining when and what to buy.

As inventory expert Jon Schreibfeder told MDM recently – I like this quote – “Where in good times we were using SWG – scientific wild guessing – people would buy quantities because they felt good – we’re now seeing people question every large purchase and really evaluating the need.” Inventory Management a Top Priority. And not only distributors and manufacturers but also end-users are looking to cut their inventory investment. Vendor Managed Inventory programs at every level are in greater demand – this is when the supplier will manage the replenishment process; usually this results in lower costs all around. Consignment is also in greater demand. Master distributors have also stepped in and become a more important piece of the pie post-recession in helping reduce inventory investment for distributors and manufacturers.

One issue that consistently comes up is the use of Point of Sale data by manufacturers. When distributors provide point of sale data to their suppliers – information about customer buying habits – it can help increase inventory accuracy and turns. But many distributors are still skeptical of this practice, as they are protective of their customers’ data, and don’t want suppliers to go around them to go direct to the end-user.

5. And finally, the fourth trend was an increased focus on diversification by distributors. How are distributors and manufacturers working together to support this goal? Is this a positive development?

After the recession, more distributors of all sizes say they recognize the need to prioritize diversification into new markets or product types to buffer their companies from the ups and downs of cyclical business. It’s also been an opportunity to increase existing customer spend. Distributors are increasingly looking to diversify their product offerings and their end-user base to reduce exposure in rough economic times. It’s also an opportunity to increase existing customer spend.

Historically this has led to increased tension – manufacturers want distributors to stay focused on their product lines – and not have those efforts diluted or competing with other types of products or private label offerings.

However, as Kevin Boyle of Industrial Distribution Consulting pointed out to me, more diversification is actually a good thing for manufacturers – distributors get more of a customer’s spend – makes them more profitable in the long run and growing loyalty at the end-user.

Master distributors – or redistributors or wholesalers depending on the segment – who sell only to distributors are helping distributors diversify without significant inventory investment, and they’ve had a growing role post-recession because of these trends. They allow smaller distributors to compete at a higher level for national account or integrated supply contracts by giving them access to more products with less investment. Master distributors also reduce transaction cost and volume discount pressures on the manufacturer.

6. Based on your discussions with experts, distributors and manufacturers over the years, what final thoughts do you have on developing partnerships that go beyond just talk?

I really liked the way Bob Conti approached this question. He really boiled it down to the basics when he said companies typically approach manufacturer-distributor partnerships from an internal perspective. It’s like a marriage – if you selfishly approach it by always looking at what you’re getting without paying attention to what the other person needs, chances are the road will be rocky. Read a summary of Conti’s presentation for MDM in What’s Partnership Really Mean?

But if distributors and manufacturers take time to step back and figure out what they can do to fulfill the needs of their channel partners, they can avoid price discussions and really start to come up with ways to strengthen how they service the end-user.

Bob also talks a lot about recognizing the strengths and motivations of your channel partners. I think people forget this. In several articles in MDM’s archives, I found reference to the fact that manufacturers and distributors have different motivations – clearly they are looking for different things at different times in their lifecycles. If they recognized this in their channel partners, they may be able to move forward on how best to meet these goals together. For example, distributors often want better support, co-op advertising or customized products for their local market needs. A manufacturer may want distributors to sell more of their product lines, to sell to new accounts or to focus more on selling value.

Part of a manufacturer or distributor’s motivations are related to where they are in their own business cycle, as Bob outlined for me. For some, they are focused on growing as quickly as possible and maximizing market share, which affects the way they approach partnerships – in other words, they may be looking to add as many partners as possible; but others are optimizing what they have as they have already met their market share goals, so are focused on profitability and not sales and are looking to get rid of channel partners that don’t contribute to the bottom line.

Distributors and manufacturers also bring different strengths to the relationship.

None of this is easy, and certainly we’re not going to see high-level partnerships on a broad level, but distributors and manufacturers can work with partners they already trust to build out a process to improve processes and profitability up and down the supply chain. Small moves focused on the right segments can make a big difference.

So what are your thoughts?