A recent consulting project involved a significant relationship between a manufacturer and a distributor that had shown significant signs of deterioration. Both firms were important to the other, and their relationship included numerous success stories over several decades. But, as one executive in the distributor organization stated:
“Our recent interactions are filled with tension. I honestly no longer believe we want to be in the same room with one another. It’s just unpleasant. And, in more meetings than not, our fears are realized, as they deteriorate into a negative exchange, sometimes crossing way over the line.”
It was unfortunately easy to get specific examples as to why this relationship had gone into troubled waters, as a few examples illustrate. A different executive from the distributor organization defined his principal concerns as falling in two categories:
“The biggest issue is poaching customers.We’ve had two large customers that were sweet-talked into buying directly from [this manufacturer]. And how did they do it? Price.T hey gave them a price that was lower than what we pay them. Not lower than our price to the customer, lower than our cost from [the manufacturer]. Those are the issues – poaching and pricing.”
The manufacturer’s executives, unfortunately, also had no problem in identifying problems that were adversely impacting on the relationship. One executive from the manufacturer provided the following comments:
“I don’t want to just sit here and provide you a long laundry list of concerns, although it’s gotten to the point where I can do so. Let me just give a few examples. First, we’ve always known that this distributor was going to have a catalog including other brands in our category. But now they have their own private label, and they are on a path to overlapping most of our SKUs with this private label. Over and over, we’re seeing that there’s not anything close to a level playing field when it comes to this private label and our brands. Second has been a deterioration in services. They are our largest distributor and the market’s perception of us is influenced by how well they do as well as how well we do. They don’t recognize this and sometimes even blame us for a problem when we had nothing to do with it.”
A different executive from the manufacturer organization focused on what she believed was the core problem: “And then you get to an issue that might be at the root of a lot of our problems. We aren’t making much money through this relationship. The economy of the past few years has caused some real problems in several of our key markets, and it’s been a tough time all around. But what they seem to want is more price concessions from us, more co-op dollars, and us to hold more inventory. Never once have they come to us to discuss how we can get margins back to a decent level.”
That there were problems in this important relationship was clear, and the problems were far beyond the “normal everyday tension” that always exists in business-to-business relationships. With these two organizations connected in a significant volume of sales, getting the relationship back to an even keel was a critical necessity.
We firmly believe that manufacturers and distributors can sustain positiveCoDestiny
relationships that are defined by shared successes that reward the shareholders of both companies[1
. Normal everyday tensions won’t go away, and can’t for organizations in such relationships, but they should never become the defining element of the relationship. The manufacturer-distributor relationships that deteriorate into deeply troubled interactions ought to be few and far between
. For manufacturers that sell through distributors, we offer three important recommendations as to how to move these relationships in the direction that will eventually yield “CoDestiny
Relationships Must Make Sense
First, never forget that these are business relationships. Unless they make business success to both partners, they are doomed to failure. Therefore, focus from the start on how to create and capture value—for both parties— in the relationship. Think hard about the three routes to value creation— increasing volume, realizing a better price point, and taking costs out of the system. Manufacturers and distributors must regularly discuss what they can do that will achieve one or more of these contributions.
Two of the routes to value creation—increasing volume and realizing a better price point—have to be addressed by the manufacturer and distributor as a “team,” as success depends on whether they can identify a way to win with more end customers and against competing “teams.” Are there new customer segments that can be reached? Are there ways of serving existing customers in different purchase settings or motivating different uses of the products? Is there a way to raise the bar in terms of services to win customers over from the competition? Can they motivate customers to move up the “Good-Better-Best” spectrum?
The remaining option for creating value, taking costs out, has to be looked at from a systems perspective that goes far beyond what each of the firms can do on their own. Over and over, we’ve seen examples where the possible savings from creative approaches has dwarfed any gains that could have been achieved by even the most aggressive price negotiator. Manufacturers and distributors have to map the costs associated with their relationship and the cost to serve in their markets, and figure out where they can increase efficiency and take the savings to their bottom lines.
Manage the Relationship
Second, be attentive to the factors that drive success in all business relationships—fundamentals like trust, knowledge, familiarity, and energy. Recognize that strong implementation skills are important – most relationship “horror stories” are the product of poor implementation via quality problems, late or missed deliveries, unresponsive customer support systems, and other such shortfalls.Both parties to the relationship need to bring innovative ideas about how to become successful, focusing here on business systems, sales processes, and information technology in the areas that connect the two firms.
Managing conflict, and making sure that “normal everyday tension” doesn’t escalate, is part of the relationship management process.There are two areas in which especial attention is required.The first involves managing the elements of manufacturer-distributor relationships that generate the type of conflicts that cause such relationships to deteriorate.At the top of the list of conflict themes is margin management.If both partners don’t find the relationships to be a profitable one, the focus immediately shifts to fighting over margin between the two organizations.Sharing the accountability for mutual profitability is the key priority in building these relationships.
Another key element of healthy relationships is end customer management.Unhealthy relationships are often characterized by distrust about end customers. As the example provided here illustrates, the channel organization typically fears that the manufacturer will “cut them out by going direct,” especially as an end customer begins to buy more and more. And the manufacturer fears that the channel partner will try to “substitute another product or even their private label brand.” We believe that the way to ensure stability in terms of end customer planning involves explicit discussion and never allowing end customer ownership become the elephant in the room that no one is willing to mention.
A final important element of relationship management returns to the topic of implementation.Both parties to the relationship have to recognize this fundamental fact: the “gang that can’t shoot straight” will inevitably be a loser in the marketplace and the firms that make up the gang will find that their relationship will devolve into zero-sum discussions and to finger pointing. Best-in-class relationships have a dashboard through which they monitor how well the organizations do, as a team, in meeting the key needs of customers for quality, delivery, service responsiveness, and other metrics. And they use that dashboard to solve problems and ensure that they are viewed by end customers as reliable and predictably on top of the challenge at all times.Their perspective is focused on the end customer, not on who’s at fault, and their approach to problem solving is getting the job done, not avoiding responsibility because it’s the other party’s fault.
Service Is Key
Success with end customers requires a focus on the services that are important to those end customers.In many instances, we have seen that end customers value services from both the manufacturer and from the distributor. The manufacturer, for example, might provide technical services linked to the products that they are supplying. The distributor, on the other hand, might provide services involving the integration of products from multiple manufacturers that they represent. Successful relationships between manufacturers and distributors involve attention to both categories of services. The role each organization plays with respect to the end customer and the coordination of services to ensure that they are effectively and efficiently delivered must both be managed to avoid duplication, inefficiencies, or competition between the two organizations.
Manufacturers and distributors must work together to put into a place an explicit plan for how the two organizations will collaborate effectively in delivering services to the end customers.They must understand each organization’s roles and responsibilities, and how the services from the two organizations, in combination, will meet end customer needs and provide a superior experience relative to competing teams of other manufacturers and their channel partners.And they must recognize that one size won’t fit all— the service strategy and the roles of the two organizations can very well differ from one market segment to the next, even from one customer to the next.
An important element to successes in developing a differentiated service strategy is recognizing that providing services is costly.It does very little good for either of the two organizations to recommend service action plans for the other organization without an honest assessment of the economic implications and the definition of a plan where those economic impacts are addressed.Sometimes higher service costs are self-supporting, as a result of increased volume or better pricing.But sometimes service spending that makes sense must be financed within the relationship, and, in those instances, good decisions require a return to the point made earlier: manufacturer-distributor relationships (and service action plans) must make business sense.
Service action plans also offer great potential for innovations that the two firms can make.Among the major success stories we’ve recently observed are ones that involving developing new ‘e’ systems for actions that range from ordering to post-sale support that were applauded by end customers as contributions that made them better off and that took costs out of the system for the manufacturer and distributor at the same time.Similar success stories have been associated with new approaches to inventory and logistics and with life-cycle MRO support. Services can become a differentiator, and also a source of added profits for the manufacturer distributor team when they incorporate new ways of addressing traditional customer needs.
With these three elements of a relationship strategy in place and executed well, the potential for success is high.For those manufacturers and distributors that are able to define and implement these foundations for successful relationships, we anticipate a future in which they too will be the subject of a “CoDestiny success story."
About the Authors
George F. Brown, Jr. and Atlee Valentine Pope are the authors of CoDestiny: Overcome Your Growth Challenges by Helping Your Customers Overcome Theirs
, Austin, TX: Greenleaf Book Group Press, © 2010.See www.CoDestinyBook.com
for further information on this book.They are also the founders of Blue Canyon Partners, Inc., a strategy consulting firm that helps businesses develop and implement growth strategies involving strategic manufacturer-distributor relationships.
See Atlee Valentine Pope and George F. Brown, Jr., CoDestiny: Overcome Your Growth Challenges by Helping Your Customers Overcome Theirs
, Austin, TX: Greenleaf Book Group Press, © 2010.
See George F. Brown, Jr. and Atlee Valentine Pope, CoDestiny Relationships with Channel Partners
, Volume 13, Issue 1, 2011.This article includes an interesting case study of the development of a positive manufacturer-distributor relationship in the automotive parts industry, involving AffiniaGroup and O’Reilly Auto Parts.