The distribution paradox

by Robert Nadeau

Manufacturers and distributors agree that changing the nature of their working relationships would lead to improved sales performance, increased profitability and higher levels of customer satisfaction. Yet a recently completed survey of 504 manufacturers and distributors reveals that a lack of trust and commitment is keeping them from accomplishing these outcomes.

How did manufacturers and distributors get into this situation? More importantly, how do they get out of the distribution paradox?

Most manufacturers and distributors are caught in a paradox. On one hand they realize that changing their working relationships would provide valuable outcomes. On the other, they don't trust each other enough to commit to making the necessary changes.

Without trust there is no commitment. Without commitment, there can be no meaningful change. Without change, sales performance, profitability and customer satisfaction will continue to suffer.

The good news is that changing the nature of manufacturer/distributor working relationships is much easier than most people realize. For manufacturers and distributors, the hardest part of the process will be changing the way they view and manage their working relationships.

Manufacturers and distributors develop and support core beliefs about the purpose of their working relationships and how these relationships should be managed. These beliefs are passed on from one generation of management to the next. Over time, individuals tend to forget why they believe what they believe. Yesterday's good idea becomes today’s policy and tomorrow's mandate. People also come to believe that what they don't know isn't worth knowing. This is how industry participants come to believe that their circumstances and problems are unique.

Unless they recognize and address these perceptual barriers, manufacturers and distributors will be unable to deal with the primary barriers to better working relationships: lack of trust and commitment.

How did these beliefs evolve?
For the past 50 years, the basis of competition in most industries has been high quality products at low prices. The value proposition (product-pricing-availability-information) was defined by manufacturers.

The distributors' role was to provide market coverage, hold inventory and process orders. In this environment, manufacturer/distributor working relationships with low levels of trust, commitment and communication produced acceptable results for everyone involved primarily because there weren't many alternatives for taking products to market.

Over time, however, most industries evolved to a point where all of the manufacturers made quality products and they all had low prices. When this happened, manufacturers and distributors began looking for ways to improve profitability, and the primary area of focus was cost cutting. What they failed to realize was that their actions to accomplish gains in short-term profitability would have long-term implications on their working relationships.

During the 1980s, manufacturers entered a period where restructuring, downsizing and divesting became the common methods for improving profitability and shareholder value. During this period, they often viewed sales/distribution channels as costs that needed to be controlled rather than as strategic assets that needed to be managed.

Manufacturers found they could increase market share by adding distribution and they could reduce costs by taking business direct. In the short-term, these actions produced results for manufacturers. However, in the long-term they have had a negative impact on distributor trust and commitment.

During this same period, distributors were also taking action to improve profitability and shareholder value. Their primary area of focus was inventory.

Inventory ownership represents between 50 percent to 70 percent of the costs in the channel, and distributors quickly discovered that they could greatly increase their profitability by shifting these costs back to their suppliers.

This action increased costs for manufacturers and reduced their trust of and commitment to distributors. Manufacturers responded by adding distributors in an attempt to get inventory back into the marketplace and by taking more business direct in order to cover the growing cost of holding and handling inventory. These actions further reduced the level of distributor trust and commitment.

After more than 20 years of this action-reaction-consequence behavior by manufacturers and distributors, it's easy to see why there is little trust and commitment between them.

So what's the solution?
Logic and emotion will not help manufacturers and distributors get out of the distribution paradox. In fact, logic and emotion are largely responsible for the current state of affairs. In reality, nothing will change until action is taken to prove that the benefits of change are greater than the costs associated with doing business as usual.

What's interesting is that manufacturers and distributors already know the benefits of changing their working relationships:  improved sales performance, increased profitability and higher levels of customers satisfaction.

However, what is generally not known are the actual costs associated with the common problems in manufacturer/distributor working relationships.

In an effort to better understand these costs, we are conducting an E-Survey. We need your help. No one knows more about your working relationships and your costs than you do. If you are caught in the distribution paradox and would like to get out, we can help. But we need information about the common problems and their costs specific to your industry. You do not have to identify yourself to participate in this survey. Simply go to www.indusperfgrp.com and click on the E-Survey icon.

Manufacturers and distributors did not intend to drive their working relationships to a point where trust and commitment are low and communication is virtually non-existent. These conditions are the long-term implications of decisions that both parties made in the past.

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