Progressive Distributor - ISA 2007 Issue

The case for planning

by Michael Marks

Manufacturers and distributors are aware of the gap between the promise and the reality of joint planning. Typically, joint planning has fundamentally been about selling more. The manufacturer gets the distributor to sign up for a “number” that represents purchases by the distributor and sales for the manufacturer.

In the past, most distributors treated this as a goal, like losing weight and eating better. Failure was a cause for guilt, and reaffirmed intentions to do better. From the manufacturer’s perspective, getting all the distributors locked in was a way to identify those that deserved punishment when the plan failed.

Consider the following:
• If point-of-sale (POS) data is not shared, then the distributor is a customer. Using the term partner requires that a manufacturer use distributor resales, not purchases, as the basis of compensating its own sales reps. This is common in other industries.
• Many manufacturers consider a loaded distributor a loyal distributor. Tying up distributor capital limits potential purchases from competitors. While making the numbers at the end of the quarter, it reduces line profitability and the distributor’s willingness to invest in growth.
• Many product life cycles have matured and assumed commodity characteristics. In an industry where customers actually purchase solutions, “or equivalent” products are often a small part of the sourcing decision.
• There is structural overcapacity in all industrial markets. Does the world need another manufacturer of motors, of cleaning equipment?
• As the automotive mentality of leveraging purchasing power continues to permeate our industry, it makes most supply chain initiatives simply transfer, rather than reduce, cost.
• The industry continues to focus on selling approaches essentially identical to those used in the 1960s and 1970s. Many manufacturers still only get excited about product quality and new features. Many distributors continually beg for margin help, like the old commercial of the monkey on cocaine.
• Higher product quality in most industries and the increasing resale market for used equipment has shrunk market size as products last longer. Imagine the impact on spark plug manufacturers and auto distributors when replacement intervals went from 10,000 miles to 100,000 miles. It was kind of tough to grow sales.

The industry has responded to these factors by making the planning process more detailed and demanding. Measuring “sales performance to plan” down to two decimal places only provides employment for clerks.

What should manufacturers do now?
1) Step one for most manufacturers is to shoot some distributors.
Manufacturers, in most cases, have too much distribution. Some of this comes from offering product to all locations of national chains. Most results from ducking channel issues over past years. In all cases, manufacturers can rank their distributors from “champ of the camp” to “chump of the dump.” A good reality check for a manufacturer is to assume it is building a distribution channel from scratch and compare the result with what actually exists.

If a manufacturer has 100 distributors, the top 20 will drive innovation and change. Sixty are in the middle, paying their bills with occasional flashes of brilliance. The bottom 20 create 80 percent of the heartburn.

Manufacturers that misunderstand the Robinson-Patman Act treat all distributors alike. Group association punishes the top distributors. Either introduce a premium distributor program, functional discounting or shoot the losers. Joint planning is powerful with good distributors. Trying to do joint planning with losers is like rearranging the deck chairs on the Titanic.

2) Step two is to stop negotiating and start listening.
The planning process is where manufacturers get reality checks on what’s happening in the open market. The dumb ones overcome objections with this contrary information and sell the required corporate number to the hapless distributor. Some manufacturers are so bad at this that their distributors are afraid to tell them what is really going on in the market.

Smart manufacturers start planning with their distributor before they have locked in a corporate number. Manufacturers need to speak to each distributor about their investment with that distributor, and ask the distributor where to spend their investment.

3) Step three is stop planning distributor purchases.
Any plan developed without intelligence creates significant unnecessary casualties. The planned distributor purchase considers: demand creation, demand fulfillment, cost to serve, competitive initiatives, investments to support growth, and a mutual SWOT analysis.

Things to plan include distributor resales, customer creation activities, new product introductions, and managing end-of-life products. Some leading manufacturers, like Owens Corning, give awards to distributors for meeting distributor profitability goals.

What’s a distributor to do?
1) Step one for most distributors is to create a strategy.
Many distributors continue to be one-dimensional: growing sales. All dollars of gross margin are not created equally, and winning distributors are clear on this. Winning distributors can answer the question, “What actions are you taking to improve competitive advantage at the end of the year?”

2) Step two for most distributors is to define a strategic line card.
Some manufacturers are profitable to deal with and some are terrible. Some of the largest are the worst. Five years from now, the cast of characters will look much different.

Distributors must identify those manufacturers that will be the long-term winners. Current sales volume is one of the least important selection criteria. The winning distributors will be the ones that represent the manufacturers with the best long-term prospects.

When a distributor has a long-term winner on its line card, joint planning is worthwhile. That discussion must include mutual investments to grow the brand, sharing confidential information on both sides and real discussion on differing agendas.

3) Step three is to narrow suppliers represented and focus on the winners.
The old model – representing all suppliers to give customers what they want – is rapidly becoming a losing strategy. It also reduces products to commodities. Stocking inventory from fewer manufacturers improves the ability to stock both breadth and depth while reducing capital investment. This requires getting sales reps to sell what is stocked and stop taking non-stock special orders. One key benefit is to reduce the number of suppliers that require joint planning activities.

4) Step four is to create a standard planning response.
Many manufacturers don’t do anything with joint plans. Winning distributors create forms, tools and processes that let clerical staff do much of the work to reduce disruption of key distributor executives. This allows the distributor to pretend to care (without wasting too much time) and the bureaucratic manufacturer to be happy with lots of paper with numbers.

The bottom line is that many markets will probably get worse with respect to joint planning activities. In this environment, many companies will sort out the process and gain in the market.

Mike Marks of Indian River Consulting Group will give two presentations on distributor/ manufacturer relationships at the Industrial Supply Conference and Trade Fair in Las Vegas, May 21. Reach IRCG at (321) 956-8617, or visit www.ircg.com.