Service strategies reinvent distributor roles

by Mark Dancer

Fee-based services are a hot topic, but many distributor executives are not sure how to devise a successful service strategy. This article takes a look at how fee-based services can provide a new source of profitable growth, and how services can protect and strengthen the distributor’s position in today’s evolving supply chains.

Distributors exist to solve problems that customers have in sourcing, acquiring, handling and using products. Distributors also provide value to manufacturers in the form of stocking local inventory, processing orders, extending credit and supporting product lines. Historically, distributors have been paid for the value provided to customers and manufacturers in the form of gross profit dollars — the margin added to the cost of the product to cover operating expenses and profit. Manufacturers add additional incentives in the form of discounts, rebates and payment terms.

This arrangement worked well for many years, but today it is increasingly problematic. For customers, support and other services are included in product price, making them seemingly “free” from the buyer’s perspective.

For manufacturers, distributors offer operating efficiencies by spreading costs over multiple product lines, but this approach also dilutes the time, attention, and effort devoted to any single brand.

Many distributors have fallen into a trap by giving away services beyond product fulfillment to generate competitive advantage and become a preferred supplier. Instead of making up the additional costs through product margin on increased volume, distributors have been squeezed by powerful customers and deflationary product economics.

Suppliers are also being squeezed, by low-cost offshore manufacturers and by customers’ free and easy access to a proliferation of high-quality substitute brands. To compete in a global economy, manufacturers need distributors to provide high levels of dedicated marketing, sales and product support activities.

Today’s dilemma is clear — manufacturers are pulling distributors in one direction and customers in the other. As powerful customers push for lower prices and leading manufacturers demand increased support, distributors’ profits are suffering.

This is where fee-based services enter the picture. Creative distributors can offer customers and manufacturers new services, and charge for them rather than merely giving away their “value add” while hoping to recoup costs through product margins. Distributors have an opportunity to become suppliers of customized and differentiated relationships, up and down the supply chain. As Facing the Forces of Change: The Road to Opportunity reveals, a clear majority of distribution executives expect to charge fees for at least some services by 2008.

Despite this optimism, distributor service strategies will only succeed when they give manufacturers and customers what they really want, with benefits that go far beyond adding value to products. Manufacturers want accountability and results, and distributors must be willing to open their businesses, share information about customers and report on salespeople tasking, training and productivity. Customers want cost improvements, and distributors must be able to prove that for-fee services deliver measurable and sustainable gains in the customers’ operations.

New rules for supply chain services
Distributors that meet the expectations of suppliers and customers through fee-based services can add incremental revenue, improve their operations and grow their profitability. Our experience and research has identified five strategic guidelines to help distribution executives achieve success with fee-based services.

New fees for old services won’t work. Many distributors still see fees as a new way to charge for something that used to be given away for free. Obviously, customers can be expected to resist paying for something that once was free, even if they acknowledge the economic logic behind the concept. Customers will seek out distributors providing value-added services “for free.” This is another reason to make sure your services offer unique and distinctive value.

Fee-based services must deliver new value. What appears to be a unique or valuable service can become commonplace in a few years as competitors join in. Distributors must offer services that directly improve the customer’s profitability and operations, or that incrementally improve a supplier’s sales, market share or brand reputation. Success here is not measured by the distributor’s delivery times or fill rates, but by metrics measured in the customer or manufacturer’s business.

Use service metrics. Distributors measure themselves on traditional reseller metrics, such as inventory turns, gross margins and sales per employee. However, fee-based services require different metrics, such as personnel utilization rates and the profitability of alternative service lines. Distributors will also need activity-based costing (ABC) software to get a fact-based look at how much it costs to sell, fulfill and provide services.

Prepare for more accountability. Fee-based services will change the distributor’s supply chain relationships by forcing distributors to deliver specific, measurable results as well as maintain excellence in their core activities. Today, distributors can offer high levels of product availability and delivery, but often the only money-back guarantee put forward is the manufacturer’s product warranty. Everything else is marketing salesmanship: “Buy from me because I’m more consistent and reliable than my rival!” If the customer is not satisfied, the only solution is to switch distributors.

Let customers and manufacturers help you. Distributors are in an excellent position to capture the services opportunity because they are already on the front lines serving customers and delivering suppliers’ products every day. Distributors understand the customers’ operations and have resources and skills that can be used to drive out costs. Figure out how to make yourself indispensable by taking over some of your customers’ more critical tasks. You must talk to customers, understand their business challenges and goals and determine how your competencies and knowledge can drive specific, measurable gains in their businesses.

New supply chain relationships
Ultimately, successful service strategies will protect and strengthen the distributor’s role in the supply chain. But this success will have nothing to do with adding value. Rather, successful service strategies will create new value — for customers and manufacturers. This is a critical distinction that many distributors miss when they set out to devise service strategies. Distributors that focus on adding value see opportunities filtered by their line cards: customers buy products provided by manufacturers, and distributors win by supporting those products better than the next distributor.

Creating value requires a new level of self-assurance and entrepreneurship. For-fee services require distributors to build a new line card, not of products that can be sold, but of problems that can be solved. Moreover, these problems are not solved with the products carried by the distributor, but by the people, assets, knowledge and experience the distributor has amassed over time.

Consider upstream supply chain relationships with manufacturers. Facing the Forces of Change: The Road to Opportunity found that manufacturers are frustrated with the distribution channel’s rising costs and declining sales talent. Often, this reality motivates manufacturers to reach out to end-customers, sometimes selling them direct. Conflict and resentment grows as distributors cry foul and claim ownership of customers.

Fee-based services can restore supplier relationships by solving the manufacturer’s problem: declining competitiveness at the end-customer. Instead of promising to support products and earning margin on transactions, distributors can offer to penetrate new accounts, build brand awareness and displace competition, while shifting compensation to fees that pay for these outcomes. Manufacturers gain accountability, distributors gain compensation appropriate to their efforts. It’s a win/win and a fundamentally new supply chain relationship.

Mark Dancer is vice president and principal of Pembroke Consulting, a firm that helps senior executives of manufacturing, wholesale distribution and B2B technology companies build and sustain market leadership. He can be reached at (847) 480-2391 or by e-mail at mdancer@PembrokeConsulting.com. This article is adapted from Facing the Forces of Change: The Road to Opportunity, which is available for purchase online at www.nawpubs.org.

This article originally appeared in the March/April 2006 issue of Progressive Distributor. Copyright 2006.

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