Progressive Distributor - Lead from the middle

Lead from the middle

A difference of opinion between manufacturers and distributors about e-business may provide a leadership opportunity for forward-thinking distributors.

by Adam J. Fein

Manufacturers and distributors are at odds about the impact of e-business on their channel relationships. This divergence will slow the adoption of e-business solutions because both groups are approaching technology investments with divergent perspectives.

This conclusion, derived from the latest “Facing the Forces of Change” study, has important implications for everyone in the industrial distribution channel. Industrial distributors represent the most significant channel to market for industrial manufacturers and the most important supply chain for customers. Therefore, technology linkages in the channel must benefit customers as well as demonstrate a clear return on investment for distributors.

Right now, distribution executives have the opportunity to “lead from the middle” of the channel and shape your supplier’s strategy and investments. You must ensure that your manufacturers properly evaluate the business needs of their distribution channel partners before implementing new technologies and programs. Use this period of economic uncertainty to clarify expectations and define your role before the cycle turns again.

Impact of e-business
Industrial distributors are still the primary players who organize, coordinate, and manage the flow of information between buyers and sellers within the channel. Today, distributors take responsibility for sales and marketing activities at the local level that are not easily or economically done by a manufacturer. Customers of distributors rely on trained inside or outside salespeople to obtain technical and business assistance. Even products that are not considered technical often require advice and assistance for product selection, training, proper use and application.

The traditional sales and marketing role of wholesaler- distributors is under pressure, leading to great uncertainty about whether distributors will continue to perform this channel function. Manufacturers are still open to the idea that the Internet can replace distributors as a way to provide product information to customers: 44 percent believe it is likely to happen; 43 percent believe it is unlikely. In contrast, distributors strongly believe the Internet will not replace their sales and communication functions — an important difference of opinion.

Customers can bypass distributors to gather product information directly from manufacturers using the Internet. Technology is still seen as a way to make the distributor less critical as a resource in helping identify and select appropriate products, even after the dot-com shakeout.

A recent ISMA/I.D.A. study found that more than 80 percent of manufacturers have (or plan to have) their product catalogs, product and technical specifications, and material safety data sheets online. Some customers may be willing to perform these tasks for themselves because the Internet makes it easier to search for and obtain product information.

Manufacturers and distributors also do not see eye-to-eye about the ultimate prospects for online exchanges. Fifty-six percent of the manufacturers surveyed expect online exchanges to generate some degree of customer loyalty by 2006. Yet 60 percent of distributors express doubts online exchanges will ever attract customers.

Distribution options
In the future, manufacturers will have an ever-expanding set of alternative intermediaries that can perform the functions of distributors. Manufacturers see these as increasingly viable alternatives. Distributors perceive their role to be much more secure.

Today, many third-party logistics companies have thriving materials-management businesses performing traditional wholesale distribution functions. In our “Facing the Forces of Change” research, we found that 54 percent of manufacturers and 61 percent of customers believe that third-party logistics companies and distributors could provide equivalent levels of service to customers by 2006. However, distributors have a very different perspective; only 37 percent believe service levels will be comparable.

Sixty-seven percent of manufacturers in our study believe that distributors will stock less inventory and rely on other supply chain companies to drop-ship to customers on their behalf by 2006. Again, distributors disagree; only 47 percent believe they will outsource logistics by 2006.

In light of the possible alternative routes to market, it is not surprising that distributors are uncertain about whether their manufacturers will invest in traditional channels during the next five years. Forty-four percent of distributors expect manufacturers to take significant measures to help them become more effective in the channel, while 34 percent believe manufacturers are unlikely to make such investments.

Given the many options for getting products and information to customers, our data show that very few manufacturers will expand direct distribution operations, even for high-margin products. The cost to a supplier of covering all customers with its own in-house direct sales force and distribution network is prohibitive, especially if the products are sold to a large number of customers spread out over a wide geographical area. Even recent U.S. Census data show a 30 percent decline in the number of manufacturer-owned sales offices and distribution centers during the past decade.

Leading from the middle
Business relationships between manufacturers and distributors are not altruistic, nor should they be. Both parties need to perceive a benefit from the relationship.

The differences of opinion outlined above represent underlying themes that will fundamentally shift the competitive environment for industrial distributors in the future. To lead from the middle, you should take the initiative in discussing the topics above with your suppliers. Your actions can demonstrate to your suppliers that you are thinking strategically about the future of both of your companies.

Here are six specific discussion questions to help you begin a strategic dialogue with your suppliers:

• “What plans do you have for sharing the burden of technology systems?” Establishing and maintaining technology is costly. Some distributors do not have the available capital to make the needed investments in technology or to build private exchanges for their manufacturers. For others, the initial investment, along with the integration and ongoing maintenance, negates the benefits of communicating electronically with suppliers. Establishing, integrating and maintaining multiple customer interfaces requires a technology staff. Distributors also face significant challenges in winning qualified tech employees from other industries.

• “Are you planning to compete with your distributors to provide information to customers?” More than 70 percent of customers in our study value the Internet as a source of product information. If customers begin to rely heavily on the manufacturer for product information, then the role of the distributor’s sales force as a source of this information could be reduced. What research have your suppliers conducted to understand the impact of having greater access to, and influence over, the customer? What plans have they shared with you?

• “How are you planning to use technology to coordinate sales and marketing activities with distributors?” Manufacturers and distributors will be most likely to use the Internet to coordinate marketing and sales for branded products requiring technical information in the sale. If the products of your key suppliers meet this criteria, you should assume that your supplier is evaluating some type of coordinating technology. Become informed early about these plans.

• “Will you routinely provide product and marketing information in electronic format?” Manufacturers and distributors will disagree over the presentation of information provided on the distributor’s Web site. Some manufacturers have issues with the particular content provided or the way in which distributors market the manufacturer’s products on a Web site. Manufacturers must be prepared with electronic content for either their own Web site or for a distribution channel partner’s site.

• “How will we work together to avoid disappointing customers”? A customer will expect a smooth experience when interacting with systems that link distributors and manufacturers. This interaction raises the stakes, because customer management and inventory systems must be seamlessly integrated across the channel. This complexity of operations and interactions creates increased opportunities to perform below a customer’s expectations. Use your knowledge as the primary interaction point with customers to help design these systems.

• “How can we deal with an uncertain future together?” The new “Facing the Forces of Change” report provides four distinct scenarios of the future of distribution channels and supply chains. Each scenario models the supply chain and marketing channels under varying assumptions about the functions of intermediaries, the mix of online and off-line activity, customer adoption rates, manufacturer channel strategies, and the compensation model for supply chain participants. You should use these scenarios to jointly evaluate sales and marketing strategies with your key suppliers.

You may have to help your suppliers think in terms of channels, rather than in terms of products. Distributors build competitive advantage by understanding customer’s purchasing priorities today and in the future. Some manufacturers are insulated from end-users by their channel relationships. Others devote their management energies to designing and marketing top-quality products without regard to the process by which customers might purchase the product.

Be sure to separate the future from today’s fluctuations. There is a natural human tendency to extrapolate day-to-day fluctuations into the future indefinitely. We saw this irrational exuberance in the performance expectations for dot-coms in early 2000. Similarly, the economic downturn will eventually turn back to growth.

Strong relationships do not spring up quickly, easily or frequently. Instead, they are crafted slowly, passing through several stages in which the partners must deepen their investments and prove their trustworthiness and commitment. Take the initiative to lead from the middle and you will create a stronger and more equal partnership with your suppliers.

Adam J. Fein is president of Pembroke Consulting Inc., a strategy and marketing consulting firm. He can be reached at (215) 523-5700 or on the web at www.PembrokeConsulting.com. This article is based on NAW’s new “Facing the Forces of Change: Future Scenarios for Wholesale Distribution,” which can be purchased online at www.nawpubs.org.