The traditional partnership between manufacturers and electrical wholesalers is marching steadily toward a rebirth. The market's consolidation, emergence of new channels, difficulty in differentiating products, market share battles that ultimately drive efficiency gains and lower prices to customers, and the share garnered by European wholesalers is dramatically changing the electrical marketplace.
These changes are forcing electrical distributors and manufacturers to rethink their partnership strategies. In the not-too-distant future, channel relationships will emphasize results, accountability and data over goodwill, relations and personal interactions; redefine or eliminate territory and product authorizations and restrictions; and add service revenue to the traditional compensation earned by distributors and manufacturers.
Distributors and manufacturers must pay attention to these changes for several reasons. They still need each other — a truth all too often ignored. Also, companies that don't work to define a new partnership will find they must live with terms set by others. Worse, they may find themselves locked out as competitors partner up.
Most importantly, these new partnerships will divide profits differently than before. New terms will be required to ensure the customer's spending is fairly allocated among supply-chain partners according to the investments made and costs incurred.
To drive home the importance of reinventing distributor/manufacturer partnerships, this article will explore how several new strategies can change the roles, functions and responsibilities of manufacturers and distributors in their channel partnership.
Distributors must sell value
Too many distributors just position their companies as places to buy electrical products. More enlightened companies are repositioning themselves by selling custom, turnkey solutions that guarantee real, measurable, bottom-line impact for customers. On the vendor side, they are also repackaging their services to be sold upstream to their manufacturer suppliers. They are reinventing themselves to survive because the profit squeeze will not evaporate as the business cycle eases. Two factors drive this reality.
The first is the continuing success of alternate channels such as catalog houses, big-box retailers, wire-and-cable distributors, energy-services companies and high-tech distributors. Alternate-channel companies focus on high-margin business and are happy to leave less profitable business for full-line distributors.
Adding fuel to this fire, electrical distributors now see their traditional service functions being unbundled. For example, customers can now access product information over the Internet, bypassing an important role of the distributor's salesperson. Also, third-party logistics providers (3PLs) are assuming direct-shipment responsibilities and may even perform installation, repair and other activities. This second factor opens the door for new distributor strategies. If buyers are willing to unbundle traditional roles, they will consider new bundles if a strong case can be made for economic gain. Consider the following examples.
Full-service warranty management
Leading-edge warranty strategies go far beyond paperwork administration and field repairs. Rather, they seek to generate a bottom-line profit and to stand alone as a business. New warranty strategies do this by creating electronic databases of customer interactions and product performance, keeping up with shorter product life cycles, marketing extended warranties, and enhancing relations between manufacturers and distributors. If distributors can demonstrate that their customer base can be mined for new revenue and profits, they have a compelling case to pitch manufacturers.
Distributors are discovering that after they deliver products to customers, they can create value by hauling other materials away. For example, commercial properties and factories need to get rid of recyclable materials, especially those requiring special handling like batteries or mercury-bearing lamps. Again, distributors can present a strong business case, independent of their traditional product offerings. Ultimate success depends on following through with bottom-line gains for customers.
Manufacturers want a return on their investment in the distribution channel. Like it or not, new manufacturer strategies start in a different place — questioning the cost of selling through distribution channels and wondering what returns are gained on their considerable investments.
Few manufacturers expend the effort to understand the total costs of selling through specific channel partners. Even fewer go the extra mile to objectively compare those costs with real, measurable marketing returns. They are running blind, overstating the value of some partners and underinvesting in those best able to drive their strategies forward. There are two critical points. First, while calculating a return on channel investment isn't easy, it can be done. If it isn't, decision-making will continue to be ad hoc, uninformed and sometimes just plain wrong.
When manufacturers calculate their return on investment in the distribution channel, they roll up channel investments (measured as discounts and rebates) from the product level to determine the cost of doing business with specific channel partners. People costs incurred for sales, marketing, channel management and product support are added to generate a total cost. Each partner's contribution to driving strategy is then investigated to complete the ROI. Returns should go beyond common measures such as sales, profits and share to consider broader contributions to marketplace objectives.
As these new strategies are developed, manufacturers should consider new roles for those distributors that deliver excellent ROI. Thinking creatively, electrical manufacturers have many strategy opportunities that can be improved by effectively working with their distributors. Manufacturers and distributors typically share these competencies, creating the opportunity for new partnerships. Here are a few examples:
Brand coordination and leverage
The reputation of electrical products is greatly affected by the channel's performance. Poor availability, delivery, installation and problem resolution reflect negatively on the manufacturer even though it's the distributor that performs many of these activities. Customers want results and aren't interested in assigning blame.
Going a giant step further, most electrical manufacturers neglect and underdevelop their brand equity. Some have confused the market by acquiring complementary products with overlapping brands. Great brand challenges exist ahead for electrical product manufacturers, and success will hinge on effective coordination with their channels. New roles will evolve and new measures of success will follow.
Turnkey repair and maintenance
These services create value by combining several competencies to offer customers hardwired guarantees of improved uptime and reductions in maintenance costs. In the automation arena, distributors do this by knowing the customer's application and performance requirements, capturing the customer's operational data electronically by factory automation equipment and offering predictive maintenance programs and repair parts acquisition.
STRATEGIES FOR SUCCESS
To improve their partnerships with each other, distributors and manufacturers should consider these strategies:
Emphasize results, accountability and data over goodwill, relations and personal interactions. For manufacturers, this means communicating exactly what is needed from partners, backed up with significant rewards and penalties for good and bad execution. Surprisingly, many manufacturers are afraid to make this commitment, worrying that they will offend their partners.
Both parties can put teeth in measurement by tying compensation to performance results. They must also work together to share customer, sales and operational data. Distributors can lead from the middle by developing detailed supplier metrics that measure performance and by making sure senior management in strategic relationships keep informed of the results.
Redefine or eliminate territory, market and product authorizations and restrictions. Limiting conflict is not the same as encouraging cooperation. As new strategies gain traction, customers will require that manufacturers and distributors work together in new ways. As a result, territory, market and product policies will fall by the wayside. These policies were once useful for coordinating efforts and limiting price erosion, but they must be reinvented if they are to survive.
Manufacturers and distributors can start by examining the new requirements of serving large accounts. These customers are demanding consistent support and pricing across all of their locations. The mechanisms for ensuring these goals are met while limiting destructive behavior among partners are not yet clear, particularly since the mix of new services and traditional product sales is still evolving.
Add service revenue to the traditional compensation earned by distributors and manufacturers. Services will grow because they fit an established trend — buying-power and supply-chain efficiencies eventually flow to the customer. Services also stretch suppliers to add new competencies, or to look for partners with established track records.
Because of all this, distributors and manufacturers should pursue service strategies, but they should avoid the knee-jerk tendency to go it alone.
Going further, manufacturers should consider distributors when making outsourcing decisions. If functional compensation is part of the discount and rebate structure, service fees should be considered in the mix.
Distributors should develop service offerings packaged for sale to manufacturers and customers. As they do so, they will be challenged to get involved in a part of marketing traditionally assigned to manufacturers — new product development. In turn, this need creates an opportunity to expand the channel relationship to include partnering for joint service development.
Electrical distributors should consider retooling their business model. New asset, cost and profit models will be required as profits earned through markup shift toward fees earned for services. New strategies are driving new channel relationships and redefining the long-standing terms of the manufacturer/distributor partnership. The early returns are in and the emerging terms of the partnership are evident.
That's not to say there isn't a lot of work, frustration and even pain ahead. At times, each partner has viewed the other as underperforming, overcharging or lacking commitment. Because of this, many will be cautious and skeptical, and prefer to sit back and watch developments. However, if you aren't working to rewire your channel relationships, someone else will do it for you. And like all partnerships, if you are not involved at the start, you can bet you won't be happy at the finish.
Mark Dancer is vice president of Philadelphia-based Pembroke Consulting, a management consulting firm specializing in strategy, channels and business marketing for distributors, manufacturers and B2B technology companies. He can be reached at [email protected] or by calling (215) 523-5700.