Supply chains and marketing channels are being redrawn as e-business, consolidation, and integrated supply alter the relationship between manufacturer, distributor and customer. This evolution is much more complicated that the naïve predictions that distributors would be “disintermediated” as customers and manufacturers established direct relationships. But how can manufacturers best leverage their existing industrial channels to grow in this era of uncertainty?
Every three years, the National Association of Wholesaler-Distributors sponsors a major trend study titled Facing the Forces of Change that examines the future of distribution channels. The most recent edition, written by Pembroke Consulting, sheds lights on strategies for manufacturers who still need the services of an independent distributor or dealer channel.
We found e-business is a powerful tool for increasing market share in business-to-business industries, particularly for manufacturers that rely on intermediaries to reach end-customers. However, e-business also calls for rethinking traditional approaches to channel management. Manufacturers can profit from new developments in the channel with three interrelated strategies.
1. Understand the End-Customer's Buying Process
Too many manufacturers remain insulated from customers by channel relationships. Reaching all but the largest customers requires manufacturers to cede responsibility for sales and fulfillment to distributors and other intermediaries. Management at industrial and technology companies further heighten their isolation from the marketplace by devoting their energies to designing top-quality products without regard to the process by which customers purchase and use the product.
Manufacturers must understand their end-user's current and future purchasing priorities in order to generate market share gains from new technologies. What's more, e-business and channel investments will be squandered and unproductive without a clear understanding of what end-customers require from the buying process – beyond a first-rate product.
Consider the changes in business procurement. During the past 10 years, business customers have focused on improving efficiencies in their inbound supply chain by consolidating supply contracts, implementing integrated supply agreements, installing e-procurement systems, experimenting with reverse auctions, and rationalizing vendors.
To respond, manufacturers must identify the winning channels and partner with them to retain access to customers. The winner might be a distribution intermediary with sophisticated transactional services, such as electronic data interchange and e-procurement support. Or the winner could be an integrated e-procurement vendor who controls access to customers.
The key to picking the winners comes from truly understanding the way in which end-customers procure your products. For example, customers in business-to-business channels face enormous organizational costs for procurement, purchasing and inventory maintenance. A distributor or channel who lowers a customer's total cost of acquisition is generally preferred over one that simply offers a lower price.
The successful evolution and transformation of a go-to-market channel occurs in response to changes in the requirements of customers. By developing early partnerships with the best channel in the eyes of end-customers, manufacturers can better leverage their resources and meet the needs of more powerful and demanding customers.
Manufacturers need to understand how end-user customers buy and want--not just which products they buy or who they are. This requires research and insight about the “how” of product selection, not simply the “what” decision. Products are a means to an end in the eyes of a buyer. Product satisfaction surveys and feature/function market research miss the behavioral trends that provide clues to the evolving channel.
2. Restructure the Economics of Your Channel Partners
E-business is unbundling channel activities by giving customers lower cost, higher service alternatives to the sub-components of traditional go-to-market. Unbundling requires new approaches to channel compensation.
For example, e-business gives manufacturers an affordable way to take greater control over the information flow to the customer. Smaller customers, such as contractors or small industrial buyers, typically rely on a distributor's inside or outside salespeople to obtain technical and business assistance in product selection and use.
Today, customers and purchasing managers are increasingly using the Internet to bypass sales channels and directly gather product specifications, warranty and rebate information, material safety data sheets, and potential suppliers. Online technology overcomes the traditional cost limitations of geography, time, or number of customers.
These developments create an opportunity for manufacturers to redefine traditional channel economics because the value of a distributor's sales force is reduced in the eyes of customers. The challenges to traditional channels are not online exchanges or direct-buy strategies. Instead, our research shows that e-business squeezes channel profits as some, but not all, functions are shifted away from the traditional channel. Either overhead shrinks or distributors must find other ways to justify their gross margin.
When this transition has occurred in channels such as pharmaceuticals or automobiles, channel margins drop since the intermediary is adding less value. Yet our research shows that business customers are reluctant to migrate their entire purchasing process to a direct on-line relationship if it means sacrificing local service, technical support, or complex fulfillment requirements.
Manufacturers can manage the fragmenting roles of their traditional channel using functional discounts programs. In a functional discount program, distributors are compensated so that payments (discount off list) are tied to the actual activities being performed by the channel.
Customers, not manufacturers, are best positioned to determine the value provided by their channel. That's another reason that deep insight about end-customer behavior becomes invaluable to implementing an e-business strategy.
3. Lead from the Top
Manufacturers stand at the top of the supply chain and can use a variety of sales, marketing, and physical distribution systems to connect their products with customers. Therefore, they are well-positioned to evaluate the business needs of their distribution channel partners before implementing new technologies and programs. Technology linkages in the channel must benefit customers as well as demonstrate a clear return on investment for distributors and dealers.
Leadership begins by knowing your partners and assessing their competencies and performance. Yet we frequently encounter industrial manufacturers with e-business and channel management initiatives but without formal distributor evaluation programs.
Evaluations should be conducted yearly and include both quantitative and qualitative assessments. Quantitative measures can include the distributor's purchase patterns, pricing abilities, and market share. Qualitative assessment can include the strength of the distributor's management, the effectiveness of their growth plans, and overall customer experience they offer.
Here are a few specific questions to begin a qualitative evaluation of e-business with a channel partner:
- “What plans do you have for upgrading your technology systems?” Establishing and maintaining technology is costly. Many smaller 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.
- “How will we work together to avoid disappointing customers”? A customer will expect a seamless 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. Develop knowledge of customer's buying preferences to help design these systems for a sales channel.
- “What are your future strategic objectives?” A critical part of channel evaluation is an assessment of distributor and dealer growth plans. Not all distributors and dealers will want to grow. For those that do, the desire to grow starts with senior management and permeates the company's business practices, service culture and compensation plans. Growth plans must be realistic, reflecting the investments and skills required to sell new products or to sell to new customers. Dealers and distributors must be able to articulate the reasons why a customer buys from them and have a clear plan for how technology fits into their company.
Business relationships between manufacturers and distributors are not altruistic, nor should they be. A strategic perspective on an evolving channel will create a better and more effective go-to-market strategy.
