Manufacturers' requests for point-of-sale data are forcing electrical distributors to do some soul-searching about the sanctity of their customer information.
There's a real sense of power in having information other people crave. With increasing frequency, distributors in the electrical industry are hearing requests from their manufacturers to share sensitive information they've never requested before. They want transaction data that tells them things like which customer bought their product, what kind of business the customer is in, how much of the product he bought, how much he paid, where he had it shipped and whether it was direct-shipped from the manufacturer or sold out of stock. There's no denying this is powerful stuff, and it's no surprise some distributors are hesitant to give it up. But many are deciding it's worth the risk in some cases to share information with their channel partners.
A steady stream of point-of-sale (POS) information can be immensely helpful for manufacturers planning sales and promotional efforts in a market area. In the hands of someone who knows how to use it, POS data can yield new insights on market opportunities, making the data a formidable competitive tool. In an era of increasing market options, where the rise of the Internet and electronic commerce raise questions about the distribution channel's value to manufacturers, POS data is a valuable asset that distributors can offer loyal manufacturers. Recognizing the power of this data, many distributors are reluctant to let such a stout lever slip from their grasp.
There are considerable risks in lending manufacturers this tool, because it may not be used strictly to the distributor's benefit. The sense of vulnerability among distributors is tangible. Some see too much risk that a manufacturer could use their data to help a competing distributor or alternate market channel, or to sell direct to the customer. They hesitate to share their data with any but the most trusted channel partners. As with just about every other aspect of the distributor-manufacturer relationship, it's a question of trust. Every distributor will have to address this issue on his or her own terms.
The chorus of requests for POS data may arise from a need for clarity in uncertain times. Manufacturers, like the rest of us, are facing a world where old equations are being critically questioned and new solutions are being proposed at a bewildering rate. In hopes of determining the best course into the future, manufacturers are looking for every bit of information they can find on their customer base and market segments. Constant advances in data mining and customer modeling add to the hunger for information that can be relied on for solid projections.
The distributor sits in the position in the channel where the most broad-based, most useful information on what customers really want and what they really buy converge. Holding these jewels of information makes the distributor powerful, gives him leverage in negotiations with manufacturers. There are limits to that power and there are many benefits to be gained by sharing the wealth, but doing so requires a leap of faith that doesn't come easily.
A large portion of the value in a distributorship resides in its deep understanding of individual customers' buying habits and unique needs. "As distributors, we're concerned about the integrity of this information. It's part of the value our customer intimacy brings to the selling channel," says Michael Fromm, president of Fromm Electric Supply Corp. of Reading, Reading, Pa. "When distributors sell their companies, they're selling customer lists. So by definition we wake up in the morning protecting that data."
As is often the case, manufacturers that have tighter relationships with distributors get the most cooperation. Manufacturers such as Rockwell Automation/Allen-Bradley, Milwaukee, Wis., that give their chosen distributors exclusive access to important product lines demand and receive almost unbridled access to their distributors' data. Others with less-exclusive distribution policies have found it harder to open that door.
The risks vary with the likelihood that sensitive information could be divulged to the rest of the marketplace. Dale Holt, president of Codale Electric Supply, Salt Lake City, Utah, says his company shares data with Allen-Bradley because of its intimate relationship there, but he would have a hard time giving it to anybody else because of the risk the data would become public knowledge. "If they're doing anything as far as managing a given area with data, then obviously they have to tell somebody else about it. And there's just a lot bigger chance of these local guys divulging information. Two-thirds of the ones we deal with here have manufacturers' reps--how're they going to take that data and do anything with it without giving it to those reps? These guys are on 30-day contracts and they deal with every single distributor there is. In those instances, I would never give them that information."
Manufacturers looking to gather POS data need to make a stronger case with distributors and do it in writing, says Richard Kerman, president and chief operating officer of Steiner Electric Co., Elk Grove Village, Ill. "Most manufacturers requesting point-of-sale data have yet to create a level of confidence with their distributors guaranteeing that the information will be held in strict confidence and only used to the benefit of that specific distributor," Kerman says. "Structuring an agreement that would legally protect distributors by honoring the sensitivity of the information being provided is not only critical but logical.
"E-commerce, the Internet, manufacturers' Web pages are all raising serious issues about the manufacturers' intention concerning the use of POS information, which could simplify their ability to sell direct. Some manufacturers are currently selling direct over the Internet, the impact of which has yet to be determined. This further supports the manufacturers' responsibility to fully protect the point-of-sale information, provided by the distributor, in writing and in the same manner that they protect their own highly sensitive confidential information."
Indeed, some distributors suggest manufacturers should put their own jewels on the line to get the data. "If manufacturers are serious about the mutual benefit of POS information, they should be willing to have an agreement that will subject them to punitive damages if the information is used against the distributor," says Jim Schmitt, president of Van Meter Industrial, Cedar Rapids, Iowa. When distributors' information-safety concerns can be overcome, manufacturers can draw value from the data for not only their own operations, but those of their contributing distributors as well. "The information is critical to collaborative planning," says Frank St. Onge, business development manager for Osram Sylvania, Danvers, Mass. St. Onge oversees the company's "war room" where data is used to generate maps showing market potentials by business type.
Because so much of the lamp business has always been handled with off-book pricing, lampmakers have had data on about 60% of product sales for years. Manufacturers use analysis of POS data on the marketing side to bolster all sorts of strategic and tactical planning. It allows them to compile aggregate profiles of different customer types and calculate estimates or multipliers to better understand how much of a particular product a particular kind of customer can be expected to buy. This insight is then shared with the distributor through market planning sessions to select sales target accounts for emphasis in the future.
Manufacturers who collect POS data can use it to manage distributor relationships and measure distributor performance, giving the distributor a more focused marketing plan, but too heavy a reliance on POS data for this can be a hindrance for distributors as well if the data is misused, misinterpreted, limited or just plain wrong. John Peterson, until recently president of Warren Electric Group, Houston, Texas, was hesitant about giving POS data to Allen-Bradley for many years, and only recently began supplying some data fields such as pricing, because of concerns about how the data would be used to manage Warren's sales of Allen-Bradley products.
"Distributors are sometimes creative about how they make their money," he says. "Sometimes you'll take a small margin from a customer on one sale because you know you're making it up elsewhere on spot buys to that customer, but the POS data doesn't reflect that. Everyone's fear is that manufacturers will manage margins based on single-dimension data."
Much of the potential for problems resides in the collection and manipulation of the data, where inaccuracies from misapplied SIC codes to simply misentered data can cause figures such as market share and account-penetration estimates to be way off. Nonetheless, distributors are expected to base their sales plans on this data.
Data such as broad-based indicators of sales trends and market potentials are very useful, says Peterson. Warren Electric Group uses manufacturer aggregate profiles and other industry resources such as EW's "Market Planning Guide" (see p. 33) to better evaluate gaps in its markets.
Fromm Electric's Michael Fromm also has found that sharing data has opened lines of communications with manufacturers and opened his own eyes to new ways of using that data within his own operations. "We found, because the importance of this data was brought to light, it made us think more seriously about how point-of-sale data can help us to do a better job of marketing within our own organization. We now use our own point-of-sale data to do what we call customer mapping, which creates a gap-analysis of our market share within each customer. We now do that across the board with all our products, not just in one manufacturing line."
Manufacturers also use POS data for production planning, to gain a better understanding of where product is in the market channel and therefore how much of which products need to be manufactured. It's sort of a rough form of supply-chain management, says Bruce Merrifield, of Merrifield Consulting Group, a distribution consulting firm based in Chapel Hill, N.C. "I'm an electrical manufacturer, and I know what I'm shipping to distributors today. I don't know whether I'm overloading the channel, and here I'm fixing to make more. If I know what I shipped to you and what you're shipping out every day, and we have an initial inventory starting point-whether we're doing VMI on an orchestrated-EDI-transaction-set basis or not-I have a better view of how much inventory's in the channel and what I should be making and how much."
Sharing POS data also can help get reps a fairer compensation structure by showing manufacturers where products are actually going as opposed to where they were ordered from, says John Fimiani, director of marketing for enclosure-maker Rittal Corp., Springfield, Ohio. "For example, if I have a salesperson who has a distributor in their territory, and they ship into a territory managed by another salesperson, I only know based on POS data where that shipment ended up. You have the same situation if a customer was buying from a distributor in one territory, then started buying through a different distributor under a blanket contract, but the salesperson was doing the specification work from the factory side. It gives you an understanding of where that went."
The same dynamic helps distributors serving product they didn't sell. Peterson says Warren Electric's Puerto Rico location, for example, provides after-sales support on a lot of product bought through parent companies in the states. "Our support for those products is critical to maintaining customer loyalty for the manufacturers," he says. Without analysis of POS data, they don't know where the product is actually being used.
Many of the benefits distributors gain from manufacturers' POS data analysis can be gained through compromise. There's no reason a distributor can't give a trusted manufacturer some useful data without turning over the most sensitive information, says Fromm. "Your job is to find a compromise that meets everyone's objectives. It may be unnecessary to give them customer names, or contact or pricing data, but it may be useful to show them unit shipments to certain territories, product groupings purchased by individual customers or items sold to customers by certain SIC codes.
"If that information can meet intended objectives without jeopardizing customer intimacy, everybody wins. That's a key point-people tend to look at POS data as an all-or-nothing consideration. You can configure data so that you're protecting your interests, but serving as a valuable resource at the same time." Some distributors worry about manufacturers using POS data to eliminate distributors from the channel altogether-a process known as disintermediation. These distributors may be overlooking the long-term value of hard-goods distributors. "If collecting POS data was the only thing stopping manufacturers from disintermediating distributors, they would go ahead and do it anyway," says Osram Sylvania's St. Onge.
According to Merrifield, most distributors' reluctance and fears about POS data come from not understanding distribution's full value or from fears about their companies' performance.
"If they're the low-cost, basic-service distributor, and the product requires physical redistribution, they know they do that better than the manufacturer ever will," says Merrifield. They know the manufacturer's not going to put a warehouse there. "They have the economy of scale of two hundred suppliers rather than one manufacturer trying to do a warehouse. They're so damn good, they don't worry they're going to be terminated tomorrow. Now if I didn't know why I existed, economically speaking, I'd worry that somehow they're going to sell direct. Obviously, there are some guys who are paranoid about the mediocre job they're doing and the poor share they're getting. They don't want to cooperate, and that will just accelerate the inevitable."
E-commerce, which many distributors believe will be the conduit to direct manufacturer sales, is a ready source of POS information. Internet portal and e-commerce sites that handle transactions from around the globe gather immense detail for aggregation and sale back to participating vendors. It suggests that not giving manufacturers data could make alternative, online selling look more attractive. Ultimately, distributors must evaluate what good the data does them if they keep it to themselves. Osram's St. Onge is hopeful the industry can find some way to provide aggregated POS data on a much larger, industry-wide scale, possibly built on the cooperative Industry Data Exchange Association (IDEA) model, handled by a third-party accounting firm to preserve anonymity. Such a tool would give manufacturers and distributors a much clearer picture of product movement for planning purposes.
With safeguards such as confidentiality agreements, distributors should feel more comfortable, but must judge whether the risk is worth the information and other benefits they get back in return. Short of an industry-wide solution, each distributor must keep making his own judgment regarding each vendor's requests for data.