He Said/She Said

Faced with an economic malaise, electrical distributors, electrical manufacturers and independent manufacturers' reps focus more on their financial issues. In a mature industry faced with accelerating consolidation, offshoring, commodity costs, an industry-wide dearth of investment in branding, training and recruitment, and increased labor and operational costs, understanding your channel partners' challenges and needs is imperative to developing mutually profitable relationships.

Our firms' recently conducted Channel Challenges Survey helps identify industry challenges to provide a roadmap for discussion. The concept behind the research was to conduct a 360-degree “interview” of the industry. This allows each channel audience to define their top challenges with the channel parties with whom they work. Manufacturers expressed their challenges with reps and distributors; reps with their manufacturers and distributors; and distributors with their reps and manufacturers. The goal is to identify the issues, and more importantly the gaps, between the parties. The research was conducted via an e-survey and interviews. We had over 250 people respond to the e-survey and interviewed more than 20 companies to obtain input. Trends became evident pretty quickly.

Manufacturers' concerns with independent reps

A vast majority of manufacturers utilize independent manufacturers' reps (either wholly or in part) to market their products. The challenge here is that you have two “for profit” entities, each with different management motivations. Reps, for the most part, are Sub-Chapter S corporations, with one or two principals. Manufacturers are corporations with the larger companies being accountable to shareholders. While the two depend upon each other for success, the challenges that they see in each other are significantly different. In considering their sales organizations, manufacturers' top five challenges were, in ascending order: specifications and sales strategy; commitment to rep product training; time management and attention given to their line; marketing support, competitive feedback and new product support; and understanding of today's distribution issues.

Rep concerns with manufacturers

Conversely, reps have more tactical concerns with their manufacturers. Their key concerns were, in descending order, communication and customer-service issues with the factory; pricing administration and support; transference of non-sales functions; pricing administration and support transference of non-sales functions; unreliable shipping information; and territory planning (budgeting) and commissions.

One rep from the Southwest expressed some frustration with his relationships with manufacturers. “Manufacturer demands now are at a point where we cannot react in a timely manner sometimes,” he said. “We cannot afford to hire more reps; the commissions and sales are not there. We always had a problem getting correct credit for sales and spend a fair amount of time tracking distributor transfers. Special pricing promos and progressive discounts are driving us crazy to make sure that the customer gets the proper credit.”

Another rep said, “We are on a 30-day contract and some act as if we only handle their line. The amount of paperwork that some manufacturers want is at a point where in really good times, we would tell them to take a hike.”

There appears to be a disconnect here. Manufacturers want to focus on revenue-generation activities whereas reps, who earn their living on revenue-generation activities, are allocating more time to administrative and customer-service issues. Since the compensation model is based on revenue, reps are challenged with spending time on non-revenue issues. To facilitate a stronger, more mutually profitable relationship, manufacturers should identify ways to either streamline administrative issues or compensate reps for selected administrative support.

Rep-distributor relations

Reps are the middle point between the distributor and the manufacturer. While they are supposed to represent the manufacturer, they don't always get the authority to do so (even though they often are loaded up with much of the responsibility). The top five challenges that reps have with distributors are, in descending order, lack of inventory; a lack of loyalty to brands and independent reps; an all-encompassing focus on price; a need to focus more on improving margins rather than on lowering market price; and selling to end users versus just taking orders.

Rep respondents seem to believe distributors are taking a more dispassionate, analytical and financial approach to the business by reducing inventory investments and focusing resources on negotiating lower prices. However, they see distributors selling based upon price and being reactive in the sales process. It appears that for many distributors, the traditional role of distribution (product transference and credit) are acceptable roles and that nominal margin is acceptable.

According to a Midwest rep who covers four states, “Our main challenge is with distributors and their stocking levels (being low because they can draw from our warehouses), and loyalty to special pricing. We get a special price from the manufacturer, give it to the distributor, and they, in turn, shop the price to get more margin. We've done the spec work but get the price shopped out from under us. Attitude and ethics are changing in this business. It's not so much about competition as it is that the distributor is focusing on their cost once the sale price has been established.

A rep respondent from the Northeast with 18 lines agreed with this rep. “Our biggest challenge with some distributors is that they don't seem to stay loyal to certain lines and even their own purchase orders. We have had a purchase order in hand and placed the order, only to have the distributor cancel the purchase order by fax the day we placed the order. When we called back to confirm the cancelled order, we found that it went to someone else for a few hundred dollars difference.

“Additionally, there are certain distributors in the Northeast that call themselves the leaders in the market, when in fact they are the lowest-margin distributors in the marketplace. Several of these distributors are bidding jobs without quotes, and basically hang the orders out on a ‘clothesline’ and invite reps and manufacturers to meet or beat the price.”

Distributor perspective on reps

As you might imagine, distributors view reps somewhat differently. Their concerns with reps were, in descending order, a need for competitive pricing; confidence in them as a sales partner; tailoring training to distributor salespeople; customer-service responsiveness; and accurate shipping information. Many of these challenges focus on administrative and pricing issues. At the same time, distributor respondents seemed hesitant to trust reps as valuable sales resources. This might be due to a previous bad experience with some independent reps or personality conflicts.

Judging from this study, distributors do seem to want it all: fairness and price for themselves and service for their customer. Factoring in the rep input, however, the solution becomes identifying reps (and lines) willing to support them (with “support” being clearly defined in writing). Issues with pricing, distribution, sales and service will remain a point of contention if both parties cannot rely on each other and be confident that they can adequately achieve market share and growth in a specific marketplace.

Manufacturer-distributor relations

Because of distributor consolidation, decreasing product differentiation and financial concerns, manufacturers have more aggressively sought alternative channels to meet customer demand over the past decade. Their rationale for these moves can be partially explained by some of the challenges that they expressed with distribution. These challenges were, in descending order, a lack of commitment to carrying inventory; less loyalty to brands and companies; ineffective marketing of products and use of co-op funds; and a need for well-trained salespeople with product knowledge.

Distributors on manufacturers

In contrast, distributor respondents were more focused on everyday issues. Respondents' concerns with their manufacturers were, in descending order, competitive pricing and price administration; responsive customer service, product availability and order accuracy; supplier conflicts; delivery commitments and freight/prepaid orders; and understanding distributor gross margin needs.

Said one large electrical distributor from the Midwest, “Roughly 75 percent of the material we buy and resell comes from manufacturers and their reps, who for the majority of the time are a pleasure to transact business with. The rest are a genuine pain in the neck to buy from, because they won't or don't want to do what they promise when it comes to prices, especially special prices and on-time shipments. Promising a price verbally is no longer acceptable even with our best manufacturer.”

The manufacturer-distributor conflict appears to become one of developing a marketplace strategy versus a distributor-specific strategy, and the rep is in the middle trying to execute, and appease both parties. Loyalty takes a hit because of the focus on price; ineffective and inconsistent sales and marketing support; the drive to open additional distribution; and personnel changes at distributors, manufacturers and reps. Rather than being expected, loyalty may now need to be earned through performance. While manufacturers may lament that loyalty is diminishing, in the words of one manufacturer, “Distributors are focused on financials versus products.” And a branch manager at a national chain summarized the current state of relations with his comment, “Trust is a word we don't use much with manufacturers and their reps. It seems that what is said about a price and return goods doesn't always come to fruition. Quotes (especially for wire) have been shortened and a number of other product groups have had their lead time increased but price guarantees shortened. I guess overall, I am seeing the marketplace change like I have not seen in the past. Pricing, inventory and profitability along with trusting what we hear from channel partners have all become areas that challenge us daily.”

What to Do

Addressing these issues on a industry level is impossible, although initiatives like standardizing the SPA process can minimize administrative challenges and enhance profitability. But to address the core issues behind these channel challenges, distributors, reps and manufacturers need to dig deeper. Here are some ideas on how to do that.

Try to understand your partners' specific challenges with each other

Ask key partners to identify the three biggest challenges they have with your company. Are the challenges the same? If not, ask yourself why or why not, and what can be done to improve in these areas.

Recognize that the challenges differ by each relationship

Generate a list of challenges across the channel partners you interact with and look for trends. Address the most important issues, and then communicate the change.

As the channel continues to evolve and becomes more consolidated, pricing, support, line conflicts and customer service issues may raise even more channel challenges. Don't worry about solving these challenges on some macro-level — it's beyond even the smartest industry executives. Just work on solving them on a relationship-by-relationship and company-by-company basis. Identify the individual points of conflict with your channel partners. Sometimes you will need to agree to disagree, but once issues are out in the open you stand a much better chance of making some progress in this constantly evolving market.

Allen Ray is principal of Allen Ray Associates, Kennedale, Texas. His firm helps companies improve profitability through effective pricing strategies and streamlining business processes through effective eBusiness utilization. Ray can be reached at (817) 704-0068 or [email protected].

David Gordon is a principal of Channel Marketing Group, Raleigh, N.C. Channel Marketing Group develops growth strategies for manufacturers and distributors. He can be reached at (919) 488-8635 or [email protected].

Check out their blog at www.electricaltrends.com.

Voices From the Field

What Manufacturers are Saying About Reps

• Reps spend time on their large lines. I need to get a reasonable share of their time.

• Reps don't understand that today's distributors are more driven financially and are less product-oriented.

• The complexity of distribution has grown. Many reps don't understand how to navigate the multiple relationships, national accounts and buying groups.

• Most reps have a short-term focus.

• Reps need to understand that price changes are based upon distributor size and commitment.

• I'd like reps to call on everyone in a distributorship, not just purchasing.

• Strategic account management within a distributor is very important. More people influence decisions than ever before.

• The manufacturers' reps need to be focused on creating pull-through business and strategic selling by spending time with consultants and specifiers.

• We need their help selling price increases and selling value rather than price.

• Reps need to see the value of training to build future sales, rather than just tomorrow's sales.

What Reps are Saying About Manufacturers

• Manufacturers are downloading more administration to the reps.

• Factories are shareholder-driven, not customer driven.

• Response time on quotes and return calls has diminished significantly, making us appear unresponsive to our distributors.

• Manufacturers can't understand why they can't have 100 percent of our time.

What Reps Said About Distributors

• Distributors are disinterested in selling something new.

• There is a challenge in getting distributors to pass information on to their staff. Everything seems to sit on a desk.

• Few distributors are committed to carrying inventory.

• There is less and less loyalty to a brand, let alone to the relationship we have with them.

• Many distributors are selling product on price only.

• It's near impossible to get electrical distributors to talk about product to end-users.

What Distributors Said About Reps

• It would be nice if reps understood the concept of limited distribution. I don't need more competition for their line.

• Reps don't understand distributor profitability.

• Reps are always asking for business for all of their lines. Don't they understand we have other lines we're selling that we prefer? They ask for too much.

What Manufacturers are Saying About Distributors

• Distributors carry too many competitive lines within one product category.

• Many distributors don't carry enough inventory to service the market and don't carry enough everyday basic inventory items in stock.

• Distributors depend on rep warehouses or us to ship small orders.

• I wish distributors would stock the products that we want them to stock. We know what sells.

• There is a growing lack of loyalty to a product. Today they shop you for a penny.

• There is insufficient participation by distributors in new product introductions.

• Distributors don't know how to sell features versus price.

What Distributors Said About Manufacturers

• I wish manufacturers were more selective in their distribution selections.

• Manufacturers' ever-expanding product offerings often conflict with our existing manufacturer relationships.

• Manufacturers aren't meeting competitive offerings from offshore manufacturers.

• Pricing issues, SPAs into stock and direct shipments are daily challenges and administrative burdens.

• Inconsistent application of SPAs. They are given to too many small customers.

• SPAs inflate the value of our inventory, increase our transactional expense and increase the risk of selling at a loss.

• When the manufacturer's selected representative has lines that compete directly with one or more of our primary supplier partners, and we don't necessarily trust the rep.