Breaking Down Barriers

Marriage is a lifelong commitment. Make that, it used to be taken for granted as a lifelong commitment.

Today, the divorce rate in the United States teeters at around 50 percent. For better or worse? The vow’s broken as much as kept these days.

And, if we can’t count on the sanctity of marriage, what’s to be said of the stability of the No.-2 most demanding commitment: business relationships?

Close to home, the primary cause of tension in business relationships can be traced to the fear of “disintermediation.” Sanitary supply distributors are more sensitive than ever about being cut out of the supply chain.

Some of the most common scenarios that lead to paranoia regarding one’s rightful place in the scheme of product distribution is varying opinions as to what the speed and level of technology adoption should be. The emergence of new markets and customers, plus consolidation, are also high on the list of “tensions.”

Clear Evidence
In the most recent edition of “Facing the Forces of Change,” arguably the most respected study devoted to the distribution industry, the study’s author, Adam Fein Ph.D., reports that there is a widening rift between manufacturers and distributors. In addition to the inherent complications and misunderstandings in any relationship of this type, the study showed diverging technological approaches are contributing to the increased tension.

For instance, manufacturers and distributors have disparate views of how the Internet will affect sales strategies, says Fein, who is also president of Philadelphia-based Pembroke Consulting. Many manufacturers feel they will use the Internet to communicate product-related information directly to customers. Fein adds, however, that it doesn’t mean manufacturers will sell direct to customers — they don’t want to become distributors — but they do want to build closer relationships with end users. However, that fact shouldn’t go unnoticed by distributors.

“I think distributors do have to worry because there are many alternate channels to market,” Fein says. “Distributors are well-positioned if they recognize the value of the relationship they have with the customer now.” Many distributors don’t take an honest look at their customer, Fein says. As a result, they’re unable to understand and identify where, specifically, they’re making money, losing money, and which customers they should be targeting with their marketing and sales efforts.

So if distributors aren’t serving customers sufficiently, sales will suffer and the distributor is more easily replaced.

“Manufacturers want to do business with better distributors,” Fein explains. “They want to work with the distributor that can run their business most effectively.” And if the current distributor doesn’t fit the bill, suppliers will find one that does.

In another recent report, issued by the Industrial Performance Group in Northfield, Ill., the findings were similar. Relationships are inevitably changing, and to be successful, it’s vital that manufacturers and distributors address and react to new influences.

“The ultimate impact of these changes is that traditional competitive strategies, channel structures, and the working relationships between manufacturers and distributors are no longer enough to guarantee success,” IPG reports.

“Survival in this new environment requires working relationships with flexibility, responsiveness, and the ability to deal with high levels of uncertainty. These attributes are typically not found in the traditional top-down manufacturer/distributor working relationships.”

Many members of the supply chain are themselves critical of some aspects of the relationships they have with business partners and industry peers.
“In many ways, this industry is 40 years behind other distribution channel members,” says John Muthe, CEO of American Sanitary Inc. (AmSan), headquartered in Cary, N.C. “We do not use technology effectively, and manufacturers and distributors treat each other as adversaries and still argue over ‘who owns the customer.’”

Customers Take Control
The deteriorating relationship between manufacturers and distributors was revealed in “Facing the Forces of Change 2000,” Muthe says. In the past, the relationships were driven and controlled by the distribution function. However, that has changed. “By the end of the decade, it should have been apparent that only the customer ‘owned’ the customer — not the distributor, not the manufacturer.” Except to the extent that the distributor added value to the supply chain, the end user customer was interested in forging relationships with manufacturers. There was a great fear of Internet-enabled distributor disintermediation. “Most would agree that has failed to materialize,” he adds.

Adding to the fear of disintermediation are the many new channels that are springing up, giving manufacturers a wider choice in ways to get to market, and pitting distributors against one another.

“The channels are flattening out and people are taking a look at other options to market their products,” says William Griffin, president of Cleaning Consulting Services in Seattle. Distributors are an important channel, but if distributors aren’t bringing something valuable to the table, Griffin says they are headed for disaster.

“Part of the challenge of a manufacturer is to sell product and there’s a number of channels you can sell product through,” says Fritz Gast, executive vice president of P.B. Gast & Sons, Grand Rapids, Mich. With paper distributors, redistributors (wholesalers) and traditional distributors, among others, competition is tough.

“The tricky thing is how to have all those channels co-exist in the marketplace without stepping all over each other and stealing business from each other,” Gast adds. The market is muddied by buyers that are now more sophisticated, and tend to play the channels against each other.

There are many ways distributors have united to adapt to a customer base that seems to hold all the cards. Distributors have consolidated, giving them the leverage to serve large, more price-demanding accounts. Other distributors have become members of alliances, or distributor buying groups, in an attempt to achieve the price and geographical leverage of large distributors, while remaining flexible and independent.

Both strategies have proved successful for many companies; however, this reorganization of supply chain makeup puts new demands on manufacturer/distributor relationships, some of which can lead to a fresh set of problems.

Fighting Back
“I think as a result of consolidation the manufacturers have become ambivalent as to the concerns of the distributor,” says Dick McGann, executive vice president of AFFLINK, an example of an affiliation of independent distributors. “There are fewer choices. They have the distributor in a position where there’s nowhere to turn.” McGann says consolidation among manufacturers — the paper mills, for example — leaves distributors with less leverage and fewer choices. AFFLINK, headquartered in Tuscaloosa, Ala., attempts to help independent distributors regain some of that leverage, and attain the clout of a regional or national distributor, while members remain independent.

Gast feels distributor consolidation is one reason there’s fewer manufacturers with which to form partnerships. Everyone is already affiliated, he says, so the pickings are slimmer.

On the other side of the equation, consolidation among distributors, contends AmSan’s Muthe, does provide larger distributors an advantage with manufacturers.

“It goes without saying that manufacturers have more at stake, the larger a distributor is. This gives the consolidator more negotiating power, and the ability to consolidate lines to improve asset management.” Manufacturers benefit, he says, with greater opportunities for revenue growth, the ability to streamline to serve national customers, and the opportunity to create strategic partnerships.

Opinions vary, but distributors large and small have one thing in common. If a channel member is playing to its strengths, that individual company or organization will continue to fill a need for its partners. Problems arise when that need is neither recognized, nor addressed.

“If you’re providing services — education, training and supporting your customer — then I don’ t think there’s that much of a risk of being disintermediated,” says Linda Silverman, vice president of sales and marketing for Maintex in City of Industry, Calif.

Silverman agrees that there was concern when the Internet came on the scene, but feels the supply chain relationships will remain healthy as long as each member is providing something of value.

“There’s always going to be some customers that shop strictly for price,” says Silverman. “Those people will probably be more enticed by some of these things on the Internet, but more people really want service, and you have to be willing to pay for that level of service.”

Gast believes distributors that are working with manufacturers that are looking for ways to bypass distribution should shop for a new manufacturer.

Manufacturers that see the value distributors add are eager to partner with them, in turn supporting each other, he says. Like it or not, the market’s “openness” is unavoidable. “The crown jewel of any distributor business is the expertise they bring to the end user,” Gast adds.

So in spite of open channels, most evidence points to the fact that manufacturers rely on distributors as important business partners, providing they’re adding some value. Once each channel partner establishes that they’re interested in working with a channel partner, there are many ways to build and grow each other’s business together.

Field Support
“I’m old-fashioned in the sense that I’m pretty simple, and one of the things that’s important to us is sales help and support out in the field,” says Pat Glasby, president of Glasby Maintenance Supply Co., Anaheim, Calif. He says his company’s greatest successes with manufacturers have come when there’s a salesperson who’s eager to partner.

Glasby recalls one paper manufacturer’s salesperson who came to his company hungry to grow the business. The salesperson realized it was a lengthy process, but his enthusiasm was contagious, and he doubled or tripled his bosses’ predictions. “If someone comes in and works with the guys and makes it easy to do business, then you end up going ahead and really growing the business together,” Glasby says.

Many manufacturers are providing technology-related assistance, which can take many forms. MSDS sheets on manufacturer websites aid in easy access for customers. Many of the websites make available the expertise of the manufacturer to the customer, and allow distributors to download product specs, information, photos and more. Some manufacturers help with catalogs, and digitize photos and descriptions on CD-ROM for distributors.

“Manufacturers typically have more technology dollars budgeted than a distributor will and if they can help leverage [technology adoption] by sharing some of [those dollars] then ultimately, they’re going to win,” Gast says.

Silverman’s strongest relationships are those with manufacturers that have a clear, strategic vision.

“They have salespeople that work with us closely, they seek the distributor’s input, they look for ways to improve efficiencies, and they’re always looking for ways to improve themselves, the processes and the products,” Silverman says.

“I think the most important thing is to have honesty and an open dialogue. Communication is the key and being willing to listen — it takes both sides,” Silverman advises. “If the manufacturer feels they’re not getting what they deserve, then a problem exists, and vice-versa.”

“I think they’re both looking through one-way mirrors expecting the other guy to deliver the value,” says McGann. “They have to realize they each have a role to play in satiating the needs of the customer.” The way to overcome this is strategic planning and thinking, he adds.

Bruce Windsor, vice president, director of marketing for Hillyard, headquartered in St. Joseph, Mo., believes one of the best ways to enhance communication with distributors — and their customers — is by using the Internet. Hillyard has steadily improved its Internet capabilities so that now customers are directed from the manufacturer’s site to the distributor in their area. The distributor is responsible for order-taking, if they so choose. Otherwise, contact information is available for phone and fax orders.

Windsor believes the Internet strengthens distributor/manufacturer relationships rather than weakens them, though he does acknowledge that the companies that do sell straight to end users create mistrust.

“There’s no doubt today there’s a trust question in the channel and that is led by manufacturers who cut out the distributor and sell straight to the account. It’s going to take a long time to get over that,” he says.

Hillyard continues to cultivate regional accounts in conjunction with their distributors.

“We’ve been putting more effort into some regional-account type selling involving multiple distributors,” says Windsor. For instance, the manufacturer will work out a program with a hotel or a nursing home chain, then have the respective distributors in those areas involved in servicing the account.

Support for the distributor is also important to Flo-Pac, based in Minneapolis. Jim Keister, vice president of marketing for Flo-Pac, says his company is providing technology and sales support, including new Web capabilities and the support of factory-trained salespeople.

Selling online is not why Flo-Pac built its website, says Keister. Rather, it was to provide its distributors the ability to sell online if they chose to.
“The distributors are important to us because even with our factory trained sales reps we cannot cover every little nook and cranny that the distributor can cover.”

In today’s change-on-a-dime, buyer-driven markets, distributors can’t afford needless distractions. Technology utilization, consolidation, and supply channels in flux are just a few of the phenomena that test business relationships. While some of us hunt for that marriage made in heaven, distributors might settle for being on the same page with their channel partners.