Article: The Changing World of Industrial Distribution
Using distributors as an alternative to selling direct is very far from being a soft option, though it may be inevitable. Here we consider the manufacturer distributor relationship and look at its three commonest problems.
Industrial distribution has grown apace over the last 30 years. It has been driven by pressures of ever increasing selling costs and the demands from users for rapid service. Industrial companies which previously managed their own direct salesforces are having to learn how to pick distributors; and they are finding out the difficulties of training and guiding distributors' selling efforts. The skills which the industrial marketer needs today are not those of motivating reps to seek enquiries and stimulate sales but in pulling the demand through the distributor chain.
The term "distributor" is used loosely to cover a wide range of middlemen. In its strictest sense a distributor should:
Usually a distributor is appointed by a manufacturer and may well operate a franchise for just one type of product. Kango hammer distributors could not sell Hilti or Bosch hammers but there is nothing to stop them selling a whole range of compressors and air tools which make a sympathetic product line up. Thus a distributor is very different to a wholly owned company depot, as independence allows it to stock a range of different products to suit customers' demands.
Mostly distributors are not formally appointed and sell whatever brands they like. Electrical wholesalers usually sell three or four brands of cable, and their allegiance to their supplier may stop with the price. The purist distinguishes between this wholesaling activity and the appointed distributor. From the manufacturer's point of view, selling trucks through distributors or lubricants via engineers' merchants pose similar problems of pulling demand through a sales outlet which they do not own.
To understand the motivations of the distributor and the manufacturer it is necessary to consider the driving force which brings them together. First let us consider how distributors begin. Often they start life as sales agencies - someone who has worked in an industry for a period sets up on their own selling a product he/she understands to customers he knows. Usually the product is a consumable or standard equipment costing tens to hundreds of pounds. It is a short step for the agent to add new and complementary products, get a small unit on a trading estate and buy and sell stock rather than take a commission.
The origins of the distributor require characteristics of local specialisation and an entrepreneurial culture. The key to everything is stock turn and margins. A fast moving consumable may have a 25 per cent margin (i.e. a 33 per cent mark up) while a piece of kit which turns over at a slower rate may command a 40/50 per cent margin (i.e. a 66 per cent to 100 per cent mark up).
The entrepreneurial distributor, originally the salesman, soon becomes desk bound and spends time on the important function of buying. A sales team is employed and being entrepreneurial the salaries are modest in the hope that commission will provide the incentive to sell.
Counter staff are paid peanuts. The whole essence of the distributorship has become a pipeline with buying and selling as the principal functions.
The manufacturer or principal on the other hand is moving away from being sales orientated. The manufacturer wants to cut back directly employed sales staff and focus on niches of demand. The manufacturer wants to concentrate on creating awareness and demand for the product through advertising. A system is needed for ensuring customers can easily obtain products anywhere in the country. A wholly owned depot is usually expensive and so the move to distribution. Distributors have a deep knowledge of local markets. They buy in bulk and save the manufacturer the trouble of sending out hundreds of invoices (which the law of averages says will have a fair peppering of bad debts). The distributor's stock saves the manufacturer space and money.
Of course, not all industrial products are suited to the distribution route. In general standard products pitched at a large and diverse target market and requiring a low level of technical competence in the salesforce are most readily suited to distributors.
The three most common sources of problems between manufacturers and distributors relate to excessive discounting, territorial disputes and arguments over the lack of distributors’ promotional efforts.
Disputes over excessive discounting by distributors.
Distributors work to a list price set by their principals and offer discounts to their own customers. Sometimes fierce local competition causes these discounts to get out of hand.
For example, since 1980 electrical wholesalers have been forced to offer larger discounts to stop their customers (the electrical contractors) buying from DIY superstores. The pressure on prices spirals backwards to the manufacturers who periodically try to tame the distribution network. Disputes are frequent where products are of high value (or bought in volume) and an extra one per cent is worth a fight. Office equipment, commercial vehicles and compressors have become battlegrounds with discounts the main weapon. Peace is restored if demand rises and the availability of products become restricted.
There is, however, much that manufacturers themselves can do. If Mita promote their copiers as being of a higher quality than others, their distributors do not need to cut prices as fiercely. Volvo trucks with a reputation for reliability and high residual values will not be discounted to the same extent as Renault or Ford.
Disputes About Geographical Areas
Distributors quite naturally want exclusivity in the territory where they sell. Manufacturers may be insensitive to this issue, preferring a multiplicity of distributors in a region - in the hope that the wider spread of sales outlets will ensure more product will hit the target.
If the product is a high turnover consumable such as abrasive discs, plumbers' requisites, cable, cutting tools and the like, the distributor cannot hope to be granted exclusivity. In any case the buyer of the consumable seldom specifies a brand for this type of product, and the distributor wins business by offering a wide range, a high level of availability, excellent service and good prices.
However, where makes or brands are specified, geographical disputes between competing distributors can occur. If buyers buy locally, as in the case of shot blasting equipment, the principal can afford to carve the country into regions. If buyers buy nationally, as in the case of trucks, truck bodies and associated gear, there cannot be any geographical boundaries, and each distributor must accept competition with others. In practice, the franchise of a truck distributor is one of around only 20 to 30 spread across the UK, and in any area a distributor has the advantage of a local following which gives a lead over his fellow franchisees in other regions.
Disputes About Distributors' Selling Efforts And Promotion
Manufacturers soon find out that they have little or no control over their distributors' sales efforts. In fact if a manufacturer tries to encourage a distributor's salesforce with training or incentives, it may well suffer a rebuff. The distributor doesn't want its salesforce locked in to one product. Furthermore a day out on a manufacturer's training course is a day ('off the road") and has to be paid for.
The manufacturer recognising these limitations of the distributor is tempted to adopt a hybrid approach, using its own salesforce to cherry pick the largest and most worthwhile accounts and leave the distributor to sweep up the rest. Distrust arises and the distributor starts to ignore the franchise guidelines and even double deal, offering alternative products even though a franchise agreement may prohibit this.
The manufacturer must be quite clear about the trading arrangements from the start. Amicable solutions can be worked out based on the purchasing power of customers (over a certain size could be handled direct) or by end use (military customers may be handled direct). Introduction fees can be given to distributors to maintain their interest and keep them happy.