Executive Summary 1
The Bottom Line Impact of Poor Manufacturer/Distributor Working Relationships. The Fourth in a Series of Industrial Performance Surveys to Identify Opportunities to Improve Manufacturer and Distributor Sales Performance and Profitability.
|A recently completed E-Survey of over 300 manufacturers and distributors finds that the costs associated with working relationship problems are much greater than most people realize.
Manufacturers and distributors have been aware of these problems for many years. They have also been aware of how they would both benefit if these problems were resolved. Yet, research indicates that only three percent of manufacturers and distributors take action to eliminate these problems. Why don't more manufacturers and distributors take action to improve sales performance and profitability?
Because manufacturers and distributors are largely unaware of the costs associated with these problems. This stems from the fact that most accounting methods do not draw the distinction between activities that generate revenue and those that do not. As a result, the costs associated with working relationship problems get lumped into the overhead category where they are viewed as fixed costs rather than as unnecessary costs that can be reduced or eliminated altogether.
Further, when the economy was strong, people didn't pay much attention to
working relationship problems. They were primarily focused on increasing sales volume and market share. Both of which are appropriate objectives for any business. However, findings from IPG's latest E-survey show that much of this top line growth didnšt make it to the bottom line.
Now, economic conditions have deteriorated, and manufacturers and distributors are looking for ways to improve profitability.
The goal of this research was to identify the common problems that manufacturers and distributors experience in working together and to quantify the costs of these problems.
The research also measured the availability of information in working relationships since most of the problems that occur in sales/distribution channels are the result of an absence of information.
Fixing mistakes, expediting orders, holding excess inventory, and waiting are the most common problems that drive unnecessary costs for manufacturers and distributors. This finding indicates a major disconnect between the flow of information and the flow of products through the channel.
Accurate product demand information assures that the right products in the right quantity get to the right place at the right time. However, 75% of survey participants indicate that they DO NOT have access to high-quality demand information. Without this type of information, forecasting and inventory management become best-guess estimates. This usually results in too much or too little inventory in the channel. Too much inventory drives holding costs up and too little inventory drives processing and handling costs up.
In the absence of information, it's easy to see how the combined resources of manufacturers and distributors are being consumed by non-revenue generating activities as people look for, expedite, and then wait for inventory to get to where it is needed.
The average yearly cost of these problems for manufacturers and distributors is 2% of gross sales. This number can easily go undetected from a top line perspective. However, the bottom line impact is much greater. For example, if your net margin is 5%, these unnecessary costs amount to 40% of your bottom line. If your net margin is 10%, these unnecessary costs amount to 20% of your bottom line. The magnitude of this problem increases when you consider that both manufacturers and distributors are losing money due to these unnecessary costs.
Do these costs justify taking action?