Executive Summary 3

Manufacturers and distributors can significantly improve sales performance and profitability by changing the nature of their working relationships.
That's the conclusion to be drawn from a four year study of 750 manufacturers and 500 distributors conducted by the Industrial Performance Group, a Northfield, Illinois, firm that specializes is supply chain and distribution channel management.

The study reveals that 82% of manufacturers and 92% of distributors report that their sales performance and profitability are being negatively impacted by problems in the working relationships.

Called Report Card Follow Up, this research effort is a follow up to the Report Card on Manufacturer-Distributor Relationships released by The Industrial Performance Group in 1998.

For manufacturers, the biggest problem with their distributors is a lack of commitment to their products and promotional programs.

The manufacturers who participated in this research also reported that distributors lack sales and marketing skills as well as the ability to effectively manage inventory.

The number one problem for distributors is the ineffective, or inconsistent, management of territories by manufacturers. The result is multiple and often conflicting channels to market, including direct selling. This condition greatly reduces the level of distributor commitment and trust for the offending manufacturers.

The research also reveals that manufacturers continue to do a poor job of providing direction for their distributors. Only 17% of distributors indicate that they have clearly defined goals and plans for accomplishing these goals, with manufacturers.

Many of the same problems surfaced during the first phase of the research. However, data from the second phase of the study reveals that conditions in these working relationships appear to be getting worse.

Nearly half, 49% of manufacturers and 42% of distributors indicate that the overall level of commitment in their working relationships is very low. This represents a nine percentage point drop from the benchmark established in 1997.

Fifty one percent of distributors and 34% of manufacturers indicate that there is a low level of cooperation in the working relationships. This is significant in that it indicates that the level of trust in these relationships is also low since the two are highly interrelated.

The greatest area of concern is the extremely low level of communication between manufacturers and distributors. 63% of distributors and 73% of manufacturers indicate that high-quality two-way communication is virtually nonexistent in their working relationships.

Communication is the glue that holds the working relationship together, and level of communication between manufacturers and distributors has declined significantly over the past three years.

Communication between a manufacturer and its distributors provides not only direction, it facilitates the efficient allocation and management of resources in the channel. Without this sharing of information, the relationship is prone to high levels of uncertainty and conflict which severely hinder the relationships ability to perform in a profitable manner.

The Industrial Performance Group's findings should serve as a wake up call for manufacturers and distributors alike. By neglecting to maintain their working relationships, manufacturers and distributors are being forced to spend more on sales and marketing efforts while their margins get squeezed even further.

Nonetheless, these findings should not be viewed as an indictment of either manufacturers or distributors. The real message of this study is that there are tremendous opportunities for both parties to improve sales performance and profitability simply by changing the nature of their working relationships.

Taking action to improve the manufacturer/distributor working relationship is hard work but it yields high returns. Typical outcomes include improved sales performance, higher margins, and customers who are more satisfied and loyal.

In reality, some manufacturers and distributors will do a better job of using this information and in making positive changes, that's the nature of competition.

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