Helping Manufacturers And Distributors
Improve Sales Performance And Profitability
Published by the Industrial
Performance Group, Inc.
No. 20

The Distribution Paradox: Barriers to Improved Sales Performance, Profitability, and Customer Satisfaction

Manufacturers and distributors agree that changing the nature of their working relationships would lead to improved sales performance, increased profitability, and higher levels of customer satisfaction. Yet a survey of 504 manufacturers and distributors completed in October, 2001 reveals that a lack of trust and commitment is keeping them from accomplishing these outcomes.

How did manufacturers and distributors get into this situation? More importantly, how do they get out of this Distribution Paradox?

The survey shows that most manufacturers and distributors are caught in this paradox. On one hand they realize that changing their working relationships would provide valuable outcomes. On the other, they don't trust each other enough to commit to making the changes.

Without trust there is no commitment. Without commitment, there can be no meaningful change. Without change, sales performance, profitability, and customer satisfaction continue to suffer.

The good news is that changing the nature of manufacturer/distributor working relationships is much easier than most people realize. For manufacturers and distributors, the hardest part of the process will be changing the way their working relationships are viewed and managed.

Manufacturers and distributors develop and support core beliefs about the purpose of their working relationships and how these relationships should be managed. These beliefs are passed on from one generation of management to the next. Over time, management teams tend to forget why they believe what they believe. Yesterday's good idea becomes today's policy and tomorrow's mandate. People also come to believe that what they don't know isn't worth knowing. This is how industry participants come to believe that their circumstances and problems are unique.

Unless these perceptual barriers are recognized and addressed, manufacturers and distributors will be unable to deal with the primary barriers to better working relationships: lack of trust and commitment.

How Did These Beliefs Evolve?

For the past fifty years, the basis of competition in most industries has been high quality products at low prices. The value proposition (product-pricing-availability-information) was defined by manufacturers.

The distributor's role was to provide market coverage, hold inventory, and process orders. In this environment, manufacturer/ distributor working relationships with low levels of trust, commitment, and communication produced acceptable results for everyone involved primarily because there weren't many alternatives for taking products to market.

Over time, however, most industries evolved to a point where all manufacturers made quality products and they all had low prices. When this happened, manufacturers and distributors began looking for ways to improve profitability. The primary area of focus was cost cutting. What they failed to realize was that their actions to accomplish gains in short-term profitability would have long-term impacts on their working relationships.

During the 1980s, manufacturers entered a period where restructuring, downsizing, and divesting became the common methods for improving profitability and shareholder value. During this era, sales/distribution channels were often viewed as costs that needed to be controlled rather than strategic assets that needed to be managed.

Manufacturers found that they could increase market share by adding distribution and that they could reduce costs by taking business direct. In the short-term, these actions produced results for the manufacturers. However, in the long-term they have had a negative impact on distributor trust in and commitment to manufacturers.

During this same period, distributors were also taking action to improve profitability and shareholder value, and their primary area of focus was inventory.

Inventory ownership represents between 50% to 70% of the costs in the channel, and distributors quickly discovered that they could greatly increase their profitability by shifting these costs back to their suppliers.

This action reduced manufacturers' trust in and commitment to distributors. Manufacturers responded by adding distributors to get inventory back into the marketplace and by taking more business direct to cover the growing cost of holding and handling inventory. These actions further reduced the level of distributor trust and commitment.

After more than twenty years of this action-reaction-consequence behavior by manufacturers and distributors, it's easy to see why there is little trust and commitment between them.

So What's the Solution?

Logic and emotion will not help manufacturers and distributors get out of the Distribution Paradox. In fact, logic and emotion are largely responsible for the current state of affairs.

In reality, nothing is going to change until action is taken to prove that the benefits of change are greater than the costs associated with doing business as usual.

What's interesting is that manufacturers and distributors already know what the benefits would be: improved sales performance; increased profitability; and higher levels of customer satisfaction.
However, what is generally not known are the actual costs associated with problems in current manufacturer/distributor working relationships.

Manufacturers and distributors did not intend to drive their working relationships to a point where trust and commitment are low and communication is virtually non-existent.

These conditions are the long-term unforeseen consequences of decisions that both parties made in the past.

After years of reacting to each other, their working relationships are now keeping manufacturers and distributors from improving sales performance, profitability, and customer satisfaction.

However, by comparing the benefits of change to the costs associated with doing business as usual, manufacturers and distributors will have an objective means of dealing with the Distribution Paradox.

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