Helping Manufacturers And Distributors
Improve Sales Performance And Profitability
Published by the Industrial
Performance Group, Inc.
800-867-2778
Issue
No. 21

Wealth Creation vs. Wealth Destruction

The Fundamental purpose of a business is to create economic value --wealth. Yet most manufacturer distributor working relationships have evolved to a point where wealth is being destroyed at an alarming rate because of unnecessary costs and cost shifting. See Executive Summary #1

Our research indicates that a significant opportunity
exists to improve sales performance, profitability, and customer satisfaction simply by changing the way manufacturer/distributor
Yet most manufacturer distributor working relationships have evolved to a point where wealth is being destroyed at an alarming rate because of unnecessary costs and cost shifting.
working relationships are defined and managed. However, only 3% of manufacturers and distributors capitalize on this opportunity.

Why do so few manufacturers and distributors take advantage of an opportunity to increase profitability and customer satisfaction at a time when everyone is complaining about a sluggish economy and declining profits?

The answer is that most manufacturers and distributors simply can't take advantage of this opportunity because they don't trust each other. This fact surfaced in a recent E-Survey in which over 500 manufacturers and distributors identified a lack of trust as the primary barrier to better working relationships.

Trust develops in a working relationship when a manufacturer and its distributors collaborate to accomplish a common goal. Over the years, we have noticed that most manufacturers and distributors do not have clearly defined goals for their working relationships. Even fewer have plans that define how they
are going to compete in their industry. See Executive Summary #3 Given this overall lack of direction, it's easy to see how manufacturer distributor working relationships have evolved to a point where conflict is high, trust is low, and wealth is being destroyed at an alarming rate.

At the heart of this dilemma lies a fundamental truth. Every industry will evolve to a point where it becomes unattractive. Unattractive because supply exceeds demand, products have been commoditized, and margins have become razor thin. This condition is a natural and predictable result of the forces of competition.

During the past 30 years manufacturers have focused on continuous process improvement. The goal of this on-going effort was to gain a competitive position in the market by improving speed and quality while reducing costs. During this period product demand was driven up by quality improvements and margins were increased through cost reductions. As
At the heart of this dilemma lies a fundamental truth. Every industry will evolve to a point where it becomes unattractive.
a result, there was little conflict between manufacturers and distributors primarily because acceptable amounts of wealth were being created by both manufacturers and distributors.

Eventually, the manufacturers in a given industry will evolve to a point where they all have high quality and low prices. This condition triggers in a fundamental change in the way manufacturers and distributors operate their businesses. It also changes the way both parties view and manage their working relationships.

Manufacturing is volume focused. When economic conditions take a turn for the worse, manufacturers do everything in their power to move volume. They will often increase the distribution of their products, try new channels to market, and/or increase their percentage of direct sales. While this may move volume and create wealth for the manufacturer, it greatly reduces the ability of its existing distributors to create wealth. This ultimately reduces the level of trust between the manufacturer and its existing distributors.

Distribution on the other hand is a margin business. When a product or industry becomes unattractive, distributors often head for greener pastures by switching to more profitable products or industry segments. However, if they cannot make the switch, distributors will take action to create wealth by reducing the costs associated with inventory and sales. This is usually accomplished by shifting these costs back to the manufacturer, which in turn reduces the manufacturers' ability to create wealth and reduces their trust in the offending distributors.

Both of these approaches create wealth. However the wealth that is created comes at the expense of the other party. This 'I Win -- You Lose' approach to the creation of wealth drives trust out of the working relationship which in turn reduces the level of commitment and communication between the two parties.

Both of these approaches create wealth. However the wealth that is created comes at the expense of the other party.
In essence, the manufacturer and distributor are competing to determine who wins and who loses when it comes to the creation a wealth, rather than working to do a better job of serving their mutual customers. When this happens, performance problems in the working relationship begin to occur more frequently along with the associated costs.

In a recent E-Survey, 400 manufacturers and distributors indicate that an alarming amount of wealth is being destroyed by the unnecessary costs they both incur as a result of fixing mistakes, expediting orders, waiting, and excessive order processing. See Executive Summary #1

If the fundamental purpose of a business is to create economic value- wealth most manufacturers and distributors have lost sight of this goal. In fact, most manufacturer distributor working relationships destroy wealth at an alarming rate. However, there is a small but growing number of manufacturers and distributors who have discovered that no matter how unattractive an industry becomes, collaboration between the two parties will always create greater wealth than will the 'I win -- You Lose' approach.

For more information on wealth creation in manufacturer/distributor working relationships, call 800.867.2778.

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