Helping Manufacturers And Distributors
Improve Sales Performance And Profitability
Published by the Industrial
Performance Group, Inc.
800-867-2778
Issue
No. 24

The Importance of Common Goals.

In August of 2001, we released the results of a four-year study of manufacturer/distributor working relationships. The study revealed that the vast majority, 87% of manufacturers and distributors are keenly aware of the fact that problems exist in their current working relationships. The study also showed that manufacturers and distributors understand that these problems are having a negative impact on
At a time when better working relationships can provide manufacturers and distributors with a profitable competitive position within their industry, they are engaging in activities that will lead to even lower levels of trust and commitment between the two parties.
sales performance and profitability. These findings came as no surprise to the readers of this newsletter. In fact, many wondered why we had invested so much time and effort only to discover what manufacturers and distributors already know.

However, the reasons given for why most manufacturers and distributors don't take action to eliminate these problems did surprise most manufacturers and distributors.

In a follow-up e-survey, more than 500 manufacturers and distributors indicated that a lack of trust between the two parties and a sense that the other party is not committed to the working relationship are the primary reasons manufacturers and distributors continue to complain about their working relationships, but do little to remedy the situation.

In order to understand the complexities of this situation, we need to take a closer look at the barriers that keep manufacturers and distributors from improving sales performance and profitability.

Commitment and Trust. Commitment is defined as the extent to which a manufacturer and distributor display a willingness to invest their resources (time-money-people) toward the accomplishment of a common goal. And trust is the confidence that develops in a working relationship when the actions of both the manufacturer and the distributor support this common goal. As you can see, a common goal forms the basis of productive and profitable manufacturer/distributor working relationships.

Yet we discovered during our four-year study that only one quarter, 25% of manufacturers and distributors have clearly defined goals for their working relationships. What is happening in the remaining 75% of the working relationships?

Between January and September of this year, we had the opportunity to work with hundreds of manufacturers and distributors in a wide variety of industries. What we discovered is that the remaining 75% of manufacturer/distributor working relationships have quotas/sales targets that loosely define what one of them hopes to accomplish. However, these quotas/sales targets are usually not mutually-beneficial nor do they clearly define the fundamental purpose of the working relationship -- what are we working to accomplish in the market place?

We also discovered that at a time when better working relationships can provide manufacturers and distributors with a profitable competitive position within their industry, they are engaging in activities that will lead to even lower levels of trust and commitment between the two parties. How could this be?

The Evolution of a Working Relationship. In the beginning, the fundamental purpose of the manufacturer/distributor working relationship is to make products available in local markets, also referred to as market coverage. For a period of time, there is a direct link between market coverage and market share. If a manufacturer wants to increase market share they simply add distribution. As long as demand and market share continue to grow, the level of trust and commitment in the working relationship will remain at acceptable levels.

However, if a manufacturer continues down this path they will eventually hit a point of diminishing returns. The realities of the market place dictate that demand and market coverage must be in balance. Manufacturers often fail to realize that they are approaching the point where these two factors meet. As a result, they continue to add distribution in an attempt to gain market share.

When this happens, distributors sense that there are
too many distributors in a given market. The increased competition leads to extended periods of severe price and service warfare. This drives margins to a point where a distributor can no longer focus their efforts on this product. As a result, the distributor level of trust of the manufacturer and commitment to the working relationship decline due to the fact that the actions of the manufacturer now pose a threat to the financial well being of the distributor.

Today, information and capabilities -- not products -- form the basis of competitive advantage.
To remedy the situation, distributors shift their focus to products which they feel offer a better return on their investment. This, in turn, is seen as a lack of commitment on the part of the distributor to the offending manufacturer's products. This usually results in the manufacturer adding more distributors to make up the difference.

Before you know it, this situation has escalated to a point were the level of trust, commitment, and communication between the manufacturer and its distributors are virtually non-existent.
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So what is the solution? Manufacturers and distributors need to redefine the fundamental purpose of their working relationships. They need to break away from the old model of "make stuff and sell stuff" and accept the realities of the market place. Today, information and capabilities -- not products -- form the basis of competitive advantage.

In this new environment, the manufacturer/distributor working relationship is not just about moving products from the point of creation to the point of consumption. Nor is it about providing market coverage. Rather, it's about collecting, managing, and sharing information that can be used to spot and capitalize on opportunities long before your competitors.

Working relationships in which both parties continue to complain and place blame yet they do little to change the situation are doomed to failure.

To survive and thrive in this new environment manufacturers and distributors must develop goals that are customer focused, mutually beneficial, explicit, measurable, and realistic given conditions in their industry. These goals will provide the working relationship with a sense of purpose and direction that will ultimately lead to higher levels of trust and commitment.

To learn more about the goal development process, call 800.867.2778.

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