Monday, November 2, 2015

Eliminate the Middle Man and Save

Out on a lonely street of the seldom used two-lane highway between Dubuque, Iowa and Madison, Wisconsin, there once stood a ragged and paint-worn billboard with these words emblazoned in three foot letters: “Eliminate the Middle Man and Save!”

While the sign has likely fallen and the once flourishing cheese factory is gone, the legend lives on in the hearts of untrained purchasing professionals everywhere. It’s one of their dozens of negotiation tools and they’re not afraid to use it on the unsuspecting manufacturer’s sales executive.

Allow me to set the stage for the typical play of this tool…
The purchasing guy’s company uses your product and has for a considerable amount of time. One day, you get a call from the purchasing department. The buyer asks for a meeting but specifically requests you come without your distributor. During the meeting, this procurement guy describes how his company likes your product and wants to strengthen and expand their business relationship with you. (The bait…?)

All sounds good so far, but then comes the well-rehearsed message: the distributor shouldn’t be part of the equation.

There are a predictable list of reasons:
• The distributor is good but doesn’t really add value to this piece of the business
• The customer wants to build a closer relationship with your company for technical reasons and the distributor only gets in their way.
• The customer is evaluating their supply chain and their “consultant” told them distributors are an unnecessary step.
• The customer has identified new business for which you are qualified but doesn’t see how it could possibly work through a distributor.

A defining moment in channel policy.
Very few manufacturing organizations with distributor channels proactively explore the proper response to such a scenario. Like most things associated with the negotiating process, salespeople come to the table unprepared and unaware a negotiation is in progress. On the other hand, purchasing teams actively train in the art of the negotiation. Most are rewarded by their ability to knock down prices without impacting quality. Stripping out the distributor margin while insisting the manufacturer continue to provide all of the services formerly handled by channel partners is a frequently used ploy.

The salesperson is unprepared.
We have already noted few manufacturer sales people realize they are being “played."  This is an issue. Exacerbating the issue, many manufacturers fail to insure their sales teams understand the cost of the transactions handled by the distribution team. For example, when the distributor is removed, orders must be placed, shipping and billing questions handled, expedites responded too and warranty issues explored by staff back at the manufacturer; typically these are more expensive than the distributor alternative. Further, issues like distance, lack of ongoing relationships and inability to quickly drop by the customer to “handle the issue” impact cost and service levels.

Most manufacturers have failed to build a decision matrix for precisely what makes for good direct business and what qualities this business should possess. Instead, untrained salespeople are forced to make subjective decisions with big bottom line impacts.

How to handle this negotiation tactic.
First, allow me to provide some fair balance to this message. I believe some business might need to be done manufacturer direct. Examples include: private label opportunities, business where the manufacturer develops a special product to the customer’s specification and business falling outside of the channels normal market segment (electrical tape sold to hockey teams for wrapping sticks might be an example). And sometimes, opportunities become so large and so price driven that distributors are not part of the equation.

The rest of the time distributors are an important part of the business model. You wouldn’t remove the distributor from the sale any more than you would say, “this is business where we don’t pay the sales team.” The channel is part of the sales team.

So how do we respond to the negotiation push for direct business? Here are a few steps that make sense from my standpoint:

1. Visit with the customer to hear the whole story. Don’t limit your conversation to (only) the purchasing department. Instead insist on talking to the engineering and production teams. Ask pointed questions about their ongoing needs.

2. Push back against price. If the customer starts off with
assumptions that your distributor is making 20, 30 or 40 percent gross margin, and the purchasing guy talks asks for that margin as a price reduction, ask where they got the numbers. Most customers over estimate the distributor margin.

3. Indicate there will not be a major price reduction driven by the direct business. Point to the services provided by the distributor which may be more expensive coming from the manufacturer directly. Point blank ask the buyer if they would want to go direct if the price remained the same.

4. If pricing becomes a bigger point, ask if the customer is willing to make some kinds of concessions in return for the price reduction. More business, blanket orders, elimination of services and/or reduction of warranties all could be tied to reduced price.

5. Offer to bring the distributor into the negotiation. Perhaps the distributor can provide added services or streamline the services they provide to help match the price cost needs.

6. Keep the distributor involved in the process from the very start.

Channel Distrust and Disruption.
Hitting on point number six from above, it is critical to keep the distributor involved in the process from the beginning. Experience dictates, the distributor probably has a better handle on the local relationship than the manufacturer’s sales team. The distributor may know people within the customer who can provided details on the reason for the negotiation; things like pressure from corporate, a loss of a major customer, a new procurement executive making a name for themselves or some mistake the distributor made in the recent past.

If the situation does call for a price increase, look to the distributor before giving away gross margin. Over three decades of work with distributors indicates most are willing to drop their gross margin percentage if presented with facts. And, most are emotional about doing so without some say in the process.

Finally, if the situation does call for a move to direct business, the distributor needs to be compensated for the following:

• Finding and nurturing the business if they originally brought it the manufacturer and developed a strategy for getting the business off the ground.

• Any work they are required to perform should your system break down. Stocking, handling warranty issues, working through customer technical questions all cost money. If you take the business direct, expect to pay for the service requests passed to the distributor.

Eliminating the Middle-man is not a savings.
Distribution is a business model. It does not exist because it’s as American as Mom’s apple pie and the freckle-faced girl next door. It exists because distributors can handle customer relationships more efficiently and effectively than a manufacturer can do directly; at least in most cases.

Manufacturers need to invest in training their sales teams on the distributor model. If your team does not understand the financial drivers of distribution, buy a Profit Report from one of the distributor associations and spend some time understanding it.

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