The Direct Sale Question Revisited

Several years ago – June 7, 2013, to be exact, I hit on the topic of direct sales. Ever being the purveyor of catchy phrases, I called out the practice for what it can be and often is - “More Channel Killing Blunders: Direct Sales Policies.” Being an easy touch for requests from readers, especially those who flatter me with kind words and mentions in their group posts, I decided to touch the third rail on more time. Moistening my finger, I have fortified myself for hate mail and ardent argument.

Receiving these questions from a friend in Latin America where the water drains in a clockwise direction, the Southern Cross (constellation Crux) serves as a navigational guide and I am happy to say distribution flourishes. I decided to share my thoughts with everyone.

⦁ What would happen if the manufacturer had to deal with all the contractors and electricians in the country?

⦁ If a manufacturer chooses to “cherry-pick” some of the best geographies to work direct, who handles the secondary territories?

⦁ If the manufacturer decides to sell directly, how does that impact their cost to do business?

⦁ Is the manufacturer truly prepared to cover the costs of servicing all the end-users of their products?

The standard consulting answer to every question is - it depends. Trying not to use consultant-lingo, let me roll up the sleeves of my vintage cowboy shirt, hammer out a few thoughts and perhaps drive a wedge through the heart of the evil beast. But before we do, allow me to make five assumptions.

Assumptions:
1. The distributors in question are knowledge-based distributors. This means they know their products, make solid recommendations and take time to explain what the customer needs and why they need the product.

2. The distributor practices “active” selling. Customers are identified, targeted and effort is made to convert customers from competitive products or convinced to try the product in new applications.

3. The knowledge-based distributors provide some training to their customers. When customers know how to use the product properly, the product value is enhanced.

4. The distributor serves as the first level of support on product issues. This eliminates most of the support calls placed back to the manufacturer.

5. The distributor provides warranty service to the customer. When a product fails, the distributor evaluates the situation and often instantly replaces “defective” products on the spot. The customer is happier and the manufacturer benefits from the improved customer experience.

If you happen to be a wholesaler whose model revolves around logistics, you may not fit into this category. In those cases, most of the value comes by way of local stock and ease of purchase. While I realize that even retail stores, who provide none of the five above mentioned assumptions, provide some level of value to the manufacturer. The cost model is quite different. The ghost of the “it depends” answer lingers – drop me a line and I will do something similar for you.

Breaking down the questions
What would happen if the manufacturer had to deal with all the contractors and electricians in the country?
Clearly, most manufacturers lack the staff to handle the entire market. Similarly, even distributors with “national” footprints struggle to cover the market as a whole; although they come closer than a manufacturer only, direct model. The costs of driving such an effort with a direct-only model are of epic proportions.

How can a channel of distributors handle the job more efficiently? First, distributors are typically engaged with the customers on a larger number of products; it’s the amalgamation of business which drives the cost of contact lower. Secondly, and the research data supports, distributors typically have lower personnel costs than manufacturers.

Not dealing with all of the market has implications. Market share growth is limited. Competitors have opportunities to chip away at existing customers. Customers not being serviced feel slighted and those who are serviced wonder if the product is worthy of their support.


If a manufacturer chooses to “cherry-pick” some of the best

geographies to work direct, who handles the secondary territories?
Observing the behaviors of manufacturers over the years, it appears most try to break into new markets by concentrating on a small geography. In the world of automation, back in the early days a couple of manufacturers attempted to gain a foothold in North America by concentrating their people and efforts in Detroit. This created issues with market growth. End users with facilities outside of the Greater Detroit area felt as though they could not rely on the manufacturer using this practice to support plants scattered around the country. OEMs based in the area worried about how products would be supported once they left their Detroit-based facility. The strategy stunted the growth and slowed the acceptance of the manufacturers’ products. Eventually, the companies in question changed their strategy, but in my estimation, the move cost the manufacturer a full decade of business.

If the companies would have opened other markets via a distributor channel, things might have worked better. But, let’s take it a step further.  If activities with the channel would have been coordinated (and that happens when there is mutual trust and fair treatment of distributors), the strong presence in Detroit would have driven business to the channel and the channel would have provided answers on product support.

If the manufacturer decides to sell directly, does that impact their cost to do business?
Unequivocally yes! Since distributors tend to purchase for stock or groups of customers, the costs of processing orders for customers is higher than for most distributor orders. Further, distributors are often required to provide orders in a “formatted way” or via some portal thus allowing for automation of certain aspects of the order entry.

Distributors are required to abide by the manufacturer’s

terms and conditions. Payment is expected at 30 days and a distributor who is chronically late with payments is put on credit hold, which puts the distributor out of business. Customers are often noted for paying on their own terms; sometimes up to 105 days after invoice. Following and collecting costs more money from customers.

Service, albeit answering routine questions, providing shipping data and other routine transactions cost the supplier money. Even when customers call with the simplest of questions, the manufacturer must extend the time, effort and energy to satisfy the demand. Customer training, when required, piles further costs onto the cost of sale.

Finding, engaging and selling the customer are the most expensive activities the manufacturer must bear. While some might argue a lot of this work can be done electronically and online, experience dictates most customers still feel the need for human support. The costs of providing this task are at least equal to or greater than the distributor margin.

BTW, a few, and we will call them enlightened, manufacturers have established formulas (or formulae to be precise) modeling their costs of receiving orders, processing orders, handling customer calls and maintaining a relationship with customers who demand direct business. The result: the cost to the customer is often higher for doing business direct.

The financials tell the rest of the story
Distributors operate on a very thin margin. The typical distributor creates just two percent of sales in pretax income – manufacturers push totals close to 5 (or more) times this number. Arguing that better use of redundant facilities might shave costs, doesn’t change the numbers. Again, looking at the distributor model, typically distributors invest 60 percent of their gross margin (essentially the distributor’s payment for all their services to customers) on people. Pushing forward, costs of people on the manufacturing side have got to be at least equal to those of wholesale distributors.

Smart manufacturer people know the advantage of distribution, but there is discontent in the ranks. To the uninformed, the distributor margin looks like money “thrown out the window” and jealousy prevails. The distributor margin appears like money for the taking – generally, it is not.

What’s the answer?
Distributors, as a group, need to educate their suppliers. When a supplier pushes into the direct business trap, we need to react with a heartfelt discussion of the value we provide. And… with some distributors adding little true value, real knowledge-based distributors need to go above and beyond in outlining the values they provide; specifically, in detail and when possible in financial terms.

When customers demand the privilege of direct business and discover parity or higher costs, most choose to do business with-- guess who, their local distributor.

For distributors, especially those in the logistics, order processing and fulfillment business, the situation may very well be different. I believe future technologies may further squeeze your model.

Everyone needs to remember one important and bone-chilling point: Distribution is a business model. When manufacturers can “actively” sell their products more efficiently and more cost-effectively in ways other than through a channel, we’ll go the way of the dinosaur becoming a cool relic of the past. The good news-- distributors are nimble and quick. We’ve survived the “disintermediation chant” of the past and morphed our model to prosper in turbulent times. Most, not all, will continue. I invite you to join me in a glowing future.

Got a different view? Feel free to post it here or send me an email. I will publish your thoughts without mentioning your name or company.












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