Introduction
Distributors play a key role in market by being a critical link between the principals and the customers. Distributors are integral to companies; increasing their reach, ensuring sustained access to the growing global markets and providing insights into market and customer behaviour. Moreover, distributors are a supply-side enabler providing a cost-effective way to distribute products. While distributors are globally used, not much has been written about the advantages and disadvantages of distributor management. Very few companies today have an effective distributor management program. The purpose of this article is to highlight that effective distributor management can not only lead to more efficient distribution, it can result in increase in sales and provide a competitive edge in the market for the company.
In my company, I have enabled procurement function to enter and play a strong role in helping create a robust distributor management; developing an invaluable value proposition which fosters growth.
Definition
But before I go further, let me pause and define “distributors”, as there is no one universally accepted definition. Distributors, are those third-party resellers who buy products from the manufacturer or principals, takeover the ownership of the products and sell to the customers. The principal almost always selects the distributor and the distributor’s role and obligations are generally specified in a contract with the principal. A distributor therefore acts as a sales representative for the principal. A distributor’s role is to constantly look out to promote the product of the principal by executing orders from the market actors and if required, the distributor manages the after-sales service including returns and repairs.
Important to understand that distributors are different to third party logistics providers (3PL), a 3PL does not take the products title; they perform purely logistics related functions. Wholesalers, on the other hand, only fulfill orders from retailers and assume no role other than satisfying retailer’s demand.
Some of the typical services performed by Distributors are:
Importation
Warehousing
Distribution
Sales & Promotion
Order Management
Account Receivable
Industry landscape and current practices
The distributor industry in developing markets as well as in many of the developed markets is very fragmented. In most of the markets local distributors are dominant, there are very few regional and hardly any global distributors. As a route to market, usage of distributor is essential, a multinational may have hundreds or thousands to help in sales and distribution of their products. In most companies, the sales team manages the distributor relationship, from appointment to managing daily operations and the contract termination. The involvement of other departments is minimal. As the company’s market presence grows, it is not uncommon that more and more responsibilities are thrusted onto the sales team; adding to the complexity of operations sales team must perform. However, the sales team’s key focus is on achieving the monthly sales target. At the end of the day that is what they are measured on. Hence, other activities take a back seat. In addition, as the company’s sales force interact closely and frequently with distributors, they often end up developing a comfortable and cozy relationship. There is a reasonable chance that favouritism towards incumbent distributors may seep in or an inertia towards change. To cure such malaise a stronger governance is required which could be in form of another function’s involvement or through cross functional body. This body would play an important and active role in distributor sourcing, compensation and governance. Within multinational principals and across the industry, there is generally no comprehensive distributor management program or even standardized selection processes. There are pockets of excellence, but knowledge is not shared nor applied consistently.
The Opportunity
A significant opportunity exists if one were to step back from daily tactical work and take a strategic view of the company’s distributor network. Is the network fully optimized? Do we have the right set of distributors serving the right channels? Do we have transparency over the distributor actions? Is the compensation structure incentivizing distributor performance? Working with my commercial partners, I created a strong distributor management program encompassing best-in-class distributor selection process, arriving at fair market value (FMV) as well as governance program. The sourcing process helps select the right ‘fit’ distributor or channel partner by looking at a host of parameters such as sales force capability, coverage, frequency of visits, infrastructure and cost competitiveness to name a few. The sourcing process also drove transparency into compensation, as we mandated that the distributors provide us the breakup of margins by key activity drivers. The traditional approach provided margins or discounts to distributors in a bundled number, expressed as x% of selling price. We did not know distributor’s efficiency and cost structure was for each key activity they performed, i.e. warehousing, distribution, order management, sales, promotion etc., the bundling of the margin masked what should truly be rewarded. Mandating unbundling brought about transparency into the selection process, increased efficiency, increased competitiveness as well as built a stronger relationship between the distributor and the multinational through optimizing compensation and clarifying the distributor evaluation criteria. A multinational’s distributor selection process can be standardized and differently weighted to consider specific needs of each market and Business Unit (BU). Distributor selection process can be standardized, at the same time flexibility is provided by assigning different weightage to the selection parameters considering specific needs of each market and Business Unit.
The value proposition by addressing this distributor management opportunity is in three key areas: a) driving the top line, b) enhancing operational efficiency, and c) strengthening compliance.
Key Takeaways:
It is in the interest of principals to ensure they have efficient, effective and experienced distributors.
Involve other functions in sourcing the ‘right fit’ distributors and in designing a robust Distributor Relationship management program.
Effective distributor management will undoubtedly drive growth and provide a competitive advantage in the market place.
Distributor Connect and Consulting Limited (DCCL) can help your organization in identifying and selecting ‘right’ distributors to help drive growth. Contact mrneerajbhargava@gmail.com
