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Ten ways for manufacturers to improve distribution management
Ten Ways for Manufacturers to Improve Distribution Management Kenneth G. Hardy and Allan J. Magrath 65 Kenneth G. Hardy is a professor of business administration at the University of Western Ontario, London. Allan J.Magrath is director of marketing services for the Canadian headquarters of a Fortune 500 multinational company,, also in London. The two co-authored Avoidin~ the Pitfalls in Managing Distribution Channels," in the September-October 1987 issue of Business Horizons.
Manufacturers lean more on channels of distribution to make their products available in today's broadening and maturing markets. "Walking a mile in the channel partner's shoes" may be the first place to start in building a smooth and profitable relationship between manufacturer and reseller. he key to building market share? Strong management of distribution channel networks has brought success to many manufacturers. Hallmark reigns over the greeting card market in large part because of its finesse in leveraging card sales via thousands of retail outlets; Steelcase's strong dealer network is envied by its competitors in the officefurniture business; and most makers of personal computers desire the stability and strength of IBM's Value Added Reseller (VAR) network. Such distribution systems provide cost-effective and responsive market coverage and serve as excellent pipelines for the rapid launching of new products. Because of Kodak's proven merchandising clout, retailers of small batteries readily accepted its new lithium battery line. Frito-Lay can launch a new snack food entry and gain premium shelf space because of its strong track record in channel management. More and more firms consider their
T
marketing channels to be strategic assets that can provide a sustainable edge over competitors who copy their product designs, duplicate their quality, and undersell them on price. This recognition of the key strategic role played by resellers is occurring at a time of changing relationships in many channels. Specialized retailers such as the Limited, N o r d s t r o m s , Toys R Us, Southland, and others are gaining in strength and joining the ranks of the Kmarts and Sears. N e w channels of distribution are emergi n g - w h o l e s a l e clubs, factory outlets, electronic shopping channels, franchises of all sorts, direct marketing operations, and hybrid channels such as the Sears Financial Network. At the wholesaler/middleman level, national distributors such as Avnet, Bearings Inc., W. W. Grainger, and McKesson are also growing into Fortune 500-scale corporations. The astute manufacturer must learn to operate in the midst of changing
Business Horizons / November-December 1988 I
"If the primary task of the reseller is to arrange sales, not to inventory products or to bill and ship to customers, then an agent or broker is a more logical choice than a fullfunction distributor with a w a r e h o u s e . "
66 power relationships that demand innovative methods of market coverage. CHANNEL MANAGEMENT PRACTICE ood channel managers share a number of practices. These practices concern strategies based on an understanding of channel dynamics and the willingness to keep channel policies and tactics relevant over time.
G
1. Set definite marketing objectives and clearly communicate marketing strategy to all channel members. In 1983, IBM executives decided they would have to use indirect channels rather than their own sales force to establish their personal computers in multiple markets. To reach such distinct vertical markets, they directed various resellers to target different end users, from professionals such as doctors and lawyers to banks, insurance businesses, and hospitals. They also limited their total resellers to a fixed upper limit (2,500 in the U.S.) to keep strong the ability of dealers to develop and grow with their line of PCs. IBM's strategy and tactics reflected its goal of obtaining market coverage in a developing mass market at a reasonable cost with some measure of channel control. The company has been quite successful; large customers can b u y direct, while smaller, more dispersed customers buy from distribution channels. Large customers get low prices but must in
turn buy large quantities to qualify for direct sale. Smaller customers buy at higher prices but receive ready local availability and no minimum purchase criteria. For medium-sized accounts, IBM has had to fine-tune its strategy to balance direct and indirect sale in ways that encourage fair competition between its own sales force and its resellers. Wang, another PC manufacturer, has not enjoyed IBM's success with distribution; its lackluster dealer relations and minimal dealer network strength directly result from its vacillating market positioning. It pursued the reseller channels later than its competitors and e x p r e s s e d its c o m m i t m e n t to dealers in e m p t y words rather than consistent actions. For example, Wang stated its desire to move its indirect business from 12 percent of sales to 50 percent. Yet, in 1985 it lowered the sales commission rates of its sales force for sales made jointly with its dealers--rates below that for sales made directly by the sales force. Naturally, in an organization with 88 percent of sales in a direct channel, Wang's own sales reps began to compete with, rather than cooperate with, their resellers. Some Wang dealers even filed lawsuits because of this policy. It is now difficult for Wang to rebuild its channel relationships by offering its dealers programs to target specific markets (as IBM has done), because a residue of dealer ill-will still exists towards its direct sales operation. Obviously, any firm that wishes to enlist channel support must communicate its marketing
vision consistently, in words and in behavior. 2. Base channel arrangements and policies on a thorough market analysis and understanding of key tradeoffs, such as coverage versus costs. Est~e Lauder, the cosmetics manufacturer, knows that in order to exercise control over its product-line image, it must follow a policy of exclusive distribution in a limited channel (department stores). It also leases space from the stores in an arrangement that provides for maximum instore display and presentation of its cosmetics lines. Est~e Lauder recognizes the somewhat specialized nature of its products and the fact that its target customers will shop for its cosmetics only as long as its products are distinctively positioned. The mass distribution of competitors such as Noxell (Cover Girl) would be inappropriate for Est~e Lauder. After a thorough market analysis, some firms opt for a mixed channel strategy. Goodyear uses a wide variety of different channels for its tires, each with its own cost versus coverage trade-off. One distribution arm is its own retail stores, a high-cost and limited-coverage channel. It also markets tires via franchises---in Goodyear Go Centers. This channel provides broader coverage (more outlets) than its own stores and costs less to support and nourish. Goodyear's least costly channel is its network of independent tire dealers who sell its tires as well as those of many of its competitors. This low-cost channel
Ten Ways for Manufacturers to Improve Distribution
p r o mass v icoverage d e b esc a u s e
thousands of such outlets exist, but Goodyear has little control over such i n d e p e n d e n t s . Clearly this mixed channel strategy is based upon Goodyear's desire to cover all segments with varying tire and servicing needs across America. Successful firms such as Goodyear and Est6e Lauder have taken a hard look at their channel arrangement trade-offs, fitting channel plans to their chosen customer targets and preferred marketing image. 3. Determine the division of tasks between supplier and middleman. A manufacturer should separate its own distributive tasks from those that it will share or delegate to its channels of distribution. Having a clearly defined task set for distribution allows a firm to utilize either limited-function or full-function middlemen. If the primary task of the reseller is to arrange sales, not to inventory products or to bill and ship to customers, then an agent or broker is a more logical choice than a full-function distributor with a warehouse. If after-sales service support by the middleman is critical, only channels that p r o v i d e installation, repair, and operatortraining services make sense. Task definition is also critical because it provides the basis for a review of the m i d d l e m a n ' s performance. Reviews allow the manufacturer and reseller to set up support systems that mutually reinforce excellent performance of both distributive functions. Building synergistic distribution programs can only occur, however, if the manufacturer and distributor/retailer agree on who's supposed to do what in the marketplace. Only then does the manufacturer's marketing and selling actually supplement and leverage the efforts of its distributors. For example, Fansteel VWWesson Metalworking, a manufacturer of milling cutters, endmills, toolholders, and inserts, was concerned that its industrial distributors were not as technically proficient at selling its products to machinists in small- and medium-sized accounts as these tool shops required. Distributor reps provided excellent order turnaround, delivery, and sales advice on
standard items but lacked the confidence necessary to handle the machinists' needs on complex, technical products. Fansteel did not have the sales resources to handle both its large accounts and the multitude of small and medium accounts; accordingly, it structured a coordinated program with its distributors to improve the reps' comfort level on complex products. The program consisted of selfs t u d y training courses custom-designed for distributors; joint-call blitzes on machine shops with Fansteel reps accompanying distributor reps; newsletters reporting success stories circulated among distributors' reps; and redesigned, more easily referenced technical catalogs. Fansteel's marketing manager summed up the process this way: We l e a r n e d . . , that the program h a s to build on the strength of both the distributors and the company, making each responsible for the things they are best equipped to perform. That may sound obvious, but too many times it's easy to pay lip-service to the obvious, without actually implementing it. Clearly, defining channel tasks is a crucial step in settling on priority tactics that will help ensure task efficiency. 4. Understand the partner's view of the world and its profit-making formula. Appeal to the channel partner's self-interest to accomplish your own goals. A distributor or retailer makes money by astute gross-margin management, optimization of inventory turns, and disciplined expense controls. With distributors, expenses may be incurred by field or inside sales forces, warehousing, delivery, and credit extension to customers. Retailers' costs often relate to investments in space for key locations, retail decor, stock, and information systems. Any manufacturer that can improve the profit' formula of its resellers on margins, turns, or expenses will find its influence over resellers markedly higher than if its programs are totally self-centered. In some retail businesses, new in-
Management
formation systems improve profit formulas and require retailers to form closer partnerships with suppliers. Firms such as Levi Strauss, Haggar Apparel, and Arrow Shirt have worked hand-in-hand with retailers like Montgomery Ward, J.C. Penney, and Kmart to develop computerized order processing-inventory management systems that link retailer and supplier. Such systems' have helped retailers generate faster reorders on best-selling lines and allowed them to accept shipments on a just-in-time basis, improving cash flow and reducing net inventory investment per dollar of sales. The ability of in-store cash registers to instantly feed back sales data to suppliers also improves the retailer's sales-forecasting reliability, reducing merchandise margin erosion caused by m a r k d o w n s . "Walking a mile in the channel partner's shoes" can be a very creative way of generating innovative channel strategies. 5. Examine the actual balance of power among channel members and pursue realistic options. The balance of power often shifts within marketing channels, both between manufacturers and resellers and between types of resellers. Large retailers can strongly affect a manufacturer's ability to direct its sales through certain middlemen. Independent manufacturer's agents (also termed manufacturer's reps) have lost clout in many markets because retailers are bypassing them and forcing manufacturers to deal directly with retailers. Reps have been cut out of the channel picture by Wal-Mart, Cataloger-Fingerhut, Kmart's Builders Square, and other chains. A manufacturer that blindly sets policies, ignoring the power dimension, often lives to regret it. Kroy Incorporated, makers of lettering machines, in 1982 attempted to drop its network of 1,000 dealers and sell machines directly from c o m p a n y owned sales branches with its own sales force. Its former dealers quickly signed with competitors and worked successfully against Kroy. As Kroy's sales growth slowed, its high-cost, direct sales organization became a severe drag on profits. Kroy eventually
I
67
Business Horizons / November-December1988 I
"Manufacturers who anticipate channel problems can alter their tactics and train their field selling organization to keep conflict from getting out of hand."
68 had to close more than 50 percent of its sales branches and lay off over onethird of its sales reps. This expensive lesson on the balance of power could have been avoided if Kroy had objectively assessed the hold its independent dealers had in their respective local markets. Kroy has re-enlisted many of its former dealers and is n o w spending as much time as possible repairing its severely damaged relations. 6. Ensure that margins and other supports equitably reward partners for performing distributive functions. If the costs to a reseller of carrying a producer's inventory, displaying, promoting, assorting, selling, delivering, and handling accounts receivable amount to 24 percent of the selling price for an item, then a supplier offering the reseller only a 20 percent margin will not be a favored supplier for very long! In fact, in all likelihood the reseller will begin to cut back its stocking levels and number of lines to shift inventory-holding costs back to its manufacturing suppliers. This typical response to a margin squeeze tends either to p u s h producers into selling exclusively direct or further cutting the reseller's margin. Inequitable margin structures can spark a sequence of negative moves and countermoves. Manufacturers should make objective assessments of the functions performed by resellers on their behalf and the likely costs incurred. If a reseller is truly failing to perform agreed-upon functions, the manufacturer should
then consider channel sanctions or alternative arrangements. In a major survey of office furniture dealers, a common complaint was that manufacturers assigned cosily dealer functions w i t h o u t providing adequate compensation. Sometimes manufacturers assist dealers in lowering their costs of holding inventory through quick-ship programs, or shipping in knock-down form to lower freight costs. In a case where a manufacturer feels that a reseller is not earning its margins, one solution is to build a ladder of discounts based upon the distributor's proficiency in some key aspect of its functional performance. For example, the distributor might receive 110 percent of the normal discount if its personnel have passed proficiency tests in selling or servicing the producer's equipment. It is critical that the manufacturer forthrightly assess the pattern of margin and function sharing with its appointed resellers and redress inadequate margin-splitting by insisting on higher performance standards or by working with resellers to lower their costs. 7. Predict and contain conflict within channels. Since 1980, Rubbermaid has increased distribution for its products from 60,000 outlets to 100,000. Such an increase in distribution can generate conflict between resellers because more middlemen gain access to a given brand. Knowing this, Rubbermaid improved its coop advertising plans and increased its retailers' margins to motivate the new
channels to add its brands even though the market was mature and competition in housewares was intense. Its decision to almost double distribution intensity to gain market share was not out of the ordinary; m a n y companies follow the same strategy. What was commendable was Rubbermaid's sensitivity to the heightened conflict that it created and its thoughtful response, ensuring that all its retailers continued to list and promote its brands. This positive response has helped double sales and triple after-tax profits since 1980. A variety of confl ct-mitigafing tactics exist for any manufacturer who is constructing plans for distribution; one is to provide competing resellers with different brands. Hallmark, for example, sells its Hallmark card line in upscale department stores and its A m b a s s a d o r card line in d i s c o u n t stores. To minimize conflict between different dealers selling identical products on the same street, Audio Products International has successfully sold more than 10 different brand-name speakers in America over a 12-year period. Other methods of managing conflict include partitioning markets between resellers; delineating direct sales policies to clarify potential conflict over large accounts; negotiating territorial issues between regional distributors; and providing recognition to certain resellers (master distributors) for the importance of their role in redistributing to others. Manufacturers who anticipate channel problems can alter their tactics and train their field selling organization to
Ten Ways for Manufacturers to Improve Distribution Management
I
keep conflict from getting out of hand. 8. Help sales reps develop skills in working with middlemen. The successful execution of a marketing program often depends on a sales force's credibility with dealers, distributors, or retailers. In a study of 216 sales promotions, one key success factor was the ability of the sales force to sell the retail buyers on the promotion's merits and then to follow up solidly in execution. Manufacturers' sales forces play a variety of roles for their resellers. Salespeople must be teachers about markets and products; reviewers of the reseller's performance to quotas; ambassadors selling the distributor on c o m p a n y policies and support programs; ombudsmen straightening out the inevitable mixups that occur between themselves and their resellers; and working partners making joint sales calls with dealer reps to key customers. Sales reps should be trained for each of these roles. One of the best ways that manufacturers can train their new reps to deal with middlemen is to insist that their "rookies" learn from an old pro by serving an apprenticeship in a veteran sales rep's territory. Sales force synergy between resellers and suppliers is a powerful lever in improving overall channel performance. 9. Audit channels to ensure that they remain viable and robust pathways to markets. PepsiCo has altered its distribution channels to stay in tune with the growth channel for soft drinks. As more and more meals are consumed away from home, Pepsi cannot depend solely on mainstream bottled product distribution, such as food or convenience stores. So Pepsi bought a number of fast food outlets---Taco Bell, Pizza Hut, and Kentucky Fried C h i c k e n - - w h o s e food sales are natural complements to Pepsi fountain sales. Bausch and Lomb, a leader in the sales of contact lens
cleaning solutions, has aggressively pursued food stores in addition to traditional drug store channels, because widespread use of contact lenses has necessitated mass distribution of "solutions. Not only must a supplier jump across to new channels as markets mature and customers look for wider product availability, but it must also be wary of channels that lose distribution vitality. New channels emerge constantly; others decline. For example, wholesale clubs are a new thriving channel in America, but catalog showroom stores are declining. The manufacturer that knows when to jump across to new channels and de-emphasize declining ones will outperform its rivals who lack such distribution smarts. Movie studios in Hollywood have shown distribution moxie when faced with decreasing domand for their films in theaters (due to attendance drops). They have jumped into movie production for three new distribution paths--primetime television, pay television, and videocassette sales and rentals. 10. Treat channels of distribution as strategic assets and constantly seek ways to utilize them in creating a sustainable competitive edge. Interstate Bakeries markets Dolly Madison pastries and regional brands such as Millbrook and Butternut bread. After losing over $4 million ori $708 million in sales in 1984, by mid-1987 the company was making a $13 million profit on $729 million in sales. Much of its turnaround was directly attributable to its recognition of how it could exploit its 3,050-mile truck route distribution system. Via license and acquisitions Interstate Bakeries began to acquire other brands that fit its current delivery systems. It added highermargin products such as pecan rolls, cookies, cakes, and pudding pies into its distribution system and turned around its static growth and declining profitability.
Federal Mogul, a manufacturer of bearings, pistons, and sealers, views its distributor network as a strategic sales asset. Through electronic links between manufacturer and reseller, Federal Mogul distributors can scan the supply stock status of Federal's 16,000 parts in its 43 U.S. branches. This information system linkage is a big boost to both Federal and its distributors. Distributors' access to stock status data allows them to make better derisions about whether to switch customers to equivalent substitutes when parts d e m a n d e d are not in stock. Federal gains by being better able to allocate slow-moving inventories between its various branch locations. Restructuring channels of distribution is also possible through buying groups. Groups of either retailers or wholesalers band together to exercise both greater buying clout with suppliers and greater merchandising clout with consumers. Groups such as Cotter and Company (parent of True Value Hardware) are creating dramatic changes in distribution of hardware, drugs, food, and appliances. In many markets these buying groups have given a needed shot in the arm to independents, who by joining the groups acquire professional marketing and purchasing help and lower merchandise costs.
irms that understand and exploit distribution channels for the pursuit of new customers or efficiencies have great power in today's marketplace. Managing marketing distribution systems often calls for the wisdom of Solomon and the guile of Machiavelli. Mastering and understanding the ten principles discussed here is the first step toward improving the always challenging decision process in distribution channel management. []
F
69
Manufacturers lean more on channels of distribution to make their products available in today's broadening and maturing markets. "Walking a mile in the channel partner's shoes" may be the first place to start in building a smooth and profitable relationship between manufacturer and reseller. he key to building market share? Strong management of distribution channel networks has brought success to many manufacturers. Hallmark reigns over the greeting card market in large part because of its finesse in leveraging card sales via thousands of retail outlets; Steelcase's strong dealer network is envied by its competitors in the officefurniture business; and most makers of personal computers desire the stability and strength of IBM's Value Added Reseller (VAR) network. Such distribution systems provide cost-effective and responsive market coverage and serve as excellent pipelines for the rapid launching of new products. Because of Kodak's proven merchandising clout, retailers of small batteries readily accepted its new lithium battery line. Frito-Lay can launch a new snack food entry and gain premium shelf space because of its strong track record in channel management. More and more firms consider their
T
marketing channels to be strategic assets that can provide a sustainable edge over competitors who copy their product designs, duplicate their quality, and undersell them on price. This recognition of the key strategic role played by resellers is occurring at a time of changing relationships in many channels. Specialized retailers such as the Limited, N o r d s t r o m s , Toys R Us, Southland, and others are gaining in strength and joining the ranks of the Kmarts and Sears. N e w channels of distribution are emergi n g - w h o l e s a l e clubs, factory outlets, electronic shopping channels, franchises of all sorts, direct marketing operations, and hybrid channels such as the Sears Financial Network. At the wholesaler/middleman level, national distributors such as Avnet, Bearings Inc., W. W. Grainger, and McKesson are also growing into Fortune 500-scale corporations. The astute manufacturer must learn to operate in the midst of changing
Business Horizons / November-December 1988 I
"If the primary task of the reseller is to arrange sales, not to inventory products or to bill and ship to customers, then an agent or broker is a more logical choice than a fullfunction distributor with a w a r e h o u s e . "
66 power relationships that demand innovative methods of market coverage. CHANNEL MANAGEMENT PRACTICE ood channel managers share a number of practices. These practices concern strategies based on an understanding of channel dynamics and the willingness to keep channel policies and tactics relevant over time.
G
1. Set definite marketing objectives and clearly communicate marketing strategy to all channel members. In 1983, IBM executives decided they would have to use indirect channels rather than their own sales force to establish their personal computers in multiple markets. To reach such distinct vertical markets, they directed various resellers to target different end users, from professionals such as doctors and lawyers to banks, insurance businesses, and hospitals. They also limited their total resellers to a fixed upper limit (2,500 in the U.S.) to keep strong the ability of dealers to develop and grow with their line of PCs. IBM's strategy and tactics reflected its goal of obtaining market coverage in a developing mass market at a reasonable cost with some measure of channel control. The company has been quite successful; large customers can b u y direct, while smaller, more dispersed customers buy from distribution channels. Large customers get low prices but must in
turn buy large quantities to qualify for direct sale. Smaller customers buy at higher prices but receive ready local availability and no minimum purchase criteria. For medium-sized accounts, IBM has had to fine-tune its strategy to balance direct and indirect sale in ways that encourage fair competition between its own sales force and its resellers. Wang, another PC manufacturer, has not enjoyed IBM's success with distribution; its lackluster dealer relations and minimal dealer network strength directly result from its vacillating market positioning. It pursued the reseller channels later than its competitors and e x p r e s s e d its c o m m i t m e n t to dealers in e m p t y words rather than consistent actions. For example, Wang stated its desire to move its indirect business from 12 percent of sales to 50 percent. Yet, in 1985 it lowered the sales commission rates of its sales force for sales made jointly with its dealers--rates below that for sales made directly by the sales force. Naturally, in an organization with 88 percent of sales in a direct channel, Wang's own sales reps began to compete with, rather than cooperate with, their resellers. Some Wang dealers even filed lawsuits because of this policy. It is now difficult for Wang to rebuild its channel relationships by offering its dealers programs to target specific markets (as IBM has done), because a residue of dealer ill-will still exists towards its direct sales operation. Obviously, any firm that wishes to enlist channel support must communicate its marketing
vision consistently, in words and in behavior. 2. Base channel arrangements and policies on a thorough market analysis and understanding of key tradeoffs, such as coverage versus costs. Est~e Lauder, the cosmetics manufacturer, knows that in order to exercise control over its product-line image, it must follow a policy of exclusive distribution in a limited channel (department stores). It also leases space from the stores in an arrangement that provides for maximum instore display and presentation of its cosmetics lines. Est~e Lauder recognizes the somewhat specialized nature of its products and the fact that its target customers will shop for its cosmetics only as long as its products are distinctively positioned. The mass distribution of competitors such as Noxell (Cover Girl) would be inappropriate for Est~e Lauder. After a thorough market analysis, some firms opt for a mixed channel strategy. Goodyear uses a wide variety of different channels for its tires, each with its own cost versus coverage trade-off. One distribution arm is its own retail stores, a high-cost and limited-coverage channel. It also markets tires via franchises---in Goodyear Go Centers. This channel provides broader coverage (more outlets) than its own stores and costs less to support and nourish. Goodyear's least costly channel is its network of independent tire dealers who sell its tires as well as those of many of its competitors. This low-cost channel
Ten Ways for Manufacturers to Improve Distribution
p r o mass v icoverage d e b esc a u s e
thousands of such outlets exist, but Goodyear has little control over such i n d e p e n d e n t s . Clearly this mixed channel strategy is based upon Goodyear's desire to cover all segments with varying tire and servicing needs across America. Successful firms such as Goodyear and Est6e Lauder have taken a hard look at their channel arrangement trade-offs, fitting channel plans to their chosen customer targets and preferred marketing image. 3. Determine the division of tasks between supplier and middleman. A manufacturer should separate its own distributive tasks from those that it will share or delegate to its channels of distribution. Having a clearly defined task set for distribution allows a firm to utilize either limited-function or full-function middlemen. If the primary task of the reseller is to arrange sales, not to inventory products or to bill and ship to customers, then an agent or broker is a more logical choice than a full-function distributor with a warehouse. If after-sales service support by the middleman is critical, only channels that p r o v i d e installation, repair, and operatortraining services make sense. Task definition is also critical because it provides the basis for a review of the m i d d l e m a n ' s performance. Reviews allow the manufacturer and reseller to set up support systems that mutually reinforce excellent performance of both distributive functions. Building synergistic distribution programs can only occur, however, if the manufacturer and distributor/retailer agree on who's supposed to do what in the marketplace. Only then does the manufacturer's marketing and selling actually supplement and leverage the efforts of its distributors. For example, Fansteel VWWesson Metalworking, a manufacturer of milling cutters, endmills, toolholders, and inserts, was concerned that its industrial distributors were not as technically proficient at selling its products to machinists in small- and medium-sized accounts as these tool shops required. Distributor reps provided excellent order turnaround, delivery, and sales advice on
standard items but lacked the confidence necessary to handle the machinists' needs on complex, technical products. Fansteel did not have the sales resources to handle both its large accounts and the multitude of small and medium accounts; accordingly, it structured a coordinated program with its distributors to improve the reps' comfort level on complex products. The program consisted of selfs t u d y training courses custom-designed for distributors; joint-call blitzes on machine shops with Fansteel reps accompanying distributor reps; newsletters reporting success stories circulated among distributors' reps; and redesigned, more easily referenced technical catalogs. Fansteel's marketing manager summed up the process this way: We l e a r n e d . . , that the program h a s to build on the strength of both the distributors and the company, making each responsible for the things they are best equipped to perform. That may sound obvious, but too many times it's easy to pay lip-service to the obvious, without actually implementing it. Clearly, defining channel tasks is a crucial step in settling on priority tactics that will help ensure task efficiency. 4. Understand the partner's view of the world and its profit-making formula. Appeal to the channel partner's self-interest to accomplish your own goals. A distributor or retailer makes money by astute gross-margin management, optimization of inventory turns, and disciplined expense controls. With distributors, expenses may be incurred by field or inside sales forces, warehousing, delivery, and credit extension to customers. Retailers' costs often relate to investments in space for key locations, retail decor, stock, and information systems. Any manufacturer that can improve the profit' formula of its resellers on margins, turns, or expenses will find its influence over resellers markedly higher than if its programs are totally self-centered. In some retail businesses, new in-
Management
formation systems improve profit formulas and require retailers to form closer partnerships with suppliers. Firms such as Levi Strauss, Haggar Apparel, and Arrow Shirt have worked hand-in-hand with retailers like Montgomery Ward, J.C. Penney, and Kmart to develop computerized order processing-inventory management systems that link retailer and supplier. Such systems' have helped retailers generate faster reorders on best-selling lines and allowed them to accept shipments on a just-in-time basis, improving cash flow and reducing net inventory investment per dollar of sales. The ability of in-store cash registers to instantly feed back sales data to suppliers also improves the retailer's sales-forecasting reliability, reducing merchandise margin erosion caused by m a r k d o w n s . "Walking a mile in the channel partner's shoes" can be a very creative way of generating innovative channel strategies. 5. Examine the actual balance of power among channel members and pursue realistic options. The balance of power often shifts within marketing channels, both between manufacturers and resellers and between types of resellers. Large retailers can strongly affect a manufacturer's ability to direct its sales through certain middlemen. Independent manufacturer's agents (also termed manufacturer's reps) have lost clout in many markets because retailers are bypassing them and forcing manufacturers to deal directly with retailers. Reps have been cut out of the channel picture by Wal-Mart, Cataloger-Fingerhut, Kmart's Builders Square, and other chains. A manufacturer that blindly sets policies, ignoring the power dimension, often lives to regret it. Kroy Incorporated, makers of lettering machines, in 1982 attempted to drop its network of 1,000 dealers and sell machines directly from c o m p a n y owned sales branches with its own sales force. Its former dealers quickly signed with competitors and worked successfully against Kroy. As Kroy's sales growth slowed, its high-cost, direct sales organization became a severe drag on profits. Kroy eventually
I
67
Business Horizons / November-December1988 I
"Manufacturers who anticipate channel problems can alter their tactics and train their field selling organization to keep conflict from getting out of hand."
68 had to close more than 50 percent of its sales branches and lay off over onethird of its sales reps. This expensive lesson on the balance of power could have been avoided if Kroy had objectively assessed the hold its independent dealers had in their respective local markets. Kroy has re-enlisted many of its former dealers and is n o w spending as much time as possible repairing its severely damaged relations. 6. Ensure that margins and other supports equitably reward partners for performing distributive functions. If the costs to a reseller of carrying a producer's inventory, displaying, promoting, assorting, selling, delivering, and handling accounts receivable amount to 24 percent of the selling price for an item, then a supplier offering the reseller only a 20 percent margin will not be a favored supplier for very long! In fact, in all likelihood the reseller will begin to cut back its stocking levels and number of lines to shift inventory-holding costs back to its manufacturing suppliers. This typical response to a margin squeeze tends either to p u s h producers into selling exclusively direct or further cutting the reseller's margin. Inequitable margin structures can spark a sequence of negative moves and countermoves. Manufacturers should make objective assessments of the functions performed by resellers on their behalf and the likely costs incurred. If a reseller is truly failing to perform agreed-upon functions, the manufacturer should
then consider channel sanctions or alternative arrangements. In a major survey of office furniture dealers, a common complaint was that manufacturers assigned cosily dealer functions w i t h o u t providing adequate compensation. Sometimes manufacturers assist dealers in lowering their costs of holding inventory through quick-ship programs, or shipping in knock-down form to lower freight costs. In a case where a manufacturer feels that a reseller is not earning its margins, one solution is to build a ladder of discounts based upon the distributor's proficiency in some key aspect of its functional performance. For example, the distributor might receive 110 percent of the normal discount if its personnel have passed proficiency tests in selling or servicing the producer's equipment. It is critical that the manufacturer forthrightly assess the pattern of margin and function sharing with its appointed resellers and redress inadequate margin-splitting by insisting on higher performance standards or by working with resellers to lower their costs. 7. Predict and contain conflict within channels. Since 1980, Rubbermaid has increased distribution for its products from 60,000 outlets to 100,000. Such an increase in distribution can generate conflict between resellers because more middlemen gain access to a given brand. Knowing this, Rubbermaid improved its coop advertising plans and increased its retailers' margins to motivate the new
channels to add its brands even though the market was mature and competition in housewares was intense. Its decision to almost double distribution intensity to gain market share was not out of the ordinary; m a n y companies follow the same strategy. What was commendable was Rubbermaid's sensitivity to the heightened conflict that it created and its thoughtful response, ensuring that all its retailers continued to list and promote its brands. This positive response has helped double sales and triple after-tax profits since 1980. A variety of confl ct-mitigafing tactics exist for any manufacturer who is constructing plans for distribution; one is to provide competing resellers with different brands. Hallmark, for example, sells its Hallmark card line in upscale department stores and its A m b a s s a d o r card line in d i s c o u n t stores. To minimize conflict between different dealers selling identical products on the same street, Audio Products International has successfully sold more than 10 different brand-name speakers in America over a 12-year period. Other methods of managing conflict include partitioning markets between resellers; delineating direct sales policies to clarify potential conflict over large accounts; negotiating territorial issues between regional distributors; and providing recognition to certain resellers (master distributors) for the importance of their role in redistributing to others. Manufacturers who anticipate channel problems can alter their tactics and train their field selling organization to
Ten Ways for Manufacturers to Improve Distribution Management
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keep conflict from getting out of hand. 8. Help sales reps develop skills in working with middlemen. The successful execution of a marketing program often depends on a sales force's credibility with dealers, distributors, or retailers. In a study of 216 sales promotions, one key success factor was the ability of the sales force to sell the retail buyers on the promotion's merits and then to follow up solidly in execution. Manufacturers' sales forces play a variety of roles for their resellers. Salespeople must be teachers about markets and products; reviewers of the reseller's performance to quotas; ambassadors selling the distributor on c o m p a n y policies and support programs; ombudsmen straightening out the inevitable mixups that occur between themselves and their resellers; and working partners making joint sales calls with dealer reps to key customers. Sales reps should be trained for each of these roles. One of the best ways that manufacturers can train their new reps to deal with middlemen is to insist that their "rookies" learn from an old pro by serving an apprenticeship in a veteran sales rep's territory. Sales force synergy between resellers and suppliers is a powerful lever in improving overall channel performance. 9. Audit channels to ensure that they remain viable and robust pathways to markets. PepsiCo has altered its distribution channels to stay in tune with the growth channel for soft drinks. As more and more meals are consumed away from home, Pepsi cannot depend solely on mainstream bottled product distribution, such as food or convenience stores. So Pepsi bought a number of fast food outlets---Taco Bell, Pizza Hut, and Kentucky Fried C h i c k e n - - w h o s e food sales are natural complements to Pepsi fountain sales. Bausch and Lomb, a leader in the sales of contact lens
cleaning solutions, has aggressively pursued food stores in addition to traditional drug store channels, because widespread use of contact lenses has necessitated mass distribution of "solutions. Not only must a supplier jump across to new channels as markets mature and customers look for wider product availability, but it must also be wary of channels that lose distribution vitality. New channels emerge constantly; others decline. For example, wholesale clubs are a new thriving channel in America, but catalog showroom stores are declining. The manufacturer that knows when to jump across to new channels and de-emphasize declining ones will outperform its rivals who lack such distribution smarts. Movie studios in Hollywood have shown distribution moxie when faced with decreasing domand for their films in theaters (due to attendance drops). They have jumped into movie production for three new distribution paths--primetime television, pay television, and videocassette sales and rentals. 10. Treat channels of distribution as strategic assets and constantly seek ways to utilize them in creating a sustainable competitive edge. Interstate Bakeries markets Dolly Madison pastries and regional brands such as Millbrook and Butternut bread. After losing over $4 million ori $708 million in sales in 1984, by mid-1987 the company was making a $13 million profit on $729 million in sales. Much of its turnaround was directly attributable to its recognition of how it could exploit its 3,050-mile truck route distribution system. Via license and acquisitions Interstate Bakeries began to acquire other brands that fit its current delivery systems. It added highermargin products such as pecan rolls, cookies, cakes, and pudding pies into its distribution system and turned around its static growth and declining profitability.
Federal Mogul, a manufacturer of bearings, pistons, and sealers, views its distributor network as a strategic sales asset. Through electronic links between manufacturer and reseller, Federal Mogul distributors can scan the supply stock status of Federal's 16,000 parts in its 43 U.S. branches. This information system linkage is a big boost to both Federal and its distributors. Distributors' access to stock status data allows them to make better derisions about whether to switch customers to equivalent substitutes when parts d e m a n d e d are not in stock. Federal gains by being better able to allocate slow-moving inventories between its various branch locations. Restructuring channels of distribution is also possible through buying groups. Groups of either retailers or wholesalers band together to exercise both greater buying clout with suppliers and greater merchandising clout with consumers. Groups such as Cotter and Company (parent of True Value Hardware) are creating dramatic changes in distribution of hardware, drugs, food, and appliances. In many markets these buying groups have given a needed shot in the arm to independents, who by joining the groups acquire professional marketing and purchasing help and lower merchandise costs.
irms that understand and exploit distribution channels for the pursuit of new customers or efficiencies have great power in today's marketplace. Managing marketing distribution systems often calls for the wisdom of Solomon and the guile of Machiavelli. Mastering and understanding the ten principles discussed here is the first step toward improving the always challenging decision process in distribution channel management. []
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