Many have heard that Cerro recently changed its sales approach. The company exercised its 30 day right to cancel its rep agreements and is adding a number of people (rumor is five) to handle distributor accounts directly. According to a Cerro representative, in speaking with a distributor, “we want to control the relationship we have with the customer, not the rep.”
With wire being the most basic of commodities and distributors primarily interested in price and availability, the move, at first glance, appears to be focused on cost-cutting. Years ago when airlines reduced, then canceled, travel agent commissions, the rationale was “we can’t control our #1 and #2 costs (employee costs and fuel) but we can control (eliminate) the commissions we pay travel agents”. It appears that Cerro, in a time when copper demand in the U.S. is down, essentially realized the same thing. But will distributors benefit with reduced prices? Will the savings go to Cerro’s bottom line? Will Cerro’s relationship with distributors grow stronger (at least for some distributors)?
Or could Cerro be considering a more selective distribution strategy, focusing its limited sales organization on fewer accounts (distributors and other channels)? Reports from distributors and marketing groups indicate that distributors desire local representation to support, negotiate and understand their needs.
At the recent NAED Conference, a couple of manufacturers also commented that when a rep loses a large revenue producer such as a wire line, the repercussions can be felt by other manufacturers as the rep must adjust their cost structure (people). Essentially larger revenue producers subsidize the rep investment to support smaller lines. Perhaps this reinforces NEMRA’s longstanding position that the current rep compensation structure should evolve to something else. Could a mixed strategy of commission and activity-based selling be appropriate?
But management by fewer is easier when there are fewer accounts. Perhaps this memo is an indication of Cerro’s intent? (click to read the memo then use your back arrow in Internet Explorer to return to this posting, names have been removed) A closer relationship with Home Depot. The cost synergies could be significant.
With a slow economy, manufacturer and distributor consolidation and continued upward pressure on cost structures, manufacturers need to review their rep and distribution strategies and policies. And unfortunately, sometimes change is “challenging” (nice consultant word!).
Your thoughts?
7 Comments
I wondered when this would happen. As a long time participant and even longer term observer of the wire business, with just a couple of exceptions it has become such a price driven commodity that reps can really add very little value.
There used to be a time when the rep understood which distributor was “using him” and which was a real partner. But, in for the most part those days are gone. The rep has become a phone screener from price requests… how much value can be in that?
As an electrical products manufacturer (non-wire), we are under constant pressure from OEM customers to reduce price or lose business to offshore sources. Given that our margin’s are already tight, it’s only natural to look at the channel and see what value sales reps and distributors add. I don’t believe a manufacturer can be accused of being predatory if the distributor has changed his MO and no longer stocks product or helps build the market. It appears many reps today spend almost 20% of their time just looking for lines to replace the ones they may be losing, thereby, making the “fight” for the rep’s time even more difficult. Taking a futuristic view and given the internet, next day deliveries, and ongoing downward cost pressure it would seem the manufacturer direct model makes more and more sense. But that’s just my take on it. I’d love to hear more.
Wow! These guys (PREVIOUS POSTERS)are geniuses!!
I wonder when the other 3 Cerro employees will post their comments? Good luck gettin to Podunk, Idaho or Appallachian State’s engineering department to make sure you’re on the specifications – or that guy in West Tiller, South Dakota that need you to come out and look at a piece of “bad wire.”
Well…since when did a rep actually think that they could pardner with a distributor….
With distributors buying product from HD and other box stores….have the rolls switched?
I firmly believe Cerro will follow the old Anaconda Wire & Cable and will be sold or out of business within 4 years. Anaconda took a similar approach in the late 70’s and were out of business within 2 years.
With building wire your three largest costs (in order) are copper, compounds (PVC & nylon), and freight. After that the costs become relatively a small part of the product if you have an efficient operation. Cutting out the reps commission out will save them only $7-$8 million tops if everything stays the same. By the way, they added 7 outside people and 14 inside, so $7-8 million in savings is optimistic. Now, if you lose customers and you have to be low priced because of poor market intelligence then most of your saving a gone. Just like Anaconda and the airlines, they didn’t address the real problem which is a bad business model for the business climate of today.
Cerro has old inefficient plants and equipment which makes them a high cost producer. They have too many plants and points of distribution for the size of their business, thus making their freight costs higher than any of their competitors. I would guess their freight costs are close to double that of Encore and United Copper. They have shitty systems which gives them poor data, poor service, which leads to poor decisions. Just like Delta Airlines, Cerro has certain fixed assets that will not go away. When Delta cut out travel agent commissions they were still not equipped to handle difficult market conditions and when faced with them they filed bankruptcy.
Conversely, Southwest, with a better business model, still posted profits and flourished in a difficult market. Encore and United Copper are like Southwest.
If Cerro really wanted to make an impact on their bottom line they would address the outrageous distributor rebate programs they have in place, which dwarf the rep’s commission by almost 3 fold. I guess we can save that discussion for another day. Now if Cerro is planning to focus their efforts on the retail (i.e. Home Depot) market and be opportunist in the ED channel then they can rationalize their decision. No reps are needed in the retail sector! So, let’s do the same in the ED Channel. Good business sense would be to add a fixed cost (direct sales force) in an up market and a variable cost (rep) in a down market. The trend is not up!
From my perspective as a former manufacturer, I applaud their decision to change the status quo. Unfortunately, they took the easy route to get some immediate savings that will cost them more in the long run, while turning a blind eye to their real problems. As a rep of a competing manufacturer, I love the decision! They had only a few distributors in my marketplace prior to the decision and now they have almost zero.
We have picked up half of their distributors immediately, while the Encore and Southwire/Senator rep’s have picked up the others. Bottom line … it is a people business and if I get last look and rep the low cost manufacturer I get the order! And usually I don’t have to be low, just close!
What insight from the former manufacturer turned rep. I counted a little over 30 statements/comments he/she made. His/her batting average for correctness wouldn’t get him/her in the minor leagues let alone a position on a 30 person high school team (and everybody gets to play there). His/her lack of knowledge or bias was impressive though.
Whether it be lack of knowledge, bias or pure wisdom it ALL holds true for me. When you figure out how to be on three job sites, figure out where an order is, pedal your product to the new director of strategic pucrchasing and wipe his ass all at once with one person please let me know! Good luck Essex I mean Cerro
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