Manufacturer Challenges with Distribution as “The” Model

Recently we’ve spoken and met with some manufacturers about their methods of going to market, and specifically through distribution, and more specifically about how distribution may be constraining their growth.

As you can suspect, the views are wide ranging.

One company, which is not in the core electrical industry, has traditionally gone to market through an exclusive distribution model. The company was contemplating going direct as many of its competitors go direct. The companies that go direct are able to undercut the price of the distribution-oriented company, thereby taking business or gaining improved margins. This industry has about 1000 contractors. The pupose of the meeting was to discuss various distribution models to help improve their competitiveness, thereby enabling the company to position itself for future growth. The distributors in this industry have margins of 18-40% and are typically overpriced by 5-50% (the sell based upon being the market leader and #1 in service).

Another company, which is in the electrical industry, currently sells through about 500 distributor locations (according to them) but finds little value in distribution. They find that sellign direct to create specifications and controlling the business whenever possible (including serving direct) is more productive.

As you can see, two extremes but both are concerned about distributors’ ability to help them create business and sell products.

For the first company, the discussion moved from a direct model to how to improve the current model when management considered the issues that would be thrust upon them to manage a direct business model. The growth issue was addressed by refining their curernt model, adding a new sales group, developing multiple pricing strategies to make distributors more price competitive and development of an innovative distributor/manufacturer marketing alliance to drive the distribution network’s and the manaufacturer’s revenues.

The second company … they’re focused on “swinging for the fences” and closing big orders. In fact, they are going through an effort to reduce the number of distributors that they sell through. Their product is not overly conducive to counter business and only limited stock business. They are a lighting company that is focused on new construction and major retrofit projects.

As an executive of one of the companies said, “Times like this is when companies should consider bold moves.”

This then got us to thinking about:

• What is the value of distribution to a manufacturer beyond credit, warehousing and local relationships?
• What should be the value of distribution for a manufacturer?
• How should a manufacturer evaluate their distribution model, and more specifically, individual distributors?
• And if distributors are perceived as credit, warehouse and relationships, is this enough for a manufacturer? How could the manufacturer / distributor relationship be enhanced to add a growth (sales) focus?

As we look towards the future, more manufacturers will question their channels to market. Sometimes distribution will win, other times … The difference is being able to show value (defined as profit opportunities … through increased sales or as an efficiency venue) and a revenue generator.

WHat do you think the value of distribution is? Post your thoughts and also let everyone know if you are responding as a distributor, a manufacturer or a rep.