Is the 3-Legged Stool Changing with Acquisitions?

We have often discussed how acquisitions have affected manufacturers and distributors in our industry, but we seldom talk much about the effects it has had on representatives.

Both NAED & NEMRA once described the relationship between a manufacturer, a distributor, and the independent manufacturer representative as a three-legged stool by which the strength of each determines that of the chair.

Last month I talked about changing relationships in the industry. Yes, age is driving much of this. It is inevitable. Trust me, I know. Consolidation is also driving this change, and, from my vantage point, we should relook at the three-legged stool of the industry to keep everyone strong.

Certainly, we have seen representative agencies continue to grow in geography, manpower and responsibility. Perhaps a look into that growth would be reasonable.

BACKGROUND 

When I began as a rep 50 years ago, the representative had a finite number of customers, which was determined by the number of distributors in the market. If there was inventory at the agency, the rep had a card system by which he kept count, and the expense of his people, both inside and out.

Thoughts on The Distributor / Rep Leg

Today the expectations by both manufacturers and distributors (as emphasized at last year’s NEMRA conference by an international distributor) is for manufacturer representatives to primarily drive specifications, and overall demand. They are expected to be technical, strategic and loyal while being able to perform all of the services the manufacturer requires including inside management, marketing, quoting, order entry, material handling, etc. (although this changes by manufacturer, and their systems differ!)

When I started, the general rule was every manufacturer offered a straight 5% commission rate and for those request inventorying, we earned an additional 2% of sales. Now many manufacturers negotiate commissions depending on the type of sales. A few offer incentives for new products or for surpassing budgets they might determine, however few in “supplies” average near 5% with many closer to an average far less. Surveying a half-dozen lighting reps, I found they averaged closer to 12-20%, often determined by various incentives including overages. Today’s cost as a representative includes various software packages necessary for tracking business, orders, and communication with various manufacturers, often on their own systems, as well as a significantly increased cost of salaries, insurances necessary, travel expenses, incentive programs from bonuses to 401K and more.

In other words, income has declined, and costs have increased … and manufacturers wonder why reps have more suppliers on their line card than ever before?

The sale of independent distribution to regional, national, and international distributors have seen many local decisions moved. They are now made, often, without the support or history of the local market included. Speaking to many sales associates of these companies, including local and regional management, it is a reason they give for not being able to hold onto people (their staff) who feel that their input, and work is seldom if ever requested, considered, or sometimes appreciated.

As a representative in an area where many management distributor people lived outside our geography, we were seldom invited to manufacturer meetings with them. Often, we only heard from local branch managers who attended the meetings what was committed by our manufacturers

There were times I actually had to go directly to the distributor management and ask to be invited. Three times I heard from different distributors that they had originally requested our presence and had thought it was we who had decided not to attend.

Thoughts on the Manufacturer / Rep Leg

Manufacturers either developing new products or acquiring companies with those products rightfully require their representatives to represent and sell them, often forcing conflicts with lines that the rep already represents. This forces many reps to decide between existing manufacturers that they may have had for years. Of course, these manufacturers also present incentives and demands to their existing distributors to do the same. The distributor with a choice may decide to remain with the manufacturer who has successfully serviced them or decide not to. Remember, the distributor is the customer, they can choose. Now, the rep, calling on end-users, is forced to sell his entire package, including the new products his distributor has chosen not to support. The rep then needs to offer the business to his distributor and have them convert or select additional distributors who will support him, and the manufacturer, but may not be the end-users preferred distributor.

I spoke to four distributors in different markets who said supply reps are now quoting their customers pricing directly. These distributors complained about the margins at which the reps were quoting. One refused the business as he was asked to stock the product for a customer with the margin being under 10%. having been quoted by the rep. Another distributor took the business.

Consider also that contractors, industrials, and utilities have also enlarged their geographies. Expanding relationships and managing them is a key part of the representative’s responsibilities and as a rule, reps are able to keep their associates significantly longer than most manufacturers in existing positions, enabling relationships to be earned.

All of these are reasons representative agencies, similar to manufacturers and distributors, need to grow as the industry continues to evolve.

CONCERNS

Reps are facing a profit dilemma.

They need to earn more given their expenses and additional responsibilities. They can earn more with fewer manufacturers or be forced to get more manufacturers, often giving less time and effort to existing ones.

Or perhaps they decide to work with manufacturers, and distributors, who are easier to do business with and/or “carry their own weight” and help in generating business.

A very successful industrial distributor I called on many years ago told me he was able to significantly grow his business when he reduced the number of accounts of his salespeople. They spent better quality time with fewer accounts, earning more business and profit dollars.

A distributor I called on offered me a percentage of profit on the industrial account business I would bring him. I rejected the offer, but it would have earned me far more income than I was generating from the manufacturer’s commissions. Perhaps distributors will outsource their sales efforts to manufacturer reps (or a division of the manufacturer rep, with the manufacturer rep really becoming a bastion of “sales expertise.”)

Some supply manufacturers are taking a page from the lighting business and now allowing / offering overages on projects. The concept initiated on the lighting side but is there a reason why it cannot work on the supply side? The rep gets a price on a job; sells it for more and keeps the difference. They are rewarded for their sales effort.

My suggestion? A VP for a larger, more innovative manufacturer, once asked me why his reps don’t complain to him about the additional expenses incurred from their new demands. “Show me in numbers what the expenses are for my company’s new demands, and if I think they are reasonable, I will certainly try helping.” His reps knew this. He had a healthy gross margin, but he was also willing to support his reps. In essence, he recognized that if he was asking for much more, he would need to either compensate or provide the resources.

Thoughts

I liked the 3-legged stool comparison for our industry. Perhaps we might better understand the needs of each of us if we want a stable stool rather than one that is becoming wobbly. “We,” or maybe companies need to address this individually, should discuss, together, how we can make our industry and each other more successful. Perhaps this is what NAED, NEMA and NEMRA meant when they announced their collaboration last May. If not, perhaps manufacturers and reps need to have their own discussions?

I was reading the recently released NEMRA Manufacturer of the Future. It highlights the roadmap of expectations, which are increasing. How are we, as a sales channel, between manufacturers and reps, going to achieve it. Some companies are already there. Most are not.

We can talk AI, digitalization, and the need for more resources, but we need to strengthen the legs of the stool so we can stand on it.

Note: This is why the recently released NEMRA Manufacturer of the Future Report is important to reps. It outlines the expectations that leading manufacturers have, and others will have. As reps, we need to be prepared to support our customer, the manufacturer. It is critical to ensuring our businesses thrive. (If you haven’t seen the report, it is free to all employees of NEMRA members by contacting Sue Todd at stodd@nemra.org. Or, if you know your login information, download it here. For all others, reach out and Channel Marketing Group will send you an Executive Summary.) The full report is available, from NEMRA, for $199.

A facilitator like Channel Marketing Group might act as a true catalyst for a manufacturer to rethink their rep support to assure mutual success!