Pushing Back on Price Increases

Having worked on both sides (manufacturing for 38 years and now distribution for the last 7) it is always a puzzle to me why a distributor would push back a price increase. It would appear to do two things for a distributor 1) incease the value of their inventory 2) as you point out, raise their profit dollars. It only makes sense to me that distribution should support price increases. What am I missing?

I work for a distributor. The logic that implies manufacturers’ price increases help distributors raise profit dollars begs the question; if a 3-5% manufacturer price increase is good, than a 5-10% price increase is better. At best, the days when the original argument made sense are long gone. I would further submit, that any distributor that views manufacturer price increases as needed “help” to raise profits, has far larger challenges.

The proliferation of computerized accounting software at even the smallest of distributors’ customers, makes all distributor price adjustments transparent. So the larger, more sophisticated, and most important distributor customers are themselves pushing back against distributor price increases. Distributors need the manufacturers help to credibly explain and substantiate price increases.

With more and more manufacturer consolidation, manufacturers have fewer industry competitors and fewer “organic” incentives to improve. Distributor push-back is one way to force manufacturers to “get better.” Too often distributors witness poor management of manufacturer operations. And instead of looking inside their own operations for increased efficiencies, the manufacturers seemingly push the figurative “easy button” and endeavor to increase profitabilty by simply “passing on” their costs. And as consolidated manufacturers become larger they run fragmented; ERP systems, logistic networks, and management and employee cultures. Their challenges, and lack of ability, to streamline becomes obvious.

What goes up… rarely comes down. Manufacturers are quick to respond to the rise of cost in their production and distribution – citing the rise in costs of raw materials, labor/benefits/heathcare and fuel. But rarely are the costs “rolled-back” when there are any easing of “input” costs. How many industry manufacturers moved manufacturing operations to Mexico and China 5 years ago and presumably realized SIGNIFICANT labor savings.? Manufacturers will tell us that the out-migration of manufacturing helped them be more competitive and mitigated otherwise necessary price increases? Really??

Distributors aren’t stupid. The electrical distributors seemingly subsidize other market channels. Too often we see evidence of electrical manufacturers cutting huge deals with large retailers (who eventually will refuse the manufacturers published price increases any way) and the manufacturer is left with no real choice but to rely on the rest of the traditional electrical channel to make-up profits. To add insult to injury, the manufacturers burden the ED channel with the inefficient SPA process. Milking as much profit via “standard pricing” from distributor customers as possible.

I know who you brought to the dance, but who you taking home? Manufacturers and distributors have traditionally worked well together. But as manufacturers worked to establish bonds with non-traditional channel customers, distributors have been busy establishing equally tight bonds with end-user customers. So what once was more of a manufacturer + distributor vs. end-user customer approach has evolved into a manufacturer vs. distributor + end-user transaction. Make no mistake, distributors absolutely want manufacturers to be as profitable as ever – but now more than ever, our customers are relying on distributors to insure the right balance of price vs. value for every one.