While chatting with HARDI Vice President Talbot Gee about possible topics for the Controls Distributors section, he sent an e-mail to various Council members asking for ideas.
The Controls Distributors Council Chairman Steve Roe (in his “real” job, he is president of Seattle, WA-based Micontrols Inc.) replied with a finely crafted and clear, yet succinct description of the type of suppliers with whom wholesalers must deal. I liked his summary so much, I decided to reproduce it for our readers. (See sidebar.)
I also like the term that he used in his e-mail to explain his descriptions as a “reality check” to remind distributors how their suppliers go to market and what role they play.
I thought a conversation with Steve, a reality check, if you will, made sense because the relationship between a distributor and his supplier has, to some degree (without getting too sentimental), as much to do with attitude and approach as it does with the hard edge of business issues like profit margin and market share.
Tom: Your thumbnail sketch of the various suppliers makes it evident that two-step distribution clearly plays a vital role in the controls business, though the relationships could be decidedly different, depending on the relationship with the supplier.
Steve: Yes. I do want to add that my thoughts are echoed and have been aired by many in our industry. Two-step distribution is involved in at least three supplier scenarios — however, not understanding the different supplier mindsets or not coming to grips with this reality can cause undue stress, grief, misunderstanding and lack of trust. The truth may well be that two-step distributors are not necessarily threatened at all — if we perform. The reality is that two-step distribution fits into the plans of all three business models, are a valued necessity and are a vital part of the potential for the stability and growth of each supplier.
What's fundamental is to accept the fact that these models do exist; then we can determine how best to work within each model so we can all (distributors and suppliers) become the most profitable.
Tom: How would you describe Supplier A?
Steve: I think that a distributor has the strongest attachment to Supplier A because, in a sense, they're joined at the hip. There is certainly a higher level of trust with this model because the wholesaler believes that they are the supplier's basic way of going to market, and it's through “me” [the distributor]. There's a more natural tendency to have a cooperative partnership. We can put our strategic vision out on the table with this type of supplier versus holding it close to the vest. In general, it's the most open relationship of the three.
Tom: How do you view Supplier B?
Steve: It's a different sort of cooperation. We might not work with the manufacturer's branch office on a day-to-day basis, but they're aware of our effectiveness in the market. The hierarchy of the supplier, in this case, supports both the branch office and two-step distributors, and we often operate with the same regional sales managers. These suppliers tend to view the branch as their primary focus and two-step as their necessary, effective and vital plan B.
We work with both Supplier A and B in staying away from identified premium accounts; these are essentially hands-off to distributors. It can get a bit emotional, even adversarial at times, so our approach is clear. We look at it realistically, and we commit to the bottom line of the contract that we signed. Because of the overlap, marketing strategy and sales can become a bit murky at times, and this is where clear communications with the supplier are vitally important.
Tom: And your take on Supplier C?
Steve: Often, these suppliers started out with two-step as the primary way to market. As the market grew, they asked: How can we grow more quickly or grab more market share? Their reality was that the market had grown sufficiently via distribution, that the next logical step for them was securing the purchasing commitment of very large controls companies. But they still want two-step distribution. It's simply that from their viewpoint, the biggest and most significant growth came from dealing direct. And they don't view this as a bad model but the right approach. If you view it from their perspective, having significant market share enables them to be strong enough to fund major research and development and significant advertising programs. They would argue that this is for the benefit for everybody in the industry.
Tom: From your description, one might infer that Supplier A is the best one?
Steve: Not necessarily. That supplier might be the easier or the more convenient one to deal with, but there is still the question of who is the major contributor to your bottom line. You could have a B or C supplier who provides you with the highest margin or greatest net gross profit. If that is the case, couldn't Supplier B or C be your “best” supplier?
Tom: Where will two-step distribution be in the next five years?
Steve: That's the crystal ball question, and it's going to be interesting to watch what happens, but I think these models are here to stay. The consolidation move has shifted from contractors to suppliers. There was a lot of consolidation five to 10 years ago in the contracting side, which has slowed way down or sometimes even reversed. Some suppliers have now shown a renewed interest in two-step distribution and realized the significant potential. Some suppliers, who have grown through making acquisitions, will take certain products, rewrap them and put them back in the market through the two-step distribution model.
Certainly suppliers are getting leaner. I think more of them will depend on two-step distribution to raise revenue, which translates into a greater partnership with us.
Tom: Any advice for your fellow distributors?
Steve: Understand the different models and develop wise strategies. You can have a partnership with any of these suppliers, but your relationships will differ.
We will sometimes do a supplier profile. We determine how they [the supplier] view us and how we view them, and then we compare notes. We end up with one of three categories: partnership, cooperative or independent. It's just like a personality profile. If you understand the nature of the relationship, you will communicate more effectively, your expectations will be valid and you will live with less grief.
In the end, if you are willing to have a clear frame of reference and leave your emotions at the door, you are more likely to be successful with your supplier, regardless of the category they might fall under.
Tom Peric' is the editor of HVACR Distribution Business magazine. Contact him at 856/874-0049 or [email protected].
Which One Is Your Supplier?
Supplier A — Views the two-step distribution model as its default, go-to, most efficient way to get products to market.
Supplier B — Views a [manufacturer's] factory branch as its primary way to gain market share and views two-step distribution as the means to provide aftermarket sales, support and small- to medium-sized new business.
Supplier C — Views the controls contractor base as their primary means to develop an installed base, but depends upon two-step distribution as a secondary means to ensure a breadth of coverage.