• The Weak Link in Supply Chain Management

    Oct. 1, 2007
    Supply chain management is a lot like marriage counseling: Most people consider it only because they hope it will fix their partner. When equipment manufacturers

    Supply chain management is a lot like marriage counseling: Most people consider it only because they hope it will fix their partner. When equipment manufacturers talk about “taking costs out of the channel,” they're usually not referring to their own profit margins. Likewise, distributors are much more eager to create vendor score cards than to participate in benchmarking of their own performance. You could be forgiven for believing that all the discussion about data-sharing and just-in-time inventory is simply a smoke screen for demanding more from the other guy.

    But, as with many healthy practices, true supply chain management is worth a little discomfort. Like it or not, most HVACR distributors are tightly bound to the manufacturer of their chosen equipment lines. The two will succeed or fail in the marketplace together. If they don't offer a strong value proposition, a leaner pair will eventually take their business. Of course, it takes time for dealers and installers to become aware of the alternatives and make the shift, but an inefficient partnership is ultimately doomed.

    So how should you approach this topic with your partner? First, remember that the goals of supply chain management are to align channel activities and eliminate duplication of effort. Alignment means that, for example, the manufacturer is aiming its advertising at the same types of customers that the distributor's sales force targets for the product line. Alignment is about effectiveness.

    Eliminating duplication refers to the division of labor between the distributor and manufacturer. For example, the manufacturer might be better placed to provide installer training because it can spread the costs of classrooms and instructors across a national base. Eliminating duplication is about efficiency. The key then is to focus on the effectiveness and efficiency of your partnership.

    Traditionally, supply chain management has centered around logistics and buy/sell transactions. This is why technology is so prevalent in discussions between partners: Exchanging more data and automating clerical tasks are excellent ways to improve operational effectiveness and efficiency.

    But is this really the most critical link in the chain? To a large extent, distributors have already picked the low-hanging operations fruit. Recent research shows that they have contributed disproportionately to the United States' recent productivity surge and “are at the forefront of using technology to reduce repetitive, low-value-added activities such as order-processing, billing, inventory control, delivery route scheduling and warehouse management.”1 And, after all, distributors do more than just store, take orders and ship. Demand-creation is a big part of the value that they provide in the channel, and sales is typically their biggest single expense. Maybe instead of operations, distributors and manufacturers should focus on the sales efficiency and effectiveness of their supply chain.

    A supply chain approach to sales is very different from the typical annual planning confrontation, where the manufacturer assigns aggressive targets and pushes the distributor to devote more sales resources. Instead, both parties take an honest look at their combined approach and ask the question, “Would this make sense if we were part of the same company?” Sometimes, a pile of antagonism and suspicion hides real opportunity. Years of posturing and negotiation can make it hard to accept the validity of the other party's views. But this challenge just means that fewer partnerships will succeed, making it that much more powerful for those that do.

    A recent example from the HVACR world vividly illustrates both the difficultly and rewards of a cooperative approach. A very successful distributor resisted its equipment supplier's suggestions for years because they seemed to be one-sided, showing little appreciation for the distributor's investments or how it really made money. For instance, the supplier urged the distributor to hire more dedicated sales reps (“feet on the street”), install customer relationship management (CRM) software and increase its inventory levels. The supplier brandished market share data that, in its opinion, showed significant growth potential in the distributor's territory. The distributor felt that the supplier was very selective in its data, emphasizing the numbers that supported its position while ignoring those that didn't. The two partners often spent more energy trying to discredit the other's position than improving their common lot.

    But after additional consideration, the distributor's management team decided to work with the supplier in adding field sales representatives. They concluded that this could enhance the firm's profitability, provided that it was done in conjunction with careful territory reassignment. They focused their conversations with the supplier on getting support and learning as much as possible about the supplier's market share density data, allowing them to identify the most underserved geographies. The transition enabled the firm to upgrade its compensation program, reduce mileage and windshield time, provide new-hire mentoring by veteran reps and justify additional sales support resources. It also received additional co-op marketing dollars and factory sales support for training. The distributor gained a less-adversarial relationship with its most important partner and has already seen sales growth from the change.

    Every relationship is different, with its own set of personalities and issues. There are no silver bullets. But, based on our experience working with clients at both ends of the channel, we can offer the following guidelines to distributors seeking to establish a less-adversarial supplier relationship:

    • Have a strategy and a system. Managers at manufacturing companies often have engineering backgrounds, while distributors are usually sales-driven. This means that manufacturers tend to think in a more linear fashion. They want to see that you are thinking logically about your approach, setting goals and measuring performance against them. It is much easier to defend your performance if the manufacturer knows you are organized and thorough. It's much easier for a partner to hear you if you speak his language. In our experience, developing a solid sales strategy and a performance measurement system to back it up is a great investment for distributors in any case.
    • Reconsider straight commissions. Chances are, once you adopt a coherent sales strategy, you will find it difficult to align sales rep activities using purely commission-based compensation. Straight commissions mean that “every dollar of gross margin is equal,” so reps will tend to pursue the business that is easiest to close rather than what is most profitable in the long term for your company. They will also generally underinvest in prospecting. A full discussion of the pluses and minuses of various compensation programs is beyond the scope of this article, but there are ways to retain the motivational benefits of commissions while also enjoying a higher degree of management control over the sales force.
    • Understand their business. When manufacturers talk about market share growth, it's more than just spousal nagging: It reflects a legitimate fear for their own survival. Manufacturers live in a “grow or die” world that forces them to adopt a growth-oriented business model. In a nutshell, when a manufacturer increases sales, it is able to spread the fixed overhead of its plants across more units, thus lowering its per-unit cost. This enables it to drop prices, driving more growth and unit cost reduction, in a virtuous cycle. Shrinking sales, in contrast, create a vicious cycle, in which rising unit costs lead to further market share erosion. So failure to grow market share can literally lead to a manufacturer's suffocation, as competitors rob it of the volume it needs to cover fixed costs. Complaining about the pressure to grow will do nothing but aggravate your partner.
    • Focus on relative improvement, not absolute market share. Manufacturers generally have more precise market size data than distributors because the number of units produced, imported and shipped is much easier to track than the number consumed in any given area. Of course, precision is not the same as accuracy. We all know that sales across market boundaries, branch transfers, centralized purchasing and direct sales can strongly distort this information. But, as noted above, manufacturers tend to have an engineering bias, and they will naturally gravitate toward numbers. Performing your own market research would be costly (you'd have to identify a statistically significant sample of contractors, dealers and direct buyers within your market and get them to provide accurate purchasing information) and would probably not be accepted anyway. It's far better to take the manufacturer's numbers at face value and focus the conversation on how both parties can move them in the right direction.
    • Demonstrate real investments. Manufacturers invest heavily in their brands and understandably expect reciprocal efforts from their partners. Unfortunately, many distributors lack the accounting tools that would help them quantify the true extent of their contribution. Distributors should quantify and brag about their investments in working capital (receivables and inventory), repair parts, literature, training classes, counter space, prospecting, bid development, etc.
    • Don't forget the objective. Always ask: “If we were part of the same company, would we be doing it this way?” This question may seem slightly naÏve, but it is the best way to see through the emotion of your relationship and find the biggest opportunities for shared success.

    For most players in the HVACR market, the real opportunities in supply chain management don't involve sharing computer data or implementing just-in-time inventory practices. The weak link is effective sales coordination between manufacturers and suppliers. By working together to strengthen this link, you can put more money in both parties' pockets.

    Steve Deist ([email protected]) is a sales management specialist at the Indian River Consulting Group. IRCG is an experienced-based firm specializing in sales execution and marketing channel optimization. Started in 1987 by J. Michael Marks, IRCG has specialists who consult with distributors and suppliers to make the changes necessary to maintain your competitive advantage. You can contact them by calling 321/956-8617, or visit www.ircg.com for more information.

    1 “Where Productivity Is Growing in Wholesale Distribution” by Dr. Adam Fein, August 2006.