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May 9, 2005

Keys to manage the distribution channel effectively

By Bill Hodgdon

A manufacturer has to take the lead and manage growth through its distribution channels. A manufacturer often relies on distributors for this, a strategic mistake. And too often a manufacturer takes the view that more feet on the street must translate into sales growth. Here’s a detailed approach for how a manufacturer can build a superior growth strategy with its distributors, one where accounts are targeted, potential evaluated, and strategy execution measured. To work, there has to be a strong distributor manager, either a direct employee of the manufacturer or a manufacturer’s representative.

Editor’s note: This first part of two articles focuses on the necessary growth strategy elements. In the next issue of MDM, part 2 details how a manufacturer and distributor can create a workable list of target accounts, and then manage a plan to reach the specific goals.

A manufacturer who uses distribution does so for one reason – to make more money. The distributor produces this result for the manufacturer by generating more sales from the territory and/or at a lower cost of sales than the manufacturer could achieve alone. If the manufacturer could make more money without the distributor, they would do it.

But the manufacturer must continue to generate profitable growth from the distribution channel over time to thrive. Thus, the manufacturer must accept primary responsibility for causing growth through this vital channel. The manufacturer who expects the distributor to take the lead is making a strategic mistake and will eventually be disappointed with the results.

However, some level of trust is required for the ideas in this article to be implemented. This trust has been sorely tested by manufacturers’ efforts to find multiple channels to market that have made it difficult for many individual distributors. Some distributors are much more important than others. If the manufacturer is committed to causing growth through the distribution channel, then these important distributors are going to have to be treated differently and better for the recommendations here to work.

Manufacturer’s Responsibilities
A manufacturer has five basic responsibilities to its distributor:

• Provide products that will sell.
• Provide the necessary technical support.
• Provide reasonable delivery of the products.
• Provide a strategy to sell the products.
• Actively manage the distributor.

The bottom line is that a manufacturer must have a distributor manager or regional sales manager (direct employee or a manufacturer’s representative) to produce the maximum growth from the distributor. The distributor manager (DM) fulfills two of the manufacturer’s responsibilities – jointly developing the growth strategy and actively managing the implementation of the strategy.

Distributor’s Responsibilities
A distributor has two primary responsibilities to a manufacturer:

• First, the distributor must provide the technical, delivery, and administrative services and support that the market wants and it must do it well.
• Second, it must sell the manufacturer’s products at a rate and profit level that satisfies both the manufacturer and the distributor.

Strategy = Successful Growth
Manufacturers tend to put the burden of developing the growth strategy on the distributor. This seems logical and easy but it is a mistake. The growth strategy of the manufacturer must drive the growth strategy of the distributor, not vice versa. That’s why the DM must drive the process. He or she will be the key to managing the growth strategy throughout the year. The DM is the limiting resource from the manufacturer; their time and skills will be a major determinant of how much growth is produced.

The manufacturer generally tells the distributor the level of sales expected and then leaves it to the distributor to figure out how to generate the growth. The contents of the distributor’s plan will depend on what satisfies the manufacturer. It can certainly be argued that this is a growth strategy, but if the DM does not use this plan to actively manage the implementation, it will fail to generate the maximum growth.

What’s a Superior Strategy Look Like?
The growth strategy is the distributor manager’s business plan for the distributor’s territory. A growth strategy cannot be limited to one year. Strategically important accounts must be viewed as long-term accounts. Thus, the information must also be considered for a longer planning horizon – three years tends to be the right timeframe. A really good one includes the five sections listed below.

1. A list of the accounts to target within the distributor’s territory.
2. The products and services that can be sold to each of the targeted accounts.
3. The business potential from each of the targeted accounts.
4. The projected sales to the targeted accounts for each of the next three years.
5. The plan or strategy to gain account share in every targeted account from Section 1.

The intelligence about business potential and projected sales is a never ending effort. It will require resources from both the manufacturer and the distributor. The quality of the business plan (Section 5) is completely dependent on the quality of the intelligence that goes into the plan.

The outcome of a growth strategy is the answer to Section 1 – a list of accounts that meet two criteria. Collectively, the accounts spend enough money buying products the manufacturer could supply that both the manufacturer and the distributor can be confident of meeting revenue goals for each of the next three years. The second criterion is that each account on the list can be contacted by the combined resources of the manufacturer and distributor far more frequently than any of the manufacturer’s competitors.

This second criterion limits the number of accounts that can be on the list. Thus, the accounts need to be well chosen or the plan will fail to produce the desired revenue gains.

Why Target Certain Accounts?
In any distribution territory there are likely to be hundreds of accounts who buy products that the manufacturer sells. Just because they buy does not mean the manufacturer should try to sell to these accounts! I know that sounds like blasphemy, but it is true. Strategy requires focus because the resources of both the manufacturer and the distributor are limited. Of all the resources these businesses possess, the one that limits growth is the number of outside salespeople. This will hold true until the manufacturer no longer has the capacity to meet the current orders that have been won.

A distributor may be able to maintain their existing business through inside sales and good operational performance, but growth requires contacts by outside salespeople. If it didn’t, then we would not have outside salespeople. Since we are talking about a growth strategy, then we are talking about focusing the activities of the DM and the distributor’s outside salespeople. The essence of a growth strategy is being clear on which accounts to say "No" to with the time of the distributor manager and the time of the distributor’s outside salespeople for the manufacturer’s products. However, saying "no" is negative. The growth strategy focuses instead on which accounts to say "yes" to with the proactive business development time of the DM and the targeted outside salespeople for the distributor.

The implementation of the growth strategy anticipates that 80% to 85% of the proactive business development time of the DM will be spent in the targeted list of accounts. This leaves 15% to 20% of their time to react to other opportunities that come their way from accounts not on the targeted list. We’re not turning down orders from accounts not on the list; we’re simply concentrating our proactive sales activities on the accounts where we believe we have the best opportunity to grow now and in the future.

The implementation of the growth strategy must alter the touch pattern of the DM and the distributor salespeople. The strategy will expect many more contacts on many more people in many fewer accounts. The DM is not necessarily trying to squeeze more time out of the distributor salesperson. He or she should be trying to concentrate the time the salesperson is willing to spend on the people within the accounts who can influence a buying decision in our favor.

Here’s how resources should be focused:

• the DM’s time in the field should be on the targeted accounts,
• the time spent with distributor salespeople (both inside and outside) should be on those calling on and managing the targeted accounts,
• the product training should be on the applications in the targeted accounts,
• new products should be launched in the targeted accounts,
• lunch and learns or other marketing activities should be on the targeted accounts, and so on.

The power of focus is that it clarifies where the business plans to grow and insists that the available resources be continuously focused on the targeted accounts. If the accounts are chosen properly and the implementation is well managed, then account share for the manufacturer’s products will begin to grow in each of the targeted accounts over the next three years. This will happen because the increased attention on the right people in the right accounts will eventually cause them to believe that you deserve the business more than your less focused competitors.

Focus on Strengths
The ability to gain account share is a function of your strength relative to the strength of the competitors also competing for business within the account. For an account to get on the list, the manufacturer’s product combined with the distributor’s services must have an edge in strength over competing manufacturer’s products and their distributor’s services. If they are not stronger, then they cannot expect to gain share.

In business-to-business markets, there are only three measures of strength that need to be used to evaluate any account for inclusion on the targeted list of accounts. They are:

1. Installed base: the installed base share of the manufacturer’s products,
2. Offering strength: the impact the manufacturer’s products and distributor’s services have on the account’s business results, and
3. Touch strength: the number of times the account is being "touched" by the manufacturer and distributor.

Installed Base Strength Measure
The purpose for putting an account on the list is to win the #1 position in installed base share for the manufacturer’s products. In general, both the manufacturer and distributor make more money on products sold to accounts where the product is #1. The manufacturer who has the current #1 installed base position is the strongest in that account for that measure of strength. Thus, one piece of vital intelligence is to know the current installed base position of all competing products and an estimate of how much money the account is spending annually buying these products.

Offering Strength Measure
While the goal is to win the #1 installed base share position, the most important component of strength in getting there is the offering. An offering is the product the account buys and uses plus everything else they consider when making a buying decision. Businesses buy products to produce better business results. The important results are the results that will reduce the cost to the account of producing their own products and services or increase the sales the account makes to its own customers.

Distribution usually attempts to compete by lowering the cost of buying and implementing the product. One-stop shopping, ease of doing business with, convenience, inventory, quick response and other capabilities of an effective distributor are all focused on reducing the cost to buy. These results are important to Purchasing and Engineering but they are not the important results. The results these departments want to produce are to reduce the purchase price, reduce the lead times, reduce the time to implement, reduce suppliers, reduce administration labor, and reduce inventories. All of their business results begin with reduce because their business measures and focus are on reducing the cost to buy and implement.

If you look at a buying decision as a Return-On-Investment decision, you will see what I mean by this. While the business certainly wants to control the investment, the real reason they are making the buying decision is because they expect to make a return on their investment – they expect to make more money by using the product.

Reducing the cost to buy does not make them more money, it just reduces the investment. The return is the increased sales or reduced operating costs that they get by using the product after it has been purchased and implemented. These are called "operating" results because they are produced by the only two departments in a business that make the business money – operations and sales.

The offering is the most powerful strength measure. Unfortunately, very few engineered products have a clear edge over competing solutions in their ability to produce better operating results. This is because good products are usually copied pretty quickly by good competitors. Nonetheless, when a manufacturer has an edge in offering strength, great gains can be made in installed base share if the sales resources are properly deployed. The manufacturer whose offering (which includes the distributor’s services) produces the best business results is the strongest in that account for that measure of strength.

So another piece of vital intelligence is to know the actual results being produced by the account that is currently using the manufacturer’s products. These results could be number of rejects, mean time between failure of the engineered product, warranty claims, time to bring a new product to market, or any of a number of other results that are measures of operating performance used by the account to manage their business. As long as the manufacturer’s product can have an effect on a business result, the manufacturer should have some idea of what those results are and whether the customer continues to be satisfied with those results.

Touch Strength Measure
A "touch" is defined as a face-to-face or voice-to-voice contact by anyone representing your side on any buying influence in the targeted account. If the competing offerings are judged by the account to be relatively equal (and most are), and no one competitor has a huge edge in account share (greater than 75%), then touches alone are enough to start gaining account share. The manufacturer/distributor team that has the most touches is the strongest in that account for that measure of strength.

We don’t need to count touches; we just need to develop a targeted list of accounts where our sales resources commit to calling on each account much more frequently in the future than they have in the past. This doesn’t mean calling on the same people more often, it means calling on people in other departments whose results we impact – departments such as operations, sales, and marketing.

These three measures of strength can be used to evaluate any account in a territory to determine if it is one that is worthy of being on the list or should be passed over for others where a concentration of touches will lead to more rapid growth.

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