The Findings Of A National Study
Of Manufacturer/Distributor Working Relationships

Manufacturers and their distributors are being challenged by the globalization of markets, the emergence of new technologies, and customers whose demands are ever increasing. Despite these growing complexities, the basic issues remain the same for manufacturers and distributors alike: Increase sales performance without sacrificing profitability.

A four-year study of 750 manufacturers and 500 distributors conducted by the Industrial Performance Group reveals that 82% of manufacturers and 92% of distributors believe that sales performance and profitability are being negatively impacted by problems in their working relationships. This research is a follow-up to the 1997 benchmark study, Report Card on Manufacturer/Distributor Relationships. The 250 manufacturers who participated in the initial survey indicated that distributor performance was lacking in critically important areas such as commitment to suppliers, sales capabilities, and the ability to penetrate local markets.

In addition, manufacturers expressed concern regarding an emerging trend in distributor inventory management—stocking less inventory and ordering more frequently from their suppliers.

While these findings were certainly not revolutionary in nature, there was, however, a noteworthy conclusion to be drawn from the data: Distributors themselves cannot be held solely responsible for many of their perceived shortcomings. Instead, the data from this first study in 1997 clearly indicated that manufacturers must shoulder the lion's share of the blame for poor distributor performance.

The 1997 data, combined with field interviews, indicated that manufacturers were not doing an adequate job of telling distributors what was expected of them in terms of market coverage, sales goals, service levels, and inventory levels to be maintained.

In addition, the data indicated that manufacturers were not doing a good job of defining training and educational objectives for distributor sales personnel and in making training readily available.

The general conclusion that came from the first phase of this research effort was that a loose approach to managing manufacturer/distributor working relationships was the primary cause of most of the problems both parties were experiencing.

Current Environment
A lot has happened since the findings from the first Industrial Performance Group study were released four years ago. The economy has slowed and teeters on the brink of recession, with three of the world's largest economies—the United States, Japan and Germany—showing stagnant or declining GNPs in the most recent quarters.

Many of the old industrial giants have lost ground to upstarts who are more responsive to ever-changing market conditions.

On the one hand, customers have become more familiar, comfortable and frequent purchasers of products sold directly on the Web. On the other, we have seen the meteoric rise and fall of the first wave of e-business strategies.

We have also seen razor-thin margins compressed to record lows in many industries.

Has anything changed in terms of the working relationships between manufacturers and the distributors who represent them in the marketplace? The answer appears to be no, and strong evidence suggests that conflict in these working relationships is increasing, while trust and communication are declining.

Preliminary Findings
Since 1997, the Industrial Performance Group has conducted survey research and field interviews with an additional 750 manufacturers and 500 distributors. This research reveals that manufacturers and distributors voice the same complaints, and they resonate even louder today.

Manufacturers indicate that the number one problem they experience with their distributors is a lack of commitment to their products and programs. Manufacturers also report that distributors lack sales and marketing capabilities as well as the ability to effectively manage inventory.

When asked if these problems are having a measurable impact on their business, 82% of manufacturers indicate that distributor performance problems result in increased sales and marketing costs, lost sales volume, and the further erosion of margins.

Distributors respond that the number-one problem they experience with manufacturers is ineffective or inconsistent territory management. The result is multiple and often conflicting channels to market, including direct selling. This condition greatly reduces the level of distributor commitment to and trust in the offending manufacturers.

Distributors also tell us that an overall lack of direction and support from their suppliers results in confusion, conflict and the duplication of efforts. Ninety-two percent of distributors indicate that these problems result in increased sales and marketing costs, lost sales volume and further margin erosion.

Both manufacturers and distributors agree that problems in their working relationships are having a negative impact on sales performance and profitability.

Improving the Relationship
Everyone talks about the importance of the manufacturer/distributor working relationship, yet very little information exists on the subject. Thus, a primary objective to the second phase of the Industrial Performance Group's research effort is to find answers to the following key questions:

• How do you define the working relationship between a manufacturer and the distributors who represent them in the marketplace?
• How do you objectively measure the relationship?
• How do you manage the relationship so that it produces mutually beneficial results?

Eight Attributes of Peak Performance
Survey data and field interviews with hundreds of manufacturers and distributors in a wide variety of industries enabled the Industrial Performance Group to identify eight attributes that determine the sales performance and profitability of manufacturer/distributor working relationships:

1. The manufacturer and distributor share a clear and common understanding of the conditions that exist in their industry;
2. They have developed goals and plans for accomplishing these goals;
3. The manufacturer and distributor are highly sensitive to the ever-changing needs of their mutual customers;
4. They have clearly defined the roles and responsibilities of each party;
5. They take action to assure that everyone involved has the knowledge and skills required to effectively perform their assigned roles and responsibilities;
6. The manufacturer and the distributor engage in high-quality two-way communication;
7. They are both strongly committed to their relationship; and
8. There is a high level of cooperation between the manufacturer and the distributor.

Overall Lack of Direction for Both Groups
An assessment of the Eight Attributes of Peak Performance in phase two of our research reveals that the root cause of the sales performance and profitability problems for manufacturers and distributors is primarily an overall lack of direction. In other words, they do not have clearly defined goals in place, nor do they have plans to accomplish these goals.

Only 33% of manufacturers indicate that they have clearly defined goals in place with their distributors. It is important to note that only 17% of distributors hold this same perception.

Goals are important because they establish the fundamental purpose of the working relationship. They define the specific outcomes that both parties are working to accomplish. Without clearly defined goals, the working relationship is prone to uncertainty, conflict and poor sales performance.

Plans define the specific actions that must be taken in order to accomplish a goal. Without plans, manufacturers and distributors end up performing random and often unrelated activities that are costly and ineffective.

Only 25% of manufacturers and 17% of distributors indicate that they have plans in place to accomplish their goals.

This finding is significant because the absence of a plan leads to poor decision-making, wasted resources, increased costs and poor sales performance.

Low Levels of Commitment, Communication, Cooperation
A lack of clearly defined goals and plans is further compounded by a low level of commitment and very low levels of communication and cooperation between manufacturers and distributors.

Commitment is the extent to which both parties are willing to allocate their resources (time-money-people) in support of the goals of the working relationship. Nearly half, 49% of manufacturers, and 42% of distributors, report that the level of commitment in their working relationships has suffered a nine percentage-point drop from the benchmark established in 1997.

Communication is the glue that holds the working relationship together. It provides a mechanism for coordinating and monitoring the resources in the relationship. In addition, the efficient collection and sharing of information can provide manufacturers and distributors with a first-to-market competitive advantage in today's constantly shifting environment.

Sixty-three percent of distributors and 73% of manufacturers indicate that two-way communication is virtually non-existent in their working relationships. This represents a significant decline from the benchmark established in 1997.

Cooperation is the extent to which the manufacturer and its distributors work together to set goals, develop plans, monitor progress, and take corrective action when necessary. Cooperation and trust are highly interrelated. Half, 51% of distributors and 34% of manufacturers, report a low level of cooperation in their working relationships.

This finding implies that the level of trust in their relationships is also low and relates directly to the decline in levels of commitment and communication in these working relationships.

Without trust, there is no commitment, communication or cooperation.

Conclusions
Manufacturers and distributors both agree that problems in their working relationships are having a negative impact on sales performance and profitability.

The survey data also indicate that both parties are keenly aware of the need for mutual goals, long-term planning and better communication. However, good intentions do not by themselves produce results.

So why is it so hard for manufacturers and distributors to change the nature of their working relationships when they know that doing so will improve sales performance and profitability?

Complacency appears to be the most common barrier that keeps manufacturers and distributors from taking action to improve their working relationships. Complacency occurs when the way things are done seem normal and comfortable because they are familiar, not because they are the right things to do.

Complacency is reinforced when the members of a business team share a false set of beliefs regarding conditions in their industry, their position within the industry, the needs and expectations of customers, and how they should compete.

The following statements are signs that an organization may be gripped by complacency:

— “Everyone has problems with their distributors.”
— “We just need to be more focused.”
— “The customers are just confused.”
— “We've been through tough times before.”
— “This has always worked in the past, why change?”
— “If we all just work harder, every thing will be OK.”

The one thing you can count on is that nothing is going to change until someone proves that the status quo should no longer be supported.

Managing the manufacturer/distributor working relationship has never been easy. In today's environment it has become even more complicated and demanding. Taking action to improve the working relationship is hard work, but it yields high returns.

As customers continue to demand more and more from their suppliers and severe price and service warfare becomes the norm in most industries, a manufacturer/distributor working relationship with high levels of trust, communication and cooperation can often be the difference between being a leader or being an also ran.