CoDestiny[1] relationships come in many flavors. The most frequent ones involve suppliers and their end customers. In some cases, such suppliers provide ingredients to the end customer’s product. In other cases, they provide complementary products like packaging and advertising. In still other cases, they provide infrastructure, ranging from machinery on the factory floor to various business services that keep the customer’s operations running. In such relationships, we frequently hear messages that suggest that “strategic supplier” and “strategic customer” are two sides of the same coin. In such relationships, both parties typically recognize the value contributed by the other organization.

Some years ago, we worked on one project involving a far different type of perception. During interviews, both parties to a large business relationship described the other as a “blood-sucking weasel.” This relationship involved a large building systems manufacturer and their largest distributor. For this manufacturer, over one-fourth of its sales went through this national distributor. And for the distributor, the manufacturer represented nearly a third of its sales. One would have expected the same mutual respect we’ve seen in the types of relationships we described earlier. But it was not the case, and, far too often, we’ve seen manufacturer relationships with channel partners fail to achieve the CoDestiny potential through which both parties can realize and enjoy a ‘win’.

Manufacturer’s relationships with channel partners – involving firms who describe themselves using such titles as dealers, distributors, wholesalers, integrators, VARs, and others – are quite different from other business relationships. Channel partners don’t use the products they get from the manufacturers with whom they work. Rather, their role is that of an intermediary, selling the product along with adjacent products and services to end customers further along the customer chain. Their value contribution is centered on one-stop shopping across product lines and brands, convenience and friendly business systems, inventory and logistics, training, credit, and other services to local customers. Most channel partners carry products from many manufacturers and many manufacturers sell their products through competing channel partners, although there are some instances of exclusive relationships in one or both directions.

Not all such Manufacturer & Channel Partner relationships are adversarial. Our friend Jerry McCabe, winner of the 2010 Automotive Aftermarket Industries Association “Innovator of the Year” award and formerly vice president of Affinia, the $1.8 billion company that manufactures filters, brakes, and steering/suspension parts under brands like Wix, provided a “success story” involving their relationship with O’Reilly Auto Parts, the huge national automotive parts wholesaler with over 4,000 stores around the country. Jerry describes an initiative that he and a colleague at O’Reilly started in order to share information between the two companies.

“There was enormous resistance to the idea of sharing information, because it just wasn’t done that way in the industry. No one wanted a customer or supplier to see the level and location of their inventory, but we persisted because we could see the value of linking our information systems.

“The filtration business is a demanding one. To fill every conceivable order would require thousands and thousands of SKUs, but no vendor like O’Reilly could carry more than the most popular 1,500 or so. So, the answer to end customers, especially those wanting a filter for a heavy duty truck, special vehicle, or commercial application would often be ‘we don’t carry that’. Occasionally, an enterprising O’Reilly employee could call us and ask if Affinia makes that part and order one. What we realized is that by linking the Wix Filter systems with O’Reilly’s, we could offer O’Reilly’s customers easy access to any filter that we make.

“What that effort did was create a situation that allowed Affinia to expand its business, O’Reilly to expand its business, and both companies to take a great deal of cost out of the system. There is a tremendous amount of business now done on the Internet that wouldn’t have been possible otherwise. Now, O’Reilly can look into Affinia’s system, see if a part is in stock in enough volume to fill their order, order it, and have it drop-shipped to an O’Reilly store or even the home of a mechanic. The only people that need to get involved are at the ends of the transaction.”

There are two important lessons about building strategic relationships with channel partners that can be learned from this case study. First is the importance of creating value for your channel partner as the route to capturing value for your own shareholders. In any business relationship, there are three routes to value creation[2].

First is the possibility of helping your customer or channel partner increase volume. Sometimes this involves helping them to capture a greater market share. In other instances, it can involve bringing new customers to them, ones that would otherwise not buy the product. Second is the possibility of helping the customer or channel partner reach a higher price point, either by motivating movement up the “Good-Better-Best” spectrum or by motivating the purchase of adjacent products and services. Third is the possibility of helping your customer or channel partner to improve their bottom line by efficiency increases or simply taking costs out of the system.

In this example, Jerry notes multiple contributions: “What that effort did was create a situation that allowed Affinia to expand its business, O’Reilly to expand its business, and both companies to take a great deal of cost out of the system. Sales that would have been lost are now being made. Lots of redundant activities were eliminated at the same time, with significant savings.” The outcome was a clear ‘win-win’ success story.

The second lesson underscored the investments that had to be made in order to realize these gains. One element of this investment involved time and resources: “The companies had no common language – their systems called vehicle models, parts, etc., by different names. So, the initial period was a time of manually creating standards in order to link information together that had been created without any. In the beginning, the errors came crashing down and it was a manual process to fix them. But, this work was a big, big deal.”

The more important, and more challenging, investment was in building a culture of trust between the two companies: “What was really important in retrospect was the change in the level of trust – it started with a handful of people seeing a small hole in a wall that they were able to chisel through and look at the other side. It shows how far things can go if two companies really work together.”

It is interesting to contrast the relationships among “blood-sucking weasels” with those that created “win-win” outcomes benefitting both firms. Clearly, the latter is the preferred outcome, but the former is all too common. We believe there are two things that suppliers and their channel partners can do in order to move towards the end of the spectrum that involves future success stories.

The first area of involves managing the elements of Manufacturer and Channel Partner relationships that generate the type of conflicts that cause such relationships to deteriorate. In the case of these unique relationships, the sources of conflict are somewhat different from those experienced in other business relationships[3]. First on the list of conflict themes is margin management. If both partners don’t find the relationships to be a profitable one, the focus immediately shifts to fighting over margin between the two organizations. Sharing the accountability for mutual profitability is the key priority in building these relationships. The Affinia and O’Reilly relationship was one that helped both firms grow their business and improve their margins. The champions of this relationship started out on the road to success by emphasizing the goal of helping both firms profitably grow their business.

Another key element of healthy Manufacturer and Channel Partner relationships is end customer management. Unhealthy relationships are often characterized by distrust about end customers. The channel organization typically fears that the manufacturer will “cut them out by going direct”, especially as an end customer begins to buy more and more. And the manufacturer fears that the channel partner will try to “substitute another product or even their private label brand”, especially if the end customer is a big buyer.

We believe that the way to ensure stability in terms of end customer planning involves some basic blocking and tackling relationship elements – honestly, commitment over the long-term, good communications. There must be a good reason for the relationship in the first place, one that is likely to ensure and one that both parties must identify and acknowledge openly. When this is done, it’s unlikely that suspicions of the type suggested above will arise.

Success also requires a focus on the services that are important to the end customer. When there is sound business logic to participating in a customer chain that involves as a structure of the form Manufacturer and Channel Partner and End Customer, it often is because the end customer values services from both the manufacturer and from the channel partner. The manufacturer, for example, might provide technical services linked to the products that they are supplying. The channel partner, on the other hand, might provide not only the traditional services associated with distribution, as listed earlier, but also services involving the integration of products from multiple manufacturers that they represent.

We find that successful Manufacturer and Channel Partner relationships involve attention to both categories of services. The role each organization plays with respect to the end customer and the coordination of services to ensure that they are effectively and efficiently delivered must both be managed to realize success and avoid duplication, inefficiencies, or competition between the two organizations.

There is a formal structure that manufacturers and their channel partners can use to decide how to best collaborate in serving end customers, one that allows both parties to contribute and capture rewards in the process[4]. Among the possible structures are a “Supplier Driven” model is selected, with the manufacturer having the dominant relationship with the end customer, and a “Channel Driven” model in which end customer relationships are managed by the channel partner. The former typically applies when the end customer’s purchases of the manufacturer’s product (through the channel partner) are substantial and when their needs for advanced technical services relating to the manufacturer’s product are substantial. The latter structure typically applies when end customer purchases are transactional, span multiple manufacturers’ products, and require various types of local support around the transaction.

One of the most effective strategies for service delivery in healthy Manufacturer and Channel Partner relationships is illustrated by the Affinia and O’Reilly case study. In that instance, O’Reilly had all of the interactions with the end customers, in this instance automotive mechanics and Do-It-Yourself-ers. The nature of these relationships suggested the wisdom of a “Channel Driven” business model in which end customer relationships were the responsibility of the channel partner. The services to the end customer were orchestrated by and/or delivered by the channel organization, but it was the development of strong business systems linking the manufacturer and the channel organization that made such service delivery possible.

We firmly believe that strategic relationships with channel organizations can be achieved, yielding the rewards associated with such CoDestiny relationships, and that ones that deteriorate into characterizations such as the “blood-sucking weasel” example ought to be few and far between. For manufacturing and other organizations that sell through dealers, distributors, wholesalers, integrators, and other such channel organizations, we offer three final recommendations as to how to move these relationships in the direction that will eventually yield “CoDestiny success stories”.

First, never forget that these are business relationships. Unless they make business success to both partners, they are doomed to failure. Therefore, focus from the start on how to create and capture value – for both parties – in the relationship. Think hard about the three routes to value creation – increasing volume, realizing a better price point, and taking costs out of the system. Focus your discussions with your channel partner with options that achieve one or more of these contributions.

Second, be attentive to the factors that drive success in all business relationships – fundamentals like trust, knowledge, familiarity, and energy. Recognize that strong implementation skills are important – most relationship “horror stories” are the product of poor implementation via quality problems, late or missed deliveries, unresponsive customer support systems, and other such shortfalls. Bring innovative ideas about how to become successful, focusing here on business systems, sales processes, and information technology in the areas that connect the two firms.

Third, put into a place an explicit plan for how the two organizations will collaborate effectively in delivering services to the end customers that you are serving. Understand each organization’s roles and responsibilities, and how the services from the two organizations, in combination, will meet end customer needs and provide a superior experience relative to competing teams of other manufacturers and their channel partners. And recognize that one size won’t fit all – the service strategy and the roles of the two organizations can very well differ from one market segment to the next, even from one customer to the next.

With these three elements of a relationship strategy in place and executed well, the potential of success is high. For those firms that are able to define and implement these elements, we anticipate a future in which they too will be the subject of a “CoDestiny success story”.