Insights

From Assessment To Action: Managing Distributor Relationships

One of our clients in the building systems industry asked us to help resolve a dilemma that had significantly impacted their growth. The vice president with whom we spoke introduced himself as the head of sales for Jekyll and Hyde, Inc. He went on to explain:

“When you speak with [certain distributors], you’ll hear we are great, the best company that they work with, a key contributor to their success. But, then go and talk with [certain other distributors]. You’ll hear from them that we are impossible, that most of what we do is constantly get in their way, that if we didn’t have products important to their customers, they’d celebrate the day they didn’t have to deal with us. That’s why we have the Jekyll and Hyde reputation. You’ll hear two very different descriptions of us, depending on which sales channel partner you talk with. Why this is true is a complete mystery. We have the same products, the same business systems, even in many cases the exact same people involved in the relationships. It’s not geography, it’s not big vs. small, it’s not anything we can put our fingers on. And solving this dilemma is critical. These distributors are our most important ones, and we are losing share in some of the most important markets in which we operate.”

Our research into the topic of channel conflict[1] suggests that this situation was not a surprising one or particularly unique. For many business-to-business suppliers, distributors, wholesalers, and Big Box retail channels are their most important customers, their pathways into their markets. Far too often, however, these suppliers view the distributors through which they go to market as “blood-sucking weasels”. Their supplier-distributor relationships are characterized more by conflict than by collaboration. With both organizations depending on the other for success, identifying the causes of channel conflict and implementing action plans to resolve conflict is critical to success.

Through extensive interviews with manufacturers and their distributors (and other channel partners such as dealers, wholesalers, and even retail “Big Boxes”), we have identified the primary sources of conflict in such relationships. The list, unfortunately, is rather extensive, and issues along even one dimension can sour a relationship that could otherwise be strong and a contributor to a firm’s success.

Based upon this research, we have developed an assessment process to help understand the level of channel conflict that exists with a particular distributor relationship and the particular root causes of problems in the relationship. The table below suggests questions that can be used to assess each particular channel partner relationship:

 

Sources of Supplier->Channel Conflict
Conflict Theme Assessment Questions
Competition for Margin
  • Is the channel partner making a profit on your firm’s products?
  • Where are your products on the distributor’s profitability spectrum? Are they among his most profitable products? Or among the least profitable ones?
  • Does the distributor spend more time debating prices, rebates, and similar topics with you than on planning sales and marketing campaigns involving your products?
End Customer Planning
  • Are there issues with respect to ownership of customers?
  • How well does the list of the distributor’s most important customers match the list of your most important customers?
  • Is information shared between the two organizations about end customers?
Relationship Processes
  • Are there well-defined processes for managing the relationship? Do they work?
  • In what time frame are relationship discussions focused? Problems in the past? Current issues? Future opportunities?
  • How well do the lists of “success metrics” monitored by the two firms match?
Price Administration
  • How much time is spent on price-related issues? Are the systems and information requirements related to pricing, rebates, claims, etc. viewed as efficient or a burden?
  • Does pricing get in the way of sales? Would either party change pricing practices if they were in charge?
  • Does this distributor view your price administration as one of the best among the companies they work with, or one of the worst?
Implementation
  • Is it easy for this distributor to do business with you, from ordering through delivery through post-sales support? Where is your firm on the spectrum seen by this distributor? A joy to work with? A nightmare?
  • Do problems get solved quickly, without a huge resource drain or a requirement to escalate up the hierarchy?
  • If the distributor has a critical piece of business with their most important customer, would they be glad to have you involved? Or hope the business involved products from other suppliers?
Roles and Responsibilities
  • Is there clarity as to roles and responsibilities? Would both parties give the same answers to questions on this topic?
  • Would either party advocate changes in roles and responsibilities, feeling the business would be better off if such changes were made?
  • Is the “team” effective in facing change or unique situations?
Competencies
  • Would the distributor nominate your firm as a “best practices” firm?
  • Does the distributor look to your firm for training, expertise, or support in important functions or knowledge areas?
  • Would the distributor view your firm as “ahead of their competition” or do they voice concerns about such topics as new product development, service delivery, or technical support?

 

When we have conducted this assessment process, we find that often the honest answers to these questions point to clear areas of channel conflict that are likely to impact on the success of the relationship. The fact that such conflict is pervasive, however, doesn’t make it acceptable. To the contrary, we believe that these sources of channel conflict are among the greatest dangers for firms that go to market through distributors or other sales channel relationships. Conflict along any of these dimensions can compromise the success prospects of even firms with strong brands, leading-edge products, and loyal end customers.

There is an exact analogy with strategic account management. Those business-to-business organizations that sell directly to large customers know the importance of managing these relationships to take them to a strategic level and to ensure that they are sources of ongoing growth and profits. The same must be true in terms of the relationships with major sales channel partners. Suppliers must transform these relationships into ones where strategic sales channel partner and strategic supplier are two sides of the same coin, where successful collaboration and partnering can yield rewards to the shareholders of both organizations.

We have developed a scoring system using the seven dimensions of conflict described in the questions above. The table below provides a summary of this scoring system. The left side of the table (the red zone) characterizes the conclusions that are drawn from the assessment questions in situations in which conflict is intense. In the middle of the table are the norms that exist in most supplier channel relationships that we have studied. Most channel relationships are imperfect, but there is a big difference between such normal, less-than-perfect relationships and the crisis situations reflected by the red zone characterizations. To the right side of the table (the green zone) are descriptions of the assessment that emerges in strong, healthy relationships. While such strong co-destiny relationships are rare, our research suggests that they are worth pursuing, as the firms involved in such relationships typically enjoy competitive success and steady, profitable growth.

 

Blue Canyon Supplier->Channel Conflict Assessment Tool
“Battling Blood Sucking Weasels” 2 3 “Typical Supplier Channel Relationships” 5 6 7  “Co-Destiny Partners”
Major friction and a zero-sum perspective, with actions taken to exert pressure and shift margins Margin Management: Some ongoing margin pressures within the relationship A formal process for shared gains and a track record of success
Customer information is viewed as “confidential” and isn’t shared End Customer Planning: Occasional discussion in the context of review meetings Explicit written plans including customer and market relationships and strategies
Interactions are driven by problems and crises Relationship Processes: Regular review meetings and discussions Formal written plans and formal processes for measuring and monitoring progress
Price administration is a major and ongoing source of conflict Price Administration: Requires some degree of ongoing back-and-forth interactions Price administration is off the radar scope, handled smoothly
Implementation problems define the relationship Implementation: Problems arise occasionally, but are solved when given attention The relationship operates smoothly in normal and crisis times alike
Considerable finger-pointing occurs within the relationship Roles and Responsibilities: Are generally stable, but occasional issues surface Formal written assignments exist and are reviewed regularly
One or both organizations sees the other as seriously deficient in some key areas Competencies: Each organization views the other as acceptable in terms of key competencies Both organizations explicitly benefit from the strengths of the other through training and other interactions

 

This assessment tool is useful in examining the various dimensions of the relationship with each distributor and also in comparing the health of relationships across distributors. We recommend applying the tool on a distributor-by-distributor basis, in that it is likely that significant differences emerge from one relationship to the next. We also find that the best assessments are ones that are done by a team including individuals from various business functions with involvement and insight into the distributor relationship under study. In this context, the best teams are demanding in terms of their assessment, requiring tough honesty in the answers and recognizing that “one success story doesn’t define the relationship’s history”. When the team completes the assessment across a number of distributor relationships, the comparisons often help to create benchmark standards that further enforce such tough honesty.

For example, in the work we did with “Jekyll and Hyde, Inc.”, we found that the VP’s prediction was absolutely correct. There were two distinct clusters of distributors in terms of the conflict assessment, as reflected in the chart below:

In this summary graphic, the scores for Cluster A reflect the averages from among the distributors who viewed the firm as “great, the best company that they work with, a key contributor.”  The scores for Cluster B reflect the averages from among the distributors who viewed the firm as “impossible and constantly in their way”. For Cluster A, scores along all seven dimensions are strong, most of them at or into the “green zone”. For Cluster B, two “red zone” situations were identified.

There were a number of important lessons learned from this assessment. First, there was quite a bit of consistency to the scoring between Clusters A and B. Along five of the seven dimensions, the scores were roughly the same in the two clusters. There were some dimensions along which the relationships were generally strong and healthy – End Customer Planning, Relationship Processes, Implementation, and Competencies. There was one dimension – Margin Management – to which attention was required, across both clusters. While not yet in the crisis mode, the assessment suggested that Margin Management was an emerging issue with this supplier’s distributors, across the board.

Along two dimensions, however, the cluster scores were as different as night and day. Distributors in Cluster A saw performance with respect to Price Administration and Roles and Responsibilities as strong, consistent with the generally high rankings given to the five dimensions described earlier. As a result, they viewed the overall relationships as quite positive. Distributors in Cluster B, in contrast, saw huge problems along these two dimensions. As a result, these issues colored the overall relationship assessment, actually masking the many themes along which there were no problems.

The assessment process enabled this supplier to focus its attention on the two themes on which there were problems; it uncovered root causes to both of them. Price Administration problems, for example, reflected the fact that within Cluster B, this supplier’s business involved customer-specific discount schedules and negotiated terms. These were quite atypical arrangements, from the perspective of the distributors in Cluster B. By contrast, in Cluster A, such situations were business-as-usual, and no strain on the distributor’s systems. As these root causes were understood, the supplier was able to work with the distributor to put into place new approaches that resolved these problems.

Being able to get from assessment to action was viewed as great progress by this supplier. It required some creativity to come up with solutions to the problems that existed with the distributors in Cluster B and additional resources were required to streamline the price administration process. But, compared with the burdens of channel conflict, these demands were viewed as great progress.

The action plans that were developed to resolve the channel conflict issues enabled the supplier to build upon the to Implementation and End Customer Planning strengths acknowledged by Cluster B distributors. Because the distributors in this cluster viewed this supplier as strong along these two dimensions, it was able to gain agreement from its distributors to the action plans designed to solve the problems that existed. The supplier and its distributors addressed the Price Administration problems by making changes to the processes already in place with respect to End Customer Planning. Similarly, the supplier was able to gain agreement as to a shift in certain responsibilities between the two firms by emphasizing the distributor’s own favorable assessment as to the supplier’s strength in Implementation. The supplier successfully convinced its distributors that such a shift in responsibility was a safe decision, given the supplier’s overall implementation skills. The transition from assessment to action was thus augmented not only to clarity as to the problems that existed, but also by an understanding of the strengths upon which solutions could be based.

One year later, a follow-up assessment revealed that the action plans had yielded results. There were no longer significant differences between the two clusters. While there were still some ongoing margin management issues, the relationship-threatening problems relating to Price Administration and Roles and Responsibilities within Cluster B had disappeared. As the VP summarized, “I guess we finally divested the Hyde division.”

The simple, short assessment tool described in this paper can be quickly used by suppliers that sell through distributors and other channel relationships to assess where they stand with their key partners. The assessment process can yield insights that help to spotlight which relationships need attention and define the specific causes of channel conflict in each relationship that needs attention. We suspect that many suppliers will gain insight from a quick, honest assessment as to where they stand on the scales included within this assessment tool. Such insight can provide the basis for actions to ensure that these critical business relationships are well-aligned and headed towards shared successes.


[1] Atlee Valentine Pope and George F. Brown, Jr., Realizing Shared Successes in Co-Destiny Relationships, Velocity, Second Quarter 2004.

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