Overcoming conflicting objectives in the PT supply chain

In the words of the great Los Angeles philosopher, Rodney King, “Why can’t we all just get along?” Manufacturers and distributors in the power transmission/motion control (PT/MC) industry are well aware of the gap between the promise and the reality of joint planning. This is not a new problem, but evolving market changes are making the process more painful.

This article is about some ways to actually improve the process. It is not about improving relationships by eating large shrimp in a hospitality suite. It is about recognizing and dealing with the fact that manufacturers and distributors often have conflicting objectives.

How did we get here?

Joint planning in the PT/MC industry has fundamentally been about selling more. The manufacturer gets the distributor to sign up for a “number,” which represents purchases by the distributor and sales for the manufacturer. In the past, most distributors treated this as a goal, often like losing weight and eating better. Failure was a cause for some guilt, and reaffirmed intentions to do better.

From the manufacturers’ perspective, getting all the distributors “locked in” was a way to identify those who needed to be punished when the plan failed. Manufacturers said nice things to distributors because most manufacturers treated them like customers. Privately expressed views are often very different. Consider the following:

If Point Of Sale (POS) data is not shared, then the distributor is a customer. Using the term ‘partner’ requires that a manufacturer use distributor resales, not purchases, as the basis of compensating its own sales reps. This is common practice in other industries.

If a distributor is, in fact, a customer, then many manufacturers consider a loaded distributor as a loyal distributor. Some think that tying up distributor capital limits potential purchases from competitors. While making the numbers at quarter end, it reduces line profitability and reduces the distributors’ willingness to invest in growth.

Product life cycles on motors, belts, bearings and the rest are all very mature and all have assumed commodity characteristics, i.e. ‘or equivalent.’ This is an industry where customers actually purchase solutions, and ‘or equivalent’ products are often a small part of the sourcing decision.

There is structural overcapacity in all industrial markets as we move into the 21st century. Does the world need another manufacturer of motors?

As the automotive mentality of leveraging purchasing power continues to permeate our industry, it makes most supply chain initiatives simply ‘cost transfer’ instead of ‘cost reduction.’

The industry continues to focus on selling approaches that are essentially identical to those used in the 1960s and 1970s. Many manufacturers still only get excited about product quality and new features. Many distributors continually beg for margin help like the old commercial of the monkey on cocaine.

The higher quality that everyone in the PT/MC industry has adopted is actually shrinking the MRO market as products are lasting longer. Imagine the impact on spark plug manufacturers and automotive distributors when replacement intervals went from 10,000 miles to 100,000 miles. It was kind of tough to grow sales.

The industry has responded to these factors by making the planning process more detailed and demanding. One fundamental law of planning is that, when people are making things up, adding granularity and detail creates a false sense of security. Measuring ‘sales performance to plan’ down to two decimal places only provides employment for clerks. It is almost like the focus has shifted to ‘who gets punished’ rather than how can we gain share. Some manufacturers have moved into the realm of: “Beatings will continue until morale improves!”

There is a significant opportunity for innovation leaders in this industry turmoil. Those manufacturers and distributors that figure it out first will gain significant competitive advantage over the rest of the industry.

Aligning resources more effectively in a competitive market is very powerful. The fundamental premise is that the winners don’t really need to do anything better; they just need to do fewer stupid things. This sounds terrible but the real idea is that reducing dysfunctional behaviour improves performance.

Manufacturers and distributors each have a key part and the parts are very different.

Manufacturers could cut some distributors

So what is a manufacturer to do now?

Step one for most manufacturers is to shoot some distributors. Manufacturers, in most cases, have too much distribution. Some of this is offering the product to all locations of national chains. Most of it is from ducking channel issues over past years. In all cases, manufacturers can rank their distributors from ‘champ of the camp’ to ‘chump of the dump.’

A good planning reality test for a manufacturer is to assume they are building a distribution channel from scratch and compare their result with what actually exists.

If a manufacturer has 100 distributors, the top 20 will drive innovation and change; they are the horses that pull the chariot. Sixty are in the middle, paying their bills with occasional flashes of brilliance. The bottom 20 create 80% of the heartburn and act like cholesterol in the market’s arteries.

Any manufacturer that misunderstands the impact of price discrimination treats its distributors alike. If the bottom 20 are there, then the treatment is equally lousy. Group association punishes the top distributors. “Don’t ever try to teach a pig to sing, it wastes your time, and it annoys the pig!”

Either introduce a premium distributor program, functional discounting, or just shoot the losers. Joint planning can be real and powerful with your good distributors. Trying to do joint planning with the losers is like rearranging the deck chairs on the Titanic.

Step two for most manufacturers is to stop negotiating and start listening. The planning process is where manufacturers get reality checks on what is really happening in the open market. The dumb ones ‘overcome objections’ with this contrary information and ‘sell the required corporate number’ to the hapless distributor. Some manufacturers are so bad at this that their distributors are afraid to tell them what is really going on in the market.

The smart manufacturers start planning with their distributor before they have locked in a corporate number. This is an ongoing, iterative process. Manufacturers need to speak to each distributor about the investment being made in that distributor and also ask the distributor where that investment should be spent.

Step three for most manufacturers is stop planning distributor purchases. All planning does is align resources against tasks that are structured to achieve objectives. Any plan developed without intelligence creates significant unnecessary casualties. The planned distributor purchase is the resulting variable at the end of an equation that considers: demand creation, demand fulfillment, cost to serve, competitive initiatives, investments to support growth, and a mutual SWOT analysis (strengths and weaknesses, opportunities and threats).

Things to plan include distributor resales, customer creation activities, new product introductions, and managing end-of-life products. Some leading manufacturers, like Owens Corning, give awards to distributors for meeting distributor profitability goals.

Distributors need a winning strategy

What is a distributor to do now?

Step one for most distributors is to create a strategy. Many distributors continue to be one-dimensional, growing sales. The world is more complicated now and issues regarding creating competitive advantage and defining value-added are becoming very critical.

All dollars of gross margin are not created equally and winning distributors are very clear on this. Winning distributors will always have an answer to the question, “What actions are being taken now that will improve competitive advantage at the end of the year?”

Step two for most distr
ibutors is to define a strategic line card. Some manufacturers are very profitable to deal with and some are terrible. Some of the largest are the worst. Five years from now the cast of characters will look much different. The distributor’s task is to identify those manufacturers who will be the long-term winners in the market. Current sales volume is one of the least important selection criteria.

The winning distributors will be the ones who represent the manufacturers who have the best long-term prospects. If these manufacturers have the market growth, they will take the distributors with them.

When a distributor has a long-term winner on its line card, real joint planning is worthwhile. That discussion must include mutual investments to grow the brand, sharing confidential information on both sides, and real discussion on differing agendas. No BS!

Step three for most distributors is to narrow suppliers represented and focus on the winners. The old model was representing all suppliers to give customers what they wanted. This is rapidly becoming a loser strategy. It also reduces products to commodities.

Reducing the need for multiple manufacturer inventory coverage improves the ability to stock both breadth and depth while reducing capital investment. This requires getting sales reps to sell ‘what is stocked’ and stop taking orders, especially non-stick special orders. This is a SWAT plan, Sell What’s Available Today. One key benefit is to reduce the number of suppliers that require joint planning activities.

Step four for most distributors is to create a standard planning response. It may sound like heresy but many manufacturers don’t do anything with joint plans. Winning distributors create forms, tools, and processes that let clerical staff do much of the work to reduce disruption of key distributor executives. This allows the distributor to pretend to care (without wasting too much time) and the bureaucratic manufacturer to be happy with lots of paper with numbers (8-point type is best).

The bottom line is that the PT/MC industry will probably get worse with respect to joint planning activities. In this overall environment, many individual companies, both manufacturers and distributors, will sort out the process and gain in the market. In his book, Animal Farm, George Orwell said, “All animals are equal, some are just more equal than others.”

Michael Marks started Indian River Consulting Group in 1987. The company, which specializes in distribution, can be contacted at 321-956-8617 or at www.ircg.com.