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Are You Connected?
Staying linked with trading partners is harder than ever in today’s business environment. How do your relationships stack up?
by Carole Edwards
In this age of technological savvy, it’s surprising that trading partner relationships in the supply chain could suffer. Despite email, Internet and electronic exchange, today’s business scenario proves that maintaining good relations between manufacturers, retailers, wholesalers and distributors still requires a personal touch.
The bottom line is connections between manufacturers and distributors always have been and continue to be a challenge. It has been this way for years, and not much has changed. Manufacturers are placing more emphasis on their retail customers, going directly to them to do business and talk deals, rather than work through the distributors.
Despite these trends and a changing business climate, distributors remain a vital link in the supply chain. It’s just going to have to be a different kind of link. The key for distributors--and all supply chain partners--is to roll with the changes and figure out how to adjust to a new way of doing business.
"Clearly, we’re doing business in a whole new environment. It’s more difficult than ever for trading partners to stay in touch. That’s why it is essential for industry professionals to take advantage of every opportunity to share an open dialogue of communication," says Scott Ramminger, new president of American Wholesale Marketers Association (AWMA). Ramminger cites AWMA’s annual REAL DEAL Expo as an ideal scenario for getting together with industry partners and discussing mutual issues of concern.
"From the C/SCAPE™ project to AWMA’s STEPS program, the resources are there to reconnect the industry," he continues.
No one in the industry will argue that improving relations is not as simple as attending a conference. But it’s a step in the direction toward better connectivity, enhanced productivity, and better service to the consumer.
Industry consultant Doug MacKay, The Glen Douglas Group, Buena Vista, CA, elaborates. "For the past 20 years or so distributors have always felt caught in the middle…the good news is there are resources for all supply chain parties to improve relationships. AWMA’s C/SCAPE™ project is the best thing since sliced bread for this type of challenge. It’s proved to be an incredible catalyst for opening dialogue between all three parties on the most important topic of concern--the consumer."
Debuted last year at both AWMA and National Association of Convenience Stores (NACS) meetings, C/SCAPE™ is the result of a year-long collaboration between AWMA and NACS. The report is based on research and real-life experiences of convenience-store distributors and retailers who used C/SCAPE™s Excel-based cost assessment tool to put their numbers to the test.
"Manufacturers, retailers and wholesale distributors must recognize that they need each other before the supply chain can operate as a team," MacKay adds. "Relationships are really all we have."
A recent E-Survey by the Industrial Performance Group (IPG) indicated that more than 500 manufacturers and distributors feel that little progress has been made in improving their working relationships, a few see a likelihood that their relationships will improve in the future.
"If both manufacturers and distributors agree that problems in their working relationships are hindering sales performance and profitability, why aren’t more of them doing something about it?" asks Robert Nadeau, managing principal of IPG, Northfield, IL. He says the "The good news is that changing the nature of the manufacturer/distributor working relationship is much easier than people realize. For many, the hardest part of the process will be changing the way the relationship is viewed and managed."
Business Not as Usual
"As margins have decreased, so have the services provided by manufacturers," says Dave Wagers, president of Idaho Candy Co. in Boise. "We see the representatives less often. We have been moved to telemarketing by some manufacturers, so we have a sales rep who calls and updates us on new products and upcoming deals, but no direct person to person contact from a broker or manufacturer. Brokers continue to play a key role in providing manufacturers’ information to distributors."
While the trend for manufacturers to work more directly with retailers is frustrating for wholesale distributors, it’s a "no-brainer" for manufacturers to devote more attention to "priority accounts," according to the general manager of a distribution company that supplies about 200 stores in the South.
"My biggest problem in recent years is delivery of products to the warehouse," he says. "I have had to increase inventory to cover delivery lags, and we have a lot of lost orders and a lot of back orders. Sometimes they hold the product because they’re one short, and they don’t notify me. I have to put a person in charge of my purchase orders, and if product doesn’t come in, she starts calling."
"Speaking as a small distributor," says Richard S. Flaks, vice president of S.R. Flaks Co. in Colorado Springs, "we don’t have relationships of any kind with most non-tobacco manufacturers, due to consolidations, the absence of brokers (at least in our marketplace) and the fact that we really don’t know who we are buying from. Factory reps, other than cigarette manufacturers, are virtually nonexistent for us. Most manufacturers are no longer helping distributors but rather dictating how things will be."
"How things will be," say many distributors, includes higher minimum orders, less generous payment terms, less frequent visits from manufacturers’ reps, and the movement of sales support away from distributors and toward retailers, who are perceived as closer to the consumer.
"Our primary principle is to put the consumer first in everything we do," says Michael Diven, director of the secondary supply chain at Brown & Williamson in Louisville, KY, the maker of Kool, Lucky Strike and other cigarette brands.
"Our relationships have become much more sophisticated in the last five or 10 years, especially the last two or three years," he continues. "Decisions are being made more from a fact-based approach instead of a good-old-boy approach. Technology has been an incredible enabler, and so has category management. The pressures on the [tobacco] industry through higher costs, at a time when the industry is declining, mean we are looking for relief from those costs at the same time that we are looking for ways to grow our business."
More Negotiating Power
Other classes of trade have followed suit to boost their negotiating power.
"The consolidation of manufacturers and brokers has dramatically changed the industry," says Bill Bedortha, president of Convenience Marketing Inc., a national broker based in Austin, TX. "There are now national brokers that cover all classes of trade, and the regional broker is almost extinct. A good deal of the representation has been cost-driven, so if you’re a national broker and you want all classes of trade, there is normally talk of a lower commission rate and the issue then becomes, ‘How do we drive costs out of the system?’
"Large manufacturers develop exclusive relationships with brokers to handle their products, so smaller manufacturers now have a big problem because they are less equipped to negotiate," Bedortha continues. "They have to shop around and find a number of regional brokers, which entails hiring some sort of sales force--and that’s an expense."
Eventually this process will benefit the consumer by driving down prices, Bedortha believes, "but anytime you eliminate competition, that’s not necessarily a good thing. We’re going to have three or four major manufacturers and a few major brokers. There will be fewer and fewer local distributors."
MacKay agrees, predicting that in ten years there will be only a few big players in distribution, maybe 10–20.
Similarly, only large retailers have the leverage to deal with large manufacturers. "There is no question that retailers, as they consolidate, are looking for ways to realize the benefit of their new position," says Bill Bishop of Willard Bishop Consulting in Barrington, IL, who worked on the C/SCAPE™ report. "That has them looking for everything from exclusive products (or products that may give them an advantage in the marketplace) to asking manufacturers to provide ‘nuisance payments’ – payments over and above what was previously done."
Long-Term Relationships
Consultant Bishop says manufacturers’ relationships with their trading partners have been altered by the fact that they are fewer and closer.
"Manufacturers are realizing that whether it be a relationship with the wholesaler or the retailer, it is going to be a mutual and longer-term relationship, and that retailers are not going to do these relationships with everyone," he says. "That has basically created an atmosphere where manufacturers are looking for ways to understand the impact of their products on their customers and to make the sales and profit impact more positive for their customers and themselves.
"There’s a lot of concentration on looking at what it costs to handle a particular brand or line or category, and on how much money is being made," he adds. "Manufacturers are looking for ways to improve the retailer’s return."
This focus on a few profitable relationships enriches the relationships, says broker Bedortha: "Probably the manufacturers that are being most successful have truly partnered with their broker partners and established a relationship that goes beyond moving products. We truly share cost information and other data. Once they say, ‘You’re my choice for a national company,’ they want to be sure you’re the right partner--and it’s in their best interest to be sure you succeed."
Rob Hackett, vice president of marketing at Burklund Distributors Inc., East Peoria, IL, also acknowledges that "the more important we are to a certain manufacturer, it’s probably true that we maintain a more solid relationship with them."
Role of Technology
Many observers confirm that technology can help improve manufacturer relationships by making business transactions more efficient and helping to identify profitable relationships.
"Some manufacturers have actually done a better job using telemarketing than they did using their own sales reps," says Idaho Candy Co.’s Wagers. "Some give us a discount for using Web-based ordering and sales support."
But Hackett is leery of technology as a substitute for face-to-face contact, though he concedes that companies may simply not yet be using it to full advantage. "We used to sit across from each other and talk," he says. "With all these machines we no longer do that. We do more business with our manufacturers than 20 years ago, but we see them less, and ideas are not generated as readily. Ideas are generated through conversation. You can’t put the same inflection on e-mail that you can with voice communication."
Hackett agrees, noting with the availability of "fax machines, voice mail, cell phones, E-mail, and Palm Pilots, it just amazes me that we have so much trouble communicating. We talked more when all we had was personal contact and the telephone."
Everyone is looking closely at cost structure because margins are narrowing, says Dave Benish, vice president of Gerke & Associates, a consulting firm in Columbia, MO, and more manufacturers are using tools like activity-based-costing to determine what it costs them to deliver to individual wholesalers. That’s why minimum order size has become such a big issue.
An executive for a large Midwestern distributor says his company sells cigarettes, tobacco and candy to "quite a few" wholesalers and jobbers. "If you can pay your bill on time we will sell to you," he says. "Because of our size and magnitude we can get good prices and resell to smaller businesses."
This executive says manufacturer relationships have changed rather than deteriorated. "The major manufacturers are taking money away from the wholesale class of trade and giving it to the larger retail chains," he says. "For example, Quaker took all off-invoice allowances away from the wholesale class and put it into shelf allowances at retail."
Manufacturers have not changed his delivery terms, he says, but he does have trouble "getting product in at the right time," which he sees as a failure of technology. "The problem generally is manufacturers’ difficulty in forecasting properly. Technology is not helping with forecasting demand.
A Look at the Future
MacKay urges distributors, who work extremely hard on tight margins, to pick up the phone and initiate communication with their manufacturer representatives.
"Most distributors are caught in the day-to-day fire fighting prone to this business. There’s very little time to cultivate relationships. But if they want to, they can go after the vice president of sales at Hershey’s by simply calling him. They don’t have to sit back accept the status quo," Mackay says.
Consultant Benish thinks convenience distributors will survive. "Convenience stores by their nature require a high level of servicing, with product turnover as high as it is, and with so many differences between stores in size, product mix and so forth. Wholesalers can deal with this better than manufacturers. The cost to distribute product to c-stores is five times what it is for other primary retailers."
Manufacturers tend to feel better about their relationships with distributors than the distributors do. They see distributors as providing necessary marketing information that will ultimately help the retailer--and it doesn’t seem to matter what they sell.
Distributors who focus on consumers are not in danger of being shut out of the supply chain, Diven says. Brown & Williamson wants to "help partners understand the importance of cigarettes to the overall business of the store" and "get across an understanding of how each consumer is different and behaves uniquely." Achieving these goals, he says, requires carrying a wide assortment, preventing out-of-stocks and determining the right mix for a particular store. Distributors are equipped to address these issues, he says, because "no store fits the national profile perfectly."
"Everyone is looking for a creative way to approach consumers," Diven says. "Putting the consumer first shores up your relationship with the whole supply chain."
Taking It Step-by-Step
Experts agree that the first, and most difficult, step to improving manufacturer/distributor relationships is to alter the way these relationships are viewed. To enhance this process, resources are available to help industry executives overcome perpetual barriers to ineffective communication.
Early this year, AWMA and the National Association of Convenience Stores (NACS) brought together a consortium of trading partners in a major new collaborative effort designed to produce the industry's first comprehensive evaluation of costs with in the convenience supply chain. They named it C/SCAPETM for "Convenience Supply Chain Assortment, Profitability & Efficiency."
The goal of the effort is to give everyone in the channel better information and badly needed business tools with which to make "smart" decisions about operations and how product assortment impacts both efficiency and the bottom line. Initial item-level activity-based costing analyses, time and motion studies and other data gathering and evaluation is taking place now. A wide cross section of retailers and wholesalers are supporting the information-gathering period, as are more than a dozen major manufacturers. Results are due early next year. Nothing like this has ever been attempted in any segment of the food industry.
For more information on C/SCAPE™, visit http://www.cscape.org.
Industrial Performance Group offers a one-week work session that helps participants with the following: learn why relationships of the past won’t work in today’s marketplace; discover what has happened to the levels of commitment, cooperation and communication in most working relationships; learn the root causes of the barriers to improved working relationships; and, most importantly, gain an understanding of what can be done to overcome these barriers.
For information on IPG’s work session, call (800) 867-2778.--TC
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