It’s Time to Make Strategic Business Agreements More Strategic
This article was originally published by Modern Distribution Management (MDM) and is used here with permission. For more than 50 years MDM has provided industry leading content for B2B Manufacturers and Distributors. We highly recommend becoming an MDM Premium subscriber.
By John Gunderson and Steve Gettleman
They say a strong economy hides a lot of dysfunctionalities in a company. But when the going gets tough, it becomes easier to determine who your most valuable partners really are. With the economy potentially softening, manufacturers and distributors will need to put all their cards on the table to strengthen their chances of success.
When we were on teams responsible for negotiating the manufacturer and distributor incentive agreements, our goal was to make the strategic business agreements (SBAs) a win-win for both parties.
It’s a lot easier to be winning together when business is growing year-over-year like it has been for the past few years. During boom times the negotiations typically concentrate on the “rebate” incenting sales growth. For example, the SBA rebate on purchases from a manufacturer might be incentivized at 1% until you reach last year’s sales level, and then a more aggressive 3% for sales growth of 10%, and so on.
For many distributors, these “incentives and programs” can account for up to 50% of the distributor’s operating profit. It’s almost impossible to sell and manage your way to better profitability as a distributor if your SBAs are not structured properly. For manufacturers, the agreement is used “to lock in business” with your best distributor partners.
Slowdown periods create opportunities for progressive manufacturers and distributors to create winning SBAs and build stronger partnerships that allow both parties to take share from the competition.
Although no one can be 100% sure of what the economy will do, if a slowdown is coming you want to plan for how to create win-win SBAs in 2022 and 2023. Slowdown periods create opportunities for progressive manufacturers and distributors to create winning SBAs and build stronger partnerships that allow both parties to take share from the competition.
The top 3 strategies to consider for manufacturer and distributor SBAs today are clear:
1. Use the Co-op and Market Development funds you put in the SBA for training and sales programs that drive brand preference and grow share.
It’s time to accept that the end customer prefers “Self Service” programs that allow them to do more on their own instead of calling your team. Providing in-depth training and technical support may have been viewed as solely a manufacturer or distributor role 10 years ago. That has changed.
For example: in the power transmission, space many manufacturers and distributors have produced numerous short training videos on complex products that have been watched on YouTube over 25,000 times each.
What would it cost you to train 25,000 people using a traditional Lunch and Learn and direct sales call approach? For a fraction of the investment, a “self-service” training program done properly will reach many more customers than traditional training ever could.
Face-to-face training still has value for complex product training, but every day, more of that product training can be — and is being — done remotely.
What is the first thing you do when trying to learn something new at home or work? You probably watch a training video or do it via a zoom call. It’s the same for your customers.
Using golf events and lunch and learn training sessions as the primary way to spend co-op and marketing funding is outdated. The better investment is to use your marketing funding collaboratively to build programs that create “self-service” options for your mutual end customers.
As partners, you want to have your mutual end customers using “self-service” programs as much as possible (using your portal, EDI, checking product availability online, etc.).
The data shows that end customers buy more and buy more often from partners who make it easier to do business with them through “self-service” programs.
2. Understand where you rank as a manufacturer or distributor in each market and structure SBAs accordingly.
Understanding how important you are to each other is key to negotiating an SBA during a slowdown period. For example, if a distributor is the top volume customer in Atlanta, both sides are able to discuss market conditions, overall outlook for 2022-23 and negotiate a win-win for both parties that may be less growth-related. Conversely, if you are the No. 3 volume customer for that same partner in market, you will probably have to negotiate a more growth-focused plan or have some hard discussions on next steps.
3. Recognize that even in down economies, both sides still need and require sales volume and growth. Create SBA’s that ensure that happens.
If the size of the market pie is getting smaller, you have to grow share to get a proper amount of pie. Both sides may be planning for a potential downturn and their leaders, like yours, won’t be excited about potential flat or declining sales. Manufacturers will focus on expanding their share with their key distributors by asking for more SKU support and conversion business from other competing manufacturers. The manufacturers will be after a bigger piece of the potentially smaller pie from each of their key partners. In 2022-23, distributors will probably have to look at becoming strategic partners with fewer manufacturers to get the SBAs you need to keep an acceptable profit level.
Manufacturers and Distributors who have more than a traditional belly-to-belly relationship selling strategy are positioned to grow faster and take share. The long-term winners are going to have great marketing programs, diversified inside sales teams (hunters and gatherers) and have great digital self-service functions that end user customers want.
The reality is that if your 2023 plan is based simply on making more end user joint sales calls and holding lunch and learns (a year 2000 sales plan) you aren’t going to grow at above-market rates and take share.
It’s difficult to negotiate a win-win agreement between a manufacturer and distributor. Throughout much of our careers, we approached the annual SBA negotiations like we were at the final table of the World Series of Poker. We did everything to not show our cards. That approach is outdated and working on joint win-win programs is critical. If next year is not looking like a great top-line sales growth year, your SBA will probably require more planning and creativity to negotiate a true win-win for both sides that grows your mutual business.
About The Authors
John Gunderson is a Sr. Consultant with the Dorn Group. Prior to joining Dorn, Gunderson was a senior distribution leader for 20+ years, leading sales, category management, marketing, analytics, pricing and e-business with companies such as Crescent Electric Supply Company, HD Supply Power Solutions, White Cap Construction Supply, Anixter and EIS-INC, a Genuine Parts company, and Modern Distribution Management.
Steve Gettleman is a senior distribution leader with 30+ years leading category management, global sourcing, pricing, analytics and private brands with companies including MSC Industrial and ADI Global Distribution.