Risking oversimplification, material handling manufacturers have been driven by volume and distributors by gross margin which inherently creates tension in the relationship. To address the need for gross margin dollars, some distributors have chosen to represent two or more competing brands. Is this strategy working? What are the important considerations to be weighed before embracing this strategy? What are the longer term pluses and minuses?
Below are four scenarios that describe the rationale for a lift truck distributor deciding to add a competing product line to those he or she already represents.
Scenario One: When a primary supplier consistently fails over time to invest and reinvent itself, thereby losing its competitive advantage, lift truck distributors have felt compelled to take on other lines while servicing an established, but dwindling, population base. This is a business decision that affects the principal’s survival and preservation of capital.
Scenario Two: Lift truck distributors have watched the trend in the auto industry toward representing competing product lines, usually in separate facilities and almost always with separate retail management. Some have adopted this template, but often without the separations. How appropriate is this template in our industry, which has a fraction of the automobile industry’s annual volume and where most contact with customers and prospects occurs at their place of business?
Under this scenario, how do lift truck manufacturers achieve the volume and economies of scale required to meet the expectations of their distributors and customers regarding: cost of sales, purchase price, aftermarket support, reinvestment in the business and expectations of the respective investors (manufacturer, distributor and customer)?
Scenario Three: Other distributors take on competing lines to keep someone else from exploiting the opportunity. They reason that they can retain representation of their primary and secondary competing suppliers by meeting the minimum requirements of both. Meanwhile, the distributors begin to compromise the expectations of their primary suppliers and fail to meet the expectations of their secondary suppliers, relationships deteriorate and consume energy, and both parties’ valuable resources (time and money) are questionably deployed. Some distributors postpone termination for non-performance over several years while due process plays out, either through a business-like settlement or through legal means.
Scenario Four: Distributors take on lines that they feel don’t compete to round out offerings to their customers. Sometimes this is a valid reason with specialty products. However, often the products they wish to add to their lineup come with a host of directly competing products, or soon will as the manufacturer expands its offerings to gain economies of scale and growth. The new supplier also wants to sell the distributor these models as well. Inevitably, one supplier or the other becomes dissatisfied with distributor performance.
A Common Effect
What is the usual effect on competing suppliers who share the same distributor? If suppliers must share the distributor’s sales force and operating management, one or the other supplier often gets screened out over time from competing for a segment of the market. Why? The sales representatives, depending on their personal preferences and established customer usage, take one or the other brand off the market.
The above scenarios, multiplied across North America, result in weaker suppliers. Through loss of volume and related benefits, these suppliers fall short of their distributors’ and customers’ expectations because they are progressively starved of the resources (sales volume and financial growth) essential to satisfy these expectations.
Dual Branding Suppliers
To gain economies of scale in a small industry and access to a larger share of the available opportunity, several suppliers have resorted to dual branding. This has occurred through consolidation/merger or strategic alliances. Although this strategy may create a negative emotional reaction among distributors, the effect on market access is different in a very important way: Unlike distributors who may screen their competing suppliers’ access to the market, dual branding usually does not constrain distributors from accessing the marketplace.
Even though competing distributors may source different brands from the same manufacturer, neither distributor, based on their unique capabilities, established customer bases/relationships and level of enterprise, is blocked from earning its fair share of any end-user’s business.
Top Concerns of Distributors
There is a certain consistency to distributors’ concerns. How do these top concerns relate to a distributor’s decision to represent competing brands? The decision process should attempt to address the following questions for each concern highlighted below:
- Hiring and Recruiting Top People. Will control of competing brands strengthen your recruiting capabilities? Or will servicing two or more competing brands confuse your employees and dilute their focus on product knowledge and your brand management strategy? Could this lead to higher rather than lower employee turnover and further erode gross margins by “commoditizing” the products in the minds of your sales force?
- Marketplace Competition. Does the availability of two or more brands increase your ability to compete? Are the choices offered to customers significantly different? Do you have the time and talents to identify target markets and train your sales force to effectively offer customers choices? Do your competing suppliers trust you enough to share information that benefits you but that could be detrimental to them? Are you holding back educating one or the other of your competing suppliers on your customers and markets, thereby depriving them of becoming stronger, more capable suppliers? If your suppliers become weaker as a result of your choices, could you lose your competitive edge?
- Manufacturer Support. How will your choices stress the partnership potential with your suppliers? With their limited resources, will they allocate more of their efforts where the conflict is less and where distributors are clearly more dedicated to representing their products? If your suppliers don’t achieve the economies of scale to compete, will they have to reduce employment and thereby reduce the support and services you get from them?
- Changing Customer Demands. If one of your suppliers doesn’t gain enough volume with certain types of customers, will that supplier fail to understand and act on changing customer needs?
- Cash Flow. How does representing competing brands affect your cash flow? Will you ever do enough volume with any line to buy efficiently and plan and control inventory investment at the service levels expected by your customers? Will taking on another line stress your lines of credit?
- Return on Investment. How does a competing line impact your return on investment? Will the volume, margins and expenses yield the return on assets and investment that you are looking for? Are your assets really sufficient to support the investment requirements your competing suppliers expect and the level of service your customers demand?
- Keeping up with Technology. Managing information more effectively can be the key to gaining competitive advantage. Each supplier puts its own special demands on distributors for processing and managing information. Can you afford the multiple interfaces? If you can, will your people understand the operational side of these demands for information flow? Do you have the time to train on the knowledge and skill sets needed to gain competency and manage multiple sources of supplier information? Often, the multiple interfaces required to do business with competing suppliers prove too confusing and costly.
- Economic Uncertainty. How will having competing lines help you address economic uncertainty? If one of your suppliers stumbles, then maybe it hedges your risk by having a competing supplier. On the other hand, maybe you accelerate the weakening of your supplier by diluting the business you give them, especially in a downturn. If they had all or most of your business, maybe they would remain a stronger supplier.
- Employee Productivity. Does having competing lines give your employees more to sell when they call on specific customers? Or, do they lack clarity as to what to sell and when? Do your managers, sales force and support personnel have the time to become trained and proficient at selling your suppliers’ products and to build the relationship with your suppliers’ employees to jointly capture opportunities and solve problems?
- Government Bureaucracy. Does representing competing brands expose you to more regulation, liability, litigation, insurance expense, training and expectations from your customers?
A decision to represent competing lines impacts assets and performance in several ways. It will dilute inventory and fill rates if no additional capital is injected into the business. If the distributor increases investment in assets (SKUs and new machine inventory) to satisfy his or her secondary supplier, improving return on assets and dealing with redundant assets become more problematic.
Alternatively, operating expense reductions and increased personnel productivity can be achieved through management leadership, vision, focus, operational excellence, employee training, effective use of solutions selling and financial merchandising, and sales force automation (lead generation programs, prospect qualifying programs, customer relation management programs).
More progressive suppliers are putting in place programs and services that contribute to a distributor’s bottom line by streamlining the transaction process, creating more cost-effective business-to-business interfaces, implementing additional marketing services, propagating best business practices, and adopting lean manufacturing, offices and distribution concepts.
If, as a material handling distributor, you have either made the decision to represent competing lines or contemplate doing so, you must assess and project both the costs and consequences associated with that decision. Except for Scenario One and possibly Scenario Four, the decision to go forward may generate neither the short- nor long-term gains anticipated.
The opinions of this article are the author’s and not the express views of MCFA.