Strategic collaboration with manufacturers could be a huge driver of revenue and profit for construction-industry distributors. So why have so many given up on trying to make it work?
The supplier-distributor relationship in building and construction is at a tipping point.
The rise of Amazon has meant customers can buy building materials and fittings direct from the manufacturer, freezing out the middleman. That’s led to quite a bit of bad blood, with distributors feeling betrayed by suppliers they’d invested time and money in.
For their part, manufacturers are finding e-commerce isn’t the path to riches that it might have seemed. With nothing much to differentiate them from competitors, they usually end up in a price war to win the sale. In an industry where margins are already wafer-thin, that’s not ideal.
The customer loses out too, with no one to help them choose the right products, advise on their best use, or deliver the required materials to the right place at the right time. The goods may be cheaper, but the time, add-on costs and risk are all higher.
That’s not how things were supposed to work
Contrast this lose-lose-lose situation with a scenario in which the manufacturer-distributor-customer relationship is working as it should:
- The manufacturer cultivates a network of committed and motivated distributors, able to provide expert advice and other value-added services to a loyal and growing base of customers.
- Those distributors work hand-in-hand with the manufacturer to develop go-to-market plans, with mutually agreed incentives including volume and value rebates, special pricing agreements for specific types of customer project, and market development funds for advertising, marketing and sales campaigns.
As the plans roll out, distributor performance data is shared transparently with manufacturers – driving further collaboration and planning, and ensuring distributors are fairly rewarded for their role in growing the manufacturer’s revenue and profit.
- The customer benefits from access to one or more local, knowledgeable distributors, working in partnership with them to advise, guide and deliver in line with the project plan, to ensure a successful, on-time project.
Three types of relationship breakdown
If you’re thinking “but that’s what we tried to do, and it doesn’t work”, you’re not alone. All research and anecdotal evidence suggests that the manufacturer-distributor-customer relationship is broken – right across the industry.
The relationship problems can be grouped into three different but inter-related categories:
- Emotional: Distributors feel betrayed when manufacturers start to sell direct. For their part, manufacturers can be suspicious and mistrustful of distributors, feeling – in the absence of convincing data to the contrary – that they overstate performance and over-claim rebate.
- Organizational: At the distributor, manufacturer relationships are fragmented between finance, purchasing and sales. No central person is responsible for building strategic relationships with manufacturers, or for using rebates and other funds strategically to drive revenue and profit for both parties.
- Technological: Deals agreed between manufacturers and distributors are too numerous, complex and ad-hoc to reflect accurately in either party’s financial systems. That leads to a lack of visibility on both sides, a tendency for manufacturers to reject claims against agreements that aren’t ‘in the system’, and an inability on the distributor’s part to maximize the use of funds to generate business, revenue and profit.
It doesn’t have to be this way
Plenty of distributors have accepted these issues as “just the way it is”. But what if it didn’t have to be? What if there were a way to get the relationship back on track, and delivering significant benefits for manufacturers, distributors and customers alike?
I believe there is a way, and it comes down to something I call collaborative deal management. It involves fixing the three problems outlined above, using new technology combined with a new organizational approach to manufacturer-supplier relationships.
Fixing the organizational disconnect
The organizational issue is one that Benfield Consulting highlighted in its October 2018 study of how US distributors view and use vendor funds. One of the findings is worth quoting in full:
“57% of distributors don’t maximize funds, and leave significant amounts on the table. This means lost sales, lost operating profit, and less than optimal relationships with vendors.”
- Benfield Consulting, October 2018
One of the consultant’s recommendations is for distributors to appoint a Vendor Funds Manager: a central person responsible for driving strategic relationships with manufacturers, acting as an internal bridge between Finance, Purchasing and Sales, and using a single view of contracts and deals to maximize their use and negotiate more.
A single, shared view of contracts and deals
That single view of contracts and deals can be invaluable internally for a distributor, enabling Purchasing and Sales to work together to maximize rebate revenues, and Finance to monitor, accrue and claim for all rebate due – with a full audit trail.
(Incidentally, this is something our DealTrack software uniquely enables companies to do, and distributors across the construction industry are using it to collaborate internally and claim promptly and accurately for all monies owed. Many find it pays for itself very swiftly by finding thousands of dollars of unclaimed rebate – as well as supporting more strategic conversations with suppliers.)
A foundation for collaboration and profit
But the real value comes when that single view is shared with manufacturers. When both parties have a shared view of deals agreed and distributor performance against them, it creates a foundation for ongoing strategic collaboration – enabling everyone to work together to maximize margin, revenue, cash flow and profit.
In an industry worth $1,231 billion annually, it’s a relationship worth saving.