In a typical trading relationship, we have three main parties: the manufacturer, distributor and the end user who is the customer. The relationship we are focusing on today is the manufacturer and the distributor.
We know that without distributors, manufacturers would struggle with getting their products to customers, and without manufacturers, distributors would have nothing to sell. The distributor is essentially the customer expert, while the manufacturer is the expert on designing, developing, and producing the product.
Although this seems like a simple concept to process, manufacturers and distributors have their own particular objectives & goals. Both parties are responsible for working together to understand each other’s needs and overcome any challenges in their trading relationship.
The ultimate goal is to transform a purely transactional relationship into one of alignment & partnership to make better deals. This is not always an easy task, and in this blog post, we’ll discuss ways both parties can go about executing that transformation with the help of customer rebates.
Why do manufacturers need distributors to sell their products?
Manufacturers don’t tend to sell their products direct to the end user because of having upfront costs from actually developing it into the production line, their aim is to get the product out of the door as quickly and efficiently as possible. Manufacturers know that product demands fluctuate and to tweak production could be quite costly for them. There are also many logistical challenges of customers being located all over the country and not just near the manufacturing facility.
Dealing with a customer direct could potentially make this more complex. Manufacturers prefer to sell in bulk and customers tend to buy products in smaller amounts, likewise the customer doesn’t want to be dealing with various manufacturers they want to shop at one place to buy most of their products.
This is really where the distributor fits in as they are smoothing that relationship out, so for a manufacturer they get their products bought in bulk with greater demand, customers have a one stop shop and the distributor can handle the relationship.
Not only do manufacturers alleviate some of their logistic and marketing burdens by selling through distributors, but they also ensure that their products are getting to the right customers at the right time.
How are rebates involved?
Between the manufacturer and the distributor is a rebate agreement that is offered, known as customer rebates for the manufacturer and supplier rebate for the distributor which both parties understand as an opportunity for mutual benefit.
For manufacturers it can be quite a tight market, multiple companies producing similar products, so rebates act as a loyalty program for the distributors. Encouraging them to stock and sell their products, providing mutually profitable growth.
We’re also seeing forward thinking manufacturers, who are treating distributors as key partners by putting together joint ‘go to market’ strategies. For example, manufacturers might incentivise distributors to sell a particular product in a certain market sector that both parties have agreed on. This provides benefits for both the distributor and the manufacturer.
Rebates are offering manufacturers and distributors the opportunity to increase market share, sales and build on loyalty with their trading partners. But without the proper rebate management processes in place those giving away rebates can be accused of dishonesty and rebates not paid in full.
Why do manufacturers need a rebate management system if they are the ones paying out the rebate?
Even though the distributor is claiming rebate and the manufacturer is paying out rebate, they both need to have a clear visibility over their deals, which if they are using spreadsheets tends not to happen, which is where a rebate management system like DealTrack comes in.
You may think manufacturers are resentful for paying for a rebate system if they can just use spreadsheets which have no costs, are easy to setup and have a familiar interface. But we have found that spreadsheets can become unmanageable with more deals added, different types of rebate agreements and various distributors.
Spreadsheets can take up a lot of admin time too and when they become too complex there may be only a small number of users who can actually edit them which makes you dependent on these key people in your company. If an inexperienced user was to delete and make the wrong changes this could affect your trading agreements for the whole year.
It can also be hard to get the data out of the spreadsheet and the reporting capabilities for the wider business can take more weeks than hours. So, the rebates can’t drive the right behaviour if manufacturers and their commercial team can’t get the data out.
What are the challenges and benefits of a rebate management system for the commercial team?
For the manufacturers commercial team if their deals are not being managed appropriately and are not driving the right behaviour from the distributor, for instance highlighting to the distributor to buy more product or if they’re close to a rebate band or tier. The manufacturer who is paying the rebate to the distributor could be losing out on growth and loyalty.
With a rebate management system in place manufacturers can now have full visibility of their rebate deals and they can be more proactive with their customers by highlighting when they are close to hitting a tier therefore building that loyalty and market presence.
They will also have more complex deal types or mechanisms available to them, so they can create more intelligent deals to achieve their business goals. On top of this they will have historic data available to them, the commercial team can now review their performance and revisit the deal live.
It can be quite common for manufacturers to offer additional rebate deals that run for a specific period of time, to respond in shifts in customer demand, push a product in a particular quarter or support a new product launch. This can be difficult to record if you don’t have a rebate management system in place.
What are the challenges and benefits of a rebate management system for the finance team?
The finance team on the manufacturers side face many challenges when it comes to rebates, they might be unsure of what deals are in place because they are filed away in a filing cabinet, in someone’s desktop or even in the emails of someone who has left the company. There is also the calculation aspect for the finance team, they may be struggling to calculate the rebate due as there are issues linking the deals they have in place to the data. Or there may be particular targets or triggers that are built into the deals that aren’t called out effectively or difficult to retract.
All of these things combined can make it difficult for the finance team to accrue correctly which can have some serious consequences that we have seen with Tesco in 2013. Over the years there has been many rebate accounting rule changes and more regulatory pressure meaning it can no longer be appropriate to handle rebates in an ad hoc or estimated way, you need to show proof of the rebate accrual process.
Once a rebate management system is implemented the finance team can now see all the signed deals with the distributors and know what rebate needs to be paid and accrued accurately. There is also granular reporting available at the touch of a button meaning they can run true profitability on their products as well as deal performance. An audit log is also built in so you can see who has amended any rebate deals.
Transforming your manufacturer-distributor relationship with rebates is no easy task, but by listening to your distributors and investing yourself in the rebate challenges they face, you can begin to create a lasting collaboration that will be mutually beneficial for both parties.
Click below to watch our webinar: How a rebate management system can support manufacturers