Why transparency is critical to effective distributor-manufacturer collaboration
Tips for transparent manufacturer-distributor relationships
1. Take steps upfront to make sure you are working with a trusted collaborator and a coveted business partner.
2. Anticipate challenges and include those considerations when you document agreements.
3. Inevitably, issues will arise. Continue to monitor these arrangements and address issues early and directly.
4. Consult your professional services firm for insights and practical solutions to reach your objectives.
Effective collaboration between manufacturers and distributors has never been more important. Customers are increasingly demanding high-quality items, timely delivery and low costs. Successfully aligning these three elements — quality, schedule and cost —is essential. This requires a strong, transparent relationship between the manufacturer and distributor.
Transparency in the real world
For example, when a Southern California distributor of precision tooling wanted to expand its product line, the company knew it needed to either invest in new equipment and training, or acquire a competitor with the desired capabilities. After considering acquisitions and doing extensive competitive market analysis, the distributor ultimately decided to partner with a manufacturer, and become the U.S. distributor for that manufacturer. The manufacturer gained a first-time U.S. presence, and the Southern California distributor gained a new product line. Since the distributor already had a significant sales presence and understood the industry, it was a natural fit.
But what made the relationship truly productive was the level of transparency. The two companies trusted one another with information about competitive intelligence, margins, expectations, inventory, pricing, potential uses of the product, catalog numbers, collective benefits, customer responsiveness, and many other areas outside the purview of a normal distribution relationship. Both parties went in with eyes wide open to the possible risks and long-term competitive challenges. Key to the relationship’s success was the mutual trust and shared commitment to getting the best result for their customers.
Effective collaboration is greatly enhanced by the ability to communicate and collaborate with supply chain partners in real time, rather than by old-school, untimely methods such as spreadsheets and paper documentation. Having online visibility and access to distributors’ documentation, sourcing information and audits gives supply chain partners — and customers —confidence in both the supplier’s business practices and the end product.
Why is transparency important?
Transparency enhances collaboration and makes distributors more valuable to manufacturers by lowering the risk of disintermediation, a common worry among distributors. Disintermediation is when manufacturers go directly to the end user, bypassing a traditional distributor. In a recent survey by Modern Distribution Management and Grant Thornton, 76% of participants indicated that this practice was a concern.
Transparency has other advantages. Sharing operational information enables both sides to achieve higher margins, get to market faster, boost the competency and market connection of sales staff, and lower distribution costs. The California distributor already had a strong presence in its market, thereby reducing costs significantly.
That’s not to say that there aren’t potential setbacks, such as exposing your client base or product line to an untrustworthy competitor. Identifying a reliable partner with mutual business interests can be a challenge. Also, over time, one party may choose to move in another direction. The partnership needs a structure and agreement that sets clear terms, including how to dissolve the relationship if one or both parties want out. Ideally, even if the partnership ends, both parties will have gained knowledge and benefits they can leverage going forward. As with any relationship, there will be challenges along the way, but transparency will help resolve issues in an open, collaborative manner.
A mutual benefit
When it’s done right, transparency in the distributor-manufacturer relationship can be a game changer. It can enable distributors to go beyond warehousing and storage to offer a full continuum of services, such as sales, customer service, repairs, replacement parts, support in various languages, etc. These added capabilities make distributors more valuable to manufacturers, and may allow them to take a bigger cut of the profits. Close collaboration — aided by transparency — also enhances distributors’ long-term viability and reduces the risk of disintermediation. The more value and competency distributors deliver to manufacturers, the more conducive it is to mutual information-sharing. Ultimately, transparency enhances distributors’ value proposition.