Today, many industrial distributors face a growing identity crisis, as they are often uncertain of their real value-add or profit models. These distributors are at risk. Why? Most of their important manufacturing customers know exactly what they want and they are working hard to get it.

Unfortunately, trends such as strategic sourcing and offshore manufacturing do not bode well for industrial distributors, as they lead to downward price pressure and reduced opportunities.

These conclusions emerged from Pembroke Consulting's analysis of Industrial Distribution's 59th Annual Survey of Distributor Operations, released last summer. While the implications for distributors accompany the report in my overview and analysis section, there is another important message, and it's for manufacturers.

Manufacturers must understand that distributors know the partnership between manufacturers and distributors needs to be upgraded. And, many distributors expect manufacturers to take the lead.

Unfortunately, ID's survey indicates that only a few manufacturers are actually stepping up to the challenge. Asked to identify top suppliers that are taking constructive actions, half of distributor executives failed to name a single company. This is unfortunate, as there are real gains to be had by manufacturers that can work to define a new win/win relationship. Distributors are ready for change, and manufacturers can make themselves stronger by getting engaged.

Over the last few years, ID's survey has explored the health of the longstanding partnership between manufacturers and distributors. The news has not been good. Two years ago, two thirds of distributors felt that manufacturer loyalty had waned. This year, nearly half of the distributors in the survey stated the relationship had worsened further.

Clearly, there is a high level of frustration on the distributor side of the partnership. Our work at Pembroke Consulting tells us that many manufacturers are unhappy as well.

In one recent study, we found that 85 percent of manufacturing executives believe distributors do not offer the innovative services and cost efficiencies necessary to help the manufacturer succeed in the face of global competition.

This situation cannot last because manufacturers and distributors still need each other. Distributors provide manufacturers with access to customers and the quality of their service helps to build the manufacturer's brand and sales. Manufacturers provide innovative products, of course, but are also in a strong position to improve the effectiveness and productivity of distributors as a channel.

The survey found that 44 percent of the distributors' most important suppliers are actively creating new programs specifically designed to improve the level of partnering with their channels. But who are these leaders? And what are they doing? Survey results provide answers, and the findings are surprising.

The survey asked distributors to consider their most important suppliers and identify the manufacturer they consider most effective at creating effective channel partnerships. On the surface, the results are disappointing. More than half of distributors did not name a single manufacturer.

But there is hope. In total, 250 different manufacturers were named. 3M garners the most mentions (23). Parker Hannifin and Sandvik are also among the top, each mentioned 10 or more times. Twenty manufacturers were mentioned three or more times, and nearly 200 manufacturers were mentioned just once. From the perspective of size and power, my analysis found the largest manufacturers with the biggest brand names capture, at most, 25 percent of the mentions, while the rest are smaller companies with lesser-known brands.

What does all this mean? For starters, large manufacturers need to "up their game." Granted, the sheer number of suppliers competing in industrial markets means that it is difficult for any company to accumulate mentions in the survey. With this in mind, 3M's results are exemplary, but many other big brand manufacturers are lagging way behind. Too many are way down the list, receiving only one or two votes.

There also is encouraging news for smaller suppliers. Manufacturers identified by distributors were 1) important suppliers and 2) skilled at managing the relationship. As noted, three quarters of the manufacturers identified were small companies. Building sales through distribution is all about helping the distributor management succeed.

Survey results say that any manufacturer of any size that is willing to work on the partnership can build the relationship. The trick is to focus on areas that are not purely personal, but rather lead to tangible business results.

Distributors provided some direction for manufacturers, but unfortunately, many of the top recommendations are not guaranteed to produce a win/win. At the top of distributor expectations for an effective partnership are, "limiting the number of competitive distributors in their markets" and, "reasonable purchase levels to earn incremental discounts and incentives."

To be sure, these actions deliver real benefits to distributors, but they are often problematic for suppliers. Many manufacturers find that limiting the number of distributors in a territory can reduce market coverage and presence to key accounts. Similarly, manufacturers view incentives as compensation, and lowering hurdles has nothing to do with improving results. Distributors aren't wrong, but their suggestions are only a starting point.

In my experience working with manufacturing clients, it takes a sustained effort to improve partnerships that yield measurable and lasting results. Executive commitment is essential, and a disciplined process helps ensure that the working team will stay on task. I have identified six key steps that can lead to superior results:

1. Take a fresh look at what each party wants from the other. This is a critical step because the rules are changing and markets become more and more competitive. Today, manufacturers are asking for reports that track and measure progress against goals, electronic visibility to customers, and new approaches to building brand awareness and reputation. As always, distributors value partnerships that increase their margins and productivity, but they also value help in gaining new accounts or finding new revenue opportunities.
2. Measure and quantify coverage and presence. Many manufacturers assume their distribution channel covers all of the industrial marketplace without doing their homework. By comparing customer lists and market data, a hard estimate of market coverage can be calculated. And don't assume that because a distributor calls on an account, you have presence to all opportunities at the customer. Dig deeper to find out if the distributor salesperson has the relationships you need and presents your products to all relevant sales.
3. Explore end-customer gaffes and gaps. By focusing on the customer, manufacturers and distributors can ensure that efforts aimed at improving the partnership do not devolve into negotiations over price and complaints about service. Market research helps, but the real goal is to understand first hand when the combined efforts of the manufacturer and its distributors do not deliver improvements in the customer's business. Look for mistakes and inconsistencies, but also go further and find areas where new approaches will yield new results.
4. Deconstruct channel conflict. The trick to solving conflict problems is knowing when conflict actually exists. Conflict should be measured as 1) two or more channels, 2) in the same account, 3) competing for the same sale, 4) with the same product. If conflict is occurring, and it is leading to lost sales, price degradation, or customer confusion, then it should be addressed. If the facts don't line up, then there may be other problems to address, but they are not conflict problems.
5. Calculate your channel ROI. Few manufacturers take the time to add up all forms of channel compensation, by distributor, and compare these results to the sales, share and strategic objectives provided by the channel. Even fewer take the time to share this information with their distributor partnerships. This is a critical missing link because the partnership between distributor and manufacturer is a business relationship, and ultimately its success should be measured in business terms.
6. Segmentation helps. Channel partnerships can take many forms: from simple arrangements of convenience to highly aligned and closely coordinated sales and marketing. Most manufacturers will find that they need a variety of partnerships across all of their distributors to build an effective channel. The first step is to segment distributors according to their business model and objectives. Then, by understanding the contribution the supplier can make to each segment and the returns that can be expected, the manufacturer can adjust strategies, plans and programs.