Strategies to maximize collaborative supply chain relationships
Editor’s note: APICS magazine managing editor Elizabeth Rennie recently spoke with George F. Brown Jr. and Atlee Valentine Pope of Blue Canyon Partners. Brown and Pope specialize in helping companies create and maintain effective strategic relationships with channel partners. Here, they explore the makings of strong collaborations and how to maintain them. What are some other typical reasons why channel partner relationships fail?
Rennie: First, please explain what sets apart manufacturers’ relationships with channel partners from other business relationships.
Pope: Channel organizations are unique because of their dual roles. They are, in fact, customers. Most distributors and other channel organizations do buy the manufacturer’s product. But they are also a conduit to the end customer organization—the one that actually uses the manufacturer’s product—playing exactly the same role here as the
manufacturer’s sales team.
Why is this important to understand when striving to create successful partnerships?
Pope: Firms that fail to recognize this duality often get into trouble and fail to create successful partnerships. Success requires a careful balancing act, one that recognizes both roles.
Brown: Our research points to several leading causes of channel conflict and failed relationships. At the top of the list is “margin management.” Stated simply, if the partners in the relationship aren’t both making money as a result of the relationship, it is doomed to failure. These are, after all, business-to-business relationships, with each firm having shareholders who expect rewards. Close behind in terms of a source of conflict is suspicion about end customer ownership. Relationships between manufacturers and channel partners involve numerous case studies in which suspicions were warranted—such as manufacturers that went direct to the end customer, cutting out the channel partner; or if the channel partner substituted another manufacturer or even its own private-label brand, cutting off the manufacturer. What symptoms should supply chain and operations management professionals look out
for in their own relationships?
Brown: In terms of key metrics to monitor: First, are each of the partners to the relationship making money? Second, is there clarity about the roles and responsibilities of each of the two organizations vis-à-vis the end customers—and agreement that such roles and responsibilities are appropriate and stable? If you do see your own partner relationship failing, what are the most important actions to take, and why?
Pope: Identify and solve the problem. There were good reasons for the two firms to enter into the relationship originally, and it’s likely that something has changed, perhaps due to external forces, perhaps due to industry dynamics. Figure out what has changed for the worse, and then identify how to resolve that problem.
Far better, however, is being proactive and getting ahead of such problems. Regular, face-to-face meetings with key executives and relationship sponsors who openly ask the right questions about the relationship can head off failure before it occurs. Best-in-class organizations know that the potential problems in manufacturer-channel partner relationships are numerous and likely to occur regularly, so they have processes to identify them quickly and address them before they become overwhelming. You say it’s necessary to be proactive. What advice do you have for people who are aiming to get ahead of potential problems?
Brown: Never forget that these are business relationships. This [concept] is centered on the importance of margin management—making sure that both parties are profiting from the relationships. Unless that is the case, there is simply no reason why the relationship can or should survive. It’s a fundamental.
I remember a major manufacturer of construction tools that went to market through a traditional set of distributor relationships with individual distributors in each important metro market. They saw widely varying market share numbers without any ability to explain that variation on the basis of any factors they could identify in terms of market demographics, competition, or other usual suspects. Working with this firm and its distributors, we measured the profitability of each metro market distributor in terms of this manufacturer’s product line. What we found was a nearly perfect correlation between market share and profitability. In metro markets where the distributor wasn’t making money, this manufacturer was getting very little mind share or attention. As the manufacturer implemented new programs to ensure distributor profitability, it saw improvements in previously lagging markets.
Pope: Also, it’s crucial to be attentive to the factors that drive success in all business relationships. This idea recognizes the route-to-market role played by the channel partner in collaboration with the manufacturers whose products they carry. Unless the team members—manufacturer and channel partner—are delivering value to end customers and doing so better than the competing teams, they will lose out. So, a key element of relationship management always involves determining how the manufacturer-channel partner team is going to create value for their targeted end customers. Remember, the end customers drive the business; they are the ones that both manufacturer and channel partner have to woo and win. Without them, there is no reason for the relationship.
[We consulted with] an agricultural equipment manufacturer and its dealers … that work very closely to offer support services to end customers after equipment is sold. [Leaders at this company] recognize that equipment downtime is unacceptable at key times—for example, harvest. And they have even created strategies for almost instant replacement of broken equipment during such periods. The manufacturer put into place an overnight direct-ship program to support its dealers. Dealers staff their service centers 24/7 when necessary. Both organizations have played a role in building and implementing these strategies. In interviews with farmers, we often heard quotes like, “There are several competitors that are close in terms of product quality and price points, but what allows this firm to stand out is its commitment to service.”
Brown: Third, put into a place an explicit plan for how the organizations will collaborate effectively in delivering services to the end customers that [they] are serving. Services … is a relatively new element to the mix. Not too long ago, many channel organizations simply delivered value by having the right products easily available at the right locations for end customers. But more and more, those end customers are demanding high-value services and choosing the teams that deliver them. It’s not only a route to competitive success, but also a way to avoid commoditization and pricing pressures. Planning for best-in-class service delivery is another responsibility of the relationship champions in the two organizations.
Two examples from the electrical products manufacturing and distribution industry illustrate this new approaches to services. One example of a simple, but highly valued, service is when one distributor delivers products to job sites that can be disorganized, messy, and full of hard-to-identify crates and materials. This distributor takes a picture of where it was delivered and a picture of the signature of the person who signs off. They save on customer service because they don’t need to chase the delivery information down, and they have a more satisfied customer, who gets immediate information on where the product has been placed at the job site. As another example, another electrical distributor has worked with several manufacturers to build solutions offerings on everything from inventory management to energy efficiency. When appropriate, “SWAT teams” from the two organizations work with end customers to deliver these high-value solutions.
When trying to create strategic relationships with channel partners, how is success measured?
Brown: The business done through a successful strategic relationship should yield attractive margins vis-à-vis relevant industry standards and faster-than-market growth rates … Secondary measures that we’ve seen in certain instances have been the criticality of the relationships in serving the most demanding end customers, contributions of the relationship to new product development and innovation, and contributions of the relationships to improved operations—for example, lower inventory carrying costs, superior demand management and forecasting, et cetera. But the simplest and most correct answer is that successful strategic relationships should be the source of sustained and profitable growth.
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