Your business, like every other business, has a supply chain. Every company also has a distribution chain, but it may have grown accidentally and is not generating enough value.
Your company also has a distribution strategy. Every business must reach its prospects and customers to sell and service them. Unfortunately, your distribution strategy is probably not creating enough value for your customers or business.
A Stream of Interactions
All businesses need a distribution chain, and their unique chain will likely consist of multiple channels. At a minimum, a company will sell through its website or e-commerce site, with inside salespeople and some outside salespeople. At the company’s launch, they might substitute a network of independent dealers to complement or replace direct salespeople. If it is an international business, it will likely have local independent representation to minimize cultural or language issues.
When it comes to service, the business may have direct employees in high-density areas, third-party service in lower-density regions, and local independent service engineers in countries with low sales. It may also have independent dealers who sell and service its products.
Unfortunately, when setting up their distribution chain, many businesses look at each location individually when the need arises instead of in a proactive, well-thought-out process. They make their decisions without considering that each decision will create a stream of interactions, which will create an overall image of the brand in people’s minds.
An Example of How to Select Channel Partners
In 1981, IBM introduced the personal computer (PC). They decided the product should be sold to existing enterprise customers by their direct salespeople and through independent resellers to smaller businesses and individuals.
Then, according to Computer Reseller News, “IBM established a rigorous authorization process, putting potential retailers through a carefully controlled vetting process. The battle between retailers and franchisees was intensely competitive. The prize — what became known as the vaunted IBM Medallion — was an authorization to sell the IBM PC.” (Bold added for emphasis.)
What Are a Distribution Chain and a Distribution Channel?
A distribution chain includes all the businesses responsible for selling and servicing a product during its useful life and interacting with prospective customers.
In most situations, depending on specific conditions, more than one business performs the same function in the same country or other central geographical area. These parallel businesses are called distribution channels.
Here are the most common types of distribution channels used by industrial equipment OEMs:
- Direct employees (both sales and service) – direct selling.
- E-commerce sites – direct selling.
- Alliances – Partnerships with companies that sell complimentary products and services. Each partner sells and maintains its products.
- Distributors*—These companies buy products and aftermarket services, including spare parts, from the OEM and resell them in their region. They are also called resellers or dealers.
- VARs* (value-added resellers): Buy from the OEM and modify or add to the product to create more value for the customer.
- System integrators* – Buy from the OEM and combine with other OEM products to deliver a complex solution.
- Independent service companies – May work as a contractor to the OEM, other sellers, or directly to the equipment owner.
*Channels may perform services, turn the services over to the OEM, or contract services with an independent service company.
Understanding the differences between all these channels is essential for a stable, long-term, profitable sales and support infrastructure. Thus, the first step is to design your ideal long-term distribution chain, whether you are just starting and trying to figure out how to sell and service your products or have an established distribution chain that needs improvement.
How to Design a Long-term Distribution Chain
Three variables must be evaluated and specified:
- Channel type – described above.
- Interactions your business has with a prospect and customer during the life of the relationship.
- Locations where you plan to stand up a partner, both now and in the future.
Here are two fabricated examples without consideration for your product, customer, and company maturity:
- You may decide to establish an e-commerce site and an independent third-party service organization in Montana and Wyoming because the market for your product is small in those states.
- In the Mid-Atlantic states, you may want to work with a systems integrator because you will sell better as part of a turnkey solution than separately. You must also decide whether to have your product serviced by a VAR or a local field engineer.
Meanwhile, this blog post describes a channel partner from a different country than the OEM: “Effective August 16, 2019, SUN Automation Group is the exclusive representative in North America and Central America for all Latitude Machinery Corp. (LMC) machinery, parts, and support. Latitude Machinery Corporation is a world-class manufacturer of Corrugated Converting Equipment specializing in… The Taiwan-based company has partnered with SUN Automation to offer new and existing North and Central American customers trusted service, support, and sales from a North American-based industry leader.”
Locations
Typically, decisions about building a distribution chain look at the state, country, or regional levels. However, the granularity of your plan must suit your products and markets.
In the U.S., you might have a mixture of states and regions. In the rest of the world, many businesses are organized on a regional level for management and a country level for sales and service locations. And in some industries, the service model includes on-site field and application engineers.
Interactions to Be Considered
Interactions are essential because each is a touchpoint that contributes to how prospects and customers think about doing business with your company. This is the definition of a brand.
Fortunately, many interactions are infrequent and prescheduled. For example, when providing initial user training after an installation has been completed, there is usually some flexibility in when the training will occur. The duration is known, so a trainer can be flown into a city and stay at a hotel while the training is conducted. That allows the trainer to build good customer relationships without being physically based in the same location or time zone.
When designing or redesigning your distribution channels, it is essential to determine each channel partner’s interactions. Here are partial lists of product-selling and service-related interactions. Many of these interactions will be repeated during the equipment’s lifetime, and some will never occur on all accounts.
- Product-selling interactions:
- Website
- Chat
- Inside sales
- Outside sales
- Service sales
- Advanced services sales
- Service-related interactions:
- Pre-installation site planning visit
- Installation
- Training
- Remote support
- Break/fix service
- Depot repairs (return materials authorization)
- Parts ordering and delivery
- Preventative maintenance visits
- Upgrades
- Deliver advanced services
- Relocate equipment
- Refurbish parts
- Remanufacture
- Decommission equipment
How to Create and Align the Channel Partners with the OEM
It seems like you cannot open a business publication without seeing the word “align” (or “alignment”). When I did a Google search on “align businesses,” I received 735,000,000 results.
Look at this definition from Indeed, and you will see why it is everywhere: “Business alignment refers to a process that organizations use to improve collaboration across the different areas of their organization and streamline their business efforts.”
Considering all your channel partners’ interactions with customers and prospects, you can see why your business and its partners must act as one unified organization. Here are the high-level steps that you should undertake before you start selecting and appointing channel partners:
- Thoughtfully define how your business wants to be perceived by prospects and customers. All leaders and key employees in your company must agree, or you will fail.
- Create unique, legally binding contracts for each unique type of channel partner. You should have someone assigned to ensure that no agreements are ever negotiated without their unique contract. Do not forget to include a non-disclosure agreement with duration if you and the partner dissolve the arrangement. Also, anticipate changes to your business models, like XaaS, that you may implement.
- Develop a process to certify all individuals interacting with your prospects and customers, both in your company and throughout your distribution chain, to ensure that everyone receives the same messages in the same way, using the same documents and software.
- Plan a compensation arrangement that will work for you and the partners. Land on typical numbers because you want the flexibility of varying the actual amount in either direction if your hire does not precisely meet the ideal profiles.
You can now take out a map of your first go-to market, country, or global region. Start with the metropolitan area with the largest projected long-term product density. Decide how to sell and service your products and what type of partner you want in both roles. Build out your map from there and decide how you will fill the various roles.
Don’t get frustrated if you cannot always follow the plan. Sometimes, the type of partner you want in a particular location does not exist. Be flexible and ensure a certified person or team is in place when needed. Don’t let “perfect” be the enemy of “good enough.” You can always change both the plan and the channel partners.
How a Distribution Chain Go Wrong
Suppose you don’t set expectations with your partner prospects before discussing sharing responsibilities and revenues. In that case, you may be locked into an arrangement that destroys, instead of creates, customer value. Here are a few examples.
Example 1: The Overprotective Channel Partner
Our sales VP managed a group of direct salespeople in the U.S. When one of them moved on, he signed up a respected sales agent who was well-known in our industry and had recently been cut loose by one of our competitors. His training time was minimal and done remotely.
After six months, our VP asked him to enter his sales pipeline into the CRM system of the direct salespeople. The VP received a brief note saying “no,” explaining that his prospects were his and he did not want us to interfere in his sales process. He told us he would update our CRM system once he received the prospect’s P.O.
As you can imagine, the relationship quickly soured, and we parted ways. We lost about a year of sales in that territory, which was a difficult way to learn this lesson.
An example of an overprotective channel partner is the service leader of a full-service distributor. While they were required to send us a signed copy of every closed service order, they withheld any paperwork that made their employees or the customer “look bad.” The OEM’s refresher training and continuous improvements were limited without that knowledge.
Example 2: The Channel Partner Offering Discounts
An industrial equipment manufacturer hired a new aftermarket sales manager. One of her first analyses was to examine parts sales per asset for all installed products. She found nothing unusual.
Then she grouped them by region and noticed two things: (1) a systems integrator (SI) had much higher sales per asset than any of the other system integrators in the country, and (2) the end users in that region had the purchases sales per asset of all regions.
This sales manager must have been part detective because she learned that the SI was buying spare parts from us at their standard discount and selling them to any customers for 10% less than our established list price. In this case, the OEM assumed part of the blame because it did not have a written policy about adhering to the list prices or poaching sales from the OEM.
Example 3: The Channel Partner Selling Parts That Aren’t Genuine
The same aftermarket sales manager also identified a dealer selling parts they purchased from industrial distributors, the gray market, and a local machine shop.
In this case, they terminated the relationship and notified the affected end users. And, of course, there were lots of unpleasant conversations with the end users about who would be responsible if one of these unauthorized parts failed in a way that damaged the asset.
Example 4: The Channel Partner Without Documentation
An individually owned channel partner decided to close down his business without giving us much notice. He kept most of his business information in his head.
As a result, while we knew where the equipment was located, we had no idea about his unfulfilled promises, the “handshake” deals he made, and even his evaluation of his employees. The OEM was left in a lurch, and the customers were miserable because the OEM refused to honor undocumented agreements.
Replace a Partner or Limit What They Do for Your Customers
No matter how meticulous you are, you will make mistakes. If you must separate a partner from your business, remember that the person or team will still be active in the same area as always. You do not want them badmouthing your business to prospects or customers. Be as fair as you can and remember that sometimes an excellent recommendation will be more valuable to them than money.
As part of a sales organization’s separation agreement, you might want to include a clause stating that if they come across an ideal prospect, they should immediately supply you with all the contact information and that if the lead becomes a customer, they will receive a fair commission. You always want ex-channel partners to talk positively about your organization, products, services, and people.
The Benefit of a Great Distribution Chain
Growing a distribution chain with solid, reliable partners will distinguish your business from your competition. However, don’t expect things to run smoothly every day.
Professional sales and service leaders frequently describe themselves as professional firehoses rushing around putting out fires. The benefit of having an excellent distribution chain is that fires are generally small and occur less often than if you had not spent the upfront time doing all the planning.
Related reading
- How to Grow Spare Parts Sales for Aftermarket Revenue and Profit
- The Four Aftermarket KPIs Every OEM Leader Should Track
- When Talking About Aftermarket, It’s Time to Show You the Money
About Middlesex Consulting
Middlesex Consulting helps our B2B product manufacturing clients grow their services revenue and profitability by applying the methodologies and techniques associated with Customer Value Creation and Customer Experience professions to assist its clients in designing and commercializing new services and the associated business transformations. Contact Sam here.