When discussing distributors and manufacturers, we have to take a look at the big picture to see how it relates to contractors. This business relationship is important because it affects a contractor’s ability to meet the demands of the end-user in a very competitive marketplace. Let’s look at the procedure of how products come to be.
It starts with an end-user who has a need or a want. The contractor contacts the distributor who finds a manufacturer that has the product. The contractor takes that product to meet the demands of the customer or end-user.
My point is, it all begins with the end-user and ends with the end-user’s satisfaction. The only reason our business exists is to obtain and retain a satisfied end-user. Since the electrical contractor’s business depends on this relationship to produce and satisfy a customer, it is important to understand each part of the relationship or partnership.
When manufacturers decide on a marketing strategy for a new product, they are faced with several options. The first decision is whether to market their product with a direct sales force or through distribution.
Direct sales has several advantages and disadvantages. The main advantage is the control of the sales effort. It is important for some companies to have total control of this effort because of its impact on financial and human resources as well as production and raw material.
A direct sales force allows a manufacturer to identify the target market and interface directly with the end-user and contractor. It also allows managers to direct the sales effort in a specific direction with the proper support. Products, inventory and human-resource levels are based on the sales quotas and objectives.
There are also disadvantages with this approach. The biggest hurdle is the cost of a direct sales force. The justification of the cost of a direct sales force can be measured by the return on investment (ROI).
According to a report by Strategies Planning Interests, “Profit Impact of Market Strategy,” a difference of 10 percent in market shares makes a difference of five points in pretax ROI. Studies show that businesses with market shares of more than 40 percent earn an average ROI of 30 percent, or three times that of those with shares under 10 percent.
Direct sales requires an organizational structure that includes administration, local managers and offices, support personnel, and sales people. Support also includes shipping and inventory control to meet the demands of the electrical contractors.
The cost of a sales call by a direct sales force is estimated to be $250 to 300 per call. It takes an average of four calls to get one order. Manufacturers have to reach several different markets so the profit margin can suffer and the cost can be prohibitive. That is why the distributors and manufacturers relationship must be beneficial to both.
Tom Naber, president of National Association of Electrical Distributors (NAED), describes his distributors as “gatekeepers.” The manufacturers rely on the distributor to get their products to the contractor and also provide informative marketing feedback on the needs of the contractors.
The distributor provides direct information and data to improve existing products and create new innovative ideas for future products. With the contractors, the distributors act as providers who provide needed material to fulfill a contract, but distributors also work as consultants providing the information for bidding on the projects. The distributors role is to act as a link between the contractor and the manufacturer.
According to the NAED, the industry’s research of total sales in 2004 reached approximately $72 billion. Customer mix was 46 percent contractor, 28 percent industrial, 14 percent commercial, 6 percent utilities and 7 percent in others.
The distributor plays a major role in the contractor and manufacturer marketing efforts. Distributors allow the manufacturer to reach multiple markets without the overhead of a direct sales force. The distributor gives the contractor local representation and warehousing. Distributor representatives are knowledgeable about their products because they have access to information directly from the manufacturers.
The distributors can work to provide contractors with prebid information needed to respond to RFQ. Distributors store the material locally, making it readily available for the contractor. This allows the contractor to manage the flow of materials based on the workflow and timetables of the project.
Because distributors don’t have the overhead of producing a product, they are able to offer financial terms and work with the contractors. For years, electrical contractors have worked closely with their distributors on large and small projects.
In a conversation with Lew Weinstock, president of New Jersey-based Linear Electrical, I asked, “What do you think is the responsibility of the distributor?” His answers were to the point:
°Offer products that meet customer demands and also offer the best price for products, with tier pricing for quantity buying
°Use financial terms that support contractors’ cash flow demands
°Offer a variety of products from different manufacturers so that specification and customer requests can be met
°Keep the product line on par with the technology curve and keep pace with the future direction of the electrical industry
°Have the stock available in the local warehouse and available for shipping and delivery to the project site on short notice
°Keep up the flow of communication. Contractors need to know pricing changes, product updates and material availability
Electrical contractors are comfortable with the long-lasting relationships they have established with local distributors. They are secure with the notion that they have local representation with the products they need in the local warehouses.
As Tom Naber suggested, contractors and distributors who have a working relationship work close together from the bidding process to the installation process. It is a partnership.
Contractors that work strictly on a low-bid basis must be aware that distributors offer more than just material—they offer support and information as a partner. The decision on selecting a distributor has to be made on the entire offering of the distributor’s services, not just on price.
There are two strategies a contractor can employ. The first approach is having a single-source supplier. This strategy focuses on building loyalty and developing a business relationship. The single-source supplier strategy creates a good working relationship, but the contractor must have a system of checks and balances.
Familiarity breeds a tendency to become complacent. When the relationship becomes a common routine, we stop paying attention, become apathetic and put too much trust in the relationship. It is up to the contractor to not be naive and keep distributors honest. It is up to distributors to repeatedly prove their trustworthiness.
The second strategy is to have competitive bidding on all projects. The bidding of each project has advantages and drawbacks. This approach doesn’t enhance the relationship or distributor loyalty. Distributors want to be your single-source suppliers and provide priority to loyal customers.
The main advantage is that the check-and-balance system is inherent in the bidding process. Contractors have distributors bid with their best price. Contractors are also getting innovative by working with distributors and creating new ideas to enhance their ability to meet the customer’s needs.
West Side—Hammer Electric, Bethlehem, Pa., found a way of working with its distributor. The distributor maintains and stocks the trailer on the job site. The distributor’s salesperson visits the site every week and restocks the shelves according to need.
Luke Cunningham, president of West Side—Hammer, said he has placed high and low tier levels of material, which acts as a check-and-balance system. If the material reaches or exceeds the low-tier level, the distributor notifies his office. By working together, the distributor and contractor can avoid overrun and take the responsibility of ordering material from the foreman.
This approach has several advantages. First, it eliminates a degree of the craftsman’s work flow. The foreman does not have to spend nonproductive time visiting the office to pick up the material. Second, by having a check-and-balance system, it allows the foreman and project manager to prevent material overruns or avoid material shortfalls. Third, it cuts back on internal transportation and warehousing, which factors into profit margin loss.
The future relationship
With the emergence of the Internet, distributors are finding competitors from their own suppliers and manufacturers. Manufacturers are finding competition from offshore factories. Electrical contractors are finding competitors from not only other electrical contractors, but also large, major contracting corporations.
In today’s competitive market, the contractors and manufacturers find distributors to be the stabilizing/centering factor. Today, electrical contractors are comfortable with the relationship that they have developed over the years. They are secure with the notion of local representation and the manufacturer’s products that they need on the shelves of a local warehouse.
Manufacturers seem comfortable with their products reaching the contractors through distributors, thereby lowering their overhead. Electrical industry relationships continue to change. Like the contractor, both distributors and manufacturers adjust to meet the future market demands. The relationship between contractor, manufacturer and distributor is a partnership that will grow stronger every year because it is built with a common goal—to produce a satisfied end-user with a profit. EC
MARTIN is a business consultant for Alan Martin & Assoc., consultant for SBA, speaker and adjunct instructor with NECA-MEI, based in Morris Plains, N.J. He can be reached at 973.540.1298 or firstname.lastname@example.org.