Links In The Chain

Manufacturers and solution providers may say they want each other to succeed, but only distributors actually need both ends of the supply chain to work in order to be profitable. Distributors say they spend a lot of time and money trying to ensure that both parties can be successful. But history, a reluctance to change and the pressure for immediate results sometimes lead vendors and solution providers into thinking they should fend for themselves.

This is why distributors have a message for the rest of the channel: Let us do what we do best. Whether it's generating demand, increasing channel profitability or selling at standard prices, executives at a CRN Volume Distribution Roundtable say their potential is going unrealized.

DEMAND GENERATORS OR FULFILLERS?
One of the most frustrating aspects of vendor relationships is the manufacturers' reluctance to view the channel as demand generators, executives say.

Too many manufacturers view distributors only as fulfillment engines, they say, which leads to missed business opportunities.

GARY BROTHERS: Both the distributor and the vendor have responsibility when it comes to demand generation.

Two out of every three calls that we make are outbound calls, so we are very proactively working on behalf of [vendors] day in and day out to try to increase their business. [VARs] are calling and saying, 'I've got a solution I'm trying to build. I need at least this, and three of this and three of that. What do you recommend?' I think that really comes in handy around the new technology offerings that proliferate in our industry.

STEVE RAYMUND: This whole question of demand generation is also a function of the type of technology involved. On more sophisticated, differentiated products, I think the end user is more sensitive to the brand. The VAR has to show up with a recognized brand that the end user trusts as a reliable technology from a reliable company. I think it's another story, though, where the VAR is selling a solution comprising components from multiple vendors, many of which are completely unknown to the end user. They don't really care if it's this guy's server or that person's printer. They are really looking for a problem to be solved with a solution. The decision-making agent for the purchase is not the end user, it's the VAR.

JONATHAN ELSTER: We cannot [sit and] wait for the phones to ring. We are bringing the customers opportunities. So it's working closely with the vendor from the distributor standpoint, teaming up with the vendor, visiting customers, and bringing them solution-selling. We've done a lot more of that in the last six, seven months, going in with our vendors, visiting with customers, and bringing them the opportunities, especially on newer products.

VENDORS USING CUSTOMER DATA
Manufacturers and distributors have invested millions of dollars in IT systems that allow better visibility into how and why product is sold, and to whom. Distributors can analyze orders down to the SKU level and have access to a wealth of information that they are willing to share to streamline the supply chain. Yet distribution executives feel the vendors aren't utilizing the information correctly, or worse, they're ignoring it.

BROTHERS: There are some that use the information and use the data that they get, and there are some that just want the data. I don't know that there is any useful purpose for them actually getting the data. They think everybody else gets the data, so 'We need it,' and [they] do nothing with it.

KEVIN MURAI: I don't think any vendor is really capturing the value of what they can do with information flow, but I would tell you there are a couple of vendors that come to my mind that I think get where it is they need to go.

They have a vision of what they would like to see in information flow and, more important, how it's going to benefit their overall supply chain. Cisco [Systems has an ongoing project] about supply chain streamlining, and how can we leverage information. I think IBM has also started along the path of doing the same kind of thing.

TIM CURRAN: Many vendors don't have the internal systems to manipulate the data they receive, so there is actually a cottage industry that has developed, smaller companies"Channel-Wave, Channel Intelligence"that essentially massage distributor POS data and feed it back to the vendors so they can understand it and use it in their systems. They don't have the systems to manage it, but they want it.

SPECIAL PRICING
For years, distributors have pleaded with manufacturers to reduce, if not eliminate, special pricing. The practice, in which vendors lower their normal prices in order to win competitive bids, is still prevalent, executives say. In some cases, it can take days to get approved for the special pricing, which makes the channel a more inefficient model when competing against direct bids. It also creates more administrative costs because distributors ship the product and are debited back the difference from manufacturers, a process that reduces profitability for all links in the supply chain, executives say. But distributors keep fighting for change.

CURRAN: We did a study that showed last year 1.5 million ship-and-debit transactions with an estimated cost per transaction to distribution of $50 to $60. And the amount of special pricing transactions is increasing faster than the rate of sales, so it's becoming a bigger problem. Even if in 99 out of 100 cases you [have a] special price, they still don't want to give up that incremental profit on the one [that doesn't]. I think there is a general acceptance that the cost now has begun to outweigh the profit benefit of the pricing systems.

RAYMUND: My belief is that the programs are out of control. The problem is the vendors want to maximize the price and gross profit for every deal, and they are afraid that an everyday low pricing strategy will leave money on the table. Then, by the same token, [they] are paranoid of losing a deal in a competitive situation, and they want to reserve the right to exercise pricing flexibility in order to capture that deal. So it puts them in this conundrum wherein, in fact, every deal becomes a negotiated deal with the vendor itself, which creates enormous costs and increases in time cycles and so on that ultimately probably renders them less competitive.

MARK DIAMOND: If we find programs and actions that are on a consistent basis, we can build a business around that vendor or that set of vendors and provide a lot of focus. What we talk to our vendors about is consistency in their approach, and that's where we are more and more successful"when we have a vendor like that who is more consistent.

MURAI: There are two very different approaches to the problem. One, having a sweet-spot list of pricing, [is what] IBM does with their Express SKUs. From a pure inventory management supply chain streamlining opportunity, it does a good job because it helps to simplify the overall SKU mix. What [Hewlett-Packard has] talked about"trying to garner the benefit of selling more and more HP options to tag along with their core product [at a lower standard price]"is a very interesting idea from an overall sales and marketing standpoint.

As long as it's done in a systematic way where that program can be automated at the distributor level so that the VAR can understand it, too, then I think it's an effective way of doing the same thing. The key is as long as the rules are known up front and the qualifications are known so you don't have to keep going back to the manufacturer to get approval deal by deal.

HOW CAN VARs BE PROFITABLE?
Profitability has long been an issue. Even when solution providers could make 30 points on PCs, there still were complaints about profitability. With the economy recovering, the executives discussed what VARs should do to make more money and what distributors can do to help.

MURAI: VARs are changing the whole makeup of their business to be much more services-oriented. You can't be successful selling just product. You've got to sell solutions. I think the VARs that have been proactive in really transitioning their business actually have a pretty bright outlook because they are better addressing their customer needs today than they were a few years ago and deploying services that have a healthier business model for the future as well.

DIAMOND: The intriguing thing is that some of the vendors have taken the role of trying to be the solution provider themselves and offering the services. The VAR has to evaluate who he or she really would like to partner with, not necessarily through which distributor, but which manufacturer. The VARs are smart, and have been smart to bring the solution to the table. The question is, in a market that is not necessarily growing by leaps and bounds, the vendors struggle with profitability and they are looking for different sources of income, and services is certainly one of those places. Does it hold true necessarily for the SMB? Probably not as much. I'm sure that's still a big question in their mind that they struggle with on a daily basis.

BROTHERS: I think our responsibility lies in trying to bring [solution providers] the right solutions for what's going on in the marketplace today. We don't have much capability from the distribution end, I don't believe, to control what is going on with the end user from a margin perspective. We can only help the reseller try to acquire the product at what he thinks is the right level to do the deal. It hasn't gotten less competitive over the years, and I really don't believe it's going to get less competitive as we go forward. We're all trying to find ways that we add value that we can afford to add and still be able to sell the products and the solutions at the competitive price required in the channel today.