For years, manufacturers and distributors have recited the mantra that the key to happiness is found in win-win relationships. Achieve win-win, and all your problems will be solved. Distributors will be loyal, grateful customers who purchase more of everything you make regardless of product quality. Distributors will make money on every transaction with customers, so inventory management doesn’t matter.

This attitude, fostered during the long period of post-WWII economic growth, lasted until the mid-1970s, when maturing markets, a slowing economy and competition from imports began to change the business landscape. By then, a false sense of security had taken hold at all levels. Retailers, distributors and suppliers felt they did not have to earn the business, they were entitled to it.

A new book published by the Distribution Research and Education Foundation (DREF) of the National Association of Wholesaler-Distributors argues that win-win is a dead concept, replaced by the Law of Legitimate Cross-Purposes. In Working at Cross-Purposes, How Distributors and Manufacturers Can Manage Conflict Successfully, authors Mike Marks, Tim Horan and Mike Emerson of the Indian River Consulting Group make the case that manufacturers, distributors and retailers all have different goals, different stakeholders and different business purposes. “The mistake is when any one party believes that loyalty is anything more than the lack of a better alternative. Successful distributors and suppliers realize that there is always a better alternative.”

The Law of Legitimate Cross-Purposes
The authors point out that suppliers and distributors derive profit in different ways that can generate conflict. “A supplier makes money by achieving high levels of plant capacity utilization,” they explain. A distributor, on the other hand, “makes money by getting a large share of a customer’s total spend with multiple suppliers and customizing the service provided for that customer to create competitive advantage.” The authors conclude that, for distributors, “The customer relationship often represents a much better long-term investment than the relationships with suppliers being represented at any point in time.”

This doesn’t mean, however, that distributors and their suppliers seek each other’s demise. It is in both parties’ best interest to promote stability in the channel. It is just that neither party wants the other to succeed at the other’s expense. The authors offer some helpful tips on how to operate in a world of legitimate cross-purposes:

• Understand that cross-purposes are good, they should exist, and they keep people on their toes. Channels don’t exist in a vacuum, nor do manufacturer-distributor relationships. If a supplier allows a distributor to operate with higher-than-industry margins, eventually that supplier is going to go away because it cannot be competitive.

• Be up front about the existence of conflicting purposes. A distributor’s relationship with a supplier should go beyond the local rep; he should build relationships at all levels of the organization. (PIDA’s Executive Conference program is designed to foster direct dialogue between manufacturers’ and distributors’ top management.)

• Distributors and suppliers should recognize their niche, and not try to be all things to all people. Suppliers are realizing that they are better off focusing on their core competencies and are allowing distributors to carry complementary products.

• Spend time helping your partners in the channel know how you make money. Suppliers care about distributors as long as the distributors add value in terms that are meaningful for suppliers. Sometimes you have to show in pure, unadulterated terms that there is an economic benefit.

• Recognize there is a fine line between complementary and competitive. High performing suppliers are willing to help their distributors find complementary lines, thus avoiding competing lines.

• Don’t overreact to Minor But Aggravating Issues (MBA’s). High performers intuitively understand how to determine which issues are important and which can be ignored.

The authors conclude that loyalty in the manufacturer-distributor relationship is an economic term. “Loyalty is measured by the trading partner’s willingness to endure a bad short-term economic outcome to preserve a long-term valuable economic outcome. It is really all about economic alignment.” Manufacturers and distributors that expend effort on becoming aligned, and that stop trying to create win-win relationships, end up creating an environment of trust, communication and growth.

Mike Marks, co-author of Working at Cross-Purposes, is a featured speaker at the SEDA Safety Leadership Forum, June 10-12, 2007 in Lake Tahoe, CA. Registration information for the meeting can be found on the SEDA website.