Ten Ways for Manufacturers to

Improve Distribution
Management
Kenneth G. Hardy and Allan J. Magrath
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Kenneth G. Hardy is a professor of business administration at the University of
Western Ontario, London. Allan J.Magrath is director of marketing services for
the Canadian headquarters of a Fortune
500 multinational company,, also in London. The two co-authored Avoidin~ the
Pitfalls in Managing Distribution Channels," in the September-October 1987 issue of Business Horizons.

Manufacturers lean more on channels of

distribution to make their products available in today's broadening and maturing
markets. "Walking a mile in the channel
partner's shoes" may be the first place to
start in building a smooth and profitable
relationship between manufacturer and reseller.
he key to building market
share? Strong management of
distribution channel networks
has brought success to many manufacturers. Hallmark reigns over the
greeting card market in large part because of its finesse in leveraging card
sales via thousands of retail outlets;
Steelcase's strong dealer network is
envied by its competitors in the officefurniture business; and most makers
of personal computers desire the stability and strength of IBM's Value
Added Reseller (VAR) network.
Such distribution systems provide
cost-effective and responsive market
coverage and serve as excellent pipelines for the rapid launching of new
products. Because of Kodak's proven
merchandising clout, retailers of small
batteries readily accepted its new lithium battery line. Frito-Lay can launch
a new snack food entry and gain premium shelf space because of its strong
track record in channel management.
More and more firms consider their

marketing channels to be strategic assets that can provide a sustainable

edge over competitors who copy their
product designs, duplicate their quality, and undersell them on price. This
recognition of the key strategic role
played by resellers is occurring at a
time of changing relationships in
many channels. Specialized retailers
such as the Limited, N o r d s t r o m s ,
Toys R Us, Southland, and others are
gaining in strength and joining the
ranks of the Kmarts and Sears. N e w
channels of distribution are emergi n g - w h o l e s a l e clubs, factory outlets,
electronic shopping channels, franchises of all sorts, direct marketing
operations, and hybrid channels such
as the Sears Financial Network. At the
wholesaler/middleman level, national distributors such as Avnet,
Bearings Inc., W. W. Grainger, and
McKesson are also growing into Fortune 500-scale corporations. The astute manufacturer must learn to
operate in the midst of changing

Business Horizons / November-December 1988

I

"If the primary task of

the reseller is to arrange sales, not
to inventory products or to bill and ship to customers,
then an agent or broker is a more logical choice than a fullfunction distributor with a w a r e h o u s e . "

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power relationships that demand innovative methods of market coverage.
CHANNEL MANAGEMENT
PRACTICE
ood channel managers share
a number of practices. These
practices concern strategies
based on an understanding of channel dynamics and the willingness to
keep channel policies and tactics relevant over time.

1. Set definite marketing objectives and clearly communicate marketing strategy to all channel
members. In 1983, IBM executives decided they would have to use indirect
channels rather than their own sales
force to establish their personal computers in multiple markets. To reach
such distinct vertical markets, they
directed various resellers to target different end users, from professionals
such as doctors and lawyers to banks,
insurance businesses, and hospitals.
They also limited their total resellers
to a fixed upper limit (2,500 in the
U.S.) to keep strong the ability of
dealers to develop and grow with their
line of PCs. IBM's strategy and tactics
reflected its goal of obtaining market
coverage in a developing mass market at a reasonable cost with some
measure of channel control. The company has been quite successful; large
customers can b u y direct, while
smaller, more dispersed customers
buy from distribution channels. Large
customers get low prices but must in

turn buy large quantities to qualify for

direct sale. Smaller customers buy at
higher prices but receive ready local
availability and no minimum purchase criteria. For medium-sized accounts, IBM has had to fine-tune its
strategy to balance direct and indirect
sale in ways that encourage fair competition between its own sales force
and its resellers.
Wang, another PC manufacturer,
has not enjoyed IBM's success with
distribution; its lackluster dealer relations and minimal dealer network
strength directly result from its vacillating market positioning. It pursued the reseller channels later than
its competitors and e x p r e s s e d its
c o m m i t m e n t to dealers in e m p t y
words rather than consistent actions.
For example, Wang stated its desire
to move its indirect business from 12
percent of sales to 50 percent. Yet, in
1985 it lowered the sales commission
rates of its sales force for sales made
jointly with its dealers--rates below
that for sales made directly by the sales
force. Naturally, in an organization
with 88 percent of sales in a direct
channel, Wang's own sales reps began to compete with, rather than cooperate with, their resellers. Some
Wang dealers even filed lawsuits because of this policy. It is now difficult
for Wang to rebuild its channel relationships by offering its dealers programs to target specific markets (as
IBM has done), because a residue of
dealer ill-will still exists towards its
direct sales operation. Obviously, any
firm that wishes to enlist channel support must communicate its marketing

vision consistently, in words and in

behavior.
2. Base channel arrangements and
policies on a thorough market analysis and understanding of key tradeoffs, such as coverage versus costs.
Est~e Lauder, the cosmetics manufacturer, knows that in order to exercise control over its product-line
image, it must follow a policy of exclusive distribution in a limited channel (department stores). It also leases
space from the stores in an arrangement that provides for maximum instore display and presentation of its
cosmetics lines. Est~e Lauder recognizes the somewhat specialized nature of its products and the fact that
its target customers will shop for its
cosmetics only as long as its products
are distinctively positioned. The mass
distribution of competitors such as
Noxell (Cover Girl) would be inappropriate for Est~e Lauder.
After a thorough market analysis,
some firms opt for a mixed channel
strategy. Goodyear uses a wide variety of different channels for its tires,
each with its own cost versus coverage trade-off. One distribution arm is
its own retail stores, a high-cost and
limited-coverage channel. It also markets tires via franchises---in Goodyear
Go Centers. This channel provides
broader coverage (more outlets) than
its own stores and costs less to support and nourish. Goodyear's least
costly channel is its network of independent tire dealers who sell its
tires as well as those of many of its
competitors. This low-cost channel

Ten Ways for Manufacturers to Improve Distribution

p r o mass
v icoverage
d e b esc a u s e

thousands of such outlets exist, but

Goodyear has little control over such
i n d e p e n d e n t s . Clearly this mixed
channel strategy is based upon Goodyear's desire to cover all segments
with varying tire and servicing needs
across America.
Successful firms such as Goodyear
and Est6e Lauder have taken a hard
look at their channel arrangement
trade-offs, fitting channel plans to
their chosen customer targets and
preferred marketing image.
3. Determine the division of tasks
between supplier and middleman. A
manufacturer should separate its own
distributive tasks from those that it
will share or delegate to its channels
of distribution. Having a clearly defined task set for distribution allows
a firm to utilize either limited-function or full-function middlemen. If the
primary task of the reseller is to arrange sales, not to inventory products
or to bill and ship to customers, then
an agent or broker is a more logical
choice than a full-function distributor
with a warehouse. If after-sales service support by the middleman is critical, only channels that p r o v i d e
installation, repair, and operatortraining services make sense.
Task definition is also critical because it provides the basis for a
review of the m i d d l e m a n ' s performance. Reviews allow the manufacturer and reseller to set up support
systems that mutually reinforce excellent performance of both distributive functions. Building synergistic
distribution programs can only occur,
however, if the manufacturer and distributor/retailer agree on who's supposed to do what in the marketplace.
Only then does the manufacturer's
marketing and selling actually supplement and leverage the efforts of its
distributors. For example, Fansteel
VWWesson Metalworking, a manufacturer of milling cutters, endmills,
toolholders, and inserts, was concerned that its industrial distributors
were not as technically proficient at
selling its products to machinists in
small- and medium-sized accounts as
these tool shops required. Distributor
reps provided excellent order turnaround, delivery, and sales advice on

standard items but lacked the confidence necessary to handle the machinists' needs on complex, technical
products. Fansteel did not have the
sales resources to handle both its large
accounts and the multitude of small
and medium accounts; accordingly, it
structured a coordinated program
with its distributors to improve the
reps' comfort level on complex products. The program consisted of selfs t u d y training courses custom-designed for distributors; joint-call
blitzes on machine shops with Fansteel reps accompanying distributor
reps; newsletters reporting success
stories circulated among distributors'
reps; and redesigned, more easily referenced technical catalogs. Fansteel's
marketing manager summed up the
process this way:
We l e a r n e d . . , that the program
h a s to build on the strength of
both the distributors and the
company, making each responsible for the things they are best
equipped to perform. That may
sound obvious, but too many
times it's easy to pay lip-service
to the obvious, without actually
implementing it.
Clearly, defining channel tasks is a
crucial step in settling on priority tactics that will help ensure task efficiency.
4. Understand the partner's view
of the world and its profit-making
formula. Appeal to the channel partner's self-interest to accomplish your
own goals. A distributor or retailer
makes money by astute gross-margin
management, optimization of inventory turns, and disciplined expense
controls. With distributors, expenses
may be incurred by field or inside sales
forces, warehousing, delivery, and
credit extension to customers. Retailers' costs often relate to investments
in space for key locations, retail decor, stock, and information systems.
Any manufacturer that can improve
the profit' formula of its resellers on
margins, turns, or expenses will find
its influence over resellers markedly
higher than if its programs are totally
self-centered.
In some retail businesses, new in-

Management

formation systems improve profit formulas and require retailers to form

closer partnerships with suppliers.
Firms such as Levi Strauss, Haggar
Apparel, and Arrow Shirt have
worked hand-in-hand with retailers
like Montgomery Ward, J.C. Penney,
and Kmart to develop computerized
order processing-inventory management systems that link retailer and
supplier. Such systems' have helped
retailers generate faster reorders on
best-selling lines and allowed them to
accept shipments on a just-in-time basis, improving cash flow and reducing net inventory investment per
dollar of sales. The ability of in-store
cash registers to instantly feed back
sales data to suppliers also improves
the retailer's sales-forecasting reliability, reducing merchandise margin
erosion caused by m a r k d o w n s .
"Walking a mile in the channel partner's shoes" can be a very creative
way of generating innovative channel
strategies.
5. Examine the actual balance of
power among channel members and
pursue realistic options. The balance
of power often shifts within marketing channels, both between manufacturers and resellers and between types
of resellers. Large retailers can
strongly affect a manufacturer's ability to direct its sales through certain
middlemen. Independent manufacturer's agents (also termed manufacturer's reps) have lost clout in many
markets because retailers are bypassing them and forcing manufacturers
to deal directly with retailers. Reps
have been cut out of the channel picture by Wal-Mart, Cataloger-Fingerhut, Kmart's Builders Square, and
other chains.
A manufacturer that blindly sets
policies, ignoring the power dimension, often lives to regret it. Kroy Incorporated, makers of lettering
machines, in 1982 attempted to drop
its network of 1,000 dealers and sell
machines directly from c o m p a n y owned sales branches with its own
sales force. Its former dealers quickly
signed with competitors and worked
successfully against Kroy. As Kroy's
sales growth slowed, its high-cost, direct sales organization became a severe drag on profits. Kroy eventually

67

Business Horizons / November-December1988

I

"Manufacturers who anticipate

channel problems can alter their tactics and
train their field selling organization to keep conflict
from getting out of hand."

68
had to close more than 50 percent of
its sales branches and lay off over onethird of its sales reps. This expensive
lesson on the balance of power could
have been avoided if Kroy had objectively assessed the hold its independent dealers had in their respective local
markets. Kroy has re-enlisted many
of its former dealers and is n o w
spending as much time as possible
repairing its severely damaged relations.
6. Ensure that margins and other
supports equitably reward partners
for performing distributive functions. If the costs to a reseller of
carrying a producer's inventory, displaying, promoting, assorting, selling, delivering, and handling accounts
receivable amount to 24 percent of the
selling price for an item, then a supplier offering the reseller only a 20
percent margin will not be a favored
supplier for very long! In fact, in all
likelihood the reseller will begin to cut
back its stocking levels and number
of lines to shift inventory-holding
costs back to its manufacturing suppliers. This typical response to a margin squeeze tends either to p u s h
producers into selling exclusively direct or further cutting the reseller's
margin. Inequitable margin structures can spark a sequence of negative moves and countermoves.
Manufacturers should make objective assessments of the functions performed by resellers on their behalf and
the likely costs incurred. If a reseller
is truly failing to perform agreed-upon
functions, the manufacturer should

then consider channel sanctions or alternative arrangements.

In a major survey of office furniture
dealers, a common complaint was that
manufacturers assigned cosily dealer
functions w i t h o u t providing adequate compensation. Sometimes
manufacturers assist dealers in lowering their costs of holding inventory
through quick-ship programs, or
shipping in knock-down form to lower
freight costs. In a case where a manufacturer feels that a reseller is not
earning its margins, one solution is to
build a ladder of discounts based upon
the distributor's proficiency in some
key aspect of its functional performance. For example, the distributor
might receive 110 percent of the normal discount if its personnel have
passed proficiency tests in selling or
servicing the producer's equipment.
It is critical that the manufacturer
forthrightly assess the pattern of margin and function sharing with its
appointed resellers and redress inadequate margin-splitting by insisting on higher performance standards
or by working with resellers to lower
their costs.
7. Predict and contain conflict
within channels. Since 1980, Rubbermaid has increased distribution for its
products from 60,000 outlets to
100,000. Such an increase in distribution can generate conflict between
resellers because more middlemen
gain access to a given brand. Knowing this, Rubbermaid improved its coop advertising plans and increased its
retailers' margins to motivate the new

channels to add its brands even

though the market was mature and
competition in housewares was intense. Its decision to almost double
distribution intensity to gain market
share was not out of the ordinary;
m a n y companies follow the same
strategy. What was commendable was
Rubbermaid's sensitivity to the
heightened conflict that it created and
its thoughtful response, ensuring that
all its retailers continued to list and
promote its brands. This positive response has helped double sales and
triple after-tax profits since 1980.
A variety of confl ct-mitigafing tactics exist for any manufacturer who is
constructing plans for distribution;
one is to provide competing resellers
with different brands. Hallmark, for
example, sells its Hallmark card line
in upscale department stores and its
A m b a s s a d o r card line in d i s c o u n t
stores. To minimize conflict between
different dealers selling identical
products on the same street, Audio
Products International has successfully sold more than 10 different
brand-name speakers in America over
a 12-year period. Other methods of
managing conflict include partitioning markets between resellers; delineating direct sales policies to clarify
potential conflict over large accounts;
negotiating territorial issues between
regional distributors; and providing
recognition to certain resellers (master distributors) for the importance of
their role in redistributing to others.
Manufacturers who anticipate channel problems can alter their tactics and
train their field selling organization to

Ten Ways for Manufacturers to Improve Distribution Management

keep conflict from getting out of hand.

8. Help sales reps develop skills
in working with middlemen. The
successful execution of a marketing
program often depends on a sales
force's credibility with dealers, distributors, or retailers. In a study of
216 sales promotions, one key success
factor was the ability of the sales force
to sell the retail buyers on the promotion's merits and then to follow up
solidly in execution. Manufacturers'
sales forces play a variety of roles for
their resellers. Salespeople must be
teachers about markets and products;
reviewers of the reseller's performance
to quotas; ambassadors selling the distributor on c o m p a n y policies and
support
programs;
ombudsmen
straightening out the inevitable mixups that occur between themselves
and their resellers; and working partners making joint sales calls with
dealer reps to key customers. Sales
reps should be trained for each of
these roles.
One of the best ways that manufacturers can train their new reps to
deal with middlemen is to insist that
their "rookies" learn from an old pro
by serving an apprenticeship in a veteran sales rep's territory. Sales force
synergy between resellers and suppliers is a powerful lever in improving
overall channel performance.
9. Audit channels to ensure that
they remain viable and robust pathways to markets. PepsiCo has altered
its distribution channels to stay in tune
with the growth channel for soft
drinks. As more and more meals are
consumed away from home, Pepsi
cannot depend solely on mainstream
bottled product distribution, such as
food or convenience stores. So Pepsi
bought a number of fast food outlets---Taco Bell, Pizza Hut, and Kentucky Fried C h i c k e n - - w h o s e food
sales are natural complements to Pepsi
fountain sales. Bausch and Lomb, a
leader in the sales of contact lens

cleaning solutions, has aggressively

pursued food stores in addition to traditional drug store channels, because
widespread use of contact lenses has
necessitated mass distribution of "solutions.
Not only must a supplier jump
across to new channels as markets
mature and customers look for wider
product availability, but it must also
be wary of channels that lose distribution vitality. New channels emerge
constantly; others decline. For example, wholesale clubs are a new
thriving channel in America, but catalog showroom stores are declining.
The manufacturer that knows when
to jump across to new channels and
de-emphasize declining ones will outperform its rivals who lack such distribution smarts. Movie studios in
Hollywood have shown distribution
moxie when faced with decreasing
domand for their films in theaters (due
to attendance drops). They have
jumped into movie production for
three new distribution paths--primetime television, pay television, and
videocassette sales and rentals.
10. Treat channels of distribution
as strategic assets and constantly seek
ways to utilize them in creating a sustainable competitive edge. Interstate
Bakeries markets Dolly Madison pastries and regional brands such as Millbrook and Butternut bread. After
losing over $4 million ori $708 million
in sales in 1984, by mid-1987 the company was making a $13 million profit
on $729 million in sales. Much of its
turnaround was directly attributable
to its recognition of how it could exploit its 3,050-mile truck route distribution system. Via license and acquisitions Interstate Bakeries began to
acquire other brands that fit its current delivery systems. It added highermargin products such as pecan rolls,
cookies, cakes, and pudding pies into
its distribution system and turned
around its static growth and declining
profitability.

Federal Mogul, a manufacturer of

bearings, pistons, and sealers, views
its distributor network as a strategic
sales asset. Through electronic links
between manufacturer and reseller,
Federal Mogul distributors can scan
the supply stock status of Federal's
16,000 parts in its 43 U.S. branches.
This information system linkage is a
big boost to both Federal and its distributors. Distributors' access to stock
status data allows them to make better derisions about whether to switch
customers to equivalent substitutes
when parts d e m a n d e d are not in
stock. Federal gains by being better
able to allocate slow-moving inventories between its various branch locations.
Restructuring channels of distribution is also possible through buying groups. Groups of either retailers
or wholesalers band together to exercise both greater buying clout with
suppliers and greater merchandising
clout with consumers. Groups such
as Cotter and Company (parent of
True Value Hardware) are creating
dramatic changes in distribution of
hardware, drugs, food, and appliances. In many markets these buying
groups have given a needed shot in
the arm to independents, who by
joining the groups acquire professional marketing and purchasing help
and lower merchandise costs.

irms that understand and exploit distribution channels for

the pursuit of new customers or
efficiencies have great power in today's marketplace. Managing marketing distribution systems often calls
for the wisdom of Solomon and the
guile of Machiavelli. Mastering and
understanding the ten principles discussed here is the first step toward
improving the always challenging decision process in distribution channel
management. []

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