The Manufacturer-Distributor Relationship: Can This Marriage Be Saved?

The Manufacturer-Distributor Relationship: Can This Marriage Be Saved?

      Every time I find myself talking to people about their distribution channel issues, it feels like I’m knee deep in marriage counseling.  Once upon a time, both parties had looked forward to an exciting journey together in which they’d grow and be successful.  But instead many growth-seeking business leaders say they feel trapped in punishing distribution partnerships. There’s no bigger downer in channel relationships than suffering through non-distinctive service levels, shrinking margin pools, escalating conflicts, and plummeting prices.  After years of inattention, we end up with simmering discontent from misaligned goals, un-kept promises and in the worst cases, mistrust and extra-curricular affairs. 

The result of all this strife is mutually unsatisfying manufacturer-distributor partnerships, which invariably leads one or more of the parties to ask the question, “Can this relationship be saved?”

Sure, relationship problems are easy fodder for lunchtime jokes and water cooler banter, but the manufacturer-distributor stakes can be high. Consider the channel dilemma faced by South Korea’s Samsung as they launch a new generation of Galaxy tablets and other smart devices in North America, where women buyers now account for the majority of purchases.  A recent article at Retail Customer Experience.com, Fifty shades of frustration: Why do women hate Best Buy?  exposed what has long been known about the state of consumer electronics shopping environments: Visually intimidating aisles, ridiculously unhelpful information displays, more employees trying to prevent theft than answer questions, little help getting bulky purchase to the car, and draconian return policies than make the whole process feel risky.  Any guesses how this marriage is likely to impact the success of Samsung’s new products?

In over twenty-five years of counseling senior marketers on designing and managing their routes-to-market, I’ve learned a few things about how why these critical business relationships so often get to the edge of a cliff, and how to help redirect them back to being profitable and productive.  More than anything else, a simple outward re-directing of attention to winning with customers - and away from finger-pointing, economic threats, marketplace punishments, or just avoidance - is the most powerful path to a healthy and productive partnership.

Herman Miller, the premier office furniture maker pushed out of its distribution comfort zone by uncovering frustrations that its end business customers had with the way their office solutions were delivered and installed by furniture dealers. Frustrations that other competing furniture makers had not yet addressed. By working closely with its channel partners, Herman Miller launched the revolutionary program named Last Mile, a proprietary new distribution service solutions that addressed those customer frustrations and spurred profitable growth for the company and its dealers. Twenty years ago Miller was at the top of its industry. It’s still there, in large part because it knew that status quo thinking wouldn’t be enough to maintain its position.

So the bottom line for most companies looking to improve under-performing distribution channels is this: Your distribution marriage can indeed be saved. But just like our personal relationships, positive change comes roaring out only when we’re willing to move beyond the familiar and comfortable.

A renewed ability to win together gets sparked when both sides of a distribution relationship accept that their most deeply held truths about the marketplace - and each other – are counter-productive, incomplete, or more than likely outdated.  And in distribution relationship therapy it’s important to manage emotions by keeping the conversation focused and straight-forward: What buying experience outcomes are end customers seeking? What activities are needed to deliver improvements to these experiences? What channel model is best equipped to perform them?

Truth on the Wall

The best way to reinvent a distribution partnership is to follow a straightforward path, and thankfully, the basic steps are not mysterious.  What it requires is fresh customer insights, objective analysis of current distribution experiences, enough hard facts to piece together a reliable view of opportunity risk and potential, and a dash of creativity. Most importantly, successful distribution partnering requires alignment and agreement at every juncture.

The first step in putting a channel system back on a healthy growth trajectory is realigning all the parties on an updated and revised truth, “on the wall” for everyone to see, about how distinctive value can be created for end customers. The most difficult challenge in building a customer-focused distribution system is keeping our own biases and implementation anxieties at bay. Early in the process, the intent is to be an exceptional listener, without screening what we hear through the lens of conventional wisdom about what can be done.

Then both parties get real with one another and make a brutally honest comparison of this truth about customer desires to what customers actually experience from the different channel options available in the market today.

Then these two assessments lead to the heart of the matter: How much separates the customer’s ideal distribution experience from the existing one? What distribution activities and competencies must be built, borrowed, or bought to come closer to what customers desire than our competitors do? And how much time, investment, and skill will it take each partner to arrive there together? These are the kinds of critical relationship questions that a distribution gap analysis seeks to answer.

As with any therapeutic relationship-building process, involvement by everyone involved is key and we want to be sure our distribution partners, or at least a representative sample of them, are actively engaged with us in developing a range of options for joining forces to improve the customer’s current experience reality.  

In the end, the manufacturer-distributor strategy improvement work concludes not at some imaginary customer experience ideal, but at the design of an optimal distribution structure. Optimal defined as a channel system that is attainable, profitable, and closer to the customer’s desired experience than competitors. It also specifies who in the relationship is to perform each channel activity and how to equitably share compensation and rewards.

Improving Relationship Dynamics

But going after new distribution whitespace and improved customer experiences is only half of what’s required, and it’s the easier half. The hard part, just as in a faltering marriage, is getting our partner to work with us despite all the baggage of the past. And we should add, our own entrenched attitudes are part of that baggage. If we’re willing to own up, and open up to the possibility of something different – and better – we have a chance.

So, how do we go about improving our channel relationship dynamics and building more trust and commitment to actually acting on a new optimal distribution approach? The process, if it’s even a process, is necessarily less systematic than generating clever Powerpoint presentations or drafting detailed execution timelines. And that makes it a messier, squishier business. It’s more of an operating style, a mix of art and attitude, distilled from companies that have succeeded (and sadly, sometimes failed) at their efforts to coax system-enhancing actions from their partners.

Here then are six fundamental levers for stepping up to the relationship-building side of distribution channels. Think of these as the six vows of a successful manufacturer-distributor relationship:

1.   We Collaborate with You (our channel partner) on Voice of the Customer research. There’s nothing that partners, domestic or commercial, hate more than surprise ultimatums. Any chance for cooperation vanishes. The companies that I’ve seen do it best invite their partners in right from the start.

2.   We Listen to You. Then after listening, we go to great lengths to respond to the needs we hear and then incorporate your thoughts in closing marketplace gaps. Helping our partners solve their own challenges, some of which may not be obvious to us at first blush, is key to alignment, productive collaboration, and mutually profitable growth. And let’s admit it, our partners do have valuable facts to contribute, ideas that are sometimes better than ours, and legitimate points to make. It makes as much sense to honor our partners in business as it does in marriage.

3.   We Share Costs and Rewards Equitably with you. It  no doubt helps channel partners when a supplier pitches in with advice, marketing collateral, and web-based support. But it means even more when a supplier goes to the trouble of factoring in the partner’s likely ROI on any new distribution model or initiative. And it speaks volumes when the supplier puts its money where its mouth is through co-investments in the relationship. Leading chainsaw maker Stihl USA did that by financing 30% of the cost for each of its thousands of independent dealers to install new showrooms.  Later as returns began rolling in, Stihl was fair in apportioning margins that fully recognized partners’ costs and contributions to end-customer value. Stihl’s exclusivity at dealerships grew, and market share for their premium-priced products climbed in the midst of an economic recession.

4.   We Deliver on Our Commitments at the level of performance we agreed to with you. Establishing trust is essential to earning the right to expect partners to execute their part of the bargain with equal drive. Action and good-faith effort speak louder than words. They overcome deep-seated suspicions and anger. They create optimism; “our problems are surmountable if we make the leap together”. It’s the marriage theme all over again.

5.   We Protect Your Investments  from others intent on free-riding off your value-added services and customer experiences. This doesn’t mean all channel relationships have to be exclusive arrangements. We can still work with other partners. But it does imply that we won’t be opportunistic and cut our partners off at the knees. “We pledge not to allow discounters to lure away customers who have just helped themselves to your high-value services.”

6.   We Build a Reputation that generates admiration, respect, commitment and trust – for us in your eyes and for you, our partner, in the eyes of your customers. There are essentially three kinds of glue that hold a marriage together: Morals – we don’t believe in divorce. Calculation – we can’t afford to split the family unit. And Affection – I love you and want to be near you. It’s amazing what possibilities begin to materialize when we look at our channel partners through the same sort of lens.

Ultimately our goal isn’t to save every distribution marriage at all costs. It’s to do what’s best for the kids, our shared end customers. More often than not, if we focus on the customer, our old channel relationship recriminations will start to fade away, and we’ll see movement towards a shared goal that’s larger than either of us. And if we’re empathetic, smart, diligent and inclusive about it, customers will open the door to increased value that we create together, and profitable growth will inevitably follow.  n

 

Richard E. Wilson is managing director of the advisory firm Chicago Strategy Associates, and a former clinical professor of marketing at the Kellogg School of Management and Director of the school’s Center for Global Marketing Practice. rick@chicagostrategy.com

Illusions of Control

Forward integrate or not? Indra Nooyi at Pepsi and Jeff Bezos at Amazon have said yes. They will very likely be proven misguided.

Nonetheless, for many CEOs and their corporate strategy chieftains, consolidation, forward distribution integration, and scale conversations are dominating the big corporate strategy debates of today. Yet if there is any truth in capitalist business environments, it must be this – no matter the strategy, you can’t hide from the market.

So let’s start our review of forward integration by taking a break from obfuscating economics-speak. When we use the term market, as in ‘let the market decide’, what we really are referring to is the sum of all the needs, desires, and resulting behaviors of final customers that sit at the end of any business system. Like it or not, these customers are both judge and jury.

This means that smart companies, as well as their strongest competitors and most astute regulators, will focus on a single dominant strategic question as they craft future direction and govern the allocation of scarce resources. What choices do end customers have as they evaluate alternatives, and who do they choose?

Yet designing and executing business systems to consistently and profitably win over these picky end customers is at once straight-forward and maddeningly complex. Even though strategists are as prone to confirmation bias as anyone (“the ‘don’t confuse me with facts’ problem), customers easily and willingly, and often quite forcefully, express the desired outcomes they seek as they make decisions about what to buy and how to buy it. That holds for both consumer and business buyers.

As a result, understanding what any company’s “ideal” growth strategy should be is the straight-forward part. It should be squarely focused on delivering the full range of what and how outcomes end customers seek, and delivering them profitably and better than any other alternatives available.

But the complex part comes barging in as companies intensely debate, across often warring internal functional factions, how to design, build, fund, and manage business system that will, at the end of the day, deliver better than any competitor those winning outcomes to customers. This brings us to the vertical integration question. And understanding it fully is as much a study of CEO psychology as it is of hard-edged financial and strategic analysis.

After years of unsuccessful efforts to stem erosion in market share and customer retention, frustrated CEOs of once-strong legacy brands often show signs of siege mentality, especially when tough questions are met with blank stares. Are we offering the right value proposition (outcome for customers)? Are we delivering it? What’s standing in our way? When answers prove elusive, either internally or from outside partners, these CEOs often make the fateful decision to “take control of their destiny” and vertically integrate.

The question is – what destiny? And is it one that leads to greater numbers of customers choosing their offerings at acceptable prices? Public rationales for most vertical integration moves are usually more about cost savings, efficiency, lower prices, and greater control. They typically make only vague allusions to the messy business of customers and new ways of winning them over. Let’s look at a recent example.

Larry Ellison, who at one time was the Red Bull of corporate IT systems, has abandoned his fierce loyalty to being a best-in-class and tightly-focused industry leader in favor of buying Sun Microsystems. Apparently as part of a drive to become a fully vertically integrated player. He seemed very tuned to the question on everyone’s mind – how will this help Oracle win over customers? - when he commented about Oracle’s decision this week that “we’re really brilliant, or we’re idiots”.

Indeed, Oracle would be wise to look at its own proud history for inspiration and strategic direction. IBM, once the world’s biggest and most powerful business system, was brought to its knees in the early-80s by a new generation of nimble, focused, best-in-class players. Players that were unencumbered by IBM’s high-cost, slow changing, vertically integrated old behemoth of a business model. A business model, as military strategists often despair, best prepared to fight yesterday’s war. In fact, Larry Ellison founded Oracle in 1977 as one of those new breed of competitor. One that offered end customers some fresh air in the form of open platform solutions. Ones that weren’t hand-cuffs like IBM’s all-or-nothing bundled alternative. So the question to Oracle is, Why this?

At the end of the day and no matter how difficult, the best business model innovations are those created in the spirit of fresh reinvention and influence over results delivered to end customers, not protection and control of the status quo. Practically, that raises tough questions about how to get best-in-class solution alliances and distribution partners to work collaboratively to create winning new end results for their common customers. While there may indeed be times when such collaboration is simply not possible, and when complete ownership and control is essential to success, they are generally few and far between. And Apple aside, they are rarely successful.

I suspect the rush to vertical integration we seem to be witnessing in today’s climate may have more to do with an overall lack of trust in market forces. And perhaps it’s also a desperate response to tough economic conditions and fast-changing industries. In fact, it might just be an ill-advised knee jerk effort to slow things down. But don’t be fooled. Customers will still have the final vote.

When it comes to vertical integration, Buyer Beware!

CSA Distribution Audits Fueling Growth

Comparing the distribution channel pressures of today with those of even ten years ago reveals a striking decline of distinctive marketplace differentiation. These changes represent a significant opportunity for companies that regularly re-assess whether they are doing everything they can to guide, manage and motivate their channel partners to achieve new levels of growth and profitability.

·   How are end-customer channel needs in your marketplace evolving and how do they create barriers to you and your distribution partners achieving your growth objectives?

·   What gaps exist between your channel partners’ current business models and the economics of emerging customer channel needs in your fast-changing industry?

·   How motivated and prepared are your channel partners to respond effectively and efficiently to industry and competitive performance pressures in their local markets?

·   Are your channel management and incentive programs as aligned as they need to be with the demands your channel partners are facing in today’s fast-changing markets?

Approach. The CSA Channel Opportunity Audit is an independent and systematic diagnosis of your company’s distribution channel opportunities and threats, and is composed of four key elements of diagnosis:

Our Channel Opportunity Audit approach has been used successfully with hundreds of companies over the past twenty five years and focuses on one dominant goal:

Surface tangible ways to work with channel partners to differentiate your products and services with end-customers and accelerate market share growth.

Process. The CSA Channel Opportunity Audit is typically executed in four to five weeks of elapsed time in your marketplace, and proceeds systematically through a series of detailed assessment and analysis steps:

Step 1:  Internal Management Interviews. A highly-seasoned distribution channel expert from CSA will interview senior thought leaders and line managers within your organization to surface critical insights and beliefs about current distribution channel opportunities and threats.

Step 2:  External Market Discussions. CSA will conduct one-on-one working discussions with end-customers and distribution channels in your marketplace to surface their insights and observations about how changing industry and customer dynamics are affecting their current business models and economics.

Step 3:   Synthesis and Diagnosis. A Channel Opportunity Audit report will be provided to you that outlines how your company is positioned to address pressing channel threats and opportunities.

Step 4:     Private Facilitated Workshop. You and your senior leadership colleagues will receive an advance briefing packet and participate in an executive-level Channel Opportunity offsite facilitated by management advisor and educator Richard E. Wilson, a global expert on distribution channel strategy, execution and management.

Benefits. The CSA Channel Opportunity Audit is specifically designed to be a fast-paced and efficient way for you to build stronger readiness for action with your distribution system.

 

Richard E. Wilson is managing director of the advisory firm Chicago Strategy Associates, and a former clinical professor of marketing at the Kellogg School of Management and Director of the school’s Center for Global Marketing Practice. rick@chicagostrategy.com

Technology Distribution Meets New SMB Realities

Distribution channels are moving front and center in the competitive arms race. Virtually everywhere in our scan of a hundred-plus markets, companies are finding that channel design, execution, and management are becoming critical to profitability, defensibility, and long-term growth.

This isn’t too surprising in mature commodity product categories, but it’s also the case in technology markets as well.

And even though technology offerings for small and mid-sized businesses (SMBs) seem tailor-made for direct-channel delivery, upstream providers and downstream customers often continue to favor the value created through new one- and two-step distribution models. The reason, we’re finding, is that SMB owners and managers still find themselves stymied by the dizzying pace of technology change, a proliferating universe of sources, and an insurmountable array of adoption hurdles.

And because they usually lack sophisticated and dedicated technology staff, SMBs are looking for best solution packages tailored to their business processes and integrated seamlessly into existing operations. In fact, share gains in the SMB market will increasingly accrue to distribution channels that efficiently and effectively deliver new value in areas related to solution customization, one-stop sourcing, on-site demonstrations, small-scale pilot testing, non-disruptive and affordable installation, enhanced adoption training, easy upgrade, and lower total adoption costs. And more.

Superb technical expertise is no longer adequate. SMB technology sales are evolving from one-off, pick-and-pack hardware and software licensing sales into persisting cloud-based subscription services. As hardware and software products become less stand-alone and more like component parts in a larger on-premise or off-premise cloud solution, physical product adoption and distribution services are taking a back seat to more consultative approaches to solving vertical- and user-specific business challenges.

Many sophisticated solution providers understand this shift and are attempting to ramp up the skill sets of their 3rd-party distribution partners. From a practical standpoint, this requires clear and actionable answers to two closely related questions:

• What specific channel behaviors will move market share? and,
• How do we incent desired channel behaviors?

For example, What steps should be followed to educate SMBs about their technology design and delivery options, in terms they find clear and compelling? What are the best ways to demonstrate tailored web-based solutions? What concrete channel activities are needed to maximize ease of adoption and use for SMBs? How can channel players best collaborate to ensure one-stop process integration and make upgrades effort-free for the SMB? Is this SMB’s business security best guarded through on-premise or off-premise cloud solutions? How can the channel help reduce an SMB’s all-in cost of adoption?

While major technology solution providers have largely figured out the product and price side of new offline and online technology offerings, many of the biggest players have yet to pin down a distribution-based competitive advantage. And while Gartner estimates that over the next five years companies will spend $112 billion cumulatively on cloud-based solutions, the road to SMB adoption has been bumpy.

SAP, for example, recently acknowledged that poor downstream value-added meant that over the past three years adoption rates of its internet-enabled offering ran barely 1% of target. IBM is finding that barely 20% of its partners are driving meaningful results in their local markets.

In the end, better results for all technology providers and their distribution partners will take detailed, customer-based understanding of the market combined with disciplined execution in the heart of the channel system – in other words, the what and the how.

High-tech adoption needs high-touch distribution

Analog circuit technology, once considered mature if not commoditized, is experiencing a renaissance in growth due to its essential role in a wide range of new devices. According to GBI Research, the analog circuit industry can look forward to attractive expansion through 2020 as new OE product platforms proliferate around smartphones, tablets, radio base stations, portable device batteries, medical imaging scanners, electric cars, and a wide variety of other industrial and medical applications. But my discussions with decision-makers and technical users at a range of OE end-users in North America suggest that analog circuit manufacturers face significant barriers to getting their newest innovations adopted in the fast-growing small- and mid-sized horizontal OE market: §         After years of digital technology adoption, today’s product development engineers at small- to mid-sized OEMs lack a deep understanding of analog technology and its latest developments. §        Lack of analog expertise means that most OE product and purchasing engineers will default to familiar legacy brands and trial-and-error component selection and procurement. The supply chain process is seen as cumbersome, risky, time consuming and inadequate. §        Rapid consolidation of semiconductor distribution means that the bulk of today’s analog products are distributed through a small number of global players offering extensive assortments, ease of order entry, and competitive prices. Promotional materials by these players aside, the reality on the street is that the field application engineering support craved by small- and mid-sized OEMs is wholly inadequate. §        The pinched economics of small- to mid-sized OEMs requires a multi-year lifecycle approach to customer development and demand creation investment that large global distributors and traditional manufacturer reps find hard to square with financial pressures. Streamlined websites and proliferating online data sheets or webinars are great but not the high-touch assistance smaller OEMs require. The bottom line for analog circuit manufacturers investing heavily in technology innovation and product differentiation for industrial and medical OEMs is this: incremental growth will come from building new demand creation capacity and competence in their distribution channels. In next week's blog post I will detail steps that forward-looking manufacturers can take to make their distribution channels their engines of growth.

Solution = Product + Distribution

"Most electronic health record solutions on the market today do a very bad job of supporting new work processes and true interoperability".

– Physician user, letter to NYTimes, April 11,2009

Better products are certainly part of a better solution. But the real opportunity for makers of medical devices of all stripes lies in better distribution—helping that practitioner or administrator through the complex process of identifying what he or she needs, evaluating the options, making the purchase on affordable terms, implementing the solution, training staff, and figuring out how to adjust work processes . 

Because buying medical technology is not straightforward, there is a fascinating set of channel issues that are begging to be explored. Whoever gets the distribution angle right first in their category—health informatics, monitoring devices, orthopedic implants, surgical gloves, whatever—is going to surge ahead relative to competition.

And Don't Forget The Channels Part

Manitowoc, the maker of huge cranes used in construction projects, had announced a (not surprising) big sales and earnings drop (Wall Street Journal, March 31), and their stock has sunk like a stone. We all know that new commercial construction was on the skids, but the Manitowoc news was still sad to hear. Especially since they’ve evidently had already done what you’re supposed to: squeeze out production efficiencies, stretch working capital, go back to the table with lenders. Keep the ship afloat.

Is there anything left that they could do to get sales growth under way again? I think there is. While I know nothing about what Manitowoc is actually trying on its marketing strategy front, there are a couple things they’d do well to explore, if they haven’t already. And we’re not talking bank-breaker stuff. Early stage exploration costs almost nothing.

First, since sales are way down in European markets, this is a good time for Manitowoc to revisit its foreign distribution partners and their business models. I don’t mean raise their prices, or insist they load up on inventory. I mean revisit and reinvent everybody’s activities down at a granular level, in search of new value-creating levers. What’s effective, what isn’t? What will help end customers most, what doesn’t add much value? Who’s good at what? How should we reapportion our division of labor?

When everybody’s desperate to reignite sales, they’re going to be more cooperative.

Second, look for ways that Manitowoc can reposition itself from a product manufacturer to a solutions provider. Cranes are a focal point in any large-scale construction process. Schedules get planned around them, very carefully. Manitowoc may be able to get more mileage out of that centrality than it has exploited thus far. Why not be sure there isn’t a way to sell the crane as the anchor to a larger solution that pulls together other equipment, other contractors, and makes portions of the entire construction process run more smoothly.

Even a cash-strapped company can afford to investigate new, innovative third-party distribution possibilities. And now isn’t a bad time. In fact, it’s an excellent time.

Boeing: Don’t Give Up on Giving Up Control

Boeing and its CEO, James McNerney, have recently received high-profile coverage; both plus and minus.

Point: The relevant portion from my distribution angle concerns the apparent breakdown in Boeing’s partnership arrangement. I say, accent the positives.

Briefly, the world’s biggest aviation company has come out way ahead of archrival Airbus in the orders department for its latest commercial craft, the Dreamliner 787. That’s the plus side.

The minus is that Boeing has run into turbulence in its supply system and is having big trouble fulfilling the first of those orders booked. Part of the reason is that the 787 is the first major aircraft built with carbon-fiber plastics that are high strength but new technology; new technologies always have break-in challenges.  The other reason is that Boeing outsourced the design and fabrication of large component assemblies, such as the entire wing structure. At the same time, it coaxed (if that is the word) these ‘Tier I’ integrated solution vendors into waiting for payback and a share of profits when Boeing itself started receiving checks from end-customer airlines as they took delivery of their planes.

Suppliers can do handsomely for themselves in a Boeing-like arrangement . . . if they can deliver.  Unfortunately with the 787, some could not, at least initially. Boeing itself has since backed off from the integrated solution amd partner-dependent arrangement that was its own idea in the first place. The Times reports that “the company is retaking control.”

Counterpoint: Given the stakes and what’s happened, you can’t fault Boeing for retreating into command mode. But we shouldn’t generalize. Boeing was not unwise to attempt heavy reliance on lead suppliers.

I favor relationships of the kind Boeing bet on initially. When enterprising upstream distributors or suppliers package multiple products and helpful services into unified platform solutions, that’s terrific – especially in cases like Boeing’s. Management was trying to get to market fast, years ahead of Airbus. Could Boeing have hit that market-driven deadline if it insisted on owning  all the design, testing, and integration tasks itself? I don’t think so, and neither did Boeing. They were justified in taking the risk. That they have pulled out of the production dive before crashing proves my point.

More generally, should downstream OE assemblers like Boeing never surrender design supervision and close control over production quality? No, that would be the wrong conclusion to draw. The right conclusion is this: Partnerships aren’t easy. They absolutely demand good communication, fair dealings, rational division of labor, and most of all trust. Earned trust.

The Times article implies that Boeing made a good faith effort to put those elements in place.  If so, we should be optimistic for Boeing. Its problems will sort out and production will coalesce.  The planes will get built, and when they do the money will start flowing in. Ultimately Boeing and its Tier One vendors will be happy, very happy.

Togues Off to Sysco

Kudos to Sysco, the world’s biggest broadline food wholesale distributor. And hats off to Business Week for catching them doing it right.

Restaurants, Sysco’s prize customer group, are teetering on the brink. It doesn’t matter whether they are big chains or small independents, upscale or downmarket, virtually without exception they’re starving for business as consumers stay home more to eat.

As in any vertical value chain, when the retailer suffers so do its suppliers. So Sysco is stepping up to help restaurants. It’s offering classes at its warehouses to teach better and more economical cooking techniques, showcasing foods and ingredients, and generally trying to give its business customers the boost they need to stay alive.

"The company has a weapon it hopes will save customers and lead to greater market share during the slump: a free consulting service called the Business Review. Along with selling cases of napkins and three-gallon containers of ketchup, Sysco is using employees . . . to help clients design menus, train waitstaff, and market their businesses. The company has turned its warehouse kitchens into schools for its customers. "We felt if we could improve their business, that would improve our business with them."

I love this! In many industries, when business is off, manufacturers and distributors don’t respond this way at all. They don’t bend to the task of improving their distribution system. They step up their advertising.

There’s nothing wrong with advertising. But isn’t it great when companies make a material contribution rather than a symbolic one? And maybe in this new (hopefully temporary) economy, material contributions will start to get the recognition they deserve.

And Now Drywall?

Everyone knows that when it comes to drywall, it’s all about price. Right? I mean, come on, this is a commodity business guys. Construction is in a massive funk, pricing pressures are debilitating, and smart buyers will find the lowest cost sources they can.

We know what that means. No-name branded drywall made in mysterious factories far, very far from consumer residential markets here in the U.S. But that’s OK, because transport costs are (usually) low, and heck, it’s only drywall, not food or baby toys…

Now comes homeowners in Florida (see WSJ article), moving out of their houses because of fears about toxic effects of cheap, but allegedly dangerous, overseas drywall used to build their homes and the freshly painted bedrooms for their kids.

New school marketers are carrying the flag of a forgotten, but basic, Marketing 101 principle:

VALUE = Benefits – Costs

In contrast to how old schoolers use the term, Value is not to be confused with low price. While it’s just common sense, it seems that reliable, safe, high quality product is indeed part of the benefits most consumers are seeking. Much of the responsibility for ensuring those benefits rests in channel systems, and with commercial buyers. Managing by Gross Margin, while it leaves plenty of time for the quick golf game or long lunch, does little to address the more complex supply chain and distribution trade-offs that a relentless pursuit of lowest price surfaces.

I’m reminded of a little story a CEO told me about his eye-opening negotiations with mid-level buyers at a major home improvement chain. The buyers indicated that if the branded product CEO didn’t get his sales team to lower their prices down to foreign import levels, they would push the products off the shelf and substitute lower cost house brands made  overseas. He knew how those price points were accomplished: using inferior and unsafe materials, cutting corners on design specs, etc. He refused to play the game for both moral and business reasons.

Consumers demand and expect that the entire system that delivers them a product or service – at any price point – is trustworthy. That means the product itself (WHAT they buy) as well as all the activity that occurs in the channel system (HOW they buy).

A new generation of business leaders is going to have to clean up the messes left behind by the old school guard and their advisers who thought so much about efficiency and low price that they forgot about the end customer. Big changes to come!

Postponed – And That’s a Good Thing!

Why would a Chinese fabric supplier buy a downstream furniture manufacturing customer in the U.S.? As a fascinating look at the furniture business in today’s Journal points out, labor costs in China are under $1 an hour whereas they’re closer to $15 in North Carolina. Doesn’t that mean more expense for the furniture supply system, not less? Labor costs do turn out to be part of the answer, but to get at the real answer, you have to read between the lines.

In a word, the answer is what distribution and supply chain academics call “postponement.” Component value added and final assembly activity is delayed longer in the system - typically closer to end consumption points, to reduce the risk (and costs!) of big inventory and availability bets placed long in advance.

In fact, in a under-appreciated shift emerging in global industries and their supply chains, once passive overseas component manufacturers (read: China) are making bolder moves downstream in local market distribution. To get closer to their ultimate end customers.

For good reason in the furniture example: 90% of exported fabric ends up in U.S. homes. Forward-integrating into local market assembly gives the Chinese a much more complete and timely picture of their prize market, reduced inventory carrying costs, improved end product availability, reduced supply chain disruption costs, and smoother production levels and scheduling back in Asia. And that's just a start.

The Chinese benefit from ownership in several other postponement-related ways as well. They shift some of the assembly costs from North Carolina to China, lowering final product costs and raising competitiveness, by shipping to what is now a US "assembler", pre-cut, pre-sewn Chinese fabric “kits” designed to the State-side assembler’s requirements. And a tighter materials/assembler supply chain gooses U.S. demand by helping the assembler assure on-time, to-spec delivery. The local market "assembler" wins new business by impressing retail furniture chains with its ability to develop living room “settings” unexpectedly fast and better than the retailer hoped.

Meanwhile, competing manufacturers in the US, with their arms-length fabric supplier relationships (and tensions) suffer miserably, even as they brag of "lower overseas manufacturing and sourcing costs".

Side note: one unstated moral of the Journal’s story seems to be that if a supplier wants postponement benefits it has to buy its customers, maybe even their customers too. While I don’t think ownership is always required, it certainly helps. It has other risks I'll discuss another time.

You can get postponement other ways. But that’s also another story.

Whose Job is Safety and Quality?

Anyone who has ever exercised in a neighborhood fitness club recognizes him. The meat head with arms and chest muscles bulging from his scissor-cut tank top, growling and grunting from machine to machine. But upper body muscles are the easiest to crank up for show, and indeed a quick glance at our meat head's rail-thin undeveloped (read: skinny) legs shows he's unwilling to do the harder work of creating a balanced weight lifting physique.

Or as they might say about him in Texas - "all hat and no cattle".

The same "go for show" mentality pervades the world of marketing, especially when it comes to managing product supply and distribution channel systems. Fears are growing that companies may be cutting big corners in their quest for uber-efficiency. They often get to wondrously low price points by pursuing long-distance suppliers with unbelievably low prices who provide the necessary performance enhancements that goose gross margins.

But just like the meat head at the gym, a big part of the process - trusted, quality-controlled and safe products - is overlooked. It's a game of chance that will increasingly catch up to shortcut takers in today's economy.

So it's with admiration that I read that Millipore, a mid-sized Biotech products company, has instead built a global quality control organization of over 350 employees. With expat salaries and other costs factored in, it's very possible they could be spending over $70 million a year on such activity. That's significant for their size; roughly 70% the size of their total R&D budget!

Why spend so much? the army of fresh-faced, hired efficiency consulting advisors might ask?

Millipore knows that trust is increasingly the new currency of global marketing.