Are you a profitable channel partner?

In Chapter Three of Facing the Forces of Change®: Lead the Way in the Supply Chain, I describe how channel compensation is becoming more fact-based and performance-oriented. Recent developments in two very different industries show how two large manufacturers are demanding greater accountability from distributors for business activities and financial results.

EXAMPLE #1: John Deere

Check out a Wall Street Journal cover story about John Deere (NYSE:DE) and its dealers called Why Deere Is Weeding Out Dealers Even as Farms Boom. The lead quote from Deere CEO Robert Lane sums up their new philosophy of channel management:

“For years we talked about Deere as a family. The fact is, we are not a family. What we are is a high-performance team....If someone is not pulling their weight, you're not on the high-performance team anymore."

Ooo, that's gotta hurt!

According to the article, the number of Deere dealer locations in the U.S. and Canada has dropped from 3,400 to 2,984 in the past ten years. The number of owners has shrunk at an even faster pace, as more owners take control of multiple locations.

EXAMPLE #2: Coca-Cola

Coca-Cola is planning to migrate distribution of Glaceau Vitaminwater (Classical music fan 50 Cent’s favorite drink!) from independent wholesaler-distributors to its own bottlers, as described in Coke Plan Riles Glaceau’s Old Network.

Coke bought Glaceau for $4.1 billion in June and now wants to sell the product through its primary distribution channel. Like many large consumer products companies, Coke faces powerful retailers who want national, integrated logistics.

But niche brands such as Glaceau are typically built by smaller, independent companies. In all likelihood, these distributors will find another niche brand to trumpet and the cycle will begin again.

On the other hand, I was reminded of the following comment from Steve Johnson, President and CEO of Tucker Rocky, in Modern Distribution Management: “We have never lost a brand we own … and we never will."

Where do you stand?

These are isolated but telling examples. Wholesale distribution executives should take a hard, objective look at their own company’s performance through the eyes of their supplier. On page 64 of Lead the Way, I describe how suppliers can use a activity-based costing methods to identify the true operating profit of working with each of its distributors.

Imagine a supplier asking the following two questions about your company:
(1) Does this distributor provide positive operating profits to us as a supplier?
(2) Does this distributor have the above-average growth potential?

If the answers to both questions are “yes” -- and you are being honest with yourself -- then you should encourage your suppliers to recognize your company’s contribution, especially if your company is not the largest wholesaler-distributor in the market.

If not, then ponder your future while re-reading the articles about Deere and Coke...