Expert Article Library

How to Win Cases through Distributor-Dealer Evaluation

by Don Smith

Nationally known marketing & sales expert with 40 years experience as an executive, consultant, Cornell MBA faculty & seminar leader. Focus: (1) Quantify lost sales & profits, (2) Patents, copyrights & trademarks, (3) Distributors & dealers.

Don E. Smith, President, American Consulting Group, LLC. Presented at Foley & Lardner’s The Law of Product Distribution Seminar. Milwaukee, WI.

Don E. Smith. 40 years experience in marketing & marketing research. Clients include family owned business and Fortune 1000 companies including AT&T, Borax, ITT, Lockheed-Martin, Lutron, Motorola, New York State Gas & Electric, Panama Canal, Snap-on Tools & Volvo. Nationally known public speaker and business trainer. University associations include Cornell Graduate School of Management, University of Wisconsin and University of North Carolina. Mechanical Engineer from Carnegie-Mellon and MBA from University of Pittsburgh. Expert witness specialties:

1. Define economic losses. Sales, profits & market share. 2. Evaluate of marketing & sales effectiveness. 3. Market research to define markets, competitors & other critical information 4. Disputes involving distributors, dealers, agents and independent sales representatives.

American Consulting Group, LLC. Ithaca, NY. 607-272-9111. dsmith@marketing-consultant.com

Scenario: You would like to terminate Midwest Distribution. Ever since the son of the founder became President, Midwest has shifted its emphasis from your Standard and Premium lines (require training and selling time) to your Economy line. In addition, some of their customers are complaining, they pay late, they don’t follow-up on their leads and they just lost two of their best sales personnel. You sent them a letter giving them 30-day notice of termination (per the contract).

Unfortunately, the distributor sues you on the basis that (1) they met your overall quota and (2) there was no prior written notice that they were not meeting your objectives. They are not only suing to retain the line but also for lost sales and profits that were the direct result of their unfair termination. You have a weak case.

I. THE LIMITATIONS OF USING SALES QUOTAS AS THE PRIMARY MEASURE OF PERFORMANCE

A. Often the dominant measure of performance. Frequently a single value. B. Often defined with very limited information. Can be difficult to defend. C. Can lead to poorly defined and implemented distributor upgrade and termination programs. II. ADDITIONAL QUANTITIVE EVALUATION OPTIONS A. Define and use quotas for each major product line plus a total for all products. Page 3, table 1, Historic Sales. B. Define easy-to-secure, meaningful distributor quantitative performance measures. Compare to a national average or similar distributors based on an index (distributor actual/national average and distributor/similar). Set goals. Keep it simple. Page 3, table 2, Performance Index.

1. Credit and payables: DRO, % of $ paid within 30 days, # of “special events.” 2. Customer satisfaction score: Very effective. Requires major effort. 3. Distributor field support costs: Activity based record of cost. 4. Inventory: $, turnover, mix. 5. Leads: # received: % follow-up feedback. # & $ closed. 6. New products: # of new customers, $, % of total sales. 7. Orders: #, $ and $/order. % emergency. 8. Pricing: # & $ of special price requests/orders. % of total sales. 9. Product returns: #, $ and % of sales returned. 10. Profitability of product mix: Typically an index based on product weights. 11. Samples: # received:. % follow-up feedback. # & $ closed. 12. Shipments: #, $ and $/shipment. % to stock/drop-ship. 13. Coop/MDF funds: % of funds earned that were used.

C. Define their capability. Focus on securing information that is meaningful to being an effective distributor for your line. Calculate indexes based on national average or similar distributors. Keep it simple. Page 3, table 3, Capability Index. 1. Personnel: Outside sales, customer service, field service. Total # of each available for your line. Sales/employee for each. 2. Trained personnel: # of each type personnel that has received training. Sales/trained employee. 3. EDI: Are they on your system? 4. VMI: Are they participating in your program? 5. Service capability: Do they have capability for system integration, startup, repair, emergency shipments, 24-hour customer service, etc? 6. Showroom: Do they have a showroom? Which of your products are included? 7. Demos: How many field demo units do they have? # of demos/sales.

D. Market. Most difficult measure to define but information has major value. Compare to national average or similar distributors. Keep it simple. Page 3, table 4, Market and Share Index. Examples of how estimate market share. )

1. Distributor market = (Market potential in total US) x (% of industrial buying power in distributor territory). 2. Distributor market = .65 x (% of US housing starts in distributor territory) + .35 % x (% of US existing housing in distributor territory). 3. Distributor market = $6 x (# of K-12 school teachers in distributor territory) + $9 x (# of professors in colleges in distributor territory).

III. ADDITIONAL QUALITATIVE EVALUATION OPTIONS Define qualitative evaluation measures appropriate for your business. Based on the judgment of your field and headquarters personnel, evaluate each of your distributors. Page 4, table 5.

IV. SUMMARIZE EACH DISTRIBUTOR’S STRENGTHS, AREAS TO IMPROVE AND ACTION PLAN Based on the quantitative and qualitative information, define each distributor’s strengths, areas to improve and action plan. Page 4, table 6. The National Sales Manager or another appropriate person develops the action plan jointly with each distributor. The action plan should be reviewed and revised quarterly.

V. CONCLUSIONS

A. $ sales quotas should be only one of the measures defining a distributor’s performance. B. Additional measures of performance and capability can be of major assistance. They do not add significantly to the time and complexity of the program. C. Ideally, measures of market potential should be included. Though potentially complex and time consuming, a knowledge of market potential and share will have a major positive impact to the principal’s distributor management programs. D. Utilize information with your annual joint planning sessions with each distributor. Jointly define action plans. Follow-up. Page 4, table 5. Summary of qualitative and quantitative measures.