Industrial manufacturers who rely on independent distributors to sell electrical, electronic, and hydraulic products face a sales channel in crisis. Distributor gross profit margins, which averaged 23 to 27% for many years, are falling. Faded product sales skills, inventory liabilities, and rising personal selling costs prevent reinvestment, leaving manufacturers with stagnant market share and no clear path to growth.
Industrial manufacturers are dissatisfied with distribution. They are questioning the value and looking for alternatives.
Industrial manufacturers seeking a market-share increase must become proactive and help distributors to evolve by reinventing into marketing and sales organizations. They are highly focused on product selling, sales growth and adding new customers and less focused on inventory, delivery and transactions. Drastic reduction in distributor operating expenses and shifts in infrastructure are required. The lean distribution model offers realistic solutions to the growing challenges facing manufacturers today. The purpose of this post is to look at the current issues with the industrial automation sales channel while my next article provides ideas for growth.
Price pressure has turned into a war. To compete and increase profits, you must improve by changing the model.
Why Is Industrial Automation Competition So Intense?
Industrial automation competition, once described as price-pressured, is now described as a war. European and Asian manufacturers with large, established product lines are entering the American market, driving down product costs for customers while squeezing domestic distributor margins. Only high-quality sales and marketing organizations are winning, and they are creating sales barriers that shut out rivals.
What Are the Core Weaknesses of Industrial Distributors?
Industrial distributors, regardless of market position or size, share four significant weaknesses that adversely affect manufacturer performance: product inventory functions as a financial liability, product sales skills have decreased, financial stress prevents reinvestment, and diversification into added products and services has diluted focus. Each weakness erodes the value that distribution once reliably delivered to manufacturers.
Historically, distributors have held many advantages for the manufacturer who has kept distribution a staple in their sales channel strategy. Now the role of the industrial distributor needs to be re-evaluated. The following are core distributor weaknesses that should be evaluated and eliminated.
Why Is Distributor Inventory a Liability?
Distributor inventory is a duplicate cost that manufacturers can eliminate. Many distributors now broker parts by ordering from the manufacturer only after receiving a customer order, which means local stocking adds warehouse, shipping, and handling costs without a corresponding service advantage. Losses from obsolete inventory and customer returns further drain available cash, and manufacturer-funded stocking exchange programs compound the expense.
How Have Distributor Sales Skills Declined?
Distributor outside and inside sales teams once provided manufacturers with deep customer knowledge and competitive intelligence. Product technical complexity has increased, requiring ongoing training to stay current, and many distributor sales teams are falling behind. Customers gravitate toward knowledgeable distributors and buy from those who demonstrate product expertise, making the skills gap a direct threat to manufacturer revenue.
What Financial Pressures Do Distributors Face?
Industrial distributor financial stress stems from two converging forces: falling gross profit margins and rising personal selling expenses. Distributor gross profit margins averaged 23 to 27% for many years before competitive pressure caused them to fall. A 1% drop in gross profit margin is described as large in its impact on net profitability. Meanwhile, inflation in cars, fuel, insurance, and employee benefits has caused average annual outside salesperson costs to rise more than 8%, and distributors require 10% annual gross profit growth and net profit above 4% each year to remain healthy.
These changes have created a dent in available cash, preventing investment to make improvements. Distributors need help.
My next article “Reinvent your Sales Model-Create Lean Distribution to prepare for the Industrial IoT Era” offers possible solutions that can mitigate these challenges. If you are dissatisfied with your sales channel and sales results then consider a re-tool of your sales channel and read my next post.
The article was written by our contributing author, Gary Simmerly, President at Automation Pilot. Gary is an engineer by education and sales engineer by choice. He founded one of the first high-tech industrial distributors servicing and supporting industrial controls for plant floor use. Great Lakes Controls (GLC) was a start-up venture to a regional distributor with six branches in 4 states. Sales grew to $20 million in 20 years.
