June 25, 2012

Designing distribution systems that actually work

by Mike Karst, Entira

Putting together a distribution system that works to maximize value takes time, effort and a long-term plan. Sounds like a pretty obvious concept, doesn't it? Yet, most companies still design their distribution systems on an as-needed basis and continue to modify them over time with no real long-term plan. The result? Systems that don't really service anyone in the value chain, let alone the customers.

Some companies have realized things need to change, and they've relied on technology to modify -- or create -- systems. While it's a step in the right direction, even these distribution systems contain a fatal flaw -- ownership and control are held by whichever group happens to be comprised of the strongest members of the supply chain. Weaker members feel powerless and put upon, and while the power struggle goes on, the ultimate customers feel their concerns and needs are ignored. Under these conditions, how could anyone expect to get buy-in to the distribution system?

All talk and no action

Even though many companies realize there's a problem with their distribution systems, they do little about it. Why?

First, true change must involve everyone in the supply chain -- and address a variety of factors. By everyone, I mean producers, retailers, distributors and manufacturers, because each of these groups has strengths and weaknesses it brings to the distribution equation. Here are a few examples of the areas of strengths: producers bring their money, retailers provide service and customer education, distributors provide logistics support, and manufacturers provide the R&D to deliver innovative products. (Some of you reading this article know your company may be involved in two or even three of these groups simultaneously so you can streamline and profit from a more efficient distribution system.)

Second, within the chain partners' own companies, there's rarely someone "at the helm," steering it toward viable change. That's not a surprise. With all of the challenges companies face each day, even contemplating a change to the distribution system can be a daunting task. Plus, when some companies finally do decide to make a change, the length of time to implement a new system and the resulting political fallout can outlast some careers!

Third, although the system is ineffective, people tend to take an "if it ain't broke, don't fix it" approach. As faulty as it may be, the system is the status quo, and few want to change it due to a lack of time, resources or the courage it takes to attack the problem head on.

Who's the strongest link in the chain?

To pull together a distribution system that actually works -- for everyone involved, including customers -- each value chain needs a hero. The hero is someone who has a big picture view of how the system should change and work. An individual who grasps the concept of sharing the wealth and makes sure all the partners are positioned to realize greater profitability while meeting the needs of customers. The hero in a chain will likely come from a company that has a strong position in the chain but is willing to use that strength to improve the value for those companies that choose to join in forming a new, improved system.

To create an effective distribution system, the hero must find ways to turn individual companies into true partners in the system and create value for everyone from the initial manufacturer to customers, uniting all parties with common goals. By uniting a group of partner companies with a common objective, the hero continues to lead while maintaining the larger viewpoint. He or she also plays a pivotal role in establishing methods to assess the performance of everyone in the chain, along with how to choose and set goals.

As a result of these efforts, the hero can improve productivity and profitability for all members of the chain -- including those of his or her own company. And, with a hero taking the lead, a closer, more efficient, dynamic distribution system can be put into place, and proper channel management can be assured.

Separating the wheat from the chaff

But instituting an improved distribution system doesn't come without casualties. You can probably think of some members of your own distribution system that add little value to the overall equation. As hard as it may be, some of these companies may have to go.

This is what I meant when I said it takes courage to attack a problem head on. And what about the political fallout that may ensue? To survive it, the hero must have a complete, well-designed plan for the proposed system -- before suggesting to dissolve any long-term relationships.

Consequently, much work must be done during the design phase to determine the number of partners to be included at every level. Furthermore, since conflict will continue to rise between channel partners, ways to resolve this conflict must also be established. And to make sure the system continues to evolve in a positive manner, there must be agreement as to how partners will be assessed and governed.

Designing the system and determining channel management methods are crucial to the success of of the future distribution system and all its partners. To do this effectively, remember to follow these guidelines for the successful co-creation of value:

  • Define clear objectives that you want the distribution system to achieve
     
  • Involve the right partners for tomorrow, even though they may not be your partners today
     
  • Find out what all partners need and want out of the distribution system
     
  • Jointly design a solution that meets partners' needs and, if possible, their wants
     
  • Decide how to share the value created in proportion to the value provided by partners
     
  • Overcome internal resistance in your own company and help others overcome it in theirs

 

If you follow these steps and focus on creating a distribution system that meets the needs of your customers and partners within the value chain, you can have a positive effect on your industry's distribution system -- and your company's bottom line. Contact Entira if you’d like to learn more or discuss how this topic fits into your strategy.

This article appeared in the October 2006 issue of Strategic Agribusiness Review.