Specialty Chemical Distribution-Market Update

Specialty Chemical Distribution-Market Update

          
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Specialty Chemical Distribution-Market Update

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    The Suppliers’ Point of View: Distribution Excellence Is Critical

    In a recent article, BCG described how optimizing sales force effectiveness represents a significant opportunity for most companies. Revenue and profit improvements of 10 to 15 percent are not uncommon. For suppliers of chemicals, distribution excellence represents a critical element of sales force effectiveness and should therefore be an important theme on the management agenda.

    On the basis of the interviews conducted for this study, we found that suppliers are currently at different maturity stages relative to distribution excellence. Some have well-developed models that capitalize on the strategic role of outsourcing partners. Other suppliers rely on ad hoc, bottom-up decisions made by local business units, with little coordination across the enterprise. To achieve distribution excellence, chemical suppliers need a more coherent approach across all channels, comprising three components: developing the distribution channel strategy, selecting the right distributors and the right distributor-interaction model, and professionalizing distributor management.

    Developing the Distribution Channel Strategy. Structural cost-effectiveness is the main reason chemical suppliers should use third-party distributors. Suppliers should consider structural distributor relationships when a specific set of customers in a specific market segment can be served more cost-effectively through third-party distribution. Whether to outsource is not a simple yes-or-no decision. Instead, it requires assessing whether particular components of the distribution value chain—such as marketing and sales, technical support, and supply chain activities—should be retained in-house or outsourced in order to reduce costs and complexity.

    Designing the right channel strategy is critical. Suppliers need to segment the client portfolio, looking at both revenue potential and servicing needs. In this endeavor, they require an objective evaluation of the expected revenue potential and the priorities and needs of individual clients. On the basis of this evaluation, they can segment the optimal structural-channel strategy into four models. (See Exhibit 4.)

    • Key account management is the desired model for large clients that represent strategic priorities for the supplier. The focus lies on cooperative value creation between suppliers and clients.

    • Regular-account management is the model of choice for midsize value buyers, focusing on the development of long-term relationships with these clients.

    • Commercial-account management is aimed at tight management of price realization for midsize to large price buyers.

    • Third-party sales models should be used for smaller clients. These include price and value buyers in both the specialty-heavy and commodity-heavy client groups. On average, however, there will be more value buyers among specialty-heavy clients. Third-party sales models include third-party distributors, in-house distribution subsidiaries, traders, and agents. It is worth noting that over time, third-party distribution becomes increasingly cost-effective because rising in-house marketing and sales costs, in many cases, cannot be offset by efficiency improvements.
    exhibit

    Suppliers can also use third-party distributors to obtain the coverage required to develop specific markets and segments in the short to medium term. Third-party distributors can provide an inroad to a specific market segment in which the supplier lacks sufficient market coverage. A lack of regional access is most typical for emerging markets in which suppliers may not have on-the-ground operations and must adhere to local regulatory constraints. Additionally, suppliers often lack application knowledge to serve highly specialized market segments such as oil and gas companies.

    If a supplier falls short in terms of either regional presence or market insights, it will have to invest both time and money to scale up. In this situation, third-party distribution may be the most attractive option. It offers immediate market access, which could lead to greater growth in the target market. Third-party distribution also limits the need for suppliers’ one-off investments, allowing suppliers the possibility of preserving margins. In this model, the supplier-distributor relationship matures over time: once the business is at scale, the supplier and the distributor should reassess the role of the distributor in the market.

    Selecting the Right Distributors and Developing the Right Distributor-Interaction Model. Suppliers should periodically review their sales-channel strategy. By actively monitoring the distributor landscape, suppliers can ensure that they team up with strong distribution partners. In assessing the distributor universe, suppliers should look at all relevant parameters, including performance to date (in terms of financial strength, market share, and growth projections), breadth of operations (number of salespeople, warehouse space, and product portfolio), number of customers and the segments they are in, historical relationships with suppliers, and the distributor’s strategic outlook (including potential opportunities and threats).

    Suppliers should also periodically evaluate the alternatives for their current distributors—including the possibility of bringing outsourced distribution in-house. This requires adopting a longer-term view of how the distributor landscape will evolve and identifying future winners. In other words, suppliers should create a plan B for each distributor. Actual switching rates will be limited by sizable barriers such as historical investments in joint business development, strong relationships of a distributor with a specific client base, and required investments in, for example, logistics and training.

    Suppliers should strive to rationalize their distributor base over time. Once a supplier clarifies its thinking on the critical future distribution partners, it should seek to rationalize the distributor base. In doing so, a supplier can focus on a smaller number of larger distribution partners. A number of suppliers in our study indicated that rationalization was indeed part of their plan for the future.

    There are two distributor-interaction models. The right interaction model for a supplier and a distributor is one that aligns incentives for both organizations, ensuring that the distributor operates in line with the commercial interests of the supplier. Broadly, there are two approaches: mutually exclusive partnerships and a multidealer model (in which a supplier works with multiple distributors for a given product).

    Mutually exclusive partnership models are generally applicable when the third-party distributor offers specific expertise and structural cost advantages. Such partnerships are most commonly used for specialty distribution, which requires intensive product knowledge and in which market access can be more challenging. In many cases, the mutually exclusive aspects of such arrangements stipulate information transparency between the two sides, agreements on revenue targets, and rules for the transfer of customers (when order size exceeds a critical-volume threshold).

    Under the right circumstances, such a relationship can help both sides create value. For example, the supplier might strengthen the distributor’s operations by providing services that require specific expertise such as marketing and after-sales service. Or it may provide infrastructure support—such as sharing a warehouse—in situations where this would lower costs, offering the potential to improve sales volume.

    Absent the above conditions, suppliers should opt for a multidealer model, in which they work with several distributors on the same product or products. The principal advantage of this model is that it puts competitive pressure on distributors to earn the supplier’s business.

    Professionalizing Distributor Management. Suppliers should professionalize the management of their distributors. This requires setting clear objectives for outsourcing partners and continually reassessing their performance against those objectives. It is critical that the distributor feel the carrot-and-stick effect. In a partnership, the supplier and the distributor should cooperate to develop new business and create value for both entities. By contrast, in a multidealer model, suppliers should manage their distributors through “tough love,” focusing on cost-effectiveness through lean processes.

    Key indicators in assessing distributor performance include sales performance against targets (for each product and market segment on a monthly, quarterly, and annual basis), growth of the business through new customers, and specific objectives linked to the supplier’s strategy and tactics.

    See “Jump-Start Growth by Sharpening Sales Force Focus,” BCG article, February 2014.