30 words
Does there always have to be a fight between a buyer and a seller over who gets the
biggest slice of the profit pie? "No," says Nirmalya Kumar. There are ways to ensure
both get more.
100 words
Word has it that P&G and Wal-Mart are two tough negotiators. Historically, P&G
dominated the trade, using its comprehensive consumer research to secure
increased shelf space for its brands. Before retailers developed sophisticated pointof-sale systems to generate their own data, they could not dispute P&G's findings.
Over the years, P&G established its reputation as a ""self-aggrandizing bully of the
trade. For its part, Wal-Mart asked its suppliers for rock-bottom prices, extra service,
and preferred credit terms. In 1992, it instituted a policy of dealing directly with
manufacturers, and only those that invested in customized electronic-datainterchange technology and put bar codes on their products. Manufacturers that
depended on the volume and growth that Wal-Mart delivered played by the policy."
Keywords: Nirmalya Kumar, strategy, marketing, distribution, consumer research,
technology, electronic data interchange, processing, billing, payment, Wal-Mart,
brands, growth, consumer durable, distributive justice, procedural justice, bilateral
communication, courtesy, familiarity, explanation, impartiality, refutability
Authors Summary: Nirmalya Kumar, director, centre for marketing, and director,
aditya v birla India centre, London Business School.
create trust, not fear, in distribution relationships
by Nirmalya Kumar
Does there always have to be a fight between a buyer and a seller over who
gets the biggest slice of the profit pie? “No,” says Nirmalya Kumar. There
are ways to ensure both get more.
Word has it that P&G and Wal-Mart are two tough negotiators. Historically, P&G
dominated the trade, using its comprehensive consumer research to secure
increased shelf space for its brands. Before retailers developed sophisticated pointof-sale systems to generate their own data, they could not dispute P&G's findings.
Over the years, P&G established its reputation as a "self-aggrandizing bully of the
trade."
For its part, Wal-Mart asked its suppliers for rock-bottom prices, extra
service, and preferred credit terms. In 1992, it instituted a policy of dealing directly
with manufacturers, and only those that invested in customized electronic data
interchange technology and put bar codes on their products. Manufacturers that
depended on the volume and growth that Wal-Mart delivered played by the policy.
As one might expect, P&G initially dictated to Wal-Mart how much P&G would
sell, at what prices, and under what terms. In turn, Wal-Mart threatened to drop P&G
merchandise or give it poorer shelf locations. There was no sharing of information,
no joint planning, and no systems coordination. Prior to 1987, no corporate officer of
P&G had even contacted Wal-Mart. According to Sam Walton, the founder of WalMart, "We just let our buyers slug it out with their salesmen."
In the mid 1980s, this adversarial relationship began to change. On a nowlegendary canoe trip, Sam Walton and Lou Pritchett, P&G's vice president of sales,
agreed to reexamine the relationship between the two companies. They gathered the
top ten officers of each company for two days to develop a collective vision of the
future. Within three months, they established a team of twelve people from different
functions in each company to convert that vision into an action plan. It examined
how the companies could use IT to increase sales and lower costs for both parties.
creating joint value
The result was a sophisticated efficient consumer response partnership. This
partnership enables P&G to manage Wal-Mart's inventory of any given product, such
as P&G's Pampers diapers. P&G receives continuous data via satellite on sales,
inventory, and prices for different sizes of Pampers at individual Wal-Mart stores.
This information allows P&G to anticipate Pampers sales at Wal-Mart, determine the number of
shelf racks and quantity required, and automatically ship orders. Electronic invoicing and electronic
transfer of funds complete the transaction cycle. The short order-to-delivery cycle enables Wal-Mart
to pays P&G for the Pampers soon after the consumer buys the merchandise.
This partnership has created great value for consumers in the form of lower
prices and more availability of their favorite P&G items. Through cooperation, the
two giants have eliminated superfluous activities related to order processing, billing,
and payment; reduced the number of sales calls; and dramatically reduced
paperwork and opportunities for error. The order less order system also lets P&G
produce to demand rather than to inventory. Furthermore, Wal-Mart simultaneously
reduced its inventory of Pampers and the probability of stock-outs, thereby avoiding
lost sales for both parties. By collaborating, the two have turned a win-lose
into a win-win proposition of reduced costs and greater revenues for both parties.
Today, Wal-Mart is P&G's largest customer, generating about $7bn in sales, or
greater than 17% of P&G's worldwide revenues.
Over the last fifteen years, the two giants have developed a partnership
based on mutual dependence: Wal-Mart needs P&G's brands and P&G needs WalMart's access to customers. Naturally the relationship has undergone the trust
building growing pains that are a benchmark for manufacturer-retailer symbiosis:
Wal-Mart trusts P&G enough to share sales and price data and to cede control of the
order process and inventory management. P&G trusts Wal-Mart enough to dedicate a
large cross-functional team to the Wal-Mart account, adopt everyday low prices
(thereby eliminating special promotions), and invest in a customized information
link. Instead of focusing on increasing sales to Wal-Mart, the P&G team concentrates
on increasing sales of P&G products through Wal-Mart, maximizing both companies'
profits.
short term vs long term
The P&G and Wal-Mart partnership illustrates the truth that exploiting power in
distribution channels pays in the short run but not in the long. For following three
reasons:
First, extracting unfair concessions will burden a firm as power positions
change over time. For instance, when Migros, a supermarket chain in Switzerland,
was founded, the large branded manufacturers refused to supply it rather than upset
their traditional mom-and-pop retailers. Without branded products, Migros adopted
an exclusively private label format. Today, Migros is the largest retailer in
Switzerland with private labels accounting for 90% of its total sales volume. Most
major brands, such as Coca-Cola and Nescafe, can't be found on its shelves.
Second, when companies systematically exploit their advantage, the victims
ultimately resist by developing countervailing power. For example, by banding
together, automobile dealers and franchisees successfully lobbied lawmakers in
Europe and the US to pass particularistic legislation that restricts franchisers like
Ford or McDonald's from sanctioning or sacking them. Apparel designers such as
Giorgio Armani, Hugo Boss, Liz Claiborne and Donna Karan opened their own outlets
to escape bulldozing department stores that unilaterally returned products, took
discounts off manufacturer invoices, and delayed payments.
Third, only by developing mutual trust and collaborating closely can
manufacturers and their resellers deliver the greatest value to end users. While
managers frequently use the word trust in distribution channels, they often fail to
define it precisely. Trust involves dependability and faith. A dependable distribution
partner is honest and credible. For example, one manufacturer signed onto a
retailer's global promotion that cost more than a country-by-country promotion
would have. However, the retailer then failed to execute the promotion effectively in
all its stores around the world.
Dependability alone does not suffice. Someone who promises to punish his
partner and then does so is honest and credible, but not trusted. In trusting
relationships, the parties believe that each cares about the other's welfare and will
take into consideration the effects of its actions on the other party-that both will act
in good faith.
what is trust?
Dealers and retailers who trust the manufacturer are less likely to seek alternative
sources of supply, more likely to produce sales, and more forgiving of the
manufacturer. For example, in the consumer durable industry, dealers who trusted
their manufacturers generated 78% more sales for the manufacturer.
Given the benefits of trust, even those suppliers who can potentially behave
like branded bulldozers should attempt to build trusting relationships with resellers.
However, managing distribution relationships based on trust instead of power
requires a leap in mind-set and culture.
To develop trust, the more powerful party must treat the weaker one fairly.
Fairness encompasses two distinct types of justice: distributive justice, or fairness of
outcomes received, and procedural justice, or fairness of policies and practices.
distributive justice
Distributive justice refers to a party's perception of the fairness of earnings and
outcomes that it receives from the partnership. It refers to "pie sharing" or the
division of benefits and burdens between partners. Compensating channel partners
appropriately by allowing them a fair return can have long term benefits
that are not immediately apparent. For example, a few years ago, Buick cars
consistently received higher customer satisfaction ratings than Oldsmobile, even
though they were built at the same General Motors plant. Why? Buick was paying its
dealers $15 per hour more for warranty work than Oldsmobile. When customers
visited Oldsmobile dealers with a small problem, the dealers responded, "All cars do
that;" Buick dealers fixed it. How dealers treat the customer factors into customer
satisfaction.
procedural justice
Procedural justice refers to "due process" or the fairness of a party's procedures and
policies regarding its vulnerable partners. Procedurally fair systems in distribution
rest on six principles:
01 bilateral communication is the willingness of the firm to engage in two way
communication with its channel partners. The more powerful companies in the
distribution channel tend to listen less to the other members in the system.
Companies that develop trust establish practices that solicit input from channel
partners. For example, at Anheuser-Busch Companies, the chairman meets with the
fifteen-member wholesaler panel at least four times a year, to hear suggestions and
complaints.
02 impartiality is the consistency of the company's channel policies across all channel partners.
While every channel partner can't be treated identically, partners can be given equitable
opportunities.
03 refutability is the ability of the smaller or more vulnerable partners to appeal
against the more powerful party's channel policies and decisions. Manufacturers such
as Caterpillar, DuPont, and 3M have dealer advisory councils at which dealers can air
their concerns.
04 explanation is providing one's partners with a coherent rationale for channel
decisions and policies. It calls for greater transparency.
05 familiarity is an understanding of the local conditions under which channel
partners operate. Before Marks & Spencer enters into a relationship with a new
manufacturer, it visits the manufacturer's plants several times and hosts meetings
among its buyers, merchandisers, and designers.
06 courtesy is treating a partner with respect. After all, relationships between
companies are actually relationships between teams of people. Managers who
recognize this fact are changing how they assign personnel to various accounts.
Sherwin-Williams, the paint manufacturer, lets managers from Sears, Roebuck and
Company help select the Sherwin-Williams people who will handle the Sears account.
Distributive justice and potentially large returns usually attract companies to
a relationship, but procedural fairness holds the relationship together. Retaining
partners by giving them higher margins than what they get from competitors is
expensive because competitors quickly match them. Developing procedurally fair
systems requires greater effort, energy, investment, patience, and perhaps even a
change in organizational culture, but will more likely lead to sustainable competitive
advantage.