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A Rational Look at Distributor Rationalization

The components distribution business is filled with acronyms, euphemisms, and other means of expression that people outside the industry might find odd. I've even thought that a drinking game could easily be built around an acronym challenge: Deliver a new acronym in a timely manner, or cite the meaning of one. If you fail, you take a shot.

Maybe I'll find some willing participants at the Electronics Distribution Show. For now, I have a word in mind: “rationalization.” This word, when used in conjunction with “distributor,” forms a euphemism for the termination of an authorized relationship between supplier and distributor.

It certainly seems less offensive to speak of a company's “distributor rationalization program,” rather than “mass termination of distributors.” In addition to taking a blow to their ego and image, distributors often face a significant loss in revenue and profit when they are rationalized. They are left with orphaned inventory, and they are exposed to the potential for layoffs. Distributor rationalization certainly seems like a textbook example of a euphemism, right?

Wrong.

A distributor rationalization program need not be traumatic, involve excessive risk, or offend in any way (bruised egos aside). A properly managed distributor rationalization program, when done in collaboration with a master wholesale distributor, allows terminated distributors to retain some or all of their business, continue to sell invested inventory, and retain staff.

Authorized distributors need not be terminated. For instance, suppliers can engage the affected distributors as authorized master resellers, with full marketing rights and warranty pass-through. Even if the supplier is not interested in a master reseller program, the master wholesale distributor (as a neutral third party) can continue to serve terminated distributors for the benefit of end customers.

Rationalization is sometimes painful for suppliers, too. Since many distributor agreements allow for inventory return in the event that the agreement is terminated, suppliers are often hesitant about making tough decisions to bring balance when a channel is suffering from acquisition-induced bloat or neglect, or when a change in strategy is mandated.

Since it is neutral and can reach thousands of distributors in different geographic and end-user markets, a master wholesale distributor helps ease the pain felt by manufacturers considering channel rationalization. Assigning saleable inventory to a master wholesale distributor allows the supplier to recover value for much of the product.

5 comments on “A Rational Look at Distributor Rationalization

  1. rederringer
    January 31, 2013

    Hi, Rich.

    Thanks for the intriguing post! I have sometimes joked that suppliers are quick to terminate Reps, but not distributors, because Reps don't hold stock. I'm sure there is more than one instance where reclassification as a Master Reseller was done to mitigate the impact of inventory return. Still, in a well-designed program, a master distributor is in the best position to gain value from existing inventory as part of the agreement to serve Master Resellers.

    Also, suppliers may appoint new distributors as Master Resellers, allowing the  Master Resellers marketing privileges. The master distributor will handle service and logistics. A win-win-win-win situation for all parties (end user included)!

  2. bolaji ojo
    February 1, 2013

    Rationalization is a way to admit you've messed up. Failing to manage that process properly could be an even bigger screw up

  3. bolaji ojo
    February 3, 2013

    The movie stars Rich Krajewski appearing as Rich Krajewski!

  4. Ariella
    February 3, 2013

    @Bolaji would that constitute life imitating art, or art imitating life?

  5. FreeBird
    February 4, 2013

    I can also see an advantage in terms of EOL product. Instead of a distributor selling off inventory after its has parted ways with a supplier, allowing that distributor to manage that inventory until it's gone can assist customers with long-lifecycle products. A win win for the distributor and its customers.

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