Some of us can remember the days not so long ago when there was an unwritten distribution rule of conflict avoidance: a distributor could not have three of the major semiconductors at that time on their line card all at once. This was perhaps to avoid product conflict and to garner sufficient share of mind from the distributor – or simply a means of controlling the channel.
Then, the rule became: no North American-based distributor could sign an “off-shore” [meant to cover any Asian] semiconductor supplier or risk being terminated by a North American semiconductor manufacturer. Then the rule was tested: A major distributor signed up an Asian semiconductor manufacturer to test the “rule” and was immediately terminated in nine branch offices by their major American semi manufacturer partner. It took this distributor many months to regain all of the branch franchises.
As distribution became consolidated over the last 20 years into the landscape that we have today, it became virtually impossible to comply with or to avoid either one of these two “rules.” At the same time, the major distributors became stronger and more-powerful in the industry and less likely to be leveraged by a single manufacturer. Hence, the rules slowly vanished and disappeared forever.
Today, we now see consolidation happening at the supplier level. At a recent Rep Council meeting, we counted over twenty major acquisitions/mergers among the manufactures over the past five years. In the past 12 months, there have been a few blockbuster deals that no one really saw coming but that have resulted in the same old shelf-sharing and share of mind issues – but not inside of the distribution sector this time. It feels as if we are taking a trip right back to the future!
Today, the conflict is rearing its head inside of the manufacturing rep community. I find myself wondering whether the conflict real, perceived, or a combination of both. How did we get to this point? Is there a solution both near term and long term?
Rep conflict arises when a rep is partnering with Supplier A, a manufacturer that gets acquired by/merges with Supplier B, who also utilizes a rep sales network or may have a direct-sales model. The combined Supplier A/B now has to decide whether to choose between the two competing reps, to go direct, or to go with some sort of Hybrid Direct/Rep model depending on each market.
Both rep companies also happen to rep OTHER suppliers [C and D]that make a few products that compete with Supplier A/B, that, up to this point, were not a problem to either rep company on its own line card. Now, one or both of the rep companies who want to sign up Supplier A/B are “encouraged” to re-evaluate their line card in order to be considered. Is the area of conflict overlap large enough for Supplier A/B to consider losing the tribal knowledge of either rep company? Is the marketplace's overlap that a particular rep company large enough to even be an issue?
How is it that this real/perceived conflict does not also exist in distribution? Perhaps is it because the suppliers are down to the top four or five distribution companies and simply have to live with shelf-sharing conflict? Or is it because, as one rep member put it: ” The supplier needs to have someone who is totally biased to advocate their technology solution – who is biased and motivated to sell their product versus any other solution.” He felt that the suppliers may think that distribution may be “agnostic” and only be interested in gaining the socket regardless of the supplier who fills it. He also suggested that perhaps the supplier does not feel that their distributor(s) in fact do any demand creation at all? Interesting comment…
The conflict with the rep community will continue until the following events occur:
- The suppliers decide to pick their best rep partner and learn to live with the conflict – that the sales growth by keeping the rep and all of its tribal market, technology, and customer knowledge far outweighs the narrow areas of conflict.
- The rep community continues to go through its own consolidation – as one rep company buys/merges with another rep company – and the combined rep company becomes too strong and too big to even be considered for termination.
- Rep companies are forced to set up “sub-reps” with dedicated sales and engineering teams all operating under the parent company's umbrella for air cover, systems [Model N, salesforce.com, etc.] coverage, and financial security.
- The suppliers decide to go direct and modify/abandon the rep model – going from a variable sales expense model to a fixed-cost model. This is a major decision for the supplier's CEO and CFO and one that has huge ramifications in their sales efforts and economic flexibility – a decision that is often reversed after the supplier sees a fall-off in sales in those markets affected.
No one is really sure as to how this may turn out. However, one thing is for sure: the big will get bigger and stronger – conflicts will continue – and suppliers will have to decide on how much they will have to compromise (or decide to not compromise) to maintain their optimum market coverage. Reps are here to stay – just remains to be seen what the rep community may look like over the next several years.
Stay tuned… In the meantime, let us know what you think in the comments section below.