The epidemic which has led to total lockdown has led to major economic downturns which have affected most companies. Manufacturers, especially those who are dependent on channel partners, face bigger challenges. Partners who were already stretched financially, are unable to get products out to customers due to supply chain disruption and many may go bust. manufacturers need to rethink their channel strategy. they cannot continue with "return to the way it was " ways and this is doomed to fail.
Many channel partners have resorted to cutting costs by reducing staff, reducing inventory and delayed capital investments. Also, better-placed manufacturers have extended support to channel partners. Technology companies have also extended their payment terms in this crisis.
The manufacturing companies should rework channel strategies and ask themselves the following questions for both short term and long term success through the epidemic.
Is it time to change the channel mix and responsibilities?
The crisis makes it an opportune moment to rethink the channel mix and responsibilities. Some situations may require more direct selling and some may call for more involvement by channel partners.
- More direct selling - Many FMCG companies have setup direct-to-customer channel allowing customers to buy their favourite products online. Even in B2B sectors channel preferences are changing especially by customers who faced supply chain disruptions decide to cut out middlemen and buy direct from manufacturers. manufacturers can in turn respond by increasing direct sales to their customers and in some cases create the hybrid model by taking charge of the logistics and product promotions.
- More selling through channel partners - It may make more senes for some manufacturers to strengthen their channel partners and expand their market coverage and reach underserved segments. Others may take advantage of channel reach and leverage the same for introducing new products or penetrate new segments.
Selecting the optimal strategy requires what the customers value, assessing capabilities, both manufacturer and channel partner, and analysing economics.
Invest in right channel partners
Manufacturers will be tempted to prioritize partners who were successful in the past. However, one has to be alert to the fact that yesterday's winners could be tomorrow's stragglers. To cut down costs during the downturn many partners have delayed investments in hiring, training and IT and may not have the capacity to expand operations rapidly. There is a risk that they will become overly dependent on the manufacturer support thereby driving up channel costs.
For the long term, manufacturers must invest in partners who provide what the customers want. partners, in turn, are looking for manufacturers with winning products, offers, incentives and support programs.
- Invest in largets, strongest partners Relying on small, funds starved partners could slow the rebound and it would be better to focus on partners best positioned for future success. They could incentivise partners who invested in capabilities and slowly cut out those who do not fit this profile.
- Help smaller, up-coming partners It is also necessary that the better-capitalised partners gain too much power, drive out smaller partners out of business. Larger partners may gain bargaining power with manufacturers and led to margin challenges. So it makes imminent sense to develop upcoming partners who are in sync with the vision and mission of manufacturers and those who are willing to invest as required by the manufacturers.
Change channel incentives and compensation
As the demand picks up once the lockdown is withdrawn, manufacturers will be tempted to lower prices for increased volume uptake to ramp up sales. This can be risky as partners may overbuy creating working capital issues. It may also lead to price erosion and give undue advantage to larger partners.
- Change pay levels to reflect changing roles Revisit, reexamine channel pricing and incentives so that it is in tune with the channel responsibilities and this should get reflected in the compensation structure.
- Invest to drive behaviours Incentives like co-funding can motivate partner behaviours. Rewarding partners for sharing market data can give manufacturers a better perspective into consumer preferences. Additional incentives can also be offered for investment in new capabilities, expertise and coverage of high-potential segments.
Serious downturns provide a golden opportunity to rethink channel strategies and be ready especially when the market reopens.
Do You Have the Right Sales Channels for a Downturn?
by Andris A. Zoltners, Prabhakant Sinha, Sally E. Lorimer and John DeSarbo
HBR 2020/09
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