Optimising the chemical distribution channel

Value Creation in distribution:

Today’s distribution business has evolved far beyond the small lot business of typically less than half truck load deliveries: In southern and Eastern European markets, where payment terms can be in excess of 90 days and where the credit risk is high, business would be difficult without the help of local and financially stable distribution companies. Having a range of strong principals and a market specific, full portfolio of key raw materials (branded polymers in particular) helps cross-selling efforts in distribution, up to packaged and modular offers. Very often, distributors are closer to customers, thanks to their diverse product portfolio. Strong local contacts, language and brand of the distribution partner enable principals to set a foothold in foreign markets, especially across regions. Distribution partners are supporting the local manufacturing and service network and help improve customer response in areas of low principal presence. Other servicesoften include repackaging / decanting, technical and lab services and trade fair representation. Distributors are small scale business multiplicators and can help grow business in a subtle way, avoiding immediate competitive action.

The point of view in distribution:

Major distribution companies have been promoting their hub-and-spoke business model for decades, striving for pan-regional distribution mandates. Often, pan-regional growth could then be realised when principals had to close offices or when local distribution companies were acquired by larger companies. Service levels of a typic pan-European distributor, however, tend to vary from country to country.

Despite this consolidation, there is a huge number of small distributors with either a strong geographic presence (in southern Europe in particular) or a specialisation in a specific industry sector (e.g. food, drugs). Some distributors have specialised on imported raw materials (e.g. from China and Russia), with very sophisticated supply-chain and forwarding technologies. It seems that chemical distribution markets are stable and growing for most industry sectors. The reason for that growth is the service level distributors provide and the customer proximitydistributors have. Much too learn for principals who often come from the other angle of simplifying offers and tending to volume business rather than value business. A healthy and mutually business inspiring collaboration between principals and distributors can help to strike a good balance between both.

The point of view at principals:

Principals tend to govern distributor customer activities with “no-go” exclusion lists. This is a policy easy to implement, but it leaves a lot of opportunities on the table. It is good practice to integrate the distributor’s sales team as far as possible into the principal’s sales team with joint sales meetings. The principal’s sales force will likely benefit from the rich customer and market intelligence of the distribution team. The distribution team, in turn, will benefit from a deeper understanding of market dynamics and technology relevant to the principal’s products. Apart from joint meetings, it is also good practice to meet both the principal’s key accounts and the distributor’s SME customers together in joint customer-distributor-principal meetings.

Many principals desire more transparency and simplicity in their distribution network, which often results in consolidating distributors. How many distributors is an ideal number to have in a given region? This is difficult to specify. One is maybe too few (and too much bargaining power for the distributor . . .). 50 is maybe too much if the principal wants to leverage market intelligence from all of the distributors. As mentioned above, it will also depend on geographic / language and market sector aspects in the region. In Europe, I would feel comfortable for a principal to have 5 to 20 distributors.

For many principals, sales through agents / representatives and through traders / trading houses are complementary to their distribution sales. Both other channels have their purpose, for example to extend reach and to sell on the spot market. There is less value add in those channels, though, and collaboration might be limited to order-by-order (traders) or to specific customers (agents).

Conclusion

There is only one stable thing in the chemical industry and this is change. A close collaboration between principals and distributors will help both partners react quicker and more appropriately to those market changes.

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