Managing distributors of hightech products

The decision to sell products through a distributor is only one step in the process. A distributor must be selected, directed, and evaluated. Again, the characteristics of high technology impose slightly different criteria compared to those of more traditional products.

Every company that is looking for a distributor judges that distributor on its sales experience, financial situation, image toward customers of the target markets, the number and quality of its sales people, and the quantity and brands of its current product portfolio. Moreover, since high-technology products have a high degree of innovation, a distributor must have unquestionable knowledge about a product to be able to respond to customer questions. Due to the frequent and rapid changes of high-technology products, a distributor must also be able to guarantee almost immediate availability in order to respond to demand at the right time. A distributor who sells technologically outdated products will see his customers go to competitors translating into lost sales. Usually, lost sales are largely underestimated. One computer manufacturer approximated its lost sales at 5% to 10% of total sales, eventually to realize that they were actually between 15% and 20%, almost two or three times its original estimate.

Furthermore, obsolescence is especially quick for some high-technology solutions with high variable costs, like computers or consumer electronics. Cellular phones or PDAs, for instance, may lose as much as 10% of their value each month;so after 7 months, their value is more than halved. Thus, today major cellular phones or PC distributors have negotiated the right to return unsold products to the vendor at no cost.

Unquestionably, the best solution for restraining the impact of lost sales and obsolescence is to gauge them by running periodic customer and distributor surveys. Consequently, inventory and order management for high-tech products is obviously more sophisticated than that for standard products and is fairly similar to the management of fashion stores. For example, one high-tech company received first-month orders for its latest products surpassing its manufacturing capacity by more than 25%. It decided to adapt by increasing both component stock and production. However, 3 months later, orders plummeted, creating an enormous inventory. The product ended up being a flop. What happened was that tight initial capacities had actually boosted early demand for phony orders placed by distributors concerned about short supplies. Then, products did not move because the market was not buying, but the producer did not figure that out and wrongly decided to expand production on the sole basis of first impressions. Such a situation explains why the most successful B2C high-tech companies have adopted the "build to order" model. By doing so, they have managed to cut their inventory cost dramatically and boost their cash flow and profitability while improving the satisfaction of their customers.

Finally, the high-technological content of these products calls for technical know-how and a professional organization. These two requirements are often important in assuring the quality of customer service. Manufacturers who are looking to engage distributors often stumble on this last criterion because customer service entails different skills than sales.

However, customer service is a basic necessity for succeeding in high technology because customers must be assured of quality products that confirm their confidence in the manufacturing company. The best marketing plan for a highly technical product can be instantaneously ruined by a distributor whose customer service does not respond quickly and correctly to the frantic telephone calls of a customer demanding the repair of his or her DVD reader, digital camera, or 3G cell phone. Usually, the solution is to train technicians to make them more competent, but if their compensation is based on the quantity of services delivered rather than the quality, extra training may backfire and create a negative feedback cycle, as illustrated in Figure 7.3, because it erodes their working time and puts them under time pressure. Accordingly, technicians will make a slapdash diagnostic, falling short of detecting problems early and, hence, leaving customers more unsatisfied than before. High-tech products require that distributors make use of more and better marketing, financial, and human resources in order to respond efficiently to these additional constraints of high technology.

Manufacturers, however, must also devote time to helping distributors assume these additional responsibilities. Every company must keep in mind that an intermediary is an independent company and more a customer representative than a manufacturer's "puppet." An intermediary is interested

Figure 7.3 A negative feedback loop in distributors' training.

in selling products that customers will buy from it and, hence, in making it a profit. For example, a high-technology company like Hi-Shear Industries, an American subsidiary of the French group Lisi Aerospace, learned this the hard way. Originally, in the military aerospace business, Hi-Shear exploited its original technological know-how to build a new activity in automotive braking cable and fastener. Contrary to the military markets, automotive OEMs demand suppliers to significantly decrease their prices as long as volume is building. Thus, when Hi-Shear thought it had its distributors locked in the same way as its military customers and tried to increase its penetration prices, the distributors reacted strongly and almost put them out of this business. Thus, Hi-Shear had to adapt quickly to its new distribution channel.

A distributor is not instinctively sensitive to these requirements of technical knowledge, optimal product management, and quality of service but should be made aware of different incentive programs [11]. A partnership should be set up with marketing objectives, inventory management, and

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