Insights into the forces shaping our industry.

Is it time to stop the madness?

Industry Commentary

David Gordon, Channel Marketing recently published his monthly newsletter on the status of POS data integrity and the ‘next’ chapter of improving the data sharing. (POS= point of sale, or place of sale. It’s a process of providing destination information on the final sale of a manufacturers’ product down to the SKU level; for purposes of agent compensation). David and I have known each other for a long time and maintain a great relationship, which includes collaborating on industry-wide issues, or trends. I replied to David’s article with a proposal to look at the issues of POS from a different perspective.

POS information was a big topic over 30 years ago with the rapid expansion of manufacturer distribution centers; and the growth of large national customers, i.e. multi-site national account customers for new construction, or national distributors that were beginning to build their own regional distribution centers (RDC’s). POS became an issue as the independent reps felt they should be compensated for all material that arrived within their contracted territory. That concept was reasonable and just as manufacturers created the contracts for their services and restricted compensation for the rep efforts to a specific territory. The complication for this market was tied to the definition of specification influence and destination credit.

My history was based on working with lighting reps, where multi-national customers (e.g. Limited Stores, Walmart, banks, etc.) building multiple new locations used a specification of building materials that was created in one location; with a ‘specification rep’ involved in the specs, a destination rep where the products were shipped for the new store, and potentially a distributor partner that inventoried products to serve the national account; with a different rep in that territory and untold numbers of reps that may be actively trying to sub out materials on the local levels with the contractors that were building the store. In short…the potential number of reps that felt they were due compensation because the products were touching their territory…could be several. And the transaction of that process, i.e. invoicing, was limited to one entity, the purchaser: typically, the distributor. It’s complicated.

Large manufacturers, regardless whether they are lighting manufacturers or construction supply equipment manufacturers, typically have multiple channels of distribution. So, if the local Ace Hardware store sells 15 steel boxes, does each ‘channel’ rep deserve compensation for that transaction? And does that require Ace to tell the manufacturer, by SKU by store location where they shipped those products?

30 years later and NEMRA is announcing they have 60 manufacturers agreeing to terms of a new software system to assist in documenting the transfer of products through distributor RDC’s to compensate the reps across those territories. We’ve had the industry IT talent working on this for 30 years and we have concurrence on a new system of 60 distributors. (we have over 12,000 distributor locations in our system). Let’s be a little provocative…

Independent reps exist for two primary reasons:

  1. Local expertise and relationships deliver better sales performance for national manufacturers
  2. Indirect sales yield the lowest cost of sales solution to a manufacturer

And good reps make a very good living, i.e. it’s a profitable business to run. The manufacturers profit from an indirect sales approach, the reps make money by sticking close to home and building local relationships. Why do both sides spend so much time arguing over the illusive ‘lost sale’?

In 2018, Egret completed a survey of Lighting Reps, that documented average commissions, channel structures, organization approaches, etc. One thing that jumped out was several participating reps stated they have their own e-commerce channel. A few are selling their manufacturers’ products on Amazon! Do those reps track POS data to compensate the destination reps? Where does it stop?

We can do better. Let’s explore parsimony…

I urge that NEMRA tasks a committee of their largest reps and largest manufacturers to craft a compensation model whereby the reps are paid a guaranteed and just compensation for their efforts; with suitable incentives built in for growth, by product category or profitability or new product sales or overall sales.

If the manufacturer paid their rep $1,000,000 last year, then the starting point should likely be $1,000,000 tied to a formula of sales that is easily and reliably accountable…all sales through local distributors or traditional approaches to the market. The rep gets a guaranteed commitment of $1M, with upside incentives and quarterly reviews of performance against goals. Establish the mutual metrics of performance and make sure they’re easy to track for both sides. Treat an occasional exception, as an exception and provide compensation adjustments for those.

With over 30 years of efforts invested in trying to find the lost sales of POS, let’s abandon these wasted investments in proving a null hypothesis. POS has engendered more distrust between the parties than the number of problems it’s actually solved. You can always find a lost order somewhere, with the expansion of new channels, the multiplicity of shipping (think of Amazon’s one-day process and how many boxes you can receive for the same order, all from multiple sites) and the continuing challenges to wholesale distribution and retail sales…why not strive for ‘simple’?

Lighting reps have a different business model than NEMRA reps; with their focus and reliance on the project business. Lighting equipment does not have a national ‘price’, so it creates a market for price elasticity that isn’t as apparent in the supply side of the business. With no ‘price list’ for lighting, the emphasis for local lighting reps is more on the negotiation of bulk, one-time project quotation practices. The result is ‘overage’, which is far too complicated to explain in this short article. But even overage practices can be accommodated in a fundamental labor contract approach with the manufacturers, reducing or eliminating the complexity of multiple levels of rep commissioning.

The world has changed. Amazon, Alibaba, e-commerce, global suppliers, private-labeling, new markets, new definitions of ‘distribution’, new product concepts. Let’s try something truly ‘new’. Select a local partner and craft an annual agreement of fair compensation and pay them to do what they are really good at doing…selling your stuff.