Managing Distributor Relationships

- Lessons Learned, Episode 29

One of the things I hadn't really thought about when I started by first IT business was sourcing products. I thought I was in a service business. But very quickly I found that clients expected me to know where to get hard drives, cables, monitors, and even whole computers. 

I started with local suppliers who were willing to open "wholesale" accounts with other businesses. And that led me to getting an actual reseller permit (which, in California, is call a seller's permit). And that, of course, led me down the road of collecting sales tax and filing sales tax reports.

The big problem with buying "wholesale" from companies who sold to the public is that there was almost no margin for me. After all, they were buying at wholesale from a distributor and still needed to make something in the deal. So while they might pay six dollars for a ten dollar cable, they had to sell it to me for eight to make a little money. 

That's fine with a cable here and a cable there. But when it comes to a whole desktop setup with all the accessories, I need to make a real margin. 

I asked some friends and former clients how they sourced materials. The primary source I started with was a company that primarily worked in the point of sale business. I applied to them and opened an account. That was fine, but gave me limited options. 

But it got me started. From there, I found out about different suppliers/distributors and opened accounts with several. At one point, I had accounts with for major distributors. Two of them are what I would call my "primary" distributors. I had two primary distributors because I knew there would be times when I need to have credit at both.

That turned out to be a good thing for two major reasons. First, I could shop them both and find the best options and prices. And, second, when I had a dispute with one, I could simply rely on the other. I had two incidents when this was very useful.

In the first incident, I had a dispute about not getting the preferred price that was promoted on the web site. The salesman on my account simply would not give me the preferred price because it reduced his commission. I complained up and down the layers of management, but they all agreed to back the sales team instead of me (the customer). So I simply stopped buying from them.

After about three months, I got a call from the distributor asking whether we'd gone out of business or what was going on. I told him all about my problem and sent copies of letters I'd exchanged with about a dozen people in the company. I explained that I would not do business with them if I can't rely on the price offered to me on the web site.

It took about a month, but they sent me a check for the disputed amount and I gradually added them back into the mix. And I moved to being "unmanaged" rather than giving ongoing commissions to the dude who used to be my sales rep.

In the other incident (with the other primary distributor), we had ordered three servers and only one showed up. But the distributor charged our account for all three. I filed a complaint - and asked for my other two servers. They said no: we had signed for three servers.

I went through this with my staff and was told absolutely that there was only one server delivered. And the paperwork said that one "unit" had been delivered. So I told the distributor that the paperwork shows we got one box and signed for one box. They said to pay the bill.

We did not pay the bill. We ordered the missing servers from our other distributor. And then we gave the other distributor all of our business. 

Again, after about three months, my rep called and asked what was going on. I explained the situation. He kicked the problem up to his manager, the and manager took it seriously. At this point, we were arguing over about $14,000 for the two servers, plus $7,000 for the bill I hadn't paid, plus roughly $50,000 per month in sales they were missing out on.

After a few weeks, the manager called me and said that they had reviewed the security footage at the loading dock and that the three servers left on a single pallet. We signed for one unit, which they took to be a pallet with three servers. I explained that only one server arrived - no pallet.

He they filed a complaint with the shipping company and they checked their video. They reported that one server left their dock headed to my office (without a pallet). We signed for it. And that was the one unit delivered.

In other words, three pallets were picked up by the shipping company, but only one was delivered to me. The distributor filed a claim with the shipper, and credited us for two servers. And we paid for the one server and started doing business with them once again.

Luckily, these were two big, expensive incidents in twenty-five years. With millions of dollars worth of transactions, a few thousands dollars worth of disputes is probably the best you can hope for. 

Lessons learned: 

1. Unfortunately, the first lesson I learned is that distributors are completed committed to backing their sales people at the expense of customers. I could tell a hundred stories of much smaller incidents that illustrate this point. But the bottom line - literally - is that sales people do whatever it takes to make commission and their managers do whatever it takes to keep them pushing products. Making the reseller happen is an after thought.

2. If you have one distributor, you have zero leverage. You have no basis for getting better service or a better price unless you are able to take your business elsewhere. And you have to have that relationship in place for the day it becomes useful.

As a rule, we used one distributed more frequently for computers and servers, but we tried to divide our overall spending between the two. This might (arguably) have reduced our discounts at some point. But the flexibility of taking our business away from someone for months at a time gave us leverage that would not otherwise have.

I'd love to hear your experiences with managing distributors.

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Note: In a future installment, I'll address margins and our hard, fast rule about maintaining them.

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All comments welcome.

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Episode 29

This Episode is part of the ongoing Lessons Learned series. For all the information, and an index of Lessons Learned episodes, go to the Lessons Learned Page. https://blog.smallbizthoughts.com/p/lessons-learned-blog-series.html

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