Changes in customer behaviors are forcing distributors to reconsider their relationships with manufacturer partners. B2B customers want omnichannel shopping and buying options and expect true value-added services from their suppliers.
For distributors to stay relevant to manufacturers, they must embrace these demands and use their unique relationships with customers to propel the customer journey into the future.
Andrew Hastert is the Director of Channel Partnerships at Rockwell Automation. He leads the transformation of Rockwell’s distributor network. The Discerning Distributor host Alex Chausovsky spoke to Hastert about how the manufacturer-distributor relationship has evolved since the beginning of the pandemic and what distributors can do to stand apart from their competitors in today’s hyper-competitive market.
Alex Chausovsky: What factors do manufacturers consider when determining their go-to-market strategy? What considerations, such as company size, geographic footprint and ecommerce capabilities, play a role in their decision-making?
Andrew Hastert: As a 120-year-old manufacturing company, Rockwell Automation has seen a few generations’ worth of change in this regard. If you look back to the 18th and 19th centuries with industry 1.0 and 2.0, manufacturing centered around places where there were energy sources, raw materials and means of transporting goods.
A manufacturer’s core competency revolved around their expertise in the problem they were trying to solve and the manufacturing process of the goods that solved that problem. But, then, physical barriers opened between the consumer and manufacturer, leaving a gap for distributors to fill.
Fast forward to today with computers, AI, machine learning and big data; industry 4.0 is opening new types of value. The distributor channel is still around. In fact, wholesale distribution is a $7 trillion market in the U.S. alone. Resellers are still wildly relevant to manufacturers. Resellers and distributors have complementary portfolios and have a unique understanding of the outcomes customers are trying to achieve.
Chausovsky: What makes a really good distributor partner? What does an ideal partner look like for you, and where are opportunities for improvement?
Hastert: From my perspective, a great distributor partner is one that deeply understands the customer’s business drivers, not just the products they buy or how they run their operations with those products, but the business outcomes the company is trying to achieve. They deeply understand the customer more than the customer understands themselves. Sometimes they position offers that deliver on those business outcomes, usually in a consultative and journey-based fashion.
They guide the customer through the journey and prove their business value quarter after quarter. They’re investing in new capabilities like digital demand generation, digital buying and consultative sales. They extend their offers into third-party marketplaces. They’re wrapping broader complementary portfolios and offers around the product a vendor wants to sell, and they usually have professional services that wrap around the offer.
A lot of these investments and capabilities are a reflection of where customers are going. So, there’s a lot of change, and these companies are adapting to the change.
Chausovsky: The distribution community has long been one with tight margins. Now distributors are dealing with inflationary pressure, increased labor and material costs, and supply chain constraints. How can manufacturers and distributors partner to make sure business remains profitable and funds are available to invest in the value creation you mentioned?
Hastert: Fundamentally, the manufacturer-distributor partnership must have mutual benefit and interest in mind. As a manufacturer, I’m deeply interested in my distributor partners growing and being profitable. Those profits enable us to discuss reinvesting in new growth engines and new types of value creation. Rockwell would not be where it is today without its distributors being profitable in supporting our business.
We’re seeing distributors build out new revenue streams (like professional and managed services) that are often more profitable than the buy/resale of products revenue stream. For example, while reseller products typically have a 20%-25% margin, professional services usually offer a 30%-35% margin. Managed services can be 50%, and if a distributor develops a software-based offer, their margins could be up to 90%.
To your point, distributors tend to float around 3%-6% EBITDA. But we’re seeing that they can create new revenue streams that are more profitable and accretive to their existing offer. They can get into much higher EBITDA levels of over 10%. Those are some ways, as a vendor, we are deeply interested in our partners building new revenue streams and creating profitability.
Chausovsky: How do you evolve your go-to-market strategy as your customer evolves, especially as they move away from distribution toward ecommerce?
Hastert: We need to consider why ecommerce and changing buying behaviors are happening. I think it’s a complicated “why.” One reason is generational workforce dynamics. Almost half the workforce is now millennial or younger. As an older millennial, I’ll say we grew up with technology. We grew up with phones in our hands; I learned how to code when I was 10. We’re digital natives, so that drives a bit of that behavior.
There’s also a generational drain happening due to the pandemic and the Great Resignation. As a result, there are a lot of folks leaving the industry who understand how the products and services distributors sell work. Because of that, there’s an inherent change in buying behavior because there’s less expertise in the buying process.
Gartner had a stat that forecasted that by 2025, over 80% of B2B transactions will happen in a digital channel. Only 29% of baby boomers prefer a digital commerce experience, but well over half of millennials and younger generations prefer digital-only buying. They do tons of online research before they engage with a rep to support the transaction.
Not to mention the offer is changing. For example, 2017 was the year we transitioned to more IP-addressable connected devices worldwide than people. So today, there are something like 15 to 20 billion connected devices. The nature of the offer is changing – it’s more connected. It’s creating and using data to make real-time decisions. People want to use digital to research and transact. Vendors and manufacturers are wildly aware of this and are asking themselves, “How do we change how we support customer research?”
Chausovsky: What are Rockwell’s typical requirements to qualify as a distributor of your products?
Hastert: We document and enhance the expectations we have for partners on a pretty regular basis. In the last few years, those expectations have risen quite a bit. As you would imagine, the digital capabilities and resources to guide a customer through a journey to deliver outcomes are two of the biggest areas where investments have been required.
Our strategy is to enhance the customer experience with and through our partners. Distributors have business relationships at a scale that manufacturers can’t own on their own. For instance, many distributors have complementary value-add services and curate digital experiences uniquely tailored to a customer’s desired business outcomes. For those reasons, we’ve set up a model where we’ve created digital configuration tools that distributors can embed as APIs into their ecommerce experience. We’ve also set up common data models for products so we can set up pricing and transact in an automated fashion through our distributors’ ecommerce platforms.
Partners will forever be relevant to a vendor and manufacturer as long as they keep adapting how they provide value to simplify the customer experience.
Chausovsky: How have things evolved with the manufacturer-distributor relationship since the start of the pandemic?
Hastert: As Mike Tyson said, everyone has a plan until they’re punched in the mouth. I think the pandemic was that punch for everyone in the product distribution space. You might say every industry was touched somehow. There were supply chain and human capital disruptions and digitalization before the pandemic, but we fast-forwarded these trends by about 10 years.
There’s an unprecedented disruption in the workforce with the Great Resignation – millions of people are leaving or changing roles. This also led to a disruption in buying influence. Once upon a time, you would sell something to one or two buyers. Now there’s a trend toward 10 or more buyers in complex transactions with large capital spend. There are 10 buyers in 10 different locations.
Then, of course, inflation is also having an impact. We’ve seen constraints across the supply chain, prices have gone up and costs have risen; that seems to be continuing even today. So, supply chain challenges seem to be ongoing, especially with plant shutdowns in China. Companies are also finding that they don’t have the expertise or know-how in-house to set up systems to plug in products or manage data models or software applications.
So, I’d say the pandemic kicked all of these things into a different gear and forced companies to react at a different pace. We’ve been delighted that Rockwell and its partner network have weathered the storm nicely. That’s because our partners had forward-deployed inventory, they had domain experts, and they deeply understood their customers and could navigate their buying journey well.
I think many industries found that the distributor became more critical during the pandemic – not less.
Chausovsky: There have been substantial challenges in the labor market, and distributors have struggled to find the right people. Have you seen any intra-partner competition for labor talent? If so, how do you manage that?
Hastert: Yes and no. Talented people are sought after by vendors like us, partners of ours and our competitors. I think that’s an ever-present challenge. In fact, it’s probably increased. The root cause of that problem is talent; talent that understands customer business objectives, the technology they implement to achieve new outcomes and the journey they go through to get there.
We focus a lot on a new generation of talent that can enter the market and add value for us, our partners, our customers and sometimes even our competitors. We worry more about talent generation and human capital generation than about who’s working where. We’ve not only set up a training organization but also an organization that works closely with universities and tech schools to create certified resources on our platforms.
We’ve set up an advanced manufacturer academy. We take in a lot of veterans because there are a lot of folks in the armed services who leave and end up getting into lesser jobs, despite having a ton of hard and soft skills they developed in the military. We’re having huge success in bringing talent into the marketplace.
There’s a talent issue we’re trying to solve and a cultural challenge. The manufacturing space in the U.S. has been traditionally very white male dominant, and that limits the talent pool that we can pull in and keep. It’s easy to get white guys into a place where there’s a bunch of other white guys, but we want to broaden the talent pool. We have to intentionally develop a culture to be inclusive and exciting for people who aren’t just white guys.
Engagement is critical. People want to be able to bring their full selves to work every day, and that requires them to feel safe, accepted and welcomed. We have done a lot to try and make our environment more inclusive and engaging for all people so they can bring their best selves to work. Catalyst recognized us for advancing women in the workplace and leadership roles, but we’re not done. We’re on a long journey. We call it our culture on inclusion journey to be a more inclusive and engaging place for all people.
Alex Chausovsky is a highly experienced market researcher and analyst with more than 20 years of expertise across economics, industrial manufacturing, automation, talent and workforce issues, and advanced technology trends. For the past two decades, he has consulted and advised companies throughout the U.S. and Canada, Europe, South America and Asia.
Alex has delivered hundreds of keynote presentations and webinars to small businesses, trade associations and Fortune 500 companies across a spectrum of industries. He is currently overseeing a suite of analytics products focused on talent for the Miller Resource Group. Alex is also consulting with companies to help them become better at attracting, hiring, and retaining the impact players in their industry.