Changing distributors is a messy business, filled with hurt feelings, business disruption, and legal implications. The good news is that when you have transitioned to a new distributor, you will benefit from the enthusiasm and commitment of a highly motivated new partner. Recapped below are Export Solutions Ten Tips for managing the process of changing distributors.
1. Secure agreement on distributor change from your senior management: In many cases, a terminated distributor will reach out to your company president or owner to appeal your decision. It makes sense to brief your management on the situation and your rationale for the change. If they are not aligned with your point of view, better to learn in advance of creating a disturbance with a distributor termination notice that could be retracted.
2. Long Term Distributor vs. Short Term Distributor?: Your approach at handling the process will vary based upon the length of time of your partnership. Dissolving Long term relationships( 5 years or more) requires careful handling, documentation of situation, and consideration of marketplace repercussions. Ending short term partnerships is usually less complex, as it is normally clear that mutual objectives are not being met.
3. Probation Period: Putting a distributor on probation sends a warning signal that termination is possible. Normally , probation periods last 3-6 months and include specific objectives to achieve during the target period. This approach gives the distributor a “second chance” to meet expected standards. Termination following a probation period reduces the risk of a distributor complaining that “he didn’t know that your company was that unhappy with his performance.
4. Check Your Contract: Distributor contracts outline termination process and procedures. The contract will guide required steps to make a distributor change. Contract terms are negotiable, particularly when a distributor relationship is ending by mutual consent. In certain cases, there may not be a contract which naturally provides a brand owner greater flexibility. On the other hand, you still must consider local laws and business practices which may be in place, even without a contract.
5. Review Local Laws: many countries have well defined laws regarding termination of distributors, brokers or “agents”. These laws often dictate a compensation formula for payments due to the distributor. The legal rationale relates to the concept that the distributor invested his own resources to build awareness and “good will” for your brand in his country and must be compensated for this investment. Puerto Rico’s Law 75 applies even when there is no contract signed and only one direct shipment to a local Puerto Rico distributor or agent.
6. Document Inventory in the Supply Chain: This includes current inventory and orders en route, and pending orders. One of the biggest issues in any distributor change revolves around inventory management. Angry terminated distributors may attempt to “forward buy” or fill the market with discounted goods. Or they may refuse to transfer inventory to the new distributor. I have also seen cases where the old distributor attempts to transfer damaged or outdated inventory to the new distributor.
7. Conduct New Distributor Identification Activities: These should be in process or completed prior to termination of under- performing distributor. This will allow you to minimize the time between termination notification and transition to a new distributor. It is likely that your current distributor may learn that you are “interviewing the market” to understand alternatives. This is all part of the probation process and may further stimulate the distributor to ramp up his performance levels.
8. Minimize Notification Periods- Contract Buy Out ? Contracts may specify a 3 month to one year notification period for a terminated distributor. A Brand owner should not want a terminated partner representing his business any longer than they have to. The risk to the brand is too high. I prefer 1-2 month transition period , even if a brand owner is required to “buy out” the last few months of a contract. It is better for everyone to move on for a fresh start as quickly as possible.
9. Trade Notification Strategy: It is likely that some customers will be upset with a decision to make a distributor change. The good news is that “they will get over it”. On the other hand, it is important to identify potential sensitive accounts and for the brand owner and the new account handler have a prepared response for an unhappy customer.
10. Fast Start Program – Six Months: Your new distributor will be highly motivated to get off to a fast start to make a strong initial impression. We need to balance this desire to run fast to “sell” with the critical steps of focusing on the fundamentals: Sufficient inventory throughout the supply chain, transfer of information in the customers computer, education of the sales force on product benefits etc. “Crawl, Walk, Run”. Normally, the process takes six months to successfully complete a transition to a new distributor.