In this article, learn about:
Different types of distributors
Negotiating and building contracts with distributors
Distributor onboarding best practices
____________________________________________________________________________________
While many suppliers distribute their products themselves, many others choose to hire a distribution company, while others opt to utilize both for different products and processes. Regardless of this decision, distribution is the heartbeat of the supply chain, ensuring that the product being sold gets to where it needs to go—whether that is directly to the consumer, through e-commerce, or a brick-and-mortar retailer.
Different Types of Distribution
There are 3 primary methods of distribution for suppliers to choose from. Each method handles the distribution process a little bit differently. The choice of distributor should align with the supplier’s overall business model and operational strategy to ensure effective market reach.
Direct Distribution: This type of distribution is when the supplier chooses to distribute their product themselves, rather than hiring a third-party to distribute.
Indirect Distribution: This type of distribution involves hiring a distribution company to distribute your products.
Dual Distribution: This type of distribution is a combination of both direct and indirect distribution, allowing suppliers to utilize both types as needed for different
Which distributor a supplier chooses depends heavily on what kind of product the supplier produces. There are many pros and cons when it comes to choosing a distributor, and many suppliers will find that they will work with multiple distribution methods for different needs and products.
Suppliers who utilize direct distribution generally have greater operational capacity. Additionally, larger retailers, such as Walmart, use direct distribution. Farm-to-table suppliers often opt for direct distribution as well.
Indirect distribution is typically utilized by suppliers who produce electronics, apparel, or packaged goods for CPGs.
For suppliers who produce multiple types of products across multiple channels, dual distribution is likely the best option.
Building a Distributor Agreement
Once the supplier has chosen the distributor (or distributors) that supports their business, the next step is to build and negotiate a contract with that distributor. This contract is sometimes called an agreement.
The contractual agreement between a supplier and distributor should clearly lay out the distinctions between the supplier’s and distributor’s responsibilities. Determining which party will do what is the first step in the process of writing up an agreement. For example, will the distributor or supplier be responsible for marketing the product?
It is important to understand regional laws, specifically tax laws, while writing up the contract.
Additionally, the contract should clearly answer the following questions:
What products are going to be distributed? A solid contract agreement should include detailed information about the product and the shipping requirements associated with it.
How will damages to the product be handled? The contract should include product warranty information.
What are the sales goals? This is an important part of the contract, both for ensuring that suppliers and distributors are on the same page, but also for the separation of responsibilities.
What are the pricing parameters that both parties will adhere to throughout the entire process of distribution? Sometimes shipping does not go to plan, and it is important that both suppliers and distributors are on the same page as to what this entails for the pricing of products.
How long is the agreement good for?
What are the terms by which the supplier or distributor may reasonably terminate the contract agreement?
What is the renewal process for the contract? A supplier may choose to have the initial contract active for a shorter term and then renew it for a longer period should the partnership go well.
How and when will both parties be paid for services rendered?
Does the supplier require the distributor to provide any sort of reporting? And if so, what are the parameters and requirements of these reports?
What are the expectations and channels for communication?
Negotiating a Distributor Agreement
With the contractual agreement drafted and sent to the distributor, the distributor may choose to request changes to the contract for various reasons.
Some best practices to follow during the negotiation process are to:
Focus on the clear and achievable goals first, then narrow down the goals later.
Make sure the entire distribution process is clear from start to finish, including what happens to the product after it sells.
Set clear parameters for the region in which distribution and sales will occur to avoid confusion.
Outsource the management of regulations, where possible. This way, suppliers and distributors can work together with a focus on marketing and selling.
Ensure that all tax requirements and obligations are met.
In addition to these best practices, it is important to have several people review the contract agreement prior to the negotiation phase.
It is important to take plenty of time in negotiations to ensure that once everything is settled that the supplier and distributor have the strongest possible relationship.
Onboarding Distributors
The distributor contract has been negotiated and signed, and now it is time for the supplier to onboard the distributor.
Suppliers must ensure that they have an up-to-date and comprehensive onboarding process when they bring on new distributors. The primary areas of focus for onboarding should be communication, legal, and training.
Clear communication is key. While the contract might have laid everything out down to the tiniest detail, communication goes beyond the written contract. Clear communication helps solidify a strong supplier-distributor relationship.
For example, it is important to clearly communicate expectations for how to manage and document inventory, expectations for utilizing EDI, expectations for shipping documentation, particularly for POs, BOLs, and ASNs.
It is important in the onboarding process to make sure than all necessary legal documents and requirements are met and signed. Ideally, this should happen immediately prior to onboarding. Understanding local markets, and market-specific regulations is essential for compliance and a successful partnership.
Finally, the bulk of onboarding should include comprehensive training for the distributor to ensure regional shipping compliance, compliance with retailers, and empower confidence in both the supplier-distributor relationship and contract agreement. Training should also give distributors confidence that they will be supported through the entirety of their contract.
Get Paid with SupplyPike
Distributor partnerships should drive growth, not losses. Protect your profits with SupplyPike’s deduction management platform!