- Posted by XPM Global
- On January 23, 2017
Nine Advantages of Combining Distributors + Foreign Affiliates
Oilweek Magazine http://mazdigital.com/webreader/43737?page=36
Exporters have long defaulted to outsourcing distribution through various types of partners. We argue that while distributors do provide critical value added service, the traditional distributor management approach isolates exporters, restricts flow of market intelligence, fails to capture potential sales, and therefore is no longer effective in today’s hyper competitive landscape.
The New Realities of Trade (EDC) demonstrate that managing exports, including distributor agreements via Foreign Affiliates if planned and operated effectively, will sharply increase sales, reduce risk, lower costs, improve market penetration, and enable agile, real time response to change.
Annual sales to a specific market / region exceed (or soon will) $500,000.
The exporter has sufficient capacity to meet demand, and keep their distributors supplied.
The focus is on exporting tangible goods. Services exporters have generally been required to establish FA since 2000.
World trade is increasingly dominated by regional trade blocks with preferential access to members, and Canada lacks FTA access with most of them.
Canada (directly) exports fewer manufactured goods now than in 1990: Foreign Affiliates sell over 50% of value added exports; and over 50% of value added exports are Services.
CFPOA (corruption) legislation requires exporters take ensure distributors are not involved in corrupt practices.
Benefits of Foreign Affiliates:
Managing Complex Markets:
You don’t “sell to China/India”: at best you sell to one region / sector. With dozens of languages and cultures, and diverse regional sectors, no distributor can reach the entire country. USA, Mexico and Brazil also consist of diverse regions with distinct economies, yet exporters still assign exclusive rights, shutting out huge potential markets. FA help ensure each sector and region have the appropriate distributor(s), and we have observed where sales immediately increased by over 400% simply by accessing one new sector.
Contract Risk Management:
Managing contracts are easier between domestic companies than across international borders. Today’s perfect distributor agreement soon may not be, and resolving cross border commercial disputes can take years. FA with qualified local staff will either avoid conflicts, or resolve them via trusted relationships. In practice, firms with FA rarely need to revert to legal action, and also help ensure compliance to CFPOA requirements.
Cost / Benefit of FA:
Most exporters are price takers, not price makers: therefore Price – Cost = Profit and controlling and optimizing costs are critical. FA achieve these objectives by driving strong growth, sharply reducing management / admin costs, sourcing low cost inputs, and distributor optimization.
FA can profitably provide value added services in many markets starting with just $250,000 in sales. In contrast, an international sales rep needs over $1M in sales to justify their existence.
Intelligence + Trends + Product Development:
Exporting is (or should be) first about obtaining market intelligence of trends, customer needs, tracking competitors, gaining knowledge of new technologies, and identifying new opportunities, and only then developing / adapting products to meet the needs of the clearly defined market. A small FA office can provide over 4,000 hours / yr of expert real time capture of market intelligence / trends, customer service, and direct business development ensuring your products are matched to need. No distributor or sales rep can match the value added by a FA.
Thousands of Canadian companies have learned that scaling via Smart Networks is the most effective export growth strategy. Scaling relies on strategically planned FA with strong market intelligence gathering capacity, working collaboratively with distributors. For context, Mexico alone has over 2,500 Canadian FA, just one of which does over $5 Billion in sales. Put simply: follow the leaders.
Brand Reputation & IP:
Selling expired or damaged goods, and dealing with IP protection related to pirates are common problems that are difficult to manage with even the best distributor. In contrast, an FA confers full commercial and intellectual rights, and enforcing local law is always faster and cheaper than filing a complaint via your distributor (who will charge you extra) or the WTO.
EDC & Canadian Banks:
When your FA holds the distributor contracts EDC can often insure your sales, and having confidence you will be paid promptly can be the difference between success and failure. If EDC is involved, your Canadian Bank will more likely participate, and many have services designed for SME exporters.
Profit Centers & Related Services:
Car dealerships reportedly make 6 to 8 times more profits on service than sales, yet many exporters consign this potentially lucrative profit center to distributors. An FA captures revenues from services such as maintenance, training, software updates, etc and by locking in exclusive support contracts with guaranteed cash flow, a firm can offer competitive pricing on the goods, helping clinch the deal and keep competitors out.
Foreign Affiliate – Right Sized:
An FA should exists only to extend your reach and knowledge / intelligence gathering capacity, be proven to reduce your costs, and must remain as a collaborative partner with your distributors. Depending on the need, an FA may be limited to contract administration, may offer customer support services, sales and business development, or be expanded to host a major distribution and logistics center. Regardless of the function, it is critical to establish the right metrics, and then pro-actively manage the KPI’s to ensure the FA is meeting objectives.
Exporting is not just stuffing containers; it is driven by agile response to timely market intelligence and developing innovative products and methods to ensure you stay ahead of your competitors. Foreign Affiliates help reduce risk, reduce costs, and obtain real time knowledge needed to manage: Distributors – even the very best – cannot do that job for you.
About the Author:
Brent McNiven MBA-PM, CITP, CMC is a Certified International Trade Professional with XPM Global Consultants Ltd, and has been assisting Canadian companies expand to over 25 countries since 1991.