Lesson 5: Winning the distributor

Ganesh Iyer has distributed Kestrel products for eleven years. His warehouse is full; his bank limit is not.

Ganesh: “Madam, I heard the whole thing. Weekly beats, more shops, wider range. Very nice. But who pays for it? More shops means more salesmen. Wider range means more stock in my godown. I have to invest more capital. Why should I?”

Ruth: “You shouldn’t. Not until you’re sure it solves a problem you actually have. Can we start there?”

Layers of resistance

Goldratt observed that when people resist a change, the resistance comes in layers, and they must be peeled in order. Jump ahead, and the layer you skipped comes back as an objection you can’t answer. In the order he used:

We don’t agree on the problem. “My business is fine.”
We don’t agree on the direction of the solution. “That’s not the way to fix it.”
The solution won’t give the results. “It won’t solve the whole problem.”
“Yes, but…” The solution will cause new problems, negative branches.
There are obstacles to implementing it.
Unspoken fear: what isn’t being said.

Ganesh was at layer 1 dressed as layer 4. So Ruth started at layer 1.

Layer 1: whose problem?

She asked him to describe his business, and she wrote down his undesirable effects as he said them.

Lead times from the company vary from 2 to 30 days.
The fill rate is poor at the item level: he orders 200 lines, gets 150.
He orders once a month, so he has to forecast, and safely, for this month and the next.
Some items sell more than forecast: lost sales, lost profit. Some sell less: excess stock.
He carries more than 45 days of inventory.
The company has a credit limit; his capital is limited. His working capital is always under pressure, and his return on investment is low.
To keep the range his customers expect, he sometimes liquidates stock at a heavy discount.
More than half of his sales happen in the last week of the month.

Then she connected them. Customers have limited tolerance time, and he can’t afford to lose a customer to bad service; but even if he needed something urgently, he wouldn’t always get it in a short time. A forecast gets worse the longer the horizon. So he must hold a lot, of the wrong mix: too much of some items, stock-outs of others, and a capital limit that makes him postpone buying the very items that sell.

And from both sides, pressure:

Pressure from his suppliers	Pressure from his customers
Accept large quantities	Buy only what they need
Hold high stocks	Limit the number of items they keep
Earn incentives only by buying more, through primary schemes	Push to get more discount
Block shelf space with every new introduction	Leave him to push whatever is available

Ganesh: “That last week… I hadn’t thought of it as a problem. It’s just how the business is.”

Ruth: “Your objectives are higher sales, higher profit, keeping customers, better use of cash and space, and a higher return. To get them you must avoid lost sales, increase walk-ins, protect margin and show the maximum range, at minimum inventory. Is that a fair description?”

Ganesh: “Fair.”

Ruth: “Then the company can only grow if you grow faster, and profitably. Your problem is our problem.”

Layer 2: what would a good solution do?

Before presenting anything, Ruth asked Ganesh to list what a great solution for him must deliver. Together they wrote the checklist:

minimal investment;
no stock-outs: full availability;
higher sales at lower risk;
higher absolute profit;
minimal dead stock;
less hassle of ordering and chasing supplies;
improvement that lasts;
peace of mind.

Pause and think: why does Ruth ask Ganesh to write the checklist before she shows him the offer?

To delay the meeting until the company has prepared a better offer than the competitors’
So the offer is judged against his own criteria, agreed in advance
To find out his margin

Agreeing on what a solution must achieve is layer 2. Once it is his list, the discussion is no longer “your idea against my experience” but “does this meet what we agreed?”.

Layer 3: the offer

The offer to the distributor has four elements.

1. A portfolio held at about 30 days of stock, item by item. Not 45 days of the wrong mix; a target for every item, set together with him from past and expected consumption.

2. The company replenishes only what he sold. The company holds stock of all the identified items in its own warehouses. The distributor reports his daily sales; the company supplies what was consumed, at frequent intervals. His gain: high availability of every item, so more sales; much lower investment; no more high stock of one item and a stock-out of another; no more being stuck with slow movers.

3. The range grows only by mutual agreement, and the company stands behind it. For a new item he keeps just one or two pieces, so he isn’t stuck with stock. If a new item doesn’t sell at all for three to six months, the company pulls it back or helps liquidate it. Promotional support is given for specific new introductions where needed. His gain: a wider range for his customers, with no dead stock and no locked cash.

4. The company works alongside him to grow sales and profit. A demarcated area: no other distributor is appointed for the agreed range. The full product range. Company salespeople who work with him to increase reach and range. And pricing policies that keep him competitive, so his sales aren’t disturbed by other channels’ prices. His gain: more sales and a higher return.

Exercise: which element delivers this benefit?

“I no longer have too much of one item and none of another.”
“If the new LED panel doesn’t sell in six months, Kestrel takes it back.”
“No new distributor will be appointed in my area for this range.”
“My godown holds about a month of each item, set item by item.”
“Their sales officer comes with my salesman to open new shops.”

Layers 4 and 5

Ganesh: “Yes, but. If I hold only thirty days and your supply is late, I lose more sales than today.”

Ruth: “Exactly right. That’s why the company holds the stock in its own warehouses, and why it measures itself on supplying you. If the company can’t replenish reliably, this offer must not be made. Anything else?”

Ganesh: “The big shops in my area. They want special prices, and some want to buy direct from the company.”

Ruth: “That’s not a ‘yes, but’. That’s a real conflict in the market. Let’s take it seriously.”

Ganesh’s first objection was a negative branch (layer 4), and it was valid: it pointed to a condition the solution must meet. His second was an obstacle (layer 5), and behind it sat conflicts that every consumer company lives with. That is the next lesson.

Check your understanding

Answer all five. Get four right to complete the lesson.

1. Goldratt’s first layer of resistance is…

Disagreement about the problem
Fear of obstacles
Disagreement about price
“Yes, but…”

Until the problem is agreed, no solution can be.

2. Why does the distributor carry 45+ days of stock and still have stock-outs?

Poor storekeeping, so items are lost or miscounted in the godown
Too many customers
Monthly ordering to a forecast, with slow and variable supply
High margins

The amount is high and the mix is wrong.

3. Under the new offer, who holds the stock of all identified items as backup?

The shops
Nobody
The distributor, at 90 days
The company, in its own warehouses

That’s what makes 30 days at the distributor safe.

4. A new item that doesn’t sell at all for three to six months…

Is the distributor’s loss
Is pulled back by the company, or its liquidation is supported
Is discounted by the distributor until it finally sells
Is pushed to the shops

So widening the range carries no dead-stock risk.

5. “If your supply is late, I lose sales” is…

An unspoken fear
A disagreement about the problem, since the distributor doubts the company
A negative branch: a valid condition the solution must meet
A reason to give up

Treat “yes, but” as a gift: it tells you what to add to the solution.