Risk Sharing and Minimizing in Modern Rep-Manufacturer Relationship

Rep and Manufacturer business relationship dates to medieval times in Europe. Ever since medieval hand workers produced more than local market could bear, they needed a rep who would bring their product to most remote places on earth. However the Rep could not carry the risk of taking goods and losing them to robbers or not being able to sell them to local resellers. Thus came the need for risk management on both sides. Surely risks did have change, and profoundly so, but not the need for them even so risk management became a tool to win the edge over the competition.

From capitalization point of view a Rep is a midget, when comparing him to the manufacturer. Thus Manufacturer is trying to strengthen his supply chain by adding a Distributor in between them. Distributor carries hundreds of product lines which mitigates his risk, should some part of their business falter on the market. They muscle themselves for large orders and care little for smaller opportunities. They leave Rep with smallish sizes of business opportunities, marginalized completely, especially during recessions. They get paid commissions, several times smaller than Distributors.

Manufacturer often does not notice the down side of this business model is under-performing in revenues, instability in supply chain, due to exceedingly high risk in this channel often forced us to cut loses and abandon the opportunity altogether.

1 Classic Rep-Manufacturer model with unmitigated risk for the Rep who is promised relatively large reward at the end of the project. Manufacturer risks nothing until he gets the purchase order. Risk for Rep is high, cash outlay also, often difference to commission is v. small.
US association MANA gathering Reps under one umbrella has tried for several years to introduce its business model back to Europe, has finally given up for no interest from European Reps.

2 Below is the older and stabler version, prevalent in Europe. In this model Vendor is engaging financially into the project at early stage, building up his stake in the project. Once that happens, he is more responsive to any need for technical support during testing and certification.

This adds to mutual dependence and as risk is shared by both, the venture is geared for higher revenues than in the previous model.
To illustrate the previous model: a project value of $K million, the Rep must invest up to $x (where $x is his commission) to win the project and in the end is being paid the $x commission. Not a good business at all, no profit.

He is forced to save on every expense to keep himself profitable, at the expense of his performance to his loss and in greater value loss to Vendor. He has to play several vendors at the same time to spread his risk thus his loyalty is split and dedication is nil, vendors must close the deal himlesf.

Contrary to (No.1), the old Rep model (No.2) requires Rep to invest only $0.4x of his own, he gets help from Vendor of $0.6x which is commission in advance, allowing him to work at full capacity, and in the end Rep gets the rest of his commission of $0.4 and 100% on ROI. It changes relationships and profitability dramatically, at the same cash flow!

Competition is so fierce right now that a difference of several percentage points in risk level or revenue can mean either loss or win against competitors.

Vendor pays the same commission in the end, but Rep, risking less is performing much better and produces more. Rep is following project over the entire Customer Journey. Rep smoothens out any possible wrinkles during production, delivery, training and installation.

These Reps are almost all exclusive and experience shows it is not unusual to have several generations of Rep working with the same vendor.

By Stefan F. Baginski
Lugano, April 5, 2011
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