Distribution Systems
All companies look to forge strong relationships with their distributors. These affiliations are particularly important in industries where distributors add value through education, showrooms, installation or other service elements.
The first question in any distributor affiliation is how much control the supplier should exercise over the relationship. This question often turns on whether the manufacturer produces a commodity product or a proprietary one and the relative size of the parties. Distributors usually will not accept efforts to control the distribution of a product that can be obtained from a number of sources. However, a manufacturer that produces a proprietary product that is in demand has the ability, if it wishes, to exercise important controls over its distribution network.
Some manufacturers build a distribution control system into their marketing plan by setting up franchise systems or exclusive distributorships from the start. Whatever the name, these systems share a common goal from the point of view of the manufacturer: to shape the way its products are distributed in the marketplace.
The past 20 years have seen a marked increase in the control exercised by manufacturers over their products. Antitrust law and policy have adopted the view that consumers benefit when a manufacturer exercises control over its network of distributors in certain ways. Of course, it remains illegal to control pricing policies. That said, there are a wide variety of measures that manufacturers can adopt to shape the way their products get to market.
Perhaps the simplest measure is to grant a customer the exclusive right to sell products in a territory. This is often necessary to entice a well-capitalized distributor to take on a new product line. Other permitted controls include customer restrictions, advertising and trademark policies, stocking requirements for inventory or samples, and full line or exclusive requirements.
Distribution Agreements
Distribution agreements are a popular way to cement the relationship between a manufacturer and its distributors. Contracts are often drafted by the manufacturer and presented to the distributor as a finished deal. However, it is generally possible to negotiate these agreements, especially where the manufacturer is launching a new product or is trying to capture a new market.
The following is a checklist of the material items that should be addressed in a distribution agreement:
- What trademarks or trade names may the products be sold under? May the distributor use the trademark as part of its business name? What sort of approvals must be obtained in connection with the use of the trademark?
- Territory: exclusive, a designated primary area of responsibility or wide open? What happens if sales are made outside the prescribed territory?
- May the manufacturer make direct sales in the territory?
- Are any accounts reserved to the manufacturer, such as national accounts?
- Must the business be conducted from a specific location? Can new locations be added in the future?
- What happens if other distributors sell within the protected territory?
- Can the distributor handle the products of competitors?
- Is the distributor required to carry the full line of products?
- What is the term of the agreement? How is the term renewed?
- Are there minimum purchase requirements?
- Must the distributor maintain a minimum quantity of inventory?
- May the distributor sell to other distributors or only to end-users?
- How are prices determined?
- What protections, if any, are there for price increases?
- Is the distributor required to participate in promotional allowances or other rebate programs instituted by the manufacturer?
- Must the distributor disclose its financial information to the manufacturer? Are there any minimum financial criteria to maintain the distribution?
- Under what circumstances may the distributor be terminated? May either party terminate the agreement without cause? What happens to unsold inventory following termination?
- What training or ongoing technical support is the manufacturer required to provide?
- Is the distributor authorized or required to provide warranty service? What parts will be stocked? How is payment for warranty service to be structured?
- Under what circumstances can the distributor return merchandise to the manufacturer?
- What are the terms of delivery? What are the distributor’s rights to inspect and test?
- Does the manufacturer promise continuous availability of products, spare parts and/or service?
- Will the manufacturer hold the distributor harmless from and actions for patent, trademark or copyright infringement?
- What insurance are the parties required to maintain?
