Case Studies:

  1. Li, a distributor in a county in Anhui, started her business early and was known for her generosity and enthusiasm. She was adept at dealing with government agencies and manufacturers, quickly becoming a prominent local business figure. However, she soon encountered difficulties: despite feeling she was making good money each year, she often faced cash flow problems, unable to pay for goods even when stock was running low, putting her in a passive position.
  2. Yao, a distributor in a city in Jilin Province, was shrewd and had built his initial capital by distributing instant noodles for a company two years ago. However, due to intense competition in the instant noodle market, his profits had shrunk significantly. Recently, he felt increasingly uneasy, as despite lower profits, they shouldn't be this low; sometimes he even calculated losses.

Analysis: Case 1: Li's situation arose because, despite her large business, she was busy with purchasing, dealing with manufacturers, and sales and delivery. Her cash management, warehouse management, and purchasing and collection were all entrusted to her elder sister, and many employees were close relatives. Later, following the advice of a manufacturer's salesperson, she conducted a thorough review of her business and discovered that her sister had been running her own business behind her back. Despite Li's cash flow issues, her sister had recently spent over 300,000 yuan to build a house (without borrowing from anyone). Given her sister's income (Li paid her 10,000 yuan a year), it was impossible for her to build such a house so quickly without other income. Li had no choice but to dismiss her sister and start reorganizing her business and staff. Case 2: Yao's situation arose because when his business was small, he handled everything himself. As it grew, he delegated vehicle management, maintenance, delivery, and salesperson management to his brother-in-law. Since there was no warehouse keeper, his brother-in-law would take the keys to the warehouse, pick goods, and sell them. When stock ran low, he would tell Yao to reorder. Sensing problems, Yao began a quiet investigation. First, he secretly counted inventory and compared it with the daily reports from salespeople. He was shocked to find discrepancies, often underreported, meaning his money was being taken by his own people. Then he discreetly asked a honest salesperson to monitor fuel usage for the delivery vehicles, and found that fuel expenses were often inflated. Next, he collected vehicle repair invoices and verified them at repair shops, only to find that some repairs were never done, and others that cost tens of yuan were invoiced for hundreds. In the end, Yao had to dismiss his brother-in-law.

When I shared these cases with many distributors, their reactions were unexpected—they had experienced or were experiencing similar situations themselves or with other distributors in the same market. They then asked me their dilemma: How should a distributor manage people?

Many distributors, as their businesses grow, often suffer huge losses due to poor hiring decisions. In Chinese business culture, many believe that hiring relatives is the first choice (some think that since they've made money, they should provide jobs for relatives). Because these people are important to them, distributors trust them completely, believing they would never betray them. Yet it is precisely these people who cause their downfall.

So how should distributors manage people?

In my communications with distributors, I always emphasize that the first consideration should be: What kind of people do I need? Then, once hired, they should be managed and constrained by systems and processes, not just because they are relatives and then left unsupervised. In a sense, whether relatives or external hires, people are not inherently good or bad, but the environment can turn good people bad, including relatives you think are beyond reproach. If your management is standardized with strict systems and processes that are enforced, relatives and external hires are the same. Conversely, if your management is full of loopholes, you create an environment that turns good people bad, especially relatives (because they may exploit your excessive trust, while external hires might be more cautious due to various concerns).

I also use Li's case to illustrate how distributors should manage people.

After dismissing her sister, Li, with the help of the manufacturer's salesperson, reorganized her business. First, she defined her future management direction: not to establish a company yet, but to operate in a company-like manner. She streamlined her brands and products, no longer purchasing small items from other places that were hard to manage and of little use, focusing instead on products from several larger manufacturers.

Next, she established an organizational structure, determined staffing and hiring standards for each department. After that, she rehired existing employees based on their fit for each department; those not suitable for any department, whether relatives or external hires, were let go. For departments short of staff, she recruited externally.

Then she began to establish management systems and processes for each department and adjusted employee compensation.

First, she set up a system for inbound and outbound goods and financial verification. Daily outbound and inbound quantities had to match; if discrepancies occurred and the warehouse keeper couldn't find the reason, they had to compensate in full. The warehouse keeper had to submit daily inbound/outbound reports to finance. Salespeople had to hand over all cash collected that day based on the warehouse keeper's documents; any discrepancies were the salesperson's responsibility. If customers had credit, the salesperson had to provide a signed IOU within their authority, with a repayment date, and the salesperson was responsible for collection; otherwise, it was treated as embezzlement. This eliminated the previous chaos in warehouse management and curbed employees taking advantage.

Since Li previously paid fixed salaries, she adopted the manufacturer's advice and reformed compensation to a "more work, more pay" system.

First, she held internal bidding for her brands to identify project leaders. Salespeople and drivers were assigned to specific areas with a "base salary plus commission plus other incentives" (salespeople and drivers could form teams freely, but once formed, changes were not easy). Drivers also received a safety bonus (an additional few hundred yuan for no accidents throughout the year). Other support staff received a "low base salary plus performance-based pay."

This single compensation reform transformed Li's management. Previously, she had to push employees daily; salespeople rarely went to the market before 10 a.m. unless the boss was angry. Now, employees started working before dawn, and sometimes before the boss woke up, some salespeople had already made a delivery. Previously, the boss had to visit the market or make calls to learn about market conditions; now, salespeople actively reported on their "responsibility areas" upon return, and some even coordinated with manufacturer reps, reporting market conditions and seeking advice. When competitors made a move, targeted responses were quickly implemented.

Since salespeople had to hand over cash daily and had credit limits, any credit beyond the limit required the boss's approval. The compensation plan also stipulated that commissions on credit sales would not be paid until the money was collected. As a result, Li had almost no bad debts, and cash was collected quickly. The days when Li had to personally chase customers for payments at year-end or other times were gone.

Other systems and processes Li implemented are not detailed here, but her change in mindset brought significant benefits: she was no longer busy like a headless fly, could travel with peace of mind, and her business was unaffected. Her delivery fleet grew from three to five vehicles, and many of her products achieved a dominant position in her market, making it difficult for competitors to gain a share.

It's worth noting that to prevent cash risks when she was away, Li required her finance to deposit money only into designated bank accounts and signed agreements with the bank that without her written authorization, the finance could not withdraw cash directly but could only transfer funds to the accounts of the manufacturers she represented.

I hope distributors will first correct their mindset and attitude towards hiring, determining how to manage people based on systems and processes, rather than on whether they are relatives. Only then can similar cases like Li's and Yao's be prevented.

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