Case 1: Li, a distributor in a county in Anhui, started her business early, was generous and enthusiastic, and skilled at dealing with government agencies and manufacturers, quickly becoming a well-known local business magnate. However, she soon fell into trouble: she felt she earned a lot each year but often faced cash flow shortages, unable to pay for goods even when stock was running low, leaving her in a passive position.

Case 2: Yao, a distributor in a city in Jilin Province, was shrewd. In the first two years, he quickly accumulated initial capital by operating a company's instant noodles. But in recent years, due to intense competition in the instant noodle market, profits shrank significantly. Recently, Yao felt increasingly uneasy: despite lower profits, they shouldn't be this low; sometimes calculations even showed losses.

Analysis: In Case 1, Li's situation arose because, despite her large business, she was busy daily with purchasing, dealing with manufacturers, and sales and delivery. Her cash management, warehouse management, and even purchasing and collecting payments at home, as well as everything when she was away, were entrusted to her biological sister. Many employees were also close relatives. Later, following the advice of a brand manufacturer's salesperson, Li conducted a thorough cleanup of her business and discovered that her sister was secretly running her own business. Even though Li sometimes faced tight cash flow for orders, 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 annually), it was impossible for her to build the house so quickly without spending. Helpless, Li dismissed her sister and began re-planning her business and defining her employees.

In Case 2, Yao's situation arose because when his business was small, he handled everything himself. But as it grew, he delegated vehicle management and maintenance, delivery, and salesperson management to his brother-in-law. Without a warehouse keeper, the 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 quietly investigated. First, he secretly counted inventory and compared it with daily reports from salespeople. The discrepancy was shocking: reported numbers often differed from actual counts, usually underreported, meaning his money was being siphoned off by his own people. Then, he discreetly asked a honest salesperson to monitor daily fuel usage for deliveries, finding that fuel expenses were often inflated. Next, he collected vehicle repair invoices and verified them at repair shops, nearly furious to find that some repairs never occurred, and others that cost tens of yuan were invoiced for hundreds. Helpless, Yao had to dismiss his brother-in-law.

When I shared these cases with many distributors, their reactions surprised me, as similar situations had occurred or were occurring with them or other distributors in the same market. They then posed their dilemma: how should distributors manage people?

Many distributors, as their businesses grow, often suffer huge losses due to poor hiring decisions. In many Chinese business minds, the first thought is to hire relatives (many also think that since they've made money, they should give relatives jobs). Because these people are important, 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, manage and constrain them through systems and processes, rather than hiring relatives and leaving them unsupervised. In a sense, whether relatives or externally hired employees, 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, both 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 exploit your excessive trust and act recklessly, while external hires may 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, re-planned her business. First, she clarified her future management direction: not to establish a company yet, but to operate in a corporate-style manner. She organized and planned her brands and product categories, stopped purchasing small items from other places that were hard to manage and of little use, and focused on products from several larger manufacturers.

Next, Li established an organizational structure, then determined staffing and hiring standards based on that structure. After defining each department's staffing and standards, she re-hired existing employees, assigning them to suitable departments. Those unsuitable for any department, whether relatives or external hires, were let go. Departments short-staffed were filled through public recruitment.

Then, Li began defining departmental management systems and processes, and adjusted employee compensation plans.

First, she established inbound and outbound warehouse procedures with financial verification. Daily outbound and inbound quantities had to match; if discrepancies occurred and the warehouse keeper couldn't find the cause, they had to compensate in full. The warehouse keeper had to submit daily inbound/outbound reports to finance. Salespeople, after returning from deliveries, had to hand over all cash collected that day, based on the warehouse keeper's documents. If amounts didn't match, the salesperson compensated in full. For customer credit, sales reps had to provide a signed IOU from the customer within their authority (with repayment date noted, and the rep responsible for collection); otherwise, it was treated as embezzlement, and the rep bore responsibility. This eliminated the previous chaos of unmanaged warehouse quantities, curbing employees' opportunistic behavior.

Since Li previously paid fixed salaries, she accepted the manufacturer's salesperson's advice to reform compensation, implementing a "more work, more pay" system.

First, she conducted internal bidding for her brands to identify project leaders for each. Salespeople and drivers were assigned to specific territories with a "base salary plus commission plus other bonuses" structure (each vehicle's salesperson and driver could freely pair up, but once set, changes were not easy). Additionally, drivers received a safety bonus (several hundred yuan for a year without accidents). 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; often, before the boss woke up, some salespeople had already completed a delivery trip. Previously, the boss had to visit the market or call to learn about market conditions; now, salespeople proactively reported on their "responsibility fields" upon return, and some even collaborated closely with manufacturer reps, actively sharing market information and seeking advice for support. As soon as a competitor changed, targeted measures were immediately implemented.

Since sales reps had to hand over cash daily and had credit limits set for sales, any credit beyond limits required boss approval. The compensation plan also stipulated that commissions on credit sales were not calculated until the money was collected. As a result, Li had almost no bad debts, and cash was collected quickly. The old days of personally driving around at year-end or other times, begging customers to pay, were gone.

Other systems and processes Li implemented are not detailed here, but her shift in mindset brought significant benefits: she no longer rushed around like a headless fly, could travel with peace of mind without affecting the business, and her delivery fleet grew from three to five vehicles. Many of her products achieved absolute monopoly in her market, making it difficult for competitors to gain any share.

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

Hopefully, distributors will first correct their mindset and attitude toward 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.

-END-

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