Editor's Note: The continuous decline in offline foot traffic is an indisputable fact. However, this does not mean that offline channels are no longer important, or that attention and investment can be reduced. Compared to embracing the endless stream of new retail formats, holding the baseline of offline channels is more critical in the current volatile market environment. How to hold it? Only through meticulous cultivation and professional management to increase volume and efficiency. To this end, New Distribution, in collaboration with Mr. Cao Yang, former Channel General Manager of Coca-Cola China's Key Account Management Group, has launched the "Key Account (KA) Management Practice" series, hoping to provide frontline channel managers with a complete methodology for managing offline key accounts in a "chaotic market." This series consists of about 20 issues in total, and this is the sixth issue, as follows. The debate between direct supply and indirect supply has been ongoing for many years. What is the essential difference between direct supply and indirect supply? This article will take you deep into three aspects: 1. The trend of digital transformation has gradually amplified the disadvantages of indirect supply. Direct supply is the general trend, a customer need, and also the fundamental interest of the enterprise. 2. Behind the direct supply and indirect supply models are the enterprise's strategic choices and the strength of its customer management capabilities. 3. Enterprises adopting a hybrid model of direct supply + indirect supply will become the trend.

What General Manager Liu Faces
Is a Challenge Many Companies Face

General Manager Liu is the company's new Sales Director. In his resume, he has served as a Key Account Department Manager, is very familiar with modern channel customers, has rich KA management experience, and is one of the few sales directors who understands KA management. It was also because of this background that he was recruited by the company's General Manager. Currently, the company's operating model is mainly dealer-based. The General Manager hopes the company will achieve digital transformation as soon as possible. As the leader of the company's business, the General Manager requires the sales department to start digital marketing projects first, and General Manager Liu is the leader of this project, playing a very important role. Shortly after taking office, General Manager Liu visited major customers in various regions. During visits to dealers, he found that many customers complained about the company, with the most common complaint being that business was not profitable, especially mentioning that doing business with hypermarkets and supermarkets was losing money. Not only were display fees in hypermarkets high, but they also charged fees under various pretexts. Dealers said the fees given by the company could not offset the money charged by the hypermarkets. General Manager Liu also found that dealers used data very limitedly in their operations. Wanting to understand the specific situation of customers, and coincidentally customers complained about not making money, General Manager Liu promised customers he would follow up on this matter. Subsequently, General Manager Liu arranged for dedicated personnel to collect customer information and found that a considerable number of dealers were indeed losing money. After carefully reviewing the analysis report, General Manager Liu discovered some problems. The company's current model is indirect supply, meaning the company sells products to dealers, who then deliver to hypermarkets. The dealers' sales representatives are responsible for daily store execution and relationship maintenance, and the company does not directly contact hypermarkets. This operating model means the company is unaware of information between dealers and hypermarkets, and General Manager Liu found that obtaining data in the indirect supply model is generally difficult. The data information that General Manager Liu mentioned as relatively difficult to obtain mainly includes two aspects:

1. Obtaining customer data through dealers is very difficult, including POS data, membership data, and store execution data.

2. The fees invested by dealers, such as fees paid to hypermarkets, have no contracts or invoices, and the freight reported by dealers also has no basis. Another objective condition is that dealers mix 2-3 brands when doing business with hypermarkets, making it difficult to split. Based on years of modern channel management experience, General Manager Liu believes that dealers' inability to provide accurate data is a very troublesome issue. There are two situations: 1. Dealers hold detailed data but, to gain more benefits, they may over-report expenses to the company. However, General Manager Liu believes only a few dealers do this. 2. Most dealers do not know to collect this data, do not know how to collect it, and do not know how to make standardized records of expenses for each manufacturer, indicating that most dealers lack professionalism in modern channels. General Manager Liu is well aware that one of the key factors in digital marketing is data, so he scheduled an afternoon with the General Manager to report. When the General Manager heard about the data issues, he interrupted General Manager Liu's report and asked: What impact do these data have on your work? General Manager Liu said: Digital marketing has high requirements for data. The types of data include not only our sales and execution data, but also market share data, customer retail data (POS), corporate and customer gross profit data, etc. These data are the foundation for implementing a key account management system, allowing the team to do sales with strategic thinking and a business perspective. General Manager Liu continued: Specifically, data is very important in three aspects: promotion planning, execution, and monitoring. 1. Using data for promotion planning: To improve profits, the company must avoid "simple and crude" low-price promotions. The team should analyze historical data, discover opportunities, and allocate resources effectively to elevate the level of promotion planning. For example, when I approve promotion plans, I require the inclusion of promotion effectiveness analysis in the proposal, not only predicting sales volume but also evaluating the input-output results. At this point, the General Manager interrupted General Manager Liu and asked: When will the additional approval step be implemented? General Manager Liu said it is planned to start next month. The General Manager immediately called the IT Director and asked him to coordinate with General Manager Liu on the approval settings. After finishing the call, the General Manager signaled General Manager Liu to continue. So General Manager Liu continued with the execution and monitoring modules. 2. Using data for store execution: Quantify execution standards, then quantify assessment, and quantify tracking during execution. This quantification is dataization. Use outcome indicators and process indicators. For example, determine the visit time in a store based on the store area and the number of displayed products, and scientifically and systematically arrange visit routes. Determine the number of sales representatives and merchandisers based on the number of outlets. These need to be quantified through professional visit actions and calculated through data and experience. 3. Using data for monitoring: Once the digitalization of planning and execution is achieved, it is easy to turn execution results into reports, allowing the team and management to see problems and opportunities in the execution process and the progress achieved in a timely manner. The General Manager said: Data monitoring is the business dashboard. Once the reports are ready, I can urge everyone in the management WeChat group. Finally, General Manager Liu said: The above content is for all customer groups. For professional customers with a large business share, it is necessary to develop a joint business plan with the customer. Customers in different channels have very different requirements for plans. Most dealers and traditional grocery stores will not require sales representatives to make a professional and detailed business plan. However, hypermarkets, supermarkets, and convenience store customers have their own strict KPI indicators. Customers require suppliers to meet indicators such as front-end gross profit, back-end gross profit, sales revenue, shelf availability, order fulfillment rate, and inventory days. Based on a win-win mindset, customers hope to achieve common goals with suppliers. This is a joint business plan, and one of its key elements is reflected in data. The General Manager nodded in approval: What you described, in terms of achieving goals, with data support, can not only achieve revenue goals but also share and profit goals. This is exactly what I hope to see! General Manager Liu continued his report. In his view, many business difficulties are directly or indirectly related to the indirect supply model. During his market visits, he also found the following problems: 1. Execution Issues

Inconsistent store performance: The same customer system's stores show significant differences in visual merchandising across different regions. For example, the number of products (SKUs) displayed in RT-Mart is generally highest in provincial capitals, with provincial capitals better than prefecture-level cities, and prefecture-level cities better than county towns. The display quantity decreases by city level.

The General Manager said: Last time I visited an RT-Mart store in a prefecture-level city, I found that the execution performance was far behind that of stores in provincial capitals. I hope to see unified execution performance across RT-Mart stores. General Manager Liu nodded and continued.

Company requirements cannot be implemented or executed uniformly: When the company strategically needs to increase sales of a single product and starts a promotion, if it conflicts with the dealer's interests, the dealer will not follow the company's requirements. The company then has to invest a separate sum of money. Only when the dealer knows the company bears all costs will they follow up with execution.

At this point, the General Manager smiled without saying anything, and General Manager Liu continued his report. 2. Inconsistency in promotions: Promotions are not synchronized across regions. A customer system may hold a promotion, but different dealers are not synchronized. North China says it can be done, Northeast says it cannot, making it impossible to achieve nationwide synchronization of promotions. 3. Lack of unified planning for expenses, leading to multiple investments: I have mentioned before that one of the reasons we invest too much is the lack of an annual plan. Without unified planning, the cumulative cost of doing a little each time will definitely be higher than a unified plan. It's like why young people are "moonlight clan" (spending all their monthly income). If you don't plan your monthly savings and spending, naturally you'll have no money at the end of the month... 4. Retailers want to cooperate directly with manufacturers

  • Modern channel customers, especially chain customers, have been promoting direct cooperation with manufacturers for many years.

  • Increasing the workload of procurement managers, as the procurement department has limited manpower.

  • Adopting a dealer cooperation model, the enterprise lacks its own professional team, and its status in the eyes of retailers will be reduced to the level of a dealer.

The General Manager said: This is the first time I've heard the first two points, indicating that our management has been too unfamiliar with KA customers. But if we use expenses reasonably, will customers also reduce their fees? General Manager Liu said: From the numbers, yes, but the phenomenon of customers overcharging is unsustainable and poses a hidden danger to the procurement manager's indicators. I believe procurement will deeply understand this. No enterprise will allow unreasonable fees to continue indefinitely. There will always be a day when they can't afford it, and then the pressure on procurement will be great because no supplier can immediately make up the fees. From the customer's corporate perspective, conducting normal business and charging normal fees is acceptable to customers. The General Manager nodded and continued: I have some feelings about the third point, because your predecessor tried to meet with a national procurement director of Customer A several times but never got the opportunity. I guess it's because we didn't have a professional team to interface with the customer. Our products appear in the customer's system under the dealer's name. No wonder. General Manager Liu: In my previous company, I also handed over modern channel customers to dealers at first, but later some problems arose. In some cases, dealers indeed lost money; in other cases, dealers' expenses were unclear. Dealers themselves said that engaging in modern channels was thankless and unrewarding. Modern channel customers are too professional, and dealers are always in a passive position. Of course, some dealers have transformed to serve modern channels and do relatively well. Overall, the professional level of dealers cannot meet customer needs. General Manager: What do you think are the advantages and disadvantages of direct supply and indirect supply?

The Long-Standing Debate Between Direct Supply and Indirect Supply

Before continuing the story, let me first explain the direct supply and indirect supply models, including the forms of delivery, payment, and personnel visits in both models. The main models in the market are as follows:

Direct Supply Model

Model 1: The company's customer managers directly interface with the procurement departments of hypermarkets, supermarkets, and convenience stores, including customer headquarters and regional departments. Stores are directly managed by the enterprise, and products are delivered by the company to customers and settled directly.

Model 2: Company personnel directly interface with the procurement departments of hypermarkets, supermarkets, and convenience stores, but products are delivered by dealers. Dealers mainly serve a distribution function. In practice, this model has different variants, such as company personnel interfacing with customer headquarters, while store teams are responsible for interfacing with stores.

Formation of Direct Supply:

  • Proactive direct supply: The company's strategy is to adopt a direct supply model for all key accounts, mainly modern channel hypermarkets, supermarkets, and convenience stores, managed with a key account management system.
  • Gradual direct supply: The company's strategy does not explicitly define a direct supply model, but direct supply is adopted for certain national customers such as Walmart, RT-Mart, China Resources, and Wumart. The number of direct supply accounts will gradually increase over time.

Indirect Supply Model

The company's strategy is to distribute through dealers. The company sells products to dealers, who interface with customers in different channels. Dealers handle delivery and payment, and perform in-store execution and maintenance.

The indirect supply model fully utilizes the four functions of dealers:**

  • Business development: Developing customers, conducting promotions and execution for existing customers.
  • Order: Accepting customer orders.
  • Distribution: Providing delivery services, retrieving or replacing near-expiry or defective products.
  • Finance: Bearing the credit period and accounts receivable.

Strategy Determines Modern Channel Practices

Analysis of Advantages and Disadvantages of Direct Supply and Indirect Supply

Next, let's continue to observe the business meeting between the General Manager and General Manager Liu, and listen to their dialogue. General Manager: Please explain the advantages and disadvantages of direct supply and indirect supply. Changing the model is a big deal, and I want to understand it in detail.

1. Advantages and Disadvantages of Direct Supply

General Manager Liu: Let me first talk about the advantages of direct supply. First, customers like it. This is very important. All national or regional customers hope to cooperate directly with manufacturers. They want to reduce distribution links. By reducing distribution links, part of the fees given to dealers can be passed on to consumers as discounts, and part can be kept as profit for themselves. The General Manager laughed: Customers think that way, but I also want to earn more as an enterprise. General Manager Liu continued: The second benefit is improving work efficiency. Promotions are negotiated directly with the manufacturer, especially for national customers like Walmart, China Resources, and RT-Mart, who want enterprises to negotiate with customer headquarters. This ensures unified actions. If a procurement manager has to negotiate with multiple dealers in different regions, the workload is heavy, and they are unwilling to do so. The above two points are benefits for customers. From our company's perspective, there are also many benefits. It can improve the five indicators and enhance overall operational capability. The General Manager interjected: It's not that simple, or the company would have done it long ago. General Manager Liu: These benefits have been verified in practice, but achieving them is indeed not easy. Let me introduce the benefits of direct supply, and you'll also feel the difficulty. The first benefit of direct supply is improving the five indicators: sales, share, execution, profit, and customer service, all without exception! We know the challenge of doing well on the five indicators lies in managing seemingly contradictory indicators. Increasing sales is not difficult, but increasing share is much harder. Not only do you need to gain share, but you also need to be profitable, which is even more difficult. The five indicators can change from market performance to corporate profit. From the market, you can see improved placement rates of essential SKUs and better visual merchandising in each store. Internally, you see increased market share and profit. To achieve these goals, professional methods are needed. For the company, this means establishing a key account management system, which is applicable not only to key accounts but also to ordinary customers. The biggest benefit of direct supply is the ability to use a key account management system, making company processes and operations smoother, not only achieving the five indicators but also enhancing the company's overall customer service capability. Direct supply allows access to customer POS data and store execution data, enabling the three modules of planning, execution, and monitoring to be done well. From a promotion planning perspective, for national and regional customers, management fees can be unified, which is very important for reducing costs. The General Manager said: We review every investment through financial audits. Why must unified planning reduce the fee rate? General Manager Liu: There are two aspects. 1) For a single customer, using a packaged fee versus spending money piecemeal, a complete plan is definitely easier to control costs. Reasonable fees that help customers achieve KPIs will not be rejected by customers. In my previous company, the stores managed by the key account department had 30% higher sales per store and 50% lower fee rates compared to stores managed by regional managers. This is because the KA department made unified plans, while regional managers applied for activities without an overall plan, so costs were higher. 2) From the perspective of national customers, customers' procurement and stores are managed uniformly, but the company's agreements with dealers do not have as detailed fee investment requirements as customers do. This makes our customers in different regions inconsistent. Neither prices nor fees are controllable. Procurement will use low regional prices to negotiate with dealers, driving down our prices. Therefore, the difference in sales and fees between managed and unmanaged is significant in terms of input-output results. The General Manager said: What are the disadvantages of direct supply? General Manager Liu: If the direct supply model is done well, there are no disadvantages, but there are difficulties and risks. The difficulty lies in talent, and the risk lies in capital occupation. This depends on whether the company's strategy supports it and whether it can bear or solve it. Because the company needs to establish a professional team with high professional requirements, if not done well, it may actually lose money. The biggest difficulty is finding the right people to be customer managers. 1) Talent development is difficult: The talent development cycle is relatively long, generally requiring 2-3 years, and key talent requires 3-5 years of development. 2) Easy to lose talent: Customer managers are easily poached if attracted by 2-3 times their salary. The General Manager said: The company is rapidly expanding, and talent is very important to the company. General Manager Liu said: If we can continuously develop our own talent, we will have strong hematopoietic function, which will guarantee business expansion. The General Manager nodded in agreement and said: It seems the company's strategy is very important. If we want to be a national brand and gain share in modern channels, do we have to do direct supply? General Manager Liu: Yes, the key account management system is key to achieving the five indicators and reflects the company's customer management capability. The direct supply model is more conducive to establishing a key account management system, naturally achieving our desired profit and share goals. The General Manager: After direct supply, a lot of capital will be occupied, which is a big risk for the company. General Manager Liu: Yes, the capital risk is even greater during the transition period. But if we have a professional team, with more people and more professionalism, we can increase sales by at least 30% and accelerate capital turnover. Of course, it also depends on the company's strategy. The General Manager: The issue of payment must be handled carefully. We cannot reform ourselves out of existence. General Manager Liu: I completely agree with you. Let's first look at the advantages and disadvantages of indirect supply, and then compare in depth.

2. Advantages and Disadvantages of Indirect Supply

The advantages of indirect supply are very direct and immediate: cost control. For the company, it saves effort and worry, is simple to operate, and costs are controllable. The disadvantages of indirect supply correspond to its advantages. In the short term, it saves effort and worry, but in the long term, it is difficult to balance the interest relationship with dealers. On one hand, customer needs are very professional; on the other hand, dealers lose money. Over time, no dealer will be willing to engage in modern channels. If the enterprise wants to do more, such as increasing sales of a single product, if the dealer is unwilling to subsidize, the company still has to pay. Currently, the company is implementing promotions by giving dealers profit plus additional company funds. Also, the dealer link in the key account management system adds management links and costs, lowering the company's overall efficiency. The following chart compares the differences between modern channels and other channels, and these differences are the reasons for dealer losses. Therefore, if the company does not need to gain sales or win more share from modern channels, we do not need direct supply; indirect supply is sufficient. The General Manager: Previously, I also asked the team to switch to direct supply, but the team would tell me that the current growth rate is very good, and switching to direct supply would increase the team's burden. Later, I didn't insist. General Manager Liu: This is the key point. In the past two years, the company's expansion nationwide has been very rapid because many stores did not have our products. So this is horizontal growth, an illusion, making indirect supply seem like a good choice. But soon, horizontal growth in some regions hits bottlenecks, meaning vertical growth is needed to meet sales, and the disadvantages of indirect supply become fully exposed. In fact, the direct supply and indirect supply models serve the company's strategy. Whatever strategy the company has determines the model. If the company does not want to occupy the national market, or does not focus on modern channels, or does not strive for share in modern channels, indirect supply is a better choice, reducing costs and saving time and effort.

Key Factors in Direct Supply and Indirect Supply

The advantages of indirect supply are gradually diminishing. With the trend of digital transformation, let's look at how the four functions of dealers for modern channel customers are changing.

  • Business development: For chain customers, each new store opening will notify the enterprise to prepare, so dealers do not need to spend time on development. They lack professionalism in promotions and store execution, with promotions mainly based on low prices.
  • Order: Chain customers send orders regularly, and dealers just accept them.
  • Distribution: Deliver on time according to hypermarket customer requirements.
  • Finance: Bear the credit period and amount for XX days, responsible for reconciliation and collection. From the perspective of enterprise digital transformation, enterprises have increasing demand for data, not only retail customer data and store execution data, but also consumer data, and need to connect company-customer-consumer data. The advantages of indirect supply are shrinking because the data foundation required for digital marketing is difficult for indirect supply to meet. It must be acknowledged that some dealers do well in obtaining data, but for the company's strategy of national expansion and intent to occupy modern channels, relying solely on some professional dealers in scale is clearly insufficient. In contrast, the key account management system is based on direct supply. We find that the content of the key account management system can match customer needs well, achieving a win-win situation for both the company and customers. This is the general trend. The company cannot hope to rely on all dealers to do digitalization well; it must start doing it itself first. Additionally, the key account management system is a process of continuous improvement and enhancement, as is direct supply. It cannot be simply assumed that direct supply will bring immediate results. In fact, through direct supply and the establishment of a key account management system, the company's overall operational capability is improved.

Hybrid Model Will Continue for a Long Time

General Manager: What you said about direct supply is indeed good and aligns with the company's development strategy. But we cannot just dig out a KA team, and as you said, talent is not easy to retain. How do we solve this problem? Also, regarding the issue of capital occupation, if we switch all to direct supply, the company's financial pressure will be enormous. How do we solve this? General Manager Liu: General Manager, the issues you mentioned are inevitable for companies adopting the direct supply model. We can start implementing direct supply with 1-2 mature national chain customers. Based on the company's capacity and the team's business capability, switch to direct supply as each customer matures. This gradual approach allows us to accumulate experience and mature over time. I estimate we can build a professional team in about 3 years and adopt direct supply for the top 10-20 customers. The General Manager concluded: It seems that the choice of model is a matter of enterprise strategy and capability, and fundamentally, it's a matter of capability. General Manager Liu, your visits to the market and customers have gathered a lot of information, basically reflecting our current level. We need to come up with a plan as soon as possible, select 2 customers from modern channels, and start promoting the implementation of digital marketing.

Final Thoughts:

Direct supply or indirect supply is determined by the enterprise's development strategy. If the enterprise's strategy is to become a national brand, occupy the modern channel market, and win national share, direct supply is the best choice. It allows the implementation of a key account management system, helping the enterprise achieve sales, share, and profit. With the wave of digital transformation, whether the enterprise's strategy is national or regional, if it does not undergo digital transformation, it will face greater competitive pressure. The hope for digital transformation should not be placed on all dealers changing themselves, but on the enterprise's self-innovation. Under the dual pressure of capital and talent, the enterprise's transformation can be carried out gradually. Adopting a hybrid model of direct supply + indirect supply based on the enterprise's own capabilities is a good choice. Use direct supply for customers where it is feasible, and indirect supply for those that are not ready, gradually increasing direct supply and reducing indirect supply. In the process of digital transformation, by adopting direct supply in modern channels and establishing a key account management system on this basis, the enterprise will surely stand out from fierce competition! -END-