CPG Distributor Agreements

Avoiding Pitfalls in Distributor Agreements: Insights from Decades in CPG Distribution

Navigating distributor agreements can be a complex and daunting task for any CPG brand. Over the years, I’ve reviewed hundreds of these agreements and learned valuable lessons about the common pitfalls to avoid and how to manage them effectively. Here’s what you need to know.

READ YOUR AGREEMENTS

This cannot be emphasized enough: read your agreements thoroughly. Distributors often charge for various services, including storage and delivery fees. These charges can add up quickly if not managed properly. By understanding every detail of your agreement, you can better control and negotiate these costs. It's crucial to know exactly what you’re being charged for to avoid unexpected expenses.

Utilize Scorecards for Effective Management

Distributors use scorecards to rank and prioritize suppliers. However, this practice shouldn’t be one-sided. Creating scorecards for your distributors and customer segments is a best practice that can provide significant insights.

Scorecards allow you to identify areas where you might be giving away margin or losing control over accessorial costs and deductions. By accurately capturing these costs, you can better manage your pricing strategy. Regular scorecard reviews help ensure you’re not leaving money on the table and can highlight opportunities for cost savings.

Understand Deduction Triggers

Knowing what activities trigger deductions is critical. Common deductions include chargebacks for late deliveries, incorrect labeling, and other compliance issues. These can quickly erode your margins if not managed proactively. Being prepared and understanding the potential pitfalls can help you avoid costly mistakes.

Regularly Review and Negotiate Agreements

Your business is constantly evolving, and your distributor agreements should reflect that. Regularly review and negotiate your agreements to ensure they align with your current business needs. If your business has outgrown its initial agreement, it’s time to renegotiate the terms.

Distributors are generally open to discussions aimed at keeping the product flow steady. They have the same incentive as you: increased sales. Don’t hesitate to come back to the negotiation table if you feel your current agreement no longer serves your business effectively.

Understanding Supplier Scorecards

Distributors use supplier scorecards to measure your performance against other suppliers. Understanding the metrics used in these scorecards is crucial to staying competitive and avoiding penalties. These scorecards influence their decisions and can impact your business significantly.

However, smaller suppliers often face the challenge of being unfairly assessed due to internal distributor issues causing stockouts and spoilage. It’s important to communicate and provide visibility into these issues to ensure a fair evaluation.

Conclusion

Managing distributor agreements effectively is vital for the success of any CPG brand. By thoroughly reading your agreements, utilizing scorecards, understanding deduction triggers, and regularly reviewing and negotiating terms, you can avoid common pitfalls and optimize your distribution strategy.

Remember, distributors are partners in your business. Effective communication and proactive management can help ensure a mutually beneficial relationship that supports growth and profitability.

For more insights and expert guidance on managing distributor agreements and optimizing your supply chain, connect with Mangrove Management Consulting. We provide tailored solutions to help CPG brands navigate the complexities of distribution and achieve sustainable growth.