Distributors and their manufacturer partners are being asked to bring new value to the supply chain. Customers require new services and innovative products to move to the next level of competitiveness. For manufacturers, these innovative products are experiencing a shorter lifecycle. To be efficient, they must create new offerings and get them up the growth curve faster than the competition so that economies of scale can be captured before the product drops to commodity status.

For the distributor, the challenge is more complex. They must assist the supplier in new product development through more advanced and targeted market intelligence and spearhead an advanced rapid deployment to get the product to market. This requires an ever stronger sales and marketing capability directed at supporting the supplier. Distributors have traditionally spread their sales efforts across many, often competing manufacturers to hold down costs. A focused effort requires new skills and more resources.

Customers, meanwhile, are showing less interest in this process and even pushing back on the distributor's outside sales efforts. To combat this disturbing trend, distributors are seeking closer customer relationships where the distributor's customer contact personnel are viewed as adding value to the customer (consultative selling). The customer, however, continues to put pressure on the distributor's margins demonstrating a poor appreciation of the value these new services are providing. The result has been an increased need for distributors to seek compensation from suppliers and find new ways to be compensated directly by customers (fee for service). The transition is causing channel disruptions.

Manufacturers who sell through distributors have a great deal at stake. If the distributor is unable to make the transition and remain profitable, manufacturers may see the channels consolidate to a few "big boxes" with narrow margins, little to no sales effort on the manufacturer's behalf, and a tremendous purchasing power wielded against the manufacturer. The only defense, once the distribution channel consolidates, would be manufacturer-owned distribution. Besides the many well-documented issues and failures associated with captive distribution, the manufacturer will be taken out of their core competency. This inability to focus on new product design, introduction, and efficient manufacturing will put many firms at risk.

Simply put, the existing model of "every man for himself" when it comes to channel compensation must change. This consortium will investigate how distributors and their suppliers collaborate to create value, to explain that value to channel partners, develop compensation methods beyond simple gross profit on products, and remain competitive while maintaining equity in the supply chain. The consortium will explore the following issues:

• Determining how service models are changing and how distributors are being compensated for new processes.
• Capturing best practices in manufacturer-distributor collaborations in taking new products to market and speeding new product introductions.
• Examining and documenting distributor compensation models in terms of traditional product margin (distributor-driven), fee for service (customer-driven), incentive based (manufacturer-driven), and hybrid models.
• Determining the role, value and cost of new sales and marketing models.
• Documenting best practices in distributor compensation models. The current distribution model is not being threatened with extinction but rather with rapid change. Manufacturer partners who understand and support positive change will not only help their distributors to succeed but also protect their own profitability. Understanding the new environments, rather than reactively responding to change is more critical now than in the past.

Consortium members will participate directly in the research and gain a better understanding of the findings. The full report will be issued to each consortium member with all analysis performed on the firm itself with the firm's data. Direct recommendations will be made for each individual participant firm on:

• Creating and developing value propositions for new products and services.
• Delivery methods (sales and marketing) for these constantly evolving value propositions.
• Optimal compensation schemes that achieve equitable compensation between supply chain partners.
• Analysis methods for demonstrating value.
• All tools created to complete the study and analysis for the study.

Best Practices will be established and tested for:

• Compensating Distributors for new product and service offerings.
• Collaboration between manufacturers and distributors, protecting profitability for each.
• Development of value propositions under rapidly changing service and product offerings.
• Documentation of best practices in compensation equity in the supply chain.

Even though many distributors may be somewhat familiar with these concepts and may utilize them to some extent, understanding and implementing a holistic approach to date has been achieved by only a select few. The development of tools that will enhance the scientific decision making capabilities and implementation procedures of firms will be the primary focus of the consortium.

The consortium members will receive results, methodology and tools developed during this pioneering research in Optimizing Channel Compensation. The key advantage for Distributors and Manufacturers would be to gain competitive advantage by implementing the scientific Optimizing Channel Compensation methods or using the tools developed to maximize value propositions. The key advantage to Technology companies will be to gain the knowledge base, methods and tools that can be implemented in their systems. Apart from shaping research focus and gaining a valuable knowledge base, methodology and tools, each consortium member will be able to send up to a total of 10 people to 2 educational sessions that will be developed from this research. The educational sessions alone represent a $20,000 value.