Manufacturers' representatives are independent contractors who develop long-term relationships with their client companies (or "principals") to sell the latter's products. They do not function under the immediate supervision of the manufacturers they sell for; therefore the relationship is not like that between a boss and employee, but is a business-to-business relationship.
A manufacturers' rep firm, sometimes called a multi-line field sales company, can be run by one person or it can be a much more extensive organization with numerous sales persons covering specific territories. The typical agency is a corporation employing about six people, including those to handle office duties, that sell for an average of 10 different principals, according to the Manufacturers' Agents National Association (MANA). The average rep agency handles annual sales volume of about $8.9 million.
The MANA directory lists approximately 7,000 manufacturers' rep firms and 30,000 agents in the United States, located in all 50 states. The firms represent every conceivable product line, from automotive to rubber products, from arts and crafts to jewelry, from electronics to energy, from food and beverage processing equipment to furniture. Virtually any product that is made and sold can be handled by rep firms.
Beyond sales duties, however, manufacturers' representatives provide an array of services to for their clients in an effort to strengthen the relationship between rep and manufacturer and to increase the mutual benefits of the relationship. These services include (depending on the size, scope, and specialization of the particular sales agency) warehousing, installation and maintenance activities, and, increasingly in the 1990s, consulting on such matters as the identification and definition of clients' needs and problems, efficiency solutions, and a host of other issues. Most rep firms provide one or more of these services in addition to their specialization in field sales.
Smaller companies that can't afford to have their own sales staff use agencies, as do billion-dollar firms that want to ensure maximum coverage for their products. Some large companies even sell exclusively through manufacturers' representatives.
Representatives generally handle sales for several different companies that offer compatible, but not competing, products to the same industry. This method reduces the cost of sales by spreading the rep's cost over the different products touted to each customer. As a result, manufacturers' agents view themselves not as middlemen, but as a cost-effective alternative to a company's hiring of a full-time salaried sales force. Tens of thousands of small- and medium-size manufacturers in the United States use agents to sell their products. This is particularly true of new products where a direct salaried force is cost prohibitive. Because reps are paid by commission, the manufacturer incurs no cost until a sale is made.
At different times, however, some large customers—such as Wal-Mart, Rite Aid, and General Electric—have tried to bypass representatives and buy only directly from manufacturers in an effort to cut costs. This practice, opposed by MANA, was the subject of a hearing in 1994 before a U.S. House committee.
Some sales agencies have been around since the turn of the century, but the manufacturers' representative business really began to grow and develop just after World War II. Industry was taking off at that time, and many new companies were just getting started and needed ways to get their products to market. These new companies especially liked the economics of the rep business: no cost until a sale was made.
The rep business has grown steadily over the years. While the economics have had a lot to do with the growth, agencies often offer much more than just a salaried sales force. They can bring continuity; manufacturers and representatives can build relationships that last years and years. While a salaried sales person may move from company to company, many reps and their principals maintain business relationships that go back decades.
One of the obvious advantages of utilizing a manufacturers' representative is the economic benefits it offers. A manufacturer has no fixed overhead. Rep firms are paid commissions when they sell products. When they don't sell anything, they aren't paid. When a manufacturer hires salaried sales people, it has to pay salaries, Social Security taxes, and fringe benefits, regardless of sales performance. Hiring a rep firm entails no such up-front costs.
While field sales calls cost an average of $250, a rep trying to sell several products to an individual customer proves an efficient and reasonable alternative. Agents who have created a complete line of products often get more time (and money) from a buyer who is interested in several of the products. The system of agency selling is geared to be highly efficient, since the agency will only receive payment if it sells products.
Another significant advantage is especially relevant to start-up firms, firms trying to launch a new product, or firms trying to penetrate a new geographic area. By contracting with a manufacturers' rep, a company gains instant access to either industry expertise or knowledge of a particular country or region. This type of knowledge could take a company years to develop on its own, and it could be very expensive. Contracting with a rep bypasses those negatives.
There are other distinct advantages as well. For manufacturers with narrow product lines, agencies offer one of the best ways to access the market. Because they normally sell compatible products to a single market, the rep firms usually are well-connected with the manufacturers' prospects and customers. This offers manufacturers immediate entry to markets that may be hard to reach with a direct sales force.
Many of the owners of start-up companies have backgrounds in production, engineering, and finance, and have little idea of what goes into sales and marketing; they still see making a superior product as the only thing that matters. Most start-up firms face stiff competition and have to work harder to get noticed. By using manufacturers' reps that handle complemetary lines, these firms usually can establish valuable contacts with the people they need to influence more easily than by employing their own sales agents who don't have customers in place in the territory.
Rep firms also can give new firms ideas of where to advertise, comment on what the competition is doing, and provide estimates of a given territory's potential. Many reps also do service calls for less cost than if it had to be handled from the factory.
There are certain disadvantages to using rep firms, however. Probably the most important drawback is the lack of control. Reps are independent contractors doing business for more than one manufacturer. Because of this, no one manufacturer gets full-time attention from the agent, as he or she must split time among various principals. Manufacturers seeking to take advantage of a rep firm's services only for the perceived cost-savings generally would do well to weigh the importance of direct control over salespeople for their particular operations
There are also times when it is preferable to have a direct sales person instead of a manufacturers' representative, especially when a product needs highly technical service. When highly skilled technical people are needed for a sale, a direct sales person may have an edge, although some reps have fairly sophisticated backgrounds in the areas in which they specialize.
Some agents also may be reluctant to provide service beyond selling. Such things as start-up assistance and service often are needed and must be supplied by the factory.
According to MANA's 1998 survey of manufacturers' agencies, the association's composite profile of the average agency shows the typical agency handled gross sales of about $8.89 million a year. The average agency had been in operation for more than roughly 20.5 years, represented 10 manufacturers, and covered nearly six states in their territories.
Additionally, a typical agency has either one or two offices, employs 3.7 sales people, a little more than two office staff employees, and almost two warehouse workers. Nearly half the firms surveyed announced that they planned to add to their sales staff within a year. More than 76 percent of the agencies were owned by the original founder of the firm, while 24 percent had been acquired, 5 percent as the result of a merger.
About 45 percent of the agencies represent foreign manufacturers in the United States, but only 19 percent actually sell product in foreign countries. Among the markets sold to by manufacturers' representatives, by far the top one was original equipment manufacturers, with 61 percent of reps aiming products there. The second most popular area was the wholesaler/distributor market at 44 percent, followed by capital equipment manufacturing at 27 percent. Other main markets included capital goods in primary industry (19 percent), contractors/architects (19 percent), government/municipalities (15 percent), and retail/mass merchandisers (9 percent).
The MANA survey showed a strong correlation between the number of years a rep firm had been in business and the financial results of the company, save for those firms who had been in business the longest. Fledgling agencies, those in business just 1 to 3 years, handled on average just $1.763 million in total sales and collected gross commissions before costs of about $132,300. For those in business 4 to 10 years, the gross sales rose to $4.8 million, with commissions of nearly $306,650. Agencies in existence 11 to 25 years handled on average $12.72 million in sales, with gross commissions topping $798,900, and rep firms in business more than 25 years had sales of more than $9.1 million and commissions of about $616,100. The slight drop in sales of the oldest firms is quite likely due to the large variation in business structures among these firms; while many have branched out continuously over the years into new markets, others have opted to remain focused on their small, long-term client lists, without an eye toward expansion.
There also was distinct differences discerned in the survey between agencies established as corporations versus those established as sole proprietorships. The corporate rep firms—the more common of the two—averaged $10.34 million in sales and collected $714,300 in commissions, compared with just $4.635 million in sales and less than $211,400 in commissions for the sole proprietors. Corpotations typically maintained a greater number of offices, covered more states, had double the number of sales personnel, and had been in business an average of 24.7 years, compared with about 14 for sole proprietors. A greater percentage of corporate-run businesses also represent foreign manufacturers or sell overseas. Moreover, corporations, though not registering a dramatic widening of the scope of their operations, outpaced proprietorships in revenue growth since the 1994 survey, a feature MANA attributes to a greater efficiency model among corporations.
Proprietorships, however, showed a far greater consistency of ownership; 88 percent of sole proprietors established their rep firms, with only 12 percent acquiring the agency, whereas just 66 percent of corporate owners established the firm, with 34 percent acquiring them. It also should be noted that principal owners and partners involved in a sole proprietorship take home net income that is a greater percentage of gross sales than their counterparts at corporate rep firms. This likely is because they have less overhead with fewer employees and less office space and warehousing capability.
Manufacturers have many factors to consider when selecting a manufacturers' representative. They typically will want someone who is knowledgeable about their products and applications. They'll want reps who respond quickly to calls, present the product in terms of how it will meet customer needs, and represent lines fairly, giving enough time to each regardless of how much income each line accounts for.
Manufacturers also need to decide whether to go with a new agency or an established rep firm. Some want agents who are younger while others want the complete coverage they think comes with an established agency that has a large staff. The best rule of thumb for manufacturers is to be patient and do plenty of preliminary research; they should treat the selection process with as much importance as the hiring of a new vice-president. MANA suggest the following guidelines:
Manufacturers must remember that their rep firms are independent sales agencies that are not employees of any of its principals, but business partners with each of them. As such, the manufacturers can't have the same type of direct control as they do over their own personnel. For this as well as for other practical reasons, it is crucial for manufacturers to fully support their relationships with their representatives if the endeavor is to prove worth the effort of contracting with an agency in the first place.
From a legal standpoint, it is important to remember that the manufacturers pay nothing to a rep until a sale is made. They also pay no withholding taxes or Social Security. It also means there is none of the bookkeeping or record keeping done by a direct sales staff. This is an important distinction for the Internal Revenue Service. The IRS typically uses as one of its tests the amount of direct control exercised over sales reps. If regular reports are demanded of independent agents, the IRS can declare the rep an employee and require the accordant withholding taxes.
Communication remains an integral part of the relationship between reps and their principals. The process of communicating, though, is different than when a salaried sales person is involved. Manufacturers still need field information, but because of the legal ramifications, the question centers on how it will be supplied. Some agents make regular calls to each of their principals once a month, which is allowable as long as it's not a requirement to keep the line. For the representative, it is often a matter of continually "selling" the relationship as much as the products that ensures a successful venture for both parties.
The key is that both parties need to know enough about what the other is doing with respect to the program. Reps should let their principals know what they are doing for them in the field, regardless of the level of sales at that particular moment, while agents need updated information on matters such as product specifications and pricing. Manufacturers should expect loyalty, with no conflict in product lines; knowledge of the territory and/or industry; knowledge of product lines after a reasonable amount of exposure; quick response to suggestions; regular follow-up; and a fair share of the agent's time. Reps, on the other hand, should expect a fair contract that recognizes performance and rewards success and longevity; access to customer service, training, and technical backup; a quality product; timely delivery; and a true commitment to build business in their territory.
One legal issue involving the use of manufacturers' representatives has evolved over a number of years. It concerns the growth of superstores—such as Wal-Mart—that represent tremendous buying power. Many of these discount stores have tried to circumvent the normal chain by telling their suppliers they won't deal with independent reps, but only directly with the manufacturer.
The superstores argue that their economies of scale allow them to undersell small local competitors. They say that "going direct" will help them sell at a lower price by eliminating the commission paid to the rep.
MANA said that large retailers have tried this tactic numerous times since 1980. The association filed a complaint against Wal-Mart in 1992 and testified in late 1994 before a U.S. House committee studying the impact of superstores on sales agents.
More recently, the major retailing firm Rite Aid, Inc. announced in October 1998 that it would cease to conduct business with suppliers who employ manufacturers' representatives. Rite Aid's decision was based on much the same reasoning as Wal-Mart's, adding that Rite Aid intended to utilize emerging technology, particularly the Internet, to cut out the sales rep's role in dealing with smaller suppliers, and instead reaching out to customers directly via online stores and the like. Rite Aid's decision sparked an outcry by manufacturers' reps; some went so far as to call for a veritable boycott by rep firms and affiliated businesses against Rite Aid.
MANA argues that the practice is "unethical and illegal," causing a domino effect that inhibits the ability of smaller companies that depend on manufacturing reps. The group said that in the American system of marketing, someone makes the sale—be it a direct salaried person or a rep firm—and that this selling function is part of the cost of the product.
Internet technology also took center stage in the industry in 1999 when a handful of manufacturers' reps were discovered selling their clients' products directly to customers over the Internet. This violation of the rep-principal relationship had yet to ignite a clear-cut policy for firms' retail accounts as they pertain to Internet selling, but as Web commerce assumes its inevitably increasing role in the economy, such guidelines are likely to be drawn.
Another emerging point of contention stems from the internal dynamics of the manufacturers' representatives industry itself. As more and more rep agencies acquire the product lines of other agencies, a growing concern has centered around the distinction between certain products. Since a rep firm's strength relies on its ability to sell related, but not competitive, products, this consolidation trend has caused many industry insiders to call for a more clearly articulated definition of "non-competitive" in order to avoid feeding a potentially self-defeating impulse.
At multiperson sales agencies, 56 percent of firms consider all sales personnel to be employees, according to another MANA survey. About 16 percent of firms use only independent contractors, while 26 percent use a combination of employees and contractors.
A little more than half of the firms, 57 percent, compensate sales people by a combination of salary and commission. A total of 19 percent utilize salary only, while 24 percent pay commission only. The remainder employ any combination of a variety of compensation methods, including car allowances, expense accounts, bonuses, and profit sharing. Comparing compensation between those paid only by salary and those making a salary plus commission, the study indicates that sales people paid with a combination of both generally make more money.
Average compensation for those making just a salary were: sales trainee, $25,286; 1 to 3 years' experience, $32,460; 4 to 6, $42,575; 7 to 10 years, $47,694; and over 10 years, $68,071. For those making a base salary and commission, compensation averaged: sales trainee, $25,905; 1 to 3 years, $36,088; 4 to 6, $55,192; 7 to 10, $63,568; and over 10 years, $89,500.
[ Bruce Meyer ]
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