August 14, 2011

The Power of Trust in Manufacturer-Retailer Relationships

Manufacturers and retailers have almost always been adversaries for each other, each trying to gain leverage over the other for better profit margins. Another fact is that manufacturers have had the upper hand in this conflict for most part of the history, as they are usually huge conglomerates or powerful entities as compared to retailers. Only in the recent times have the retailers gained significant strength owing to the emergence of mega-retailers or supermarkets or buying alliances.
The aforementioned conflict seems like a necessary evil, and obviously has its disadvantages for the manufacturers and the retailers:
1.      The victim tends to have payback whenever there is a change in the position of power.
2.      The victim always tries to find a way to escape the oppression, often harming the other party in some way or another.
3.      This conflict represents a loss of opportunity, wherein the two parties could have worked together for mutual benefits as well as provided greater value to the end consumer.
If the manufacturer-retailer relationship is based on trust, it leads to the following benefits:
1.      The retailer shows more commitment towards the manufacturer, which can be observed from the relatively better performance in terms of sales.
2.      The trust preserves the relationship during patchy times, especially when one of the partners goes against the will of the other.
3.      The two partners can easily share some of their confidential information for mutual benefits. They can also customize their information systems or dedicate their people and resources to serve each other better.
Another aspect of trust is that it encourages interdependence instead of independence. This, at first, might not be very comfortable for most organizations, but it is always advisable to develop long-lasting relationships based on inter-dependence. Additionally, no manufacturer can completely trust its retailer, and vice versa. There are at least a few aspects where the two partners can’t trust each other completely, as they do have some goals that are not in synchronization with each other. But these limitations are not strong enough to impede the development of a mutually benefitting relation.
The key to creating trust is to treat the weaker partner fairly, which not only means giving the partner a fair share of the profits and benefits, but also makes it essential for the stronger partner to ensure free and bilateral communication, impartiality among the different partners, respect, courtesy and transparent policies. Besides, complicated and lengthy contracts also hinder a healthy and strong relation.
Another aspect is that such a relationship might not be possible with every partner. Thus it is very essential that the partners be chosen judiciously. An easy way to judge the suitability is to see if the values of the potential partner match those of the seeking organization.
Procter & Gamble and Wal Mart represent an extraordinary example of a manufacturer-retailer relationship based on trust, even though they are both huge and powerful and used to be very tough adversaries of each other. They have gained a lot from this alliance over the years and are representing an inspiring, but not rare case in this regard.
The writer of this article, Akshay Agarwal is a PGP student of Indian Institute of Management, Raipur and has done his B.Tech from Indian Institute of Technology, Guwahati.

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