RCI Master Distributor Evolution of Supplier Relationships 9/16/2012 Group 3 PHILIP CORRADINI (IE/15/009) KAMALIKA GANGOLY (PGP/15/019) S. SIDDHARTH (PGP/15/048) DEVINA BHASKAR (PGP/15/082) APOORVA GOYAL (PGP/15/130) MADHURI MUKHERJEE (PGP/15/155) AMARENDRA (PGP/15/202) DHANANJAY JANARTHANAN (PGP/15/216) GAUTAM S (PGP/15/277) S. HARIPRASAD (PGP/15/314) HISTORY OF RCI 1946 – Mark Schwartz founded a motor repair business and secured a GE franchise for component parts. He was instrumental in bringing about a service innovation by exchanging fully working motors with customers who came in for repairs of their broken down motors.
He then repaired them and replenished his motor inventory. 1962- GE’s General Purpose Control operation developed a new contactor for its air-conditioning and refrigeration business. Mark Schwartz attained the rights to exclusively distribute these contactors to the aftermarket through air-conditioning and refrigeration wholesalers. 1963 – RCI had demonstrated to GE that they could get GE’s products to market, with the parts moving from master distributors to wholesalers and ultimately service repair persons. RCI also worked in the direction of providing new innovations in terms of packing and product innovations as well.
Mark Swartz worked with GE engineers and through this inputs in developing innovations, RCI continued to distribute these models exclusively. 1974 – Danny Swartz takes more responsibility and starts taking all the day-to-day business decisions. Some of the key values which RCI followed were * Working by developing a relationship of trust and faith with suppliers. They did not have any formally drawn contracts. * Demonstrating to the suppliers how difficult distribution was and how RCI’s competencies could not be replicated. CURRENT SYSTEM The current position of RCI was as follows:
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RCI distributed over 6000 electrical and related products earning revenue of $ 35. 8 million and with operating profits of $ 3 million. RCI plays the role of a master distributor i. e. it sells to air-conditioning and refrigeration wholesalers who in turn sell to air conditioning and refrigeration contractors and repair houses. Their role is essentially restricted to the aftermarket channel for repair parts. RCI’S SALES PROCESS RCI uses a network of independent manufacturer’s reps. who were 45 in numbers and from 14 companies. The average commission received by them was 3. % and usually do not carry competing lines. RCI operated five warehouses which were electronically linked and operated on real-time inventory basis. RCI’s strength was in commercial refrigeration and air-conditioning business where price was secondary in some cases and reliability was more revered. Manufacturers of Electronic Components Ex: GE, Texas Instrument, Honeywell, Emerson W. W. Grainger Wholesale/ Distributor 330 Outlets Master Distributors e. g. , RCI, Steveco, Brownell, GEM Appliance Equipment Manufacturers e. g. , GE, Amana, Trane Air-conditioning, Refrigeration and Appliance Wholesalers approx 1250 with 4000 branches) Repair and Service Houses (approx. 10,000) Appliance Retail Dealers Consumers Overview of Industry Channel Structure Conflicts with GE GE Appliance and control: Loss of exclusivity In 1976, RCI first lost its exclusivity for cold controls to GEM which started selling 10 times the volume of cold controls as compared to RCI. GE Appliance and control was not very confident with Mark Schwartz who had only 3 years of distribution business experience. GEM’s success led to gradual loss of exclusivity of PCI over other products.
GE appliance and control used ‘Coercive power’ against RCI because the latter was not able to increase the sales volume as desired by the former. Listed below are the outcomes of GE Motors’s distribution channel study:- a. Master distributors were gradually becoming inefficient and ineffective in managing inventories, product knowledge and providing merchandising support. b. Master distributors were being bypassed by suppliers who were selling products directly to wholesalers. c. The wholesalers were getting products at prices 5-17% lower than GE’s master distributors from GE’s competitors selling directly to them. . Master distributors started losing share of sales to manufacturers selling directly to wholesalers. GE Motors hence decided to keep master distributors but proposed to sell directly to top 10 wholesalers, a proposal that would have given RCI a very serious blow. But RCI threatened GE motors to take back existing inventories with them, billing them for catalogue printing and distribution cost and refused any kind of repair service which meant end of the relationship. RCI had been in this business for a very long time and its innovative ideas were not being imitated by competitors as effectively as they could.
The threat resulted in GE scrapping the proposal. This showcases the use of ‘Expert power’ by RCI owing to its expertise in distribution channel. This time around GE wanted to bypass RCI and remove its exclusivity by selling its products to WW Grainger who was a distributer/wholesaler (that too, a large one). This was esp. in the case of ‘design and control relay’ which had been mastered by Mark Schwartz for GE under the RCI banner. We could say this was GE’s display of ‘Legitimate Power’ as it was looking out for options which could have brought in more sales volume to GE.
RCI established itself as a standard in low cost ‘lower end two pole devices’ - a #2 seller only next to Honeywell in retaliation to GE not reducing its price or developing a low cost product for the low end device by tying up with Component Manufacturing Seeing this GE approaches RCI to distribute its low cost private label for the lower end of the business. This behavior or GE was due to RCI establishing itself as a reference in Lower end two pole device which can be seen as RCI’s ‘Referent Power’. Post the death of Mark Schwartz GE wanted to eliminate the Master Distributers completely.
Danny threatened to drop the GE Line completely and add in competitors’ line. GE yielded to this seeing the revenue from RCI as a bird in hand better than two in the bush where it had to develop newer channel partners. Thus in this case we can say that RCI exhibited ‘Reward Power’ RCI – GEM Difficult period in 1986: The demise of Mark Swartz left Danny Schwartz in charge of RCI for the first time. There was decline in sales for the first time in 1986 since 1971. There was also a major drop in the profits. Danny feared of making a loss due to these reasons.
This led to questions whether RCI be able to handle this transition. The following were the threats faced by Danny Schwartz: GE acquiring GEM: GE bought GEM products in the year 1986, who is a competitor distributor to RCI. Implications of GE takeover of GEM: GE could internally lower price to GEM as it was only an internal transfer price. If this happens then GEM could sell at a lower price than RCI. And if GEM turns out to be profitable, GE could eliminate RCI as its distributor. Danny Schwartz remarked that this was the worst time of his life. GE’s relations with Grainger:
Grainger was an integrated distributor/wholesaler franchise with 330 wholesale outlets that were served by its own captive distributor. It had significant buying power at the manufacturer. Grainger though was not a direct competitor to RCI. But it was competitor to the customers of RCI, the other wholesalers. Because of its strong influence on the consumers, the customers who went to Grainger to make a purchase would continue to buy in Grainger thereby pulling away business from the other wholesalers who are RCI customers. This way Grainger causes a serious threat to RCI.
Pricing policy for OEMs: OEMs were also reselling parts of the products. Due to their huge volume of buying, the OEMs were able to purchase GE motors components at discount about 25%. This would imply that price of a component purchased by RCI at 25$ would cost only 20$ to OEMs. Response by RCI: Danny struck a deal with A. O. Smith to make top 25 models of products under RCI Label. GE cautioned by Danny’s attempt of distributing a “fighting brand” by reducing its price from 25$ to 21$. It then distributed the A. O. Smith models to the areas where GE sales were weak.
THE CRITICAL ARMS OF THE RCI BUSINESS Customers For RCI, the customers are the wholesalers. Their biggest asset is the strong relationships they have built with their customers, which is primarily a result of their performance, and is also somewhat based on their social interactions and experiences with each other. RCI tries to re-educate customers in a way that is advantageous for them, mainly by convincing them that small shipments are better, which increases their reliance on RCI. They offer two pre season specials in which they give extended terms and rebates based on the quantities purchased.
This is contradictory to their philosophy of encouraging small shipments; however, it keeps the customers’ warehouses loaded, leaving lesser space for competitor’s products. Suppliers Managing suppliers is a major task for RCI. This is achieved, firstly, by purchasing in volumes, and secondly, by maintaining strong social relationships. Social relationships are maintained at a personal level with individuals by making suppliers comfortable in visiting them or having RCI people visit them, socialising, and working together.
However, the downside of maintaining personal relationships is seen when the advocate at the supplier’s end moves to a new job. At that juncture it becomes difficult because a new relationship needs to be developed with his successor or boss or other people in the concerned department. Operations RCI has faced problems at various ends, many a times by losing exclusivity or their suppliers’ share to competitors. However their competitors have mostly failed with the products they were given. RCI has been able to maintain a significant share in all products except the cold controls which was the first product they lost exclusivity on to GEM.
RCI tries to accommodate the needs of each major customer by structuring different deals for them. The RCI business is a relatively small part of their customers’ overall business and they make large gross margins on their products. RCI represents not more than 5-10% of their customers’ business even if they have about 80% market share in the products they supply. As a result, their reliance on RCI is low. However, they want their customers to get hooked on to them by regularly placing small orders. Manufacturer’s Reps The reps cultivate and maintain personal relationships with customers.
They are the first point of contact for the customer due to the relationships that they build. In addition they provide ‘One stop shopping’ for the customers by allowing them to choose from a broad line of products from various manufacturers. The master distributor lacks the manpower or the capability to deal with individual customers and negotiate with them on price or quantity. This factor prevents manufacturers from entering the distribution business directly as he would face the same challenges. While dealing with individual reps the master distributor has significant power as RCI for instance accounts for 50-70% of its rep’s income.
This allows them to be demanding in their expectations from the reps. However at the same time RCI ensures that it makes its payments on time and that it does not cheat its reps out of their commissions. The reps situation appears to be fragile as it can be seen from the case that 75% of the rep companies have come on in the last ten years. In case a particular rep does not perform up to expectations or if he is outsourcing the work to other reps RCI is prompt in getting rid of him. This ensures that only competent salesmen remain. Threats The primary threat faced is the consolidation of customers.
This results in a loss of income in the following ways. The manufacturers decide to deal with the consolidated customers directly through their captive distribution divisions leaving out the master distributor entirely. This process also forces existing wholesalers to consolidate or quit the business entirely thereby severing the relationship they have with the master distributor. Upon consolidating customers start centralized distribution warehouses and thereby eliminate the need for specialized services that RCI provides such as rapid delivery.
Although margins have remained constant prices have dropped throughout the industry. Acting upon the lower base prices the gross margin dollars of RCI has decreased over time. Other problems faced include a growing increase in expenses on account of inflation, increased wages and other costs. At a time of constant margins this ends up affecting the bottom line. OEMs’ have a different relationship with manufactures due to the large volumes they provide. These volumes enable them to purchase parts at a significantly lower rate than independent replacement part distributors.
This lowers the value of the assets that these replacement part distributors provide but enables them to capture a greater share of the OEM aftermarket share. OEM’s are also starting in-house aftermarket distributors by using the price discounts that they receive from manufacturers. This could be a major threat in the long run as the only thing preventing the growth of these firms is the belief that manufacturers would not allow the same product to be sold to two different customers performing the same function at two different prices.
RCI competes with such firms on the basis of its credibility and service that it provides. It provides a broad product line and better packaging with instructions and labels at a cost effective rate. Manufacturers prefer selling to companies like RCI as their margins would be higher. The long term attractiveness of RCI’s business is also decreasing due to the fact that prices are margins are being eroded in the long run.
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