In this edition of our blog mini-series on life science distribution, we’ll be discussing the use of contractual terms to help motivate distributors. Previous posts were on improving the performance of existing distributors, distributor selection, and using contractual terms to improve distributor performance.
Replacing distributors is often a difficult task. Similar to firing an employee, it’s something we often don’t want to do, but circumstances arise when the business case is clear – the distributor must be replaced. On the other hand, things can go the other way as well and you may find the relationship being terminated by the distributor. While replacing a life science distributor can be a difficult process, there are certainly many things you can do, both before and during the process, to make it easier on both you and your business.
The time to start planning for the potential need to replace a distributor is before an agreement is ever made. Before contracts are signed, or even before you begin to approach distributors, you should develop a contingency plan. Know in advance that the relationship may not work out and that you’ll may be in the position of needing to replace the distributor some day. When determining what life science distributor(s) you want to partner with in any particular region, identify your top 3 or 4 choices, not just your #1. Know who they are and maybe even who to contact in your second and third choices so you can make contact and initiate negotiations quickly if need be. If you have a distribution contract, make sure that the terms won’t prevent you from effectively transitioning between distributors, either. If you’re providing a distributor with exclusivity, it’s a good idea to have the exclusivity automatically revoked if they fall well below target sales and / or if they remain below target sales for an extended period of time. Non-exclusive distribution agreements are the best thing for life science suppliers when replacing a distributor, as you can transition while your original distributor is still in place.
If the time comes when you feel like you may have to replace a distributor, critically analyze the situation. If the issue is sales-related, make sure that replacement really is the best option. Are there other ways to motivate the distributor to increase sales? Is the drop in sales temporary, due to a factor beyond the distributor’s control, and / or due to a reason that may be unknown to you? A good distributor-supplier relationship should be open and honest, so talk to your distributor to get a better idea of what the problem may be. Lastly, identify the other life science distributors who would potentially replace the one in question. Assess their capabilities and be sure that they have sufficient reach, are a good fit, and would likely pay sufficient attention to your product lines. Even through a distributor is under-performing, if there are no other distributors who would be a good fit or can match the capabilities of your current distributor, it is wholly possible that replacing the distributor may actually result in lower sales.
If the situation cannot be reasonably rectified and there are better options available, then it is indeed time to make the transition to a new life science distributor. If the distributor had exclusivity which is now revoked and you will be engaging a new distributor while the old distributor is still under a non-exclusive agreement, be straightforward with them. It will be far better if you tell them that they’re going to have competition than if they find out themselves. If you don’t have the benefit of being able to sustain a non-exclusive distributor relationship, try to engage another distributor far in advance. This will give the new distributor time to prepare to market, sell, and support your product lines so they will be better able to hit the ground running, so to speak. This can be done by signing a distribution agreement that takes effect at the same time the existing distributor’s contract expires.
We all enter supplier-distributor relationships hoping they work out, but unfortunately that can’t always be the case. With sufficient planning, however, you can minimize the disruption to your business caused by a transition to a new life science distributor.