Reps and Distributors — the Basics, Part 1


© 1999 Westrate-Yarbrough Group, LLC
All Rights Reserved


Most companies entering the semiconductor capital equipment industry employ reps and distributors as their initial sales vehicle. It is important to understand both the pluses and minuses of utilizing third party sales personnel with one's initial sortie in the complicated world of semiconductor capital equipment sales.

Definitions:

For the purpose of this discussion, the term "rep" refers to manufacturers representatives who are awarded a previously agreed upon commission after completion of a sale of the product or service. Quotations are issued by the principal and the actual sales transaction is between the principal and the end user. The rep does not take ownership of the goods as a middle man and is NOT legally empowered to put the principal into a contract with the end user. As a rule of thumb, reps are not required to purchase demonstration inventory, provide after sales service, nor provide sophisticated applications support. In some cases, particularly in Asia, reps will agree to provide these services in exchange for additional compensation.

An "Agent" is similar to a rep; however, an agent IS authorized to create contracts between principals and end users. Agency is rarely used in the semiconductor equipment industry.

"Distributors" buy for their own account at a negotiated discount and resell to end users. They are expected to buy inventory, provide demonstration capability, perform warranty and after sales service, and provide applications engineering support. They set their own selling price to the end user and are expected to make a profit from the spread between cost and sale. Payment terms between the principal and the distributor are negotiated and are usually comparable to normal commercial terms offered to domestic end users. The distributor is responsible for credit risk and collection from the end user.

Why reps and distributors?

Reps and distributors provide three extremely important capabilities that are nearly impossible for new companies to economically replicate in the start up phase. These are access, credibility, and local yore. Access means the capability to quickly get you and your product in front of the key decision-makers in the customer base. Credibility is based on success with other products at the customers' sites and is transferable to you, simply by virtue of your association with the trusted rep. Local yore is account knowledge based on experience and relationships that have been established over time. It takes many years of successful business dealings with each account to duplicate these capabilities.

Aren't reps and distributors expensive?

Reps are nearly "free." From a cost point of view, they are an incremental cost of sale since they are compensated only after successfully selling the product. In the early sales cycle, they work for free. All of their time and expenses are invested in a principal that they are convinced will repay them in the future. In many cases, it takes over twelve months before any funds flow back to the rep. Unfortunately, this initial investment by the reps is often forgotten when they become successful and are garnishing substantial commissions. In contrast to reps, direct sales personnel are compensated whether or not they are successful in selling the product. Direct sales personnel are a fixed cost of sale and, at the early stage of a company's development, can be very expensive.

Distributors are an even better deal. They provide needed cash at the early stage of a company's development through the purchase of demonstration equipment and inventory. They also underwrite expensive secondary expenses by taking responsibility for after sales service and applications engineering in remote locations.

What are the normal responsibilities of reps and distributors?

The rep and distributors number one responsibility is to maximize the sales of your products in their territory. They should also provide marketing and sales feedback to your organization in a timely and accurate manner. Part of this is accurate forecasting. Forecasts should be submitted monthly with a running six month outlook and should include customer name, contact, address, date, model number, estimated quantity of units, competition situation.

Reps and distributors are not to compete in any way with a principal. By this we mean, products that directly compete as well as products which compete for the same budget functionality. Candor is the best solution to any questions here. If there is the possibility of competition, both parties should discuss the details and come to a conclusion.

Reps and distributors are expected to participate in direct promotional activities and trade shows. Generally speaking, distributors in Japan and Europe carry the burden of Semicon shows in these locations. The principal is expected to provide sales and technical support, signage, and (in some cases) demonstration equipment. Semicon/West is considered a national show and the principal is expected to underwrite most of the costs associated with its production. Reps and distributors are generally assigned booth duty at scheduled intervals. Small local shows and exhibitions are the responsibility of the local rep or distributor with only modest support required from the principal.

Reps and distributors are required to obey all laws and regulations that pertain to them, both domestically and abroad. They are also expected to maintain confidentiality on all sensitive information given to them in trust.

What is the principal's responsibility?

The principal is expected to fill all orders in a prompt and efficient manner. They will pay commissions on time and in full in accordance with the rep contract.

The principal is to provide adequate sales and technical information regarding the product and company which may be desired or necessary for the successful promotion of the product. In the case of reps, timely and accurate quotes should be issued immediately when requested. Avoid letting the rep do the quoting directly since this dilutes the principal's control in the selling situation.

Reasonable amounts of literature, data sheets, advertising data, brochures, and other sales materials are made available by the principal at no charge. The principal must create effective sales presentations and teach the reps and distributors how to use them. The principal provides warranty as to performance and reliability of the product. The principal defends its intellectual property at its own cost and indemnifies the rep and distributor and holds them harmless in the case of legal activities from third parties against the principal and or product. The principal provides product liability guarantee when appropriate.

The principal is expected to provide adequate training for the reps and distributors. In the case of reps, this is mostly sales training. In the case of distributors, this is sales training, service training, and applications training. These can occur at the factory or in the field depending on the competency of the personnel and the complexity of the equipment. (Special note: if English is not the native language of the trainee, plan to spend approximately twice as much time training the personnel as would be normally expected if English were the native language.)

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