peshkov | stock.adobe.com
The manufacturer who called me was sincerely puzzled. “I am trying to hire reps and all of them are asking for Life of Part/Life of Program (LOP/LOP) or shared market development fees.*”
- “What happened to just paying the rep based on each month’s commissionable shipments?”
- “If I gave a rep LOP/LOP and then replaced him or her with a new rep, then the new rep would end up handling price negotiations on repeat orders that are commissionable to the old rep. Why would the new rep try to maximize the selling price if commission goes to the old rep?”
- “And if the new rep handles negotiations on repeat orders that are commissionable to the old rep, what incentive does the new rep have to work to keep the reorder from going offshore?”
To answer the first question, let’s say you are a casting manufacturer who wants to target Ford Motor Company.
Before any commissionable parts orders ship, your rep must:
- Introduce your company to Ford.
- Get your company through Ford qualifications.
- Wait for a new program to come up (say a new rear-view mirror design).
- Get your part on the print.
- Wait for tooling to be produced.
- Wait for prototypes to reviewed, perhaps adjusted, and resubmitted for approval.
- Wait for the program to be released.
Without LOP/LOP and/or shared market development fees the rep risks working 3-5 years for free and then being terminated after the first production order ships.
And making the rep’s situation even worse, for every project he or she works on that becomes an order, the rep also probably worked on 5-10 similar opportunities that did not become orders for reasons that were completely outside the rep’s control.
That’s why manufacturers who want their reps to hunt for elephants put LOP/LOP and/or shared market development fees in their contracts.
For the answers to the manufacturer’s last two questions, watch for next month’s “MANA Minute.”
* The manufacturer’s comments have been edited for clarity and brevity.
