GETTING CONTROL Projects generally include a design phase, a bidding phase, and a construction phase. Players at various stages of any project may include the owner, architect, construction manager, general contractor, lighting designer, electrical contractor, distributor, product representative, and fixture manufacturer. The size and scope of the project determines which players are needed for each phase of the project, and the players in each layer of this chain have one objective in common: Obtain sufficient control of the project to maximize profit.
Professionals such as architects and engineers who are licensed by the state in which they practice are legally held to certain standards of performance than professionals who are not licensed. They are bound by a fiduciary responsibility to the client, meaning they must always act in the client’s best interest from start to finish. A breach of fiduciary responsibility could lead to license revocation. If an architect were to skim money from the project by taking kickbacks in return for specification of a product, there would be a clear breach of fiduciary responsibility, which could result in serious legal problems or criminal charges.
But all of the players in the supply chain are not usually held to a uniform code of ethical conduct. Each may simply attempt to take as much money as possible from the project. There are many creative ways to do so that are in common use today.
THE “OVERAGE” GAME The difference between the fixture manufacturer’s book price and the price a sales rep can get for it is called “overage.” This appeals to and serves a basic human flaw: greed. In its beginning, a manufacturer who simply copied another’s design and avoided some normal costs of doing business, such as UL testing, offered the overage deal as an extra incentive for the sales rep. Initially it was a 50/50 deal. As more manufacturers entered the overage game, competition between them increased. In the 1970s, the stakes went up as manufacturers became more aggressive by offering larger overage shares such as 60/40. These deals have progressively increased: 70/30, 75/25, 80/20, 85/15, 90/10, and even higher. And the manufacturers are willing participants. Keep in mind that overage is money extracted from the project without the client’s consent or knowledge. Yet from the manufacturer’s perspective, it’s a method of getting (buying) the sales rep’s discretionary business with money that is not his or her own.
Sales reps conceal the fixtures’ actual prices within a “lump sum” package bid. Manufacturers collect the fee, paying the lion’s share back to the rep as a commission on the sale.
Often, the reps consolidate overage from several manufacturers and then shop for the best overage split, putting it all where the payback split is the highest. It would be foolish for them to put overage with a manufacturer paying 50/50 if there is another manufacturer paying 75/25.
In the late 1990s, the vice president of sales for a manufacturer related this story: Competition had driven him to offer a 75/25 percent overage split to its reps. The factory issued a quote for the complete bill of materials at a price of $14,000. A month later, the order came in from a rep at a “lot-net” price of $94,000. The overage of $80,000 had to be split, and a 75-percent check for $60,000 was then sent to the sales rep. Events similar to this happen more frequently than one might think. If this isn’t a form of money laundering, then what is?
None of the players in the various supply-chain layers are exempt from the temptation to find creative ways to build overage into a project. Some are willing participants, as in our previous example; others are unaware of the risks that they are taking. The latter group includes the architects, engineers, and lighting designers who write the specifications, who might be unwittingly putting their clients—and even their own firms—at risk.
At present, control rests mainly with the various contractors and the sales reps, but that will likely change over the next few years. Fixture manufacturers don’t particularly like the fact that sales reps have such a high degree of control over their market share and profitability.
A common practice to save time and hold costs down involves preparation of a primary (one-name) fixture schedule with a copy given to competing sales reps, requesting that each rep prepare a list of the manufacturers they represent that meet the specification. Not only is this is an open invitation to product substitution, it also creates a biased specification. In turn, the client or owner is at risk of receiving inferior products, and it is the specifier, not the sales rep, who will be held responsible for the fixture selection if something goes wrong.
Not bound to any standards or a common code of ethics, this is like swimming in a sea of sharks. But there are no sanctions or penalties, so there is minimal risk. If in the course of business, specifications are broken, so be it. Is it any wonder that design professionals express frustration with the complexity of the lighting supply chain?
CONTROLLING THE FUTURE At present, control rests mainly with the various contractors and the sales reps, but that will likely change over the next few years. Fixture manufacturers don’t particularly like the fact that sales reps have such a high degree of control over their market share and profitability. Fixture manufacturers most likely will aggressively move to control their own destiny. And that’s a good thing.
We already see a good majority of projects in the U.S. being done by design/build contractors, some of which are very large firms. In the future, fixture manufacturers will likely favor selling to this class of customer directly, limiting or bypassing the traditional layered supply chain. The same holds true for large national accounts. Most large manufacturers already pursue national accounts through direct sales rather than through reps.
Two benefits result from either of the examples mentioned above. First is a reduction in cost of sales. Second, and most important, is that the manufacturer gets back in control of the relationship with its larger customers.
At some point, fixture manufacturers will need to aggressively address cost reduction. There’s not much more that can be taken from the material or labor, so expect sales costs (sales representation costs and distribution costs) to come under closer scrutiny.
Also, LED lighting is a whole new technology, with complexities of its own that manufacturers, specifiers, and owners will have to address. Lacking expertise in this new technology, many of the players currently in the layers of the supply chain are ill-equipped to handle the products. An additional layer, through which this knowledge and information is filtered, may emerge.
Looking forward, we see little reason to expect the layering of the supply chain to become less complex any time soon. There are too many players pulling in too much money for any rapid change. But the lighting supply chain will likely get a lot cleaner.
Jim Fowler is a lighting industry veteran of 40 years. Most recently he was vice president and general manager of Philips Genlyte’s Vista and Morelite divisions. In 1997 he authored the book Spex: A Lighting Specifier’s Guide to Increasing Productivity and Preserving Design Integrity, a frank examination of the players involved in the lighting supply chain.