Redefining How The Game Is Played In The Distribution Industry Part One

Berling AssociatesManaging The Forces Of Change

Redefining How The Game Is Played

In The

Distribution Industry

Part One

2Berling AssociatesManaging The Forces Of Change

The Last Thirty Years

The changes of the last thirty years have been continually eroding the margin for error in distribution companies

The major themes of change can been described as

1982 to 1987 as a time of opportunity when the business climate favored distributors, and their growth in many cases outpaced that of the general economy

1988 to 1992 as a period of aggressive restructuring, meaning increased rates of consolidation, new entrants into the channel, and the emergence of new ways of doing business

1993 to 1995 as a time to focus on the improvement of business practices within the company and across the links of the supply chain, as acquisitions increase, and technology becomes a more pervasive enabler

1996 to today as the period when the time it takes for an industry (and economy) to make a 180-degree change compressed dramatically; from dot.com to dot.bomb and from economic expansion to economic recession

The last thirty years have demonstrated that to be successful (or maybe even to survive) the distributor must be continually redefining the way he does business. He needs to be responsive to changing customer-markets, to evolving customer needs, and to increased competitive pressures. He also needs to be creating advantage through the identification and implementation of business process improvements that yield cost reductions and to be developing core competencies valued by his customers and potential customers


The Environment Today

(High)

Complexity

Risk (Tons)

Death Taxes

Moon Landing

Integrated Supply Chain Network Management

Edsel

Oil Rig Fighter

Managing Distribution Company

Coordinating Strategic Alliances

Five imperatives are the legacy of the last thirty years

Fully understand the customers’ needs and wants and how those needs and wants change over time, so as to engage your customers over time at a profit

Only perform those activities that are valued by your customers, vendors, employees, and other stakeholders

Continually improve the effectiveness and efficiency of those processes you must perform

Develop competencies and capabilities in your people, processes and systems

Effectively manage your resources

The complexity and risk inherent in managing the distribution function whether it be a single company or in a network of companies coordinating an integrated supply chain has dramatically increased

Relative Risk and Complexity of

Managing a Distribution Company Today


Focusing On A Profitable Relationship With The Customer

The first imperative:

“Fully understand the customers’ needs and wants and how those needs and wants change over time, so as to engage your customers over time at a profit.”

Our focus will be on the customer and how distributors can continually be “in the loop” as to the customer changing needs and wants. Our focus is not only on the sales organization understanding the needs and wants of the customer, but on all the organization units of the distributor working harmoniously to serve the changing needs and wants of the customer over time at a profit.


Serving Customers At A Profit

To fully understand the customers’ needs and wants and how those needs and wants change over time, so as to engage your customers over time at a profit, you must

“Own” the customer and all the information about him

Communicate continuously with the customer regarding his changing needs and wants and how he values them

Communicate continuously with all in your organization to ensure all understand the needs and wants of the customers you are attempting to serve at a profit

Effectively manage your resources


Own The Customer – The Power In The Channel

The power in the channel belongs to the one who can dictate terms, prices and other aspects of the business transaction. Today, the information about what the customer needs and wants can be a source of power. To ensure his role and possibly survival, the distributor must grow the amount of his power vis-à-vis the supplier.

Supplier Distributor Customer

Color Key to Level of Relative Channel Power: High, Medium, Low

Distribution of Power in the Channel

In the beginning

In most cases today

In the beginning

Suppliers fulfilled many distributors who provided product to a homogeneous block of customers

Suppliers determined product functions and features

Distributors sold on price, with little differentiation on service

Customers purchased what was available

In most cases today

Fewer distributors are providing products from fewer suppliers to individual customers

Suppliers are seeking customer input on product functions and features

Distributors are selling on price, with significant differentiation on service features

Customers are purchasing what they need and want


(High) (Medium) (Low)


Own The Customer – Information Is King

To shift power from the supplier to the distributor, the distributor must “own” the customer

The “how” is simple, but within the “simple” is much complexity

To own the customer the distributor must utilize his customer facing position

to learn and to continue to learn about the needs and wants of his customers and potential customers

from this information the distributor must create new service packages around the basic product to dovetail into the customers’ business processes delivering value extended beyond the basic utility of the product

as the distributor becomes more deeply involved in the customers’ business processes, he will be in a position to see what is causing the needs and wants of the customers to change and begin to anticipate/direct change. All of this information will be of value to the suppliers as they look to evolve product attributes and create new products

These are not periodic snapshots of information, but continuous flows of information; “being in the loop”


New Service Packages

Changing Needs and Wants

Changing Needs and Wants

Evolved Products


An HVAC distributor carries a number of primary product lines and has a strong market position. But, the distributor is only marginally profitable. Management is attempting to determine what to do. They gathered the internal and outside sales teams and asked what their customers want from them and their product offering.

Sales Force Said

1. Best product quality

2. Broadest product line offering

3. Next day delivery

4. Lowest price

What Do The Customers’ Say

Communicate Continuously - Externally

Missing from the internal inquiries was a look outside to the customer.


On-tim

e delivery

High product quality

Parts availability

Quick response to inquiry

Quick delivery

Spare parts packaging

Tech. assistance

Product innovation

Low price

Sales rep attention

Brand recognition

Product line breadth

Customer specialty item

s

Tech. training

3.0

3.5

4.0

4.5Importance Ranking

With web technology today, a distributor can frequently ask customers what elements of his product/service package are most important.

Our example asks the customer to rank the importance of fourteen different service elements based on a scale of 1 to 5. The data is collected via a web survey instrument, at any time or place convenient to the customer.



On-tim

e delivery

High product quality

Parts availability

Quick response to inquiry

Quick delivery

Spare parts packaging

Tech. assistance

Product innovation

Low price

Sales rep attention

Brand recognition

Product line breadth

Customer specialty item

s

Tech. training

3.0

3.5

4.0

4.5Importance Ranking Performance Ranking

In another part of the survey instrument the distributor asked the customer to rank how he is performing on the fourteen service attributes. The response is overlaid onto the importance ranking chart. The distributor is over- and under-performing in different areas. The action should not be only to focus on bringing performance up in the most important areas where he is underperforming, but should critically evaluate those activities, which are not highly valued and can be scaled back.

Under-Performing

Over-Performing



While the ERP system was fraught with its own challenges, it was not the culprit in the margin decline. The company had lost contact with its customers. While seeking the efficiencies of a standard pricing schedule it treated its customer base as a homogenous group, which was not in 2001.

To address the margin degradation the distributor commenced a series of meetings across its network with branch managers and customers in an attempt to identify value (a code word for price) points for various product groups and service packages. They learned there national business was very local in terms of price elasticity. For example the price a customer was willing to pay for a particular product/service bundle in Pennsylvania varied significantly in Altoona, Harrisburg and Philadelphia; Harrisburg being only 100 miles from Altoona and Philadelphia.

21%

22%

23%

24%

25%

26%

27%

28%

Month 1 Month 3 Month 6 Month 9 Month 12

Months Since Go Live

Gro

ss M

arg

in P

erce

nt

A large distributor with over 300 branches located across the United States installed an ERP system to replace a number of legacy systems that had been acquired through a series of acquisitions. As a part of the application’s installation the distributor attempted to standardize as much as possible. One area of standardization was the consolidation of all the regional pricing programs into one national pricing schedule. Shortly after the “go live” the company watched its gross margins drop more than two percentage points.

A new pricing schedule template was developed and implemented. The new schedule was reflective of the customers’ local values, and the new result was a dramatic increase in the previous gross margin levels.



The Implication Of Not Communicating Continuously Internally

Customer The customer was not asked about changing the line, and the the new line was a mediocre performer.

Marketing From their silo point of view marketing did everything right in accordance with their existing business practices.

Sales Sales did all they were asked to do. They took the new line and tried to “push” the product.

Customer Service

CS learned about the new line when the first customers began to call. CS was not able to respond to questions about the product usability because it had no information about the products.

Warehouse The warehouse saw the packaging for the product when they unloaded the first container. The boxes received were in 24 units to a pack. The sales pack consists of four units per pack. All the boxes needed to be repacked into packs of four per. This required the renting of a separate facility and leasing of temporary personnel to do the special repackaging.

IT When the warehouse set up the special packaging operation at the remote location, IT was called to set up communications and remote computers to record the special packaging operations.

In a sports equipment distributor, the marketing group decided to revamp one of the product lines. They identified a supplier, negotiated a large systems contract, then informed purchasing of the business arrangements with the supplier. They next turned their attention of developing the marketing materials and campaign. Purchasing in the mean time set up the supplier and began releasing orders. At the semi-annual sales meeting the marketing group introduced the new line to the sales force.

The lack of communications about the needs of the customer and the impact on internal operations cost the margin garnered by the new line.

Communicate Continuously - Internally


Ensure All Are Aligned

The example on slide 12 demonstrates how a lack of continuous communications internally about customers’ needs and wants can result in less than optimum cost performance.

While the example focuses on communications internally, underlying the communications message is the importance of taking action once the communication is received. In our example, that is aligning activities within the business across the business functions to be responsive to the needs and wants of the customers.

This same message is present in the first example, on slide 8, where the distributor found himself to be over-performing in activities which were not important to the customer. In this case the distributor needs to refocus his resources away from the activities which lack importance or value.

Central to these notions about aligning business activities to the needs and wants of the customer is the fact that these needs and wants change over time and as they do so must the distributor’s business activities.


Effectively Manage Resources

Just as the distribution business is a lot about having the right product, in the right place, at the right time, it also about having the right resources in the right place, in the right quantities, at the right time.

Traditionally, resource management decisions have been based on information acquired through the application of financial controls and analysis of both the balance sheet and income statement. This focus has traditionally been historic and aimed at examining the results of operations and monitoring working capital.

Aggressively managing the customer relationship and its many aspects, also requires the effective management of resources. But, all of the tools that provide the information to manage the resources applied to customer relationships are typically not found in the financial controls and analysis tool box.

The consumption of resources is measured financially, but the indicators or metrics used to monitor/manage the activities and activity levels that consume the financial resources are best measured with non-financial tools.

The metrics used in the management of customer relationships are continuing to evolve. Interestingly, the metrics being utilized are being used as performance monitoring tools, as well as relationship building tools and competitor entry barriers.


Growth Cash Flow Profitability

Same Branch Sales

Days Sales Outstanding

Special Packaging, Labeling, etc.

New Branch Sales Deductions/Charge-backs Per Invoice

Shipping Requirements (TL vs. LTL)

Margin Days Sales in Inventory

Order Lot Size

Price Points Special Carrier Requirements

Transaction Size EDI/Internet Exchange

Share of Wallet Sales Support Needs

Growth Cash Flow Profitability Reliability

Same Location Days Payables Outstanding

Special Packaging,

Labeling, etc.

On-time Delivery

New Locations Deductions/Charge-backs Per

Invoice

Shipping Requirements (TL vs. LTL)

Fill Rate

Margin Days Purchases in Inventory

Order Lot Size

Price Points Special Carrier Requirements

Transaction Size

Damaged Goods Per Shipment

Share of Wallet

Returns Per Shipment

Sales Program Terms

Cash Discounts

The Customer Relationship Has Two Points Of View

The Distributor’s Point Of View The Customer’s Point Of View

Measuring the “quality” of each customer relationship is critical to knowing what level of resource to apply

Interestingly, the measures work for the distributor and for the customer. Recognizing this synchronization and using it as the basis for a quarterly customer performance scorecard can be an effective competitive tool

Effectively Manage Resources


May We Be Of Assistance

Berling Associates has been providing an array of proven services to the distribution industry for over 25 years. Our perspective, forged over time, can assist executives to redefine how they play the game.

Business Strategy Supply Chain Analysis Market Analysis

Strategic Assessment Inventory Management Segment Profitability

Market Segment Analysis Cargo Management Customer Profitability

Competitor Evaluations Sales/Service Analysis Product Profitability

Acquisition Evaluation Vendor Management Perception Analysis

Strategic Alliances Purchasing Management

Strategic Planning Customer/Vendor Surveys Business Process Management

Activity Cost/Value Analysis Process Analysis

Measurement Tools Site Location Analysis Process Simplification

Activity Based Costing Warehouse Cost Management Process Integration

Product Line Profitability Logistics Network Optimization Customer Process Integration

Customer Impact Management 3PL Analysis Vendor Process Integration

Key Business Metrics Decision Support Systems Knowledge Management


Contact Information

Rob Berling

Berling Associates

550 Pharr Road

Suite 212

Atlanta, GA 30305

Tel. 404.365.9836

Fax. 404.365.9837

Email: [email protected]

Website: www.berlingassociates.com

Redefining How The Game Is Played In The Distribution Industry Part One

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Transcript of Redefining How The Game Is Played In The Distribution Industry Part One