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

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

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

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

  2. 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

  3. The Environment Today Relative Risk and Complexity of Managing a Distribution Company Today • 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 Risk (Tons) Integrated Supply Chain Network Management Coordinating Strategic Alliances Moon Landing Managing Distribution Company Oil Rig Fighter Edsel Death Taxes (High) Complexity

  4. 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.

  5. 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

  6. Distribution of Power in the Channel In the beginning • 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 Supplier Distributor Customer (High) (Medium) (Low) In most cases today Supplier Distributor Customer Color Key to Level of Relative Channel Power: High, Medium, Low 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.

  7. Supplier Distributor Customer Changing Needs and Wants Changing Needs and Wants Evolved Products New Service Packages 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”

  8. Communicate Continuously - Externally • 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 • Best product quality • Broadest product line offering • Next day delivery • Lowest price What Do The Customers’ Say • Missing from the internal inquiries was a look outside to the customer.

  9. Communicate Continuously - Externally 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.

  10. Communicate Continuously - Externally 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

  11. Communicate Continuously - Externally • 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. • 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. • 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.

  12. Communicate Continuously - Internally • 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.

  13. 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.

  14. 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.

  15. Effectively Manage Resources 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

  16. 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.

  17. Contact Information Rob Berling Berling Associates 550 Pharr Road Suite 212 Atlanta, GA 30305 Tel. 404.365.9836 Fax. 404.365.9837 Email: rberling@berlingassociates.com Website: www.berlingassociates.com

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