Are Profit Vampires Sucking Your Blood?

As you relax comfortably reading this article, vampires are plotting a diabolical simple strategy.  Their evil aim: suck the

precious life’s blood from your unsuspecting business.  Like a hungry swarm of vampire bats menacing overhead, they’re everywhere.  And, based on the latest “as seen on TV vampirology”, they can feed for years before they finally finish you off.

Before you start stringing up garlic necklaces for your staff and reading through ancient and musty lore of Transylvanian past, let me say these aren’t physical forms.  Rather, they come in the way of old time myths disguised as modern business practices.  So join me as we talk our way through the vampires in the Industrial Supply Business.

The evil deeds of dastardly fellow, known as Count Purchasing, are legendary.  You could probably add a few anecdotal stories of your own.  But in our world, the greatest disaster to innocents with salesperson business cards comes when Count Purchasing transmutes into the shape of our best friend.

His sweet siren's song goes something like this: “You’re really a great company.  We really think you have worked hard…and because of all this, I am going to let you have the order… Assuming you can match the price.”  To the uninformed, it sweetly rings forth with a too good to pass up message.  At least until you analyze its hidden meaning.

Deep in the cavernous hideout of his castle office, Count Purchasing has an engraved plaque bearing the motto “buy from the best supplier, but pay the price of the worst on the planet.”  In our case, he may be touting the ill-conceived price of that organization down the street.  The one with no post-sale support, poor delivery and terrible accounting practices.  Or in the case of our technology driven products, he may use the price of a company without specialists.  All falling after your motion control, abrasives or cutting tool specialist invested days and dozens of phone calls helping his own engineering team develop detailed specifications, bills of materials and all the rest.  Simply put, you do the work and get paid like the guys who did nothing.

Vampire killing tip Numero Uno, you must recognize that Count Purchasing was trained to sing this verse.  But wait, there's more.

Another sweet song comes in the form of exaggerated quantities.  “I will be acquiring zillions of these over the next few years.  Give me the price level for your largest quantity break.”  Strangely, the large order never comes.  What’s worse is we, as innocents, often lock their organization into large quantity pricing without setting expectations for lack of quantity or periodically reviewing the results.  Years pass and they continually feed on our goodwill.  Again, a “trick of the trade” is used to pull the life’s blood from our organization.  Vampire killing tip number two; develop quotes that allow for periodic quantity reviews.

Not every vampire in our industry has a cubical down in the

Procurement Department.  Some of them dwell like invisible demons in the minds of our own folks.  When we substitute “nice guy” thoughts in place of business sense, they flourish.  Each and every time we give a really friendly small customer the same pricing as the gigantic user down the street – they put the bite on our bottom line.  Research by David Bauders of Strategic Pricing Associates demonstrates thousands of examples of this phenomenon.  Tiny customers are given sub-market pricing, strangely buying quantities of one or two at levels equal to or lower than your biggest customer who purchases hundreds at a time.  Drop by precious drop the life’s blood of your business is drained from your bottom line.  How much can this be?  These are tiny droplets – but the red cells add up.  David’s team has a track record of adding two points of added margin to distributor’s business.

A trip to the musty crypt of the undead reveals a menacing claw fiendishly refusing to die. 

This monster goes by the name of Free Service.  Let’s bravely explore the situation.  We sold the customer a system back in 2006.  Strangely, a decade later, we find ourselves mesmerized into believing post-sale service is our responsibility.  What’s worse, we think we’re obligated to do it for free.  In spite of expert advice to drive a stake through the beast’s black heart, the darn thing just won’t die.

The practice of free service is a time honored tradition in the electrical wholesaling world.  It is reinforced by some supply partners.  They would have you believe it’s the true duty of every red-blooded prey… I mean distributor.  And systems integrators, contractors and installers echoed the message like sound bouncing in Dracula’s tomb.  For some unholy reason, there’s not an issue with our service, as long as we never, ever charge for the privilege.

Distributors face a growing crisis as our margins are squeezed at exactly the same time as the demand for our services is increasing.  Add the factoid that many of our products are going down in price.  New technology requires even more configurability, and expertise to operate.  Additionally, demographic data eerily screams thousands of highly skilled baby boomers are opting for the sandy shores of some retirement communities.  Their replacements will require even more assistance from our trained people.  And that further complicates our position.

For years, our salespeople have expounded the extraordinary support available through their back-up teams

– specialists, application engineers, project managers and proactive expeditors.  In more than a couple of occasions, I have even heard these guys describe the point that “no sale is ever final” at their company.  Unknowingly they expose their necks and our profits to the hypodermic fangs of this monster.

During the last recession, many of our supply partners “pulled in the reins” by cutting or eliminating manufacturer supported post-sale service and support.  The first time they experienced a 47 minute hold time to have a question answered, customers by the dozens added us to their speed dial.  Still others demanded more from their local distributor when the other manufacturers instituted a fee-based extended support fee.  Either way, we found ourselves on the tooth. 

My own visits to the specialist room across distributor land show more of this highly paid sales resource tethered to their phones rather than out assist in in closing orders.  The problem is, many of them receive positive reinforcement from customer and supply partners alike for this work.  So many have lost sight of their true value, and the revenue creating tasks associated with sales generation.

The Wooden Stake

Bram Stoker gave us Count Dracula.  I can still remember the terror as my 12-year old eyes witnessed Bela Lugosi threatening everything good and pure in that 1931 scary movie classic.  As I left the theater that dark Friday the 13^th

night to trudge home with my little brother in tow, I recall the solace of understanding the proper methodology for dispatching a Dracula.  Allow me for a moment to don my very own Professor van Helsing hat and share a couple chapters on vampire killing.

Spend a little time at your next sales meeting talking about negotiation techniques.  A few years ago we worked with purchasing guru Malcolm Mills on a series of sales process improvement programs.  We discovered the guys on Malcolm’s side (purchasing) regularly attend classes covering negotiation strategies.  They don’t lie, but developing skills to mislead our sellers seems to be worth the investment to them.  Every time we stumble into one of their snares, it cost us money.  Insist your sellers answer the comment “your price is too high” with a powerful value statement.

Invest a little time in understanding your value to the customer.  Some of your day-to-day actions create thousands of dollars in real measurable value.  Don’t let Count Purchasing hypnotize you into believing “all our vendors can do that."  First, it’s probably not true.  More importantly, it doesn’t matter.  If you produce real measurable value – it adds to the customer’s bottom line.  You should be fairly compensated. 

Learn the art and science of pricing process.  With tens of thousands of SKUs and thousands of customers, it’s simply too complex to be left to a spreadsheet or manually developed system.  According to our research, a scientifically driven pricing system is the best investment in the distribution business.  If you haven’t already explored the options, sign up for one of Strategic Pricing Associates’ many free seminars.  Even if you do something now, learn about the state-of-the-art in Pricing.

Brainstorm with your salespeople.  Should house accounts be allowed to attend training sessions for free?  Set a policy for time spent with “C” level customers.  Think about this, if a customer generates $2,000 in Gross Margin dollars a year, does it make business sense for your in-house experts to spend a day with this account?  I don’t think so  But it happens; sometimes with good reason.  Could we recoup a portion of the cost?  We need to do something.

Before you venture out into the deafening darkness, before

stepping into the chill of the misty midnight air, beware.  This time the vampires aren’t just a figment of ancient folktale.  They’re real and ready to feed.  Did I mention I have “Holy Water” for sale?

Non-Price Benefits of a Pricing Process

You see us write a lot about pricing and pricing strategies.  For most distributors, the obvious advantage of a disciplined pricing process is the corresponding increase to the bottom line. Research conducted by David Bauders and Strategic Pricing Associates of Cleveland, Ohio indicates that most

distributors see a margin bump of more than two points. At the same time, examination of the Profit Reports generated by a number of distributor associations indicates the bottom line advantage enjoyed by the “upper quartile” members – those who outperformed 75% of their colleagues - comes from more than “just” a margin advantage.

We discovered these upper-end players were at the vanguard of distributor organizations using Strategic Pricing Associates data driven pricing process. We wanted to explore two points:

What non-pricing benefits/advantages have they discovered as they implemented the SPA process?
How has this migrated into the overall company culture?
We spoke with Jay Johnson, President and COO of Plumbers Supply in Louisville Kentucky, to find the answers.  In his mind, the price related dollars are just the tip of the iceberg. Mr. Johnson went on:

“We believe that our Strategic Pricing Associates based process is a cornerstone in nurturing customer relationships. Consistent pricing builds trust. Nothing is worse for our contractor customers than getting one price today and an unexpectedly different price next week. When a customer experiences this, they begin to question every aspect of our relationship. Things like inventory, service and programs all flash through their minds."

Jay isn’t alone in his feelings about non-price benefits. We interviewed John Wiborg, President of Stellar Industrial Supply of Tacoma, Washington. As we talked about building a pricing strategy, John made this comment:

“The biggest benefits from SPAs disciplined pricing process come in employee morale and service. Let me elaborate. When we centralized the pricing function, it took a lot of the complexity and stress out of our CSRs life. When they (the CSRs) use system price, they don’t need to worry about creating long term customer issues.  It helps them concentrate on the area they typically enjoy most – solving customer issues. When we solve a problem, it makes the customer money. If our price is a little bit more but our expertise creates addition uptime and more customer profit, we feel good. This translates into better customer service where it really counts. Further, our quotes are turned around and delivered faster – customers appreciate that because it allows them to be more efficient. The accounting departments of our customers appreciate accurate billing their invoices. This accuracy has improved the morale of our credit department because they don’t get stuck with disputed invoices that require hours of research and multiple phone calls to correct.”

The Company Culture Piece
Successful distributors simply don’t sell on price. In depth studies of purchasing patterns in segment after segment show price ranked in the fourth or fifth slot. Yet, our sales people repeatedly get “hung up” on this one seemingly low ranked point. And often price moves to the number one spot in their personal hit parade.

Why? I believe it has to do with three basic points:

The uncertainty of price
Metrics like product application features and delivery times can easily be measured and compared. Our competitors provide this information to the public and we can easily measure their widgets against our own.

Human ego
For sales types nothing has the sting of being told, “Your competitor out performed you.” When sales people find themselves on the wrong end of the purchasing decision, they immediately look for something else to blame. Price is a pretty good excuse.

Nice Customers
Regardless of what you read, most people are really nice folks. They don’t want to hurt other people’s feelings (even if they are a quasi-incompetent sales guy,) the human ego is a terrible thing to bruise. Rather than simply say, “I like you. You work for a good company and you seem like a nice enough guy but your competitor out worked you,” it’s easier to convey the message – your price was too high.
Combining this with the human ego above creates an unnatural aura around price.

On the road to building a strategic pricing strategy, distributors face a barrage of pushback not from customers – but from their sales team. But once the process is launched and the sales team witnesses no customer backlash, experiences no loss of business and sees the uptick in gross margin, these sellers start to feel empowered. They savor a new found freedom from the heavy yoke pricing had placed on them.

Distributors with a data driven pricing process, know cognitively and empirically - our price is fair. The data and metrics used along the way give them pricing confidence. It removes a portion of the pressure. A new logic embeds itself into their consciousness. Value is the new game in town.

When sales teams loose an order to a competitor and price is uncertain, there is a strong propensity to blame price and move along. But, take price out of the equation and the self-reflection is directed at a new more meaningful set of evaluations.

Questions like:

• Is this customer really the type of business best matched to our organization?
• Did I really understand the customer’s needs?
• Is something lacking in a component of our relationship?
• Did my package of values align with the customer’s needs?
• Did I properly communicate the value provided with the product?
• Does my competitor offer better product, service, delivery, etc?

These questions drive behavior in a direction that promotes positive human and organizational growth.

Before we go…
Allow me one favor. Go back and review the first question. Research indicates that companies who build a process around targeting customers are 47% more effective in reaching their sales goals. Strategic Pricing Associates is the only organization that provides data rich pricing statistics and a value driven process for improving sales. Targeting is a natural extension. Wouldn't you agree that 47% is a big number?

The Future of Knowledge-based Distribution

Earlier this month I was asked to lead a discussion on the future of distribution.  In this case, we focused in on the future of members of the Fluid Power Distributors Association (FPDA).  Since many of our readers are not FPDA members, allow me to provide a bit of background.  The members of FPDA tend to be deeply involved in providing customer solutions.  In many ways they epitomize the knowledge-based distributor.  Their products are complex, sellers understand product technology and application nuances, customers lean on the distributors to provide technical support and most offer up additional fee based services.

Referring to the infographic below and the evolution of the distributor model, FPDA distributors are the poster perfect picture of the Knowledge-based distributor.  Deep product expertise, product specialists, customer centric engineering and solution selling is their mode of operation. 

  

While the argument for Amazon-like eCommerce may make great sense for the distributors falling into the “Logistics” side of the distribution industry, similar investment on the Knowledge-based side of the evolutionary line is likely to be poorly spent.

A quick survey of those attending the meeting revealed the following statistics:
• 38 percent of attendees’ companies did zero eCommerce
• 50 percent did less than 5% of their business via eCommerce
• Only 12 percent of attendees indicated eCommerce represented between 11-20% of their sales

Thinking about available resources like time, effort and money, knowledge-based distributors investing in eCommerce do so at the expense/neglect of other potentially more rewarding investment opportunities.  The pressing question is where should a knowledge-based distributor invest?

This question can be broken into four segments:
• What customers are best matched for the offering of products, service and knowledge provided by the distributor?
• How can the distributor better their ability to drive solutions to this group of customers?
• How might the distributor scale up their ability to provide the solutions?
And the most important question of all….
• How can the distributor ensure they will be paid for the value they provide?

With all of this in mind, let’s dwell on the critical topic of getting paid for the value provided. 

For this breed of distributor it’s not about value-added sales, instead the crux of the equation is value-metric selling.  Simply put, knowledge-based distributors provide value far above the logistically based guy whose “value-add claim to fame” comes by way of timely deliveries, consolidated invoicing and the occasional cross reference to a more conveniently purchased part.  Instead, knowledge-based distributors provide the stuff needed to help the customer develop better manufacturing processes, reduce costly downtime, reduce rejects and drive profitability.  

Strangely, only a few of the sellers in this high value world really understand the true worth of their actions.  Research indicates, their sellers go the other way, undervaluing what they do.  Instead of measuring the financial impact of their ideas in terms of impact to the customer’s business, they shrug off the economic benefit as part of their “service”; often struggling to justify a percent or two greater margin than the person who provides just products without much needed technical support.  This puts the group in a dangerous position.

As knowledge-based distributors move into the future, their reliance on technical advice, engineering support and turnkey engineered solutions as a competitive advantage deepens.  Demographic shifts point to escalation of human side and other associated costs for the distributor.   Without an understanding of the customer value they create, the distributors will see profitability sag.

Knowledge-based distributors need a different kind of training.  The selling advantage goes to the distributor salesperson who can explain the value of their proposed solution in real customer-centric terms.  It’s no longer acceptable to pepper the conversation in technical jargon and call it good.  Improved cycle times, communication speed, scan rates and other data may be factors for selecting components.  But when a solution is being discussed, the conversation must focus on advantage to the customer.  Going further, customer advantages are best described in financial terms.  For instance, the product feature of improved cycle times, translates into 10 percent more parts generated and that newly created production generates $500,000 additional revenue to the customer.  

While training focused on understanding customer economic value is critical, it must also be understood that rarely are solutions outlined in black and white.  To better understand the situation, let’s explore a hypothetical interaction with the customer.

Acme Manufacturing has an issue with a new machine design.  They would like to employ a robotic arm to properly

locate parts.  The distributor proposes a solution capable of reaching into the machine grabbing the part and properly aligning the part thus eliminating a great deal of human interaction and reducing scrap.  It’s a nice marriage of technology and customer need.  The economics justify the work and the purchase is given the green light.  However, midway through the design stage, the customer asks for a new feature.  Instead of only one positioning action, the robot will require an extra move in order to add a date stamp to the part.  

On the surface, the hardware required to complete the job remains about the same.  But additional engineering is required to make a software adjustment.  And the distributor seller is faced with a dilemma; eat the software cost, avoid conflict and keep the customer happy or negotiate a new price with the customer.

A study of distributors conducted earlier this year, points to a deficit in distributor negotiation skills.  Looking more closely, we have sales teams who constantly negotiate solution and system pricing yet have very little formal expertise in the practice.   

Anticipating questions, allow me to address a couple of points.
• Our customers see us a partners and don’t negotiate when dealing with us.  This misconception is rampant in the distributor landscape.  Customers certainly do negotiate as many have had formal negotiation skills training.  Have you ever formalized the technical side of a solution only to be handed off to a purchasing person to finalize the details?  This in itself is a negotiation tactic.
• Our sellers have been doing this for years and know how to negotiate.  Selling is typically about knocking down roadblocks to getting the order.  Giving away a little margin, or throwing in some added engineering time is an easy way to close the deal.  Further demonstrating the phenomenon, distributors who run engineering organizations report reoccurring conflicts between those required to generate profits in the technical operation and the salespeople.  Truth is, the sellers are better at negotiating with their co-workers than with customers.
• Since our sales team is paid on the gross margin they generate, it’s in their best interest to capture as much gross margin as possible.  From a purely cerebral standpoint, this makes good sense.   However, many salespeople reason that a commission on a small gross margin is better than “haggling over a few bucks” and possibly jeopardizing the order or customer relationship.  Pushing further, antiquated commission policies sometimes encourage sales types to capture less than optimal margins because giving away technical support or engineered services does not reflect on the gross margin number.  In this case, the salesperson gets a commission on bad business. 

What do I recommend for Negotiation Training? 
Over the years I have had the opportunity to sample a number of negotiation skills training packages.  Unfortunately, I have not been impressed.  The big names push tactics over substance.  Most fail to understand that our kind of selling is different.  Distributor-customer relationships are living breathing and ongoing bond.  Every interaction adds to (or subtracts from) the tie between companies.  Tragically, most sellers attending were turned off by the whole seller wins at buyer’s expense mentality.

Thankfully, someone recognized this issue and did something to change the landscape.  SPASigma sprang from

the work done by David Bauders and his Strategic Pricing Associates (SPA) team.  With nearly a quarter century of experience helping distributors apply scientific analytics to their pricing process, SPA has assisted nearly 500 distributors in their quest for developing fair and equitable system pricing.  SPA understands the how distributor business works.  SPASigma has taken a new approach to negotiation training.  Along the way, they have developed a whole system of in-person seminars backed up with online retention tools to assist in changing the outlook of sellers in this field.   You can access SPASigma here. 

Before we go,
We started off by saying, money spent on eCommerce could be better spent in other ways.  Following this path of skill development centered on understanding your value to the customer, understanding the cost of the services you bundle and negotiation for the best deal will position your company for immediate payback.   Payback capable of funding the future.

Fall Tune Up for Distributors

Let’s face it, summer time is filled with distractions.  Our

customers are distracted; they have vacations, kids playing Little League, golf leagues, cabins in the woods, lawns to mow and who knows what else.  This distraction is contagious.  Being people too, distributor folks get caught up in all the summer stuff. 

Sometime around September 1^st, we snap out of our summer induced behavior and put our noses to the grindstone.  For the next week or so, we are going to talk about a few fall tune-ups for distributors.  Think summer end elixir for a better year end. 

If ever you planned to institute a new habit, this is the time.  For the next four minutes, let’s think about selling time.  We’ll ask a few questions:  How much time do our salespeople spend selling?  What distracts them? How might we put the beauty back into the process?

How much time do salespeople spend actually selling?

Based on observations of hundreds of salespeople and dozens of distributors, the answer is simple: not much.  Without getting into anything earth shattering, we can subtract vacation, holidays, training sessions, sales meetings and sundry interruptions.  Vacation, holidays and personal time for life issues alone typically account for nearly 8 percent of the work year.  Let’s add in a few sales meetings, training sessions, and off-site vendor meetings and we could easily come to some interesting conclusions.  First, let’s assume salespeople are paid to “sell,” yet they’re away from their job for more than 10 percent of the time.  Secondly, the seller spends just one day per week doing administrative “paperwork.”  We’ve somehow managed to drop time spent selling by another 15 or 20 percent.

 This brings the total time engaged in face-to-face selling activities down to 70 percent of the real year.  This is the functional equivalent of being paid regular wages for an 8 to 1:30 workday.  But those are just the mechanics.  For the next five minutes, let’s look at how we drop from 70 percent to the actual number, which experts have pegged at around 25 percent.

Salespeople, please continue to read…

This is not about sales department slacking.  While we may touch up against the need for planning, scheduling and effective use of time, this article isn’t about calendar management.  Instead, it’s about sales management.

What takes salespeople away from selling?

Operational issues are a major source of sales distraction.  Think back to the last time you went out with a member of your sales team.   Was a portion of the sales call devoted to discussing shipping errors, delivery issues or a poorly handled customer service issue?  Nothing sours a well-planned sales call like a little back peddling early in the meeting.  It’s hard to sell “ease of doing business” when you just cost your customer money based on something easily avoidable.

What’s worse for many distributor managers is this:  Most lack the data to determine if their growth problems are based on a sloppy warehouse and a crappy customer service department or an ineffective sales team.  Some wonder if customer issues with missed delivery dates or inaccurate shipments are just part of the “distributor sales game.”  With this in mind, one would wonder if gathering administration and logistics data shouldn’t be a standard procedure for every distributor.   We think it should be.

Pricing situations can spoil a selling situation.  While we could argue that price negotiations are an integral to selling, I believe we need to explore a couple of points. 

First, unless you have accurate pricing information loaded into your ERP system, just arriving at a valid price provides a selling distraction.  Each transaction requires additional research.  Every time a salesperson quotes an amount to a customer, a dozen questions flash through their mind.  Is the price right?  What price did we use last time?  Could someone in customer service have priced this differently?   Where do we sit compared to the competition?  And more.

Not only is time spent researching for the right price, we also create doubt and uncertainty.  When the salesperson guesses incorrectly, it creates additional distraction.  The salesperson spends even more precious selling time fixing the issue.

Secondly, when no selling process exists, the salesperson is stuck negotiating every single sale.  To summon up something said by my friend and pricing expert David Bauders of Cleveland-based Strategic Pricing Associates, you never see a dog beg just once.  His point is simple: If you give your dog table scraps one time, they turn into constant beggars.  When our salespeople lower their prices once, the customer becomes conditioned to request a lower price on each opportunity.  Negotiations take away from, you guessed it, selling. 

Unless the distributor employs a full-on pricing process, salespeople are left to determine price.  Customers bombard them with the message “your price is too high,” and it ruins the selling moment.  This constant bombardment of negative energy causes many sellers to lose perspective on the value their organization provides to customers.   Sales experiences, without the presence of value-creating solutions, are about as exciting as the paint page of the 1964 Sears catalog.  

Management teams syphon selling time on a regular basis.  Earlier, we listed all of the mundane consumers of time (vacation, sales meetings and so on,) but many times managers hurt their own cause by not thinking of the sales team when they set up meetings.  Any meeting scheduled for midday consumes the better part of a whole day, even if it only lasts an hour.  This is especially true when ending times are not strongly enforced. 

The office is not the salesperson’s friend, specifically, the practice of starting a business day in the office.  It puts the kibosh on selling efficiency.  Nothing cuts into sales time like being readily available at the launch of a business day.  Here’s why.

It’s natural for customers to ask for their salesperson on some of the most routine issues.  The sales DNA steers the seller toward helpful behavior.   They get wrapped up in lots of trivial tasks that should be funneled to someone in customer service.  What’s worse is this: Customer service people often don’t understand it’s their job to get the salespeople outof the office.  I have seen inside salespeople and customer service representatives complain when sellers refuse to handle incoming calls.  This quickly becomes a management issue.  You cannot afford for salespeople to handle things like order entry, stock checks and routine expedites.

How do we ramp up the real selling activities?

It’s a management-driven process.  First, you must ensure the distractions are removed.  Distributor selling today is a team sport.  Some of these are not directly tied to outside salespeople.  Metrics and measures must be inserted throughout the whole of the customer experience. 

You must develop performance expectations for all components of the selling machine.  Here’s a fact: Many sales types confuse routine reactive care with selling.  They feel good at the end of a long day of handling administrative tasks and minutia associated with their customers.  Customer care is important, but it’s not the best use of their time.  If they must step aside from real face-to-face selling, something is wrong in another department.

Finally …

I believe in data.  Hand waving and opinions are nice.  No discussion of politics, religion or Olympic figure skating should go without them.  In our world, I’ll take data.  I regularly require my clients to take inventory of their day.  How did they really spend their time?

Here’s how it works.  I ask every salesperson to log their day

in 15-minute increments.  Simply put, I want to know what they did from 8:00 to 8:15, 8:15 till 8:30 and so on throughout the day.  If they were talking on the phone, who were they speaking to and about what?  If they were at their desk, what task was at hand?

At the end of the week, I ask for tabulations.  How much time was spent in each of 10- activities?   I insist on real-time logs, but leave the tabulation to the seller.  The end result is always eye opening for the seller and their manager.   Most can radically improve their sales effectiveness.  Why?  Well, if your sales time is hovering at around 25 percent, just a few minutes a day can ramp you to 30 or 40 percent.  That’s a big jump.

If you would like to see the 12 activities we tie to times, drop me a line.  You can log the time spent under planning and process improvement.

The Future of Distribution: Q&A with Frank Hurtte

Looking ahead in Distribution

Perhaps it’s the economy, maybe it’s the weather, could be a coincidence, but a lot of folks are wondering what the future might hold for distributors. Just to give you a flavor, during the past couple of weeks I have heard the term “disintermediation” used as a looming threat from some credible sources.

The following are a number of questions forwarded to me for commentary by a writer for Electrical Wholesaling. These will be combined with the expert opinion of others in the distribution industry and published sometime in the coming months. I will share a link to the complete article when it is available, but in the meantime, here are some of my comments.

Question:
Looking ahead 5 years in the electrical distribution world, some estimate fewer than 200 distributors will exist. What are your thoughts?

First, I believe the distributor model will change. The “safe” size for a “garden variety” electrical distributor has grown much since my first introduction back in the late 70s and it continues to accelerate. Looking back, in the 70s a sub-$10M electrical distributor was quite viable, by the mid-90s the number had grown to about $20M, today the number is probably $50M but in five years anything less than $100M will feel the pressure.

Let me make a point, I don’t see small distributors dropping like flies. Instead, I see an increasing number of “baby-boomer vintage” owners running out of steam and realizing the business probably can’t be passed along without severely inhibiting the operating capitol.

Further, I see a lot of distributors with business models that have morphed into something outside the normal value-add product model. They have added engineering, fee based-services and have also imbedded themselves into their customer’s process in a way which builds their importance to both customers and manufacturers. Their model crosses over the line into what used to be viewed as the duties of manufacturer’s reps and systems integrators.

Back to the question, I believe consolidation will continue. But, I believe the 200 number is pretty low. Over the next five years, I see the number shrinking but something like 25-30%.


Question:
How will the independent distributor survive as it competes against its larger national rivals, many of whom have national contracts? Do you predict a sharp increase in M&A Activity?

First, there will be a sharp increase in M&A activity. For instance, in the past six or eight months there has been a lot of activity in the Rockwell Automation channel. I see more of this into the future, along with the issues I have already outlined.

Along the M&A activity line, I see many distributors in Automation side of the electrical business who are approaching retirement age without strong succession plans. Revisiting the old adage, “you can’t take it with you.” In the next few years, a lot of these owners will face the need to do something. The bigger and aggressively mid-sized distributors in the acquisition mode offer up an exit strategy which may be easier than a succession strategy.

Competing against much larger distributors will require a shift in business model. If a small distributor goes head-to-head with a larger competitor on product availability, price or e-commerce capability they will lose – period. However in the past, larger companies struggle to provide a customized set of services to closely match customer needs. This is particularly true in highly technical areas. I don’t see technology getting easier anytime soon, instead I see technology growing more pervasive.

Finally, some of the smaller distributors will be propped up by manufacturers because the larger guys do a sloppy job of introducing new products. Regardless of all the hoopla, the story from distributor supply partners has remained constant. The larger guys prefer to service the demand for products rather than assist in creating market demand by finding applications for new products or discovering innovative applications for existing products.

Question:
Some “traditional” industrial distributors are trending towards buying companies to complement their current business. Wesco, for example, has been widely known as an electrical distributor, recently bought a safety distributor. They are now an MRO supplier/supply chain strategist. Do you see this as temporary or a growing trend?

In the future there will be very few “pure electrical” distributors. We have already see this as distributors launched into the data-com world a little more than a decade ago. Today we see electrical distributors in the safety, motion control, automation, fluid power, power transmission and the industrial market. Over the course of time, this will accelerate.

Why is this happening? First, for solutions-based distributors, customers are demanding it. They want to buy a full solution not just the electrical components. For MRO/Logistically focused distributors, the emphasis is similar; providing a larger market basket of goods to their customer base.

In the past, distributors have launched out into adjoining lines of trade only to discover that breaking into the field was more difficult than they imagined. For most the move took five years or longer. And, during this time, they struggled to justify inventory. And the product/application expertise required to be credible in the market ate into their bottom line.

Acquiring a distributor already in the space makes more since because it creates a cash flow during the ramp up years. Further, acquiring brings existing relationships with first tier supply partners which are difficult to build from scratch. Lastly, buying someone also brings along the needed expertise to support the sales efforts and drive credibility in the market.

Question:
How important will Big Data be for distributors?

Distributors will need analytics to produce maximum results into the future. In general, the group gets failing results today. Pricing systems are poorly maintained and rarely use state of the art process (like David Bauders’ Strategic Pricing Associates) to find the proper balance between pricing sensitivity and gross margin. Sales efforts are mostly poorly analyzed as most distributors still rely on time consuming manual manipulation of data.

Further, operational issues can now be pushed to “big-data” process. For instance, many distributors still manually enter customer purchase order information into their systems wasting countless hours of highly skilled workers who could be assigned to tasks with better return.

Question:
Considering Amazon Business has focused on logistics and quick delivery, do you feel distributors may overhaul their delivery systems?

First, lots of distributors in the electrical space make customized deliveries without thinking about the type of customer. For instance, they provide free delivery to customers who aren’t really profitable. Lots of times, they roll out their delivery truck for boxes that could be sent UPS for three bucks because the sales team thinks delivery on the truck costs nothing.

Secondly, very few distributors understand what their delivery system costs. Add vehicle cost, fuel cost, driver salaries to all the other variables and you can rack up dollars faster than you expect.

Finally, the local distributor’s biggest differentiator comes with delivering products which are both heavy and lower cost. Amazon might out do us on the 10 ounce sensor that costs 100 bucks, but they can’t handle the bundle of conduit that weighs 500 pounds and sells for 200 dollars. Distributors need to be smart on this. If they find themselves delivering only the heavy (and bulky stuff) without considerable quantities of the lightweight goodies, they are probably losing money.

I see progressive distributors placing a value on deliveries and sometimes charging for big stuff. I see distributors getting better at using all the options available including some of the same advanced logistics as Amazon.

Question:
How will all these changes affect the supply chain and the distributor/customer/manufacturer relationship?

We have to understand the Electrical Wholesaling industry is not a way of life, it’s a business model. As soon as manufacturers determine they can go to market more effectively and efficiently through some other model, they will shift their focus. Regardless of their commitment to distribution, loyalty and all the rest, if reaching customers works better some other way, they’ll be all over it. They have to in order to survive.

We have already seen this process in the lighting industry. With LED technology, the lighting market is changing. The lamp companies don’t necessarily need a distributor to sell something that lasts for twenty years. The replacement lamp business will come to a close in the next ten years if not the next five.

Manufacturers will be forced to demand POS data in order to better understand the flow of their products to market and who buys the stuff after it lands on the distributor’s dock. It’s a premise of modern manufacturing.

Manufactures will insist on better analytics from their distributors. In some instances, supply partners will require additional staffing in the form of product specialists, application engineers and professional marketers to drive new product/technology introductions to the market.

Question:
How does the buyer fit into all these changes? Will expectations change? The focus used to be product, price and availability. How will buyers change their patterns and what this will mean for “relationship selling?” Will relationships still matter?

Relationships – people buy from the folks they trust. Trust doesn’t necessarily belong entirely to people. For instance, I trust Hotels.com. While I am a once in a blue moon customer to the hotel, to Hotels.com, I am a constant repeat customer and am rewarded as such. I believe people trust Amazon because they rarely screw up orders and when they do they fix the issue with zero hassle. Distributors must get the service right and eliminate issues that erode trust.

Pure relationship selling still works for small contractors and other small to mid-sized privately owned companies. In this environment, a relationship with the owner/operator/manager still counts.

Trusting relationships at Fortune 1000 sized companies is fraught with danger. When the chips are down and the buyer must pick between you and keeping their job, you’re out; in a heartbeat.

For larger customers, selling will be about providing an ongoing economic advantage to the customer. This basically boils down to a few items, can the distributor:

• eliminate people from the process? 
• help improve productivity?
• assist in eliminating waste?
• drive down utility or other costs?
• assist in meeting governmental regulations?

This is an economic sell and requires selling to different people.

In the future, upper-quartile distributors will excel at building relationships with upper management people who understand the economics of the sale. Today, very few distributors nurture this level relationship.

Question:
An electrical distributor who relies solely on the sales of electrical products may not survive. What should electrical distributors be doing to try and position themselves for growth-and survival?

Selling electrical products “only” will not kill a distributor, if they are large, they can leverage their suppliers and provide pricing which is near best in class. For small distributors, tying to electrical products “alone” is a recipe for quick financial disaster – most likely during the next major recession. For mid-size distributors, the strategy will equate to longer term stagnation. If the ownership is 50 plus, they will most likely survive till retirement; just don’t encourage the kids to get into the business.

Question:
With the blending of automation, electronics, etc. in the electrical industry, what effect do you foresee this having on the marketplace, specifically do you see new competitors or new forms of competitors on the horizon?

Will there be new competitors? You bet. For those playing in the automation space, expect lots of competitors. The automation space, especially around motion control, lies at the crossroads of fluid power, power transmission and electrical technology. We have already seen lots of conflicts in this market. More to come.

The Internet of Things (IoT) and its industrial cousin, the Industrial Internet of Things (IIoT) promises to be a boom market in the not so distant future. This attracts not only the normal cast of competitors but some biggies like Cisco and others from the IT field. I am optimistic that a few electrical distributors will be big players, but they will be fighting it out with a whole new set of competitors.

Further, the line between some distributor and systems integrator (and even contractors) is blurring. New technology players in technical spaces are turning to SI’s because they got terrible reception from the distributors they approached. In this play, the SI ties product sales to services and replaces many tasks once conducted by distributors.

Finally, there are a host of off-shore companies with plans to break into the US market. They have made the rounds of distributors and have a difficult time getting traction with established wholesalers. They get little respect because they currently don’t have the market share required to produce instant results. But, many of these organizations are big enough and powerful enough to create other alternatives. I believe some will circumvent traditional distribution and thus create new competitors in our market.

What will the future hold?
Changes lots of changes. This doesn’t cover all of the changes but it does touch on quite a few major ones. We are interested to hear from you on your prognostications for the future. What will your world look like in 2025?

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