Are you doing business with OEMs?

Does your OEM customer view spare parts as a revenue stream?   Solution sellers should know the answer to this

You and your customer can share
a love of those spare parts!

very simple question.   Strangely, perhaps even sadly, many distributor sales guys have never fully explored the question.  In their daily struggle to get parts specified, solve technical issues and sometimes baby-sit orders flowing from the customer, they overlook an opportunity to move up the supplier food-chain. 

For review let’s look at the types of folks selling to our customers:

Type of Supplier	Customer Perception
Vendor	A company we send lists of materials to and sometimes make purchases if the price is right and delivery schedules meet our needs.
Supplier	A company we regularly purchase from because they appear to provide a competitive price and good service.
Valued-Supplier	A company we do more business with because their products and services eliminate hassles from our world.  These people provide technical guidance, value-add services and other assistance in a way that complements our in-house team.
Business Partner	A company that helps us make more money.  They perform services which help us make more money and are our competitive advantage in the market.

Perhaps a bit of soul searching may be in order as to where you fall in this category.  I suspect that most self-described “solution sellers” are really performing in the Valued-Supplier space with their best customers and at the supplier or vendor level for the rest.

Think differently, push to the Business Partner level. 

You need to understand how your OEM customer views spare parts.  Are they a profit center, source of service revenue or just a hassle they would like to dispense with?  All three of these have opportunities for you to help them build their business.  Let’s break it down.

OEM sees Parts as a Hassle

What would happen if you knew the machines your product was used on and had their internal part numbers in your ERP system?  When the OEM receives a call for the part, they could simply push the customer over to you and your organization’s inside sales team could quickly identify the right part, convert the conversation to an order and solve the OEM’s customer issue.  End of problem.

What’s in this for the OEM, better satisfied customers and less time spent searching through catalogs to reference the right part?  If you had a copy of the OEM’s drawing, you could provide advice on auxiliary components often overlooked (things like mounting brackets and bushings.)   For the distributor, there is enhanced margin because typically, customers searching for this type of part, are not price shopping.  The customer gets increased uptime and clears the problem sooner.  A win-win-win solution.

OEM sees Parts as a form of Service Revenue

If the OEM sees parts and part replacement as a form of service revenue, you are presented with a slightly different set of opportunities to assist the customer.  First, end customers consider it an irritant if the service person arrives without the necessary parts to make the repair.  How do we address that?  What if the distributor assisted with standardization of parts used in the design?  Would it be simpler to insure the parts were available?  If there are a sub-set of parts used, which are the most common failures?  You might assist in identifying them and perhaps putting together a traveling kit containing most commonly failed parts.  Further, you might provide the service people with “recommended spares” which the OEM could provide to the end customer.  You create the list and package the products as an “add-on” to their service work.  Again, improved profitability for the OEM who marks up your recommended spares list and nice business for you. 

OEM sees Parts as a Revenue Source/Profit Center

This is the greatest opportunity ever.  Typically, OEM operations are not good at maintaining inventories and operating distribution centers.  For distributors, it’s our middle name.  Let’s explore some of the scenarios.

The OEM receives an order and you fulfill it from your warehouse. 
In most instances, this eliminates a middle step, where you ship to the OEM and they ship out to the customer.  Time, money and effort are saved and the customer gets the part a couple of days earlier.  Further, many of the better distributor ERP systems allow for your company to print packing slips which mirror the OEMs own system.  You ship, bill the OEM and everybody makes more money. 

The distributor works with their suppliers to create exclusive part numbers for the OEM.
Each of these new part numbers lock the OEM’s customer into purchasing them from the OEM rather than on the open market.  This enhances the OEM margin and sweetens the pot for the distributor by locking out other distributors jockeying for the business. 

You build exclusive sub-assemblies for the OEM.
Since many distributors are assuming value-add responsibilities for nearly all of their customers, what if you slapped a high quality label on parts to identify the OEM sub-assembly and then offered up your ability to provide these quickly as needed in the field? 

You hold obsolete components to extend the operating life of machines.
In many industries, manufacturers change revision levels or otherwise change the configuration of their products regularly.  This creates issues for their end customers and tracking hassles for the OEM.  Think about ways you might address the issue by holding back inventory or working to find alternative sources.  

What’s in this for You?

First, showing an interest in something besides just selling more sends a message to the customer.  You are really a solution seller.  Secondly, you learn more about the internal workings of the customer.  Going through the exercise will very likely lead to other opportunities.

Finally, the best person to discuss this type of issue with will fall in the management team of the OEM.  This opens the door to better relationships with those responsible for writing the checks to your company.  These management types begin to understand that you provide solutions far above the normal “good service” and “smart people” played up by your competitors.  You win substantial street cred for your efforts and those pay dividends into the future.

Before we go

It’s not uncommon for OEMs to mark-up the spare parts they sell by 250-400 percent.  It would seem reasonable to

assume the OEM should be able to pay more for products sold this way, especially if you helped them develop their own business or streamline the process.  You should negotiate better margins for your efforts. 

Don't Let the State of the Economy be an Excuse

The State of the Economy – a down and dirty analysis

Everybody always wonders how the economy is impacting business.  The topic comes in Numero Uno in the cocktail chat at most distributor association meetings.  No distributor to distributor phone conversation excludes the topic.  We are in some uncertain times.  In general I have heard stories of great Januarys followed by pathetic Februarys or some permutation of the story.   

Privately held distributors often won’t provide sales data for the record and sometimes exaggerate when asked.  Yet I believe most of us are still interested in what’s going on.  With this point in mind, we thought about providing a short recap of the publically held companies in our sector.  They are required by law to report sales so the information is real.  While there is a difference between their business model, territory and scope, I think it gives us a subtle insight into the economy.

Grainger

Up 4% compared to the same period in 2012.  This is a difficult number to contrast as Grainger is in a constant state of expansion in products and territories.  Here is an interesting little tidbit for distributors out there. “The company's gross profit margin increased 0.8 percentage points to 45.2 percent versus 44.4 percent in the 2012 first quarter, primarily driven by the United States segment.”   If your team is dropping their prices because of price competition from Grainger you better inspect the data.

Fastenal

Sales growth of 4.9% with the highlight announced… “during the first three months of 2013, we installed 4,352 new machines.”   We took a tongue in cheek look at this vending machine thing here.

AIT – coming May 2^nd

Motion Industries

Down 2%  (EIS – their sister electrical supply division was down 5%)

Wesco

Up overall, but organic sales were down 3.4%.  Using some hocus-pocus of numbers of days in the quarter and other stuff for the financial world, they are saying down between 1.8% and 2.2% let’s just say down 3.4%.  For those of you wondering about gross margin at Wesco here is what they reported.

Gross profit of …. 21.1% of sales, for the first quarter of 2013 improved 120 basis points compared to 19.9% of sales, for the first quarter of 2012.

We believe the gross margins of these companies are trending upwards as they apply more sophisticated pricing process to their business.  If your organization does not have a similar plan, we recommend you give us a call.  We are not in the pricing business – but we have studied it pretty thoroughly and have some recommendations for you.

A final note: What does this have to do with on-boarding?

The answer is probably nothing.  However, we feel you should share this information with your new sales guys.  There are two messages. 

First, if you are a knowledge-based, value creating distributor you should be outperforming these national players.  Why?  Well for one thing you are most likely doing more for your customer.

Secondly, gross margins are going up.  Distributors are making more money.  And, my guess is none of their customers are sharing that message.  They need to hear it from somebody.  You are hearing it from me.

As a footnote – these guys are not distributors but since a number of the distributors subscribing to this series serve the automation and electrical space.  And, because they enjoy such a large marketshare in the US it might be good to note this comment from the Rockwell Automation Quarterly announcement - Rockwell said U.S. sales rose 2.5 percent in the quarter.

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