Analytics Have Become a “Must Have” Tool

It’s Thursday afternoon, I’m on the beach in Florida with my friends, and I’m energized.  

Let me share…

I just finished spending the afternoon with attendees of the Association of High Technology Distribution spring meeting where the topic of the day was driving more value from your ERP system.  But let me digress for a moment…

During the course of the last couple of downturns, analytics have gone from the growth tool of a few progressive distributors with a technology bent, to a “must have” instrument for longer range survival.

To be clear on this survival thing; I’m not saying lack of analytics will put you out of business today, next year or even over the next five, but I do believe companies with analytics are getting more sales during this year’s downturn.  They are also capturing customer “wallet share” today, which will grow when economic winds blow in a more favorable direction.  They are more productive in gross margin.  They are likely finding it easier to develop new salespeople as well.

The key to analytics for distributors comes via business data served up by the company’s ERP System.  Since literally everyone uses an ERP Business System, we should be able to assume data is readily available.  But, it’s not as available as you would think.

Based on my observations, only a few distributors have the ability to instantly access data from their ERP system and review it in meaningful ways.  Those who have invested in “smart front ends” for their ERP using systems like MITs, Sales Management-plus or other organizations seem to have more and better reports and make more analytical data.  But the data is there, lurking just below the surface.

Real Networking and Benchmarking

The Association for High Technology Distribution, hosted a round-table event to facilitate an exchange of ideas tied to the use of ERP systems.  This was pure networking the way it should be done.  Two groups of non-competing members of the distributor community talking about what worked, didn’t work and some of the tricks they had learned along the way.

While the groups didn’t follow this list of questions precisely, they talked about the following points:

• What is your current computer system and how long has it been in place?
• If you had just one thing you could change about your computer system, what would it be?
• Have you ever attended the user’s group meeting of your software vendor?  
• Did you see value in attending?
• Based on your experience with your system, how long does it take for a new inside sales/outside sales person to master the system?
• Thinking about your routine (daily, weekly, etc.) activities, what reports could you NOT do without?
• What reports do you wish you could pull from your computer system?
• How long does it take for you to get the right information by way of a report?
• Does your system make any “upselling” recommendations to your inside sales people?
• Does your system have CRM functionality?

Real information flowed from member to member.  I could see lights going off and people scribbling down notes as the meeting progressed.  The good stuff was flowing around the room.  Nearly everyone left the meeting with solid takeaways.

Sometimes the manufacturer’s data is better

Many of the attendees were fresh from a similar meeting conducted with manufacturers and distributors discussing best practices with “Reverse POS”.  For those of you who aren’t familiar with the concept, here’s a good description:

"Reverse POS is an analytical tool provided by manufacturers to distributors who provide them with POS data.  Often the data is benchmarked against nationwide statistics and offers objective tools for identifying customer opportunities for the distributor.

What's in your sales toolbox?

           

One such tool is product segmentation.  Based on a show of hands, most distributors have a difficult time segmenting manufacturer’s products into component parts (with examples being Electromechanical Contactors and Starters, Proximity Sensors, Photo Sensors and Power Supplies.)  This bit of analytical data (commonly called GAP analysis) is a huge tool for distributors; particularly during down economic swings.

Based on the comments of one distributor, a significant amount of their business growth can be traced to using the data provided by a select group of manufacturers via reverse POS.  One couldn’t help but notice the buzz recreated during the network session following the comment.

Analytics are must have tools

Previously, I mentioned that I was energized.  Here’s why.  Distributors and their supply partners are getting together to break down the analytics barrier.  Even distributors who were once cavalier in their attitudes around the topic are taking steps to improve their game. 

Quoting Allen Ray, who I view as one of the thought leaders in distribution and regular contributor to Electrical Trends:

“If your company bought an ERP software system 5-10-15-25+ years ago and set it up like most did, you may have built in limitations because the national average for ERP productivity usage is about 40%. This means that you may only use 40% of its capability.”

In my mind, the 40 percent Mr. Ray refers to comes centers mostly on the operational side of distribution, things like entering orders, handling inventory, billing and accounting.  The missing 60 percent is the ability to pull data and make data driven decisions. 

Thankfully, distributors are upping their ante on the process.

Before we go, what are today’s must have analytics

Here is a quick list of analytic related reports every distributor needs today:

• Product segment purchases made by customer – this allows the distributor to identify what’s missing from customer purchases.  It enables you to sell more to existing customers (which experts report is five times easier than finding new customers.
• Product segment sales by salesperson – A quick report to determine if seller "Frank" is not comfortable or effective in selling all the products you have for sale.
• Comparative sales and gross margin numbers for every customer showing the last several months and the same numbers for the time period last year.  Why?  Because it’s embarrassing when a customer flips their business to a competitor and you don’t notice it for six months.
• Purchases of new products by customer – we are constantly launching new products but often lack an easy feedback mechanism to determine if our efforts were fruitful.
• Purchases by new customers – discover when you break the ice with a customer.  This allows you to track sales progress and explore what products are the door openers to your business.  

Got questions?  Analytics are on our mind.

Commission Policies in the Automation and High Tech Electrical Industry

We are gathering information and building a list of frequently asked questions.  

I am often asked about commission structures within the Automation, Electrical Distribution Industry and other knowledge-based distributor operations (Power Transmission Distributors PTDA, Fluid Power Distributors FPDA and Industrial Distributors). Considering the frequency of the question (from potential salespeople, experienced seller, managers and others,) I feel it appropriate to post some thoughts on the practice. While this is not our typical kind of post, I wanted to create a forum for discussion.

Commissions based on Gross Margin are one of the most commonly used incentive practices on the channel side of the business. On the manufacturing side, many people are still paid based on their gross sales numbers. Often you will hear distributors refer to this practice as paying on “tonnage” because sales professionals compensated in this matter really aren’t required to worry about whether their company makes a profit or not. Distributors must produce gross margin to survive. Further, the gross margin does not flow straight to the bottom line. Instead, gross margin dollars pay for everything from the light bill, insurance and rent on to the cost of the distributor’s employees (which typically account for 60 percent of the total gross margin).

In nearly four decades of involvement in the industry (which includes service as a sales manager at a major manufacturer, C-Level executive in a regionally based distributor, President of the North American trade association dedicated to the automation channel (The Association for High Tech Distribution) and, over a decade, as a consultant to the industry,) I have seen literally hundreds of commission models. These range all the way from commissions accounting for only 10 percent of the salesman’s total compensation to structures which comprise 100 percent of the salesperson’s monetary package.

I typically recommend a compensation plan which is comprised of a base-salary and a commission. For the record, I find deep fault with both straight commission and straight base salary plans. The exact percentage must be fine-tuned based on the company and conditions in the seller’s territory.

The most common industry practices on payment of commission are:
• Monthly draws on commission which are settled at the end of each year.
These packages are designed to “smooth out” the monthly variations in commission amounts. Draws give the seller some consistency over the year, but often lead to conflict when the total commission for the year is not met and the seller ends up owing money from surplus commission draw.

• Commissions which are paid quarterly, semi-annually (every six months) or annually.
Most companies have discovered the accounting required to provide accurate monthly commission payments are too time consuming to justify payment on a monthly basis; hence the quarterly, semi-annual or annual payments.

As stated before, well over 90 percent of commission plans are paid based on Gross Margin generated by the sale.
Gross Margin is defined using the formula (Sell Price) – (Cost of Goods Sold)

This number does not include incentives to the distributor from manufacturers, buying group rebates, special buys, mark-ups on freight, special handling fees or other income generated by the sale.

Further, distributors do not typically pay commissions on the following:
• Sales made which are not paid in full by the customer due to disputes or other issue.
• Sales made which remain unpaid because of credit/collection issues by the distributor
• Sales made which are turned over to collection agencies.
• Sales which are paid well outside of the distributor’s terms (i.e. paid 60, 90 or more days after the normally extended terms.

Sales are not one time events
It is important to note, sales generated in this industry are not one time events. Instead, the distributor/customer sales cycle is a long continuing relationship where no sale is ever considered final. Distributors are called on to provide after-the-sale service for many years after payment is made and money has changed hands. The unwritten agreement with the customer can be summarized in this manner: If the distributor customer continues to grow the business relationship with the distributor, the distributor will extend follow-up services in perpetuity.

In Knowledge-based distribution commissions serve as a plan to compensate the salesperson for more than just “closing the order,” they also serve as payment for continued support. With this in mind, it is considered an industry norm to not pay commissions for salespeople who leave the company. For instance, when commissions are issued on February 15th for the quarter ending December 31st, and a salesperson resigns on February 1st, commissions are forfeited.

Conversely, it is not uncommon for distributor salespeople to benefit from the work done by their predecessor at the account. Most customers come with a level of “flow business” which once started continues on for many years. The new seller assumes the role of service champion and is rewarded with commissions on sales they had nothing to do with initially generating.

In the world of knowledge-based distribution, sellers are judged on their ability to not only close the sale but to provide the kind of service which causes the customer to buy more from their employer. Distributor salespeople are judged on their ability to grow the relationship as opposed to garnering one time orders.

As stated earlier, this post is in response to the dozen phone calls or emails we get from all levels of the distribution world each month and is by no means a full report on the state of commission (or commission rates) in our industry. Instead, we thought it appropriate to answer many of the common questions asked.


Here are a few random comments:

On Commission starting and end dates
• Typically distributor salespeople in our industry benefit from the past work of others at their accounts. This comes by way of business flow which was developed prior to their assignment to the accounts under their charge. Typically, new salespeople start with some commission based on the work of others.

• When salespeople leave other resources must be assigned to their accounts to maintain the service level at the accounts developed. These resources must be continued whether they are provided by a new salesperson or through resources such as inside sales, customer service, product specialists or others. It should be noted this practice extends not only through the ranks of distributors, but also applies to many other members of the supply chain: supply-partner manufacturers, manufacturer’s rep agencies and others.

• Policies on being currently employed in order to receive commissions have remained unchanged for many years. Recently, we spoke with a gentleman who resigned his post in the late 1960s. He indicated his commission plan was very similar to those of today. When thinking about leaving his (then) current employer, he waited until the week following the issuance of commission checks. He went on to form a company of his own and has no hard feelings on the potential commission left behind.

• Do policies like this favor the person who stays in position for a long time? I believe long duration salespeople do better in the distributor world because they learn more about their accounts and build layer after layer of flow business. This is typically good for seller and employer alike.


Why don’t distributors pay commission on sales volume?
• Typically, manufacturers pay a commission based on total sales volume. Some distributors call this being paid on tonnage. The average manufacturer salesperson is not privy to the internal cost of the product. Sell prices are very likely to be set by others. In addition, the margins for manufacturers is higher than distributors. Distributor salespeople often know their company’s cost of the product and are paid to capture as much gross margin as possible. For the sake of those outside the industry who may be reading this article, the typical distributor ends up with a profit before taxes and interest of between 2-4 percent. They are not working on a gigantic margin.

Different commission rates?
• Is it reasonable to have a different commission rate for various products sold within the distributor organization? Yes. Here is why: The cost associated with doing business with many supply-partners (some distributors have as many as 500) varies. Some provide incoming freight, some are easy to business with and others have mounds of paperwork associated with each order. Fluctuating the commission rate based on the type of product sold is common.

• Can a distributor have different commission rates based on the sales territory? Again, the answer is yes. Size and type of customer play a role in how easy or difficult it might be to create a relationship. Geography plays a part as well. The salesperson responsible for a large urban territory might may discover the sheer number of potential customers to be larger than the more rural based territory.

Commission rate changes?
• How often can commission rates be changed? Business is a fluid thing. Conditions ebb and flow. Product lines become obsolete. Economies rise then fall into recession. The one mistake either seller or employer make is to assume what works today will always work. While I am definitely not in favor of change for change sake, I do believe business conditions warrant changes in commission rates. As a rule of thumb, any commission plan which has not been tweaked for over five years is probably in need of some examination.

Finally….
I am building a repository of questions, comments and background information around commission plans. I would invite your comments be they anonymous or sent via email and posted at this end.