Tough Economy May Call for Tough Love

For those of us selling into the industrial sector, the economy has turned tough.  One of the gauges of business levels comes from large manufacturers of industrial products.  Numerous end of quarter reports point to slumping sales.  We’ve seen everything from no growth to decreases from three to six percent being typical. 

At the same time, a few large industrial corporations have announced plans to “revisit, reevaluate and rethink” their supply chains.  Their strategy is simple:  The economy is slowing and they plan to squeeze a few points out of their suppliers to offset other slides in profitability.  In the past 45 days or so, distributors have shared feedback on margin squeezing moves by key customers.  Longer payment terms (How does 105 day payment sound?) and requests for across the board price reductions are common.  In the past month alone, at least a half dozen distributors report moves to “eliminate the middleman” with customers asking key vendors for a direct relationship.  We wrote about this phenomenon last year.  The future is uncertain, distributors are under pressure and now is the time to take action. 

Why now?  

First, we still have maneuvering room.  Business levels are nowhere near the doom and gloom days of the Great Recession of 2008-2009.  Our sellers have not fully bought into the theory of a down economy.  They are still open to direction and see the opportunity to grow their territories.  Secondly, we have some advanced notice.  We have time to position ourselves to grow business and take market share from the competition.

What should we be doing?

Target and focus our efforts  

Now is not the time to waste resources on customers who lack the potential to provide us with growth.  Most distributor salespeople have 150-200 accounts on their list, but the real potential lies with their top 25-30 accounts.  Quit wasting time servicing people who can only buy $1,000 bucks a year, even if they are nice guys, loyal and all that good stuff.

Broaden your contact list at targeted (Top 25) accounts  

If your business is dependent on a single point of contact, you are vulnerable.  During times of turmoil, companies often reassign, transfer or downsize people.  If a favorite customer contact goes, so goes your business. 

Take time to know the management team of your accounts  

When our customers feel the pinch, they often take measures to reduce costs.  National chains and integrated supply groups skip over our traditional contacts to deliver a financial message to customer management teams.  Most knowledge-based distributor teams don’t really understand the business objectives of their customers.  Understanding the customer’s real plans allows for better solutions and better customer service.

 

Understand the value of your solutions  

During times like this, many companies become more frugal with their investments.  Projects require better ROI to go forward.  Organizations move from a one year payback goal to something better.  Understanding the financial benefit delivered through your solutions improves your competitive position.  Further, we cannot assume our allies within the customer have a clear picture of the monetized value of our work.  Helping them understand enhances the relationship.

Sell backward to your suppliers 

Do your suppliers understand your strategy in the market?  More importantly, do they have firsthand knowledge of your efforts on their behalf?  Has this information been communicated to the upper management of your suppliers?  If the answer to these questions is not crystal clear and an astounding yes, you may be vulnerable to customer efforts to create a direct relationship (and eliminating the middleman.)  Our suppliers are under pressure to maintain profitability too.  If you don’t educate them, they may do something detrimental to your growth.

Improve communications within your organization  

Most distributors make use of product specialists, support desks, inside sales teams and other customer-facing groups.  Many times important information is not passed from department to department.  Yet, each of these groups has access to critical customer information.  If you use a CRM system, now is the time to review how you use this information and how the various groups can all access key data.

Follow-up and measure customer quotations and proposals  

Do you develop customer quotations then simply toss them over the wall without following up on their reception?  Research indicates that customers appreciate the effort and, what’s more important, the same research shows distributors who inquire about quotations are often rewarded with additional business.

Develop negotiation skills

Going back to one of the points we made earlier, major industrial firms have gone public with their plans to squeeze their supply chain.  Some have noticed, they can get additional discounts just by “asking” for them.  Customer purchasing types are going to negotiate with our sellers and we need to be prepared.  Based on my observations, most distributor salespeople have not received proper negotiations training in recent history.  And, if they attended any at all, the class was generic rather than distributor focused.  If you haven’t seen the cool videos provided by SPASigma, I recommend you click here.  The message is both entertaining and to the point.

Now for the Tough Love…

A lot of the points made will run into resistance from within the organization.  There will be pushback and foot dragging unless management insists they be done (and hopefully done quickly.)  Now is the time to improve your sales process.  Now is the time to add structure to your organization.  Waiting for the economy to improve is a poor decision.  

How to Incentivize a Distributor Purchasing Professional

The Challenge – How to Incentivize a Distributor

Photo from zazzle.com

Purchasing Professional

After writing tons of articles on the sales process in distribution where I brutally vilify purchasing and procurement types, I received an email with the following:

“Frank, you often make sweeping generalizations about purchasing types. As a former sales guy, I tend to agree with most of what you say. However, my organization (a distributor) has a couple of purchasing people. And while I certainly don’t push them to lie, cheat or steal from our vendors, I would like for them to be more proactive in helping our business make money. Do you have any recommendations for points we should intensify them on? Is it possible for them to do more than just enter orders with our suppliers?”

This was a very good question and one I hadn’t thought about for quite some time. There are many purchasing folks working in distribution. These folks are critical to our organization. Most are hardworking, trustworthy and loyal. A good many are also not working at their full potential, vis a vis, generating revenue for their organization.

I decided to create a list of topics I believe should be included in discussions between distributor management and their purchasing groups. This is my first pass. I hope it generates some discussion here and more importantly, in the conference rooms of distributors.

Let’s start off with a few assumptions:
1. Outside of commodity products, most Distributor Purchasing folks do not decide the manufacturers of products which are going to be purchased.
2. Purchasing people are often responsible for setting inventory levels.
3. Purchasing people are responsible for returns to manufacturers.
4. Purchasing people are often charged with keeping dead stock under control.


Discussion Points
Inventory:
• What is the dollar amount of inventory which has not sold in 180/365 days? Are there ways this number can be improved via returns, inventory swaps or some other method?

• When we stock new product offerings from our supply-partners, do we insist on reviewing the quantities and amounts after 60 days? If so, does the review actually take place?

• How do we calculate a good deal when presented with a seasonal or special buy situation?

• How often do you process returns for warranty items and defective returns from customers? How do you handle suppliers who are slow to process these items?

• What is the inspection process for equipment returned from customers? Are the items in first class shape? Are boxes and packaging in “sale ready” condition?

• If we scrap dead stock, who oversees the process to ensure nothing sellable is lost?

• How do you manage purchasing of commodity products? Are there some products which are completely interchangeable in our market?

Freight:
• Which manufacturers offer freight allowance (free shipping) with certain size orders? Are there times when we miss the freight allowance? Have we attempted to negotiate better shipping terms?

• Do we regularly use our own freight accounts for companies who do not allow freight to avoid hidden mark-ups in the freight cost?

• If we do not receive freight allowance for an item, is the cost of freight calculated into our pricing? (In one instance we discovered a line where freight would have added a full 9 percent to the cost of the item. Incidentally, the typical GM on the item hovered in the mid-20s. A big ouch.)

Special Pricing Agreements (SPAs):
• How do we ensure our company takes advantage of all SPAs available to us?

• If a manufacturer uses ship and debit procedures for customer specific SPAs, how do we track them and what safeguards exist to ensure we get our money in a timely fashion?

Don't let this be you or your team!

Networking with other distributors:
• Do you network with other distributors to cultivate sources for hard to find products?

• What do you consider to be a “reasonable” price over cost to buy products from another distributor?

Supplier Relations:
• Do we regularly review and “scorecard” our suppliers?

• Which of our suppliers provide us with back-side rebates on purchases? How do you manage this group to maximize the rebate?

• Which suppliers provide co-op advertising and promotional items as part of their package of value? How do you work with marketing and other departments to ensure we harvest all of the dollars available?

• Which suppliers are “notorious” for missed shipments, poor shipping documents, quantity errors or other actions which make them difficult or costly to deal with?

Non-stock items:
• How often do you review “non-stock special purchases” to determine if they should become “stock items?”

• Who enters the data for non-stock items into our ERP system? Is there a review process to ensure the proper catalog number and description was used in our ERP system?

Technology-based products:
• Do we have products which need to be rotated due to revision, software or other changes? How do we manage the process?

• When new technologies are added, how do you determine the proper part numbers and quantities to add to our stock?

In closing
This is merely a starter list. Your own list should be far more detailed; however, there are a number of folks without any list. If you are one without a list, feel free to use mine until you get yours fine-tuned.

Pricing Process appears to be a Top Secret Strategy

A couple of weeks ago I published an article called Pricing Professional – The time has come. The piece outlined the need for distributors to consider how they run their business and develop a new position. We hit on why the person who typically handled ‘pricing tasks’ was likely more of an administrator responsible for loading the prices of income purchases rather than a margin building professional. We pushed for distributors to consider the impact of a true pricing process and the qualities of the person best equipped to make the pricing process work.


Somewhere along the way, we touched a nerve. Building a pricing process is a viewed as a top secret strategy. While a number of our readers commented, it seems no one wants to go on record with their plans. Here is a sample of the way the emails began:

“Hope things are going well. While you'd probably prefer I comment directly on the post I really don't want our competitors to know we're doing this. So feel free to use the info here without disclosing the source or location.”

But not everybody was concerned about their competition. A couple were concerned about the reaction of their suppliers. One made this point:

“Many of our suppliers don’t understand all of the work that goes into selling and making their products work. Every time they bring us into an opportunity, they recommend prices that are way outside of the range we feel needed to make a decent profit. If we go outside of their suggested 15-16 percent range, they push back with stories of our need to grow their sales more aggressively.”

One was concerned with push back from their selling team:

“Management has given us the responsibility of raising margins, but they will quickly cave when a salesman comes back with a story of this or that competitor having a lower across the board price. We fear that acknowledging our efforts in the pricing department will only create an environment where sales brings in a story for every account they deal with. This will crush our efforts to make pricing stick.”

One distributor executive shared this story from a previous life:

“My previous employer had an entire team developed to establish pricing levels. It was a company-wide effort that crossed over all of the branches so it was impossible for the team to really track the efforts. I, like all the other branch managers, gave the program lip-service. We acted like were engaged, but basically our job was to grow the gross margin as a total rather than improve the margin. Without detailed measures, we could go fight the other battles and continue with the old version of letting sales set the price.”

But all made the point to say, their current version of price process worked. The reports went something like this:

“We went live with Strategic Pricing Associates just a little over a year ago. Based on offline conversations with others already using SPA, we decided to apply our pricing process to all of our customers except our top 100 accounts. In our old culture, it was acceptable for both outside and inside salespeople to set their own price. It took us a while to get this changed. Originally we had a team of three people who spent nearly an hour at the end of each day reviewing the pricing exceptions made by our salespeople. We constantly reeducated and argued. After a month or so, everyone knew the new program had teeth. We still find ourselves discussing price issues but not nearly as often. And, our GM is up dramatically, over 2 points…”

“Our management team attended a two day workshop at Texas A&M last year on this subject. We came back and did the customer stratification and changed some pricing matrices but just from giving the customers a label and allowing salespeople to react to that we have raised our GM by over 60 basis points in less than 6 months. I guess what I'm saying is this really works and we fully expect to get 100 basis points this year and at least 50 next year. In addition if we reach our goal this year everyone in the company will benefit financially. The pressure the inside people exert on the outside people for margins is great to see.”

Over the past couple of years I have talked directly to over 50 of Strategic Pricing Associates’ 350+ clients. A good many of these have been “on the record” conversations, even more were enthusiastic about the results but not ready to speak to the world in general.

Nearly all have seen marked improvement in their Gross Margin levels; ranging from just south of two points all the way to four with one pushing five full points of GM improvement. One of the critical differences seems to be the level of engagement of the distributor’s top management. The second comes in their selection of a pricing professional. Companies who select a pricing leader with strength of conviction, leadership skills and organizational clout gain and hold onto more gross margin gains than their counterparts (who still perform quite well just not as well.)

When asked if the whole process is worth it, one president of a 40 Million dollar distributor made this comment, 

“Our gross margin is up 2.4 points. Do the math. There is nothing we could have done to add a million bucks to our bottom line faster than assigning one of our top guys to the post of Pricing Czar.”

Top Secret Strategy?
With results like these, I can see why pricing strategy might be considered the secret sauce of distribution profitability. Those employing advanced pricing strategies are quietly building their cash reserves for future purchases, systems improvements, building upgrades and establishing shareholder equity.

If they are your competitor, there is a very good chance you’ll never learn of their strategy from shared customers. Why? After speaking with all of these folks, only one reported an issue with customer push back. And, that one was a customer put into the wrong category via clerical error.

How can normally price sensitive customers miss a margin move of this magnitude? The answer falls with price sensitivity. A small subset of the products sold by the typical distributor carry a great deal of price sensitivity; market conditions set the price. The rest are purchased based on availability, ease of doing business, customer convenience and bundled services. Most distributor salespeople price everything at the same low margin levels as the few products with price sensitivity. By doing such, they are giving away huge opportunities to increase profitability.

Returning to the pricing professional, allow me to ask one question: Who is responsible for driving gross margin improvement at your company? If this is such a top secret that even those within your organization don’t know who it is… It’s time for a change.