Why Use a distributor?

Yesterday, a new manufacturer asked me a straightforward

question, “Why should I use a distributor?”  He bore no malice to the world of wholesale distribution, but, as he contemplated the company's future path to the market, he righteously wondered about the whole distributor model.  Clearly, the question demanded an answer.  Fortunately, there are a lot of answers. 

The Old Answers
There are a ton of old-school distributor justifications which are still tossed out.  For instance, I could have gone into the finances of the whole distributor thing.  Distributors pay their bills and most pay them on time.   This can be huge; however, in a world moving toward corporate credit cards and other financial instruments, the credit subject is getting a little worn out.

Local inventory used to be a big deal.  Last week I blogged on the changing role of inventory in a world crowded with next day shipping capabilities.  While I still believe inventory is important, for this manufacturer’s product it was viewed as only marginally interesting. 

Customer Intimacy takes on a Different Meaning

Customer intimacy might be something we can still hang our hats on, if we actually possess a few basic components.  Back in our fathers’ day, customer intimacy meant we knew the people, had personal relationships with them, and they liked us.  Typically, this also meant business flowed our way.  In our environment, customer intimacy translates into knowledge about the customer. 

The following is a short list of points we should know about the customer:

• Specifically, how does the customer make money?  For instance, a few weeks ago we wrote about OEM’s looking to spare parts as a profit center.  If we instead referred to contractors, wouldn’t it be nice to know what kind of projects they found most profitable and understand why?
• What processes does the customer use in their business?  How do materials flow?  What portions of their business are highly automated?  What are the training requirements for workers?
• Are there issues where the customer is in search of new technology to advance the way they provide products?
• Do certain components of the customer’s business create ongoing issues?

Simply stated, we know the inner workings of the customer well enough to provide “targeted opportunities” with a high probability of success.  Distributors should be able to look at a new product and quickly rattle off the best candidates for the manufacturer’s product.  This is something we need to be able to do more efficiently than a telemarketer working a list or script.

Product Expertise provided by the Distributor

Knowledge-based distributors bring product expertise to the customer.  They help select the right product from a confusing catalog.  Solution providing distributors work with their customers to design the customer’s future.  They assist in developing specifications for products which will serve the customer well into the coming five years or more.  These activities multiply the manufacturer’s time.

Think about the value brought to the manufacturer when a distributor does one of the following:

• Gets a product specified for a new application.  The sale continues for years creating opportunities for more sales, repair part MRO sales and many others which bring value to the manufacture for years following the transaction.
• Serves as the first line of product support.  New customers need hand holding.  They have issues reading the user’s manual.  They get stuck midway through the installation.  A good distributor takes care of many of these calls and raises the customer perception of the product.
• Trains customer people on the product.  Stating it once more for the record: For distributors, training is the new marketing.  When distributors train customers on a manufacturer’s product they create a pool of workers ready to apply the product.  With a highly mobile workforce, trained customers move to new organizations and bring along their application knowledge.
   
• Amalgamate products to provide a solution.  Many new manufacturers cover a narrow band of the customer’s need.  In the case of the guy who asked my original question "why should I use a distributor?", I wonder how many customers would even give him an appointment.  His product was cool and neat, but alone it just didn’t solve that big of an issue for most customers.  When a distributor adds his product to a total solution, he wins. 

How do you stack up?

To answer the question about distributors in the channel, we need to think about where we fit into the equation.  If you’re a distributor and all you really do is shuffle paper (as well as phone calls, emails, quotations and requests for support) back to the manufacturer, I can’t really think of many good reasons for you to survive in the future.  If you provide the skills outlined above, I am fairly confident you will be around for the long haul. 

 

I know I missed out on a good many things you may do to create value for your suppliers.  Share them and I will send you a postcard from Iowa.

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.

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.