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.

Inventory on the Shelf vs. Inventory When You Need It

Over the years I have heard some pretty amazing things said about distributor inventories.  Let me share a few of these:

• A peddler can’t sell from an empty wagon and a distributor can’t sell without a full warehouse.
• It’s the distributor’s job to provide local inventory.
• If the distributor doesn’t stock your product and lots of it, you’ll never get its full commitment.
• We want distributors to prove their commitment to our company by placing a large stock order up front.
• The distributor’s stock provides a margin of error for logistics problems at its suppliers.

While all of these probably made sense back in the day, those days are finito, over, dead and gone.  Or at least they are for the knowledge-based distributor.  Astonishingly, I still hear most of these words of wisdom bantered about; mostly by the sales teams of distributor supply partners.  What’s really bizarre is most of these folks never took the time to think seriously about their comments.

Let’s shoot a few holes in these antiquated theories.  First, a peddler selling from an empty wagon story predated Sears and Roebuck setting the retail world on fire by selling from a catalog.  It definitely came years ahead of Amazon Supply where many of the items are shipped directly from somewhere other than an Amazon warehouse. 

The local inventory argument…

The distributor role in local inventory is critical, but things have changed.  Allow me to share a story.  Back in the early days of my Iowa career (1978), I worked for a manufacturer with a plant 217 miles away.  We had a warehouse in Iowa to serve emergency needs.  Why?  Because (and I know this fact will be hard for Millennials to fathom) back in the days before Fed Ex and UPS arrived in Iowa, shipment time from Milwaukee to Davenport, Iowa was 4-5 days. 

The ideal local stock today would be items required for immediate use by the customer.  Pulling an example from the Automation Industry, I can’t even imagine a customer decided during lunch that he needs to start and complete an automation project during the afternoon.  The human time required to engineer and design the system requires days, sometimes weeks to accomplish.  This lag typically provides plenty of time to acquire and receive any parts and pieces needed to finish the job. 

What might be an immediate need for the customer and thus justify inventory?  Common spare parts for emergency breakdowns qualify.  Consumables may be justified.  Anything a customer requires on the spur of the moment are important.  OEM customers often place blanket orders with monthly estimated usage quantities, typically these are easy to drop ship, but things happen.  Distributors need to be prepared to immediately replenish failed items and handle those instances where larger quantities are required with short notice.

Distributor commitment tied to inventory?

Somewhere, somehow, manufacturers came to the conclusion distributors were more committed to suppliers with a ton of inventory sitting in the back warehouse.  Perhaps it appears this way on the outside looking in.  Here’s an example.  Friendly Frank’s Distributing has a great relationship with Acme Manufacturing.  Over the years, Friendly Frank (FF) and his team have developed a number of mutual customers.  Acme helps by providing leads, support and a quality product.  Customers make many purchases and, as described above, FF finds it necessary to carry more stock to service those sales.  To the supplier on the outside, it might appear as though the inventory drives the selling activities.  In reality, it is the other way around.

A few manufacturers, who are just launching their products, depend on distributors to assist in funding their launch.  Often, they covet the “initial stock order” as a tool for driving their profitability.  While a nice stock order does provide them with instant cash, one can only wonder what happens if the distributor stocks the wrong mix of product or, worse yet, the market doesn’t embrace their new products.  The whole thing turns into a force fit situation.  Distributors clamor for expensive stock rotations.  Product ages on the shelf creating issues with revision levels and old dusty boxes.

I have suggested this idea a couple of times without much acceptance, but wouldn’t it be easier for the distributor to pay something resembling a “franchise fee” which provides funding to the manufacturer without the hassles of inventory issues?  Perhaps this fee would enable the distributor to get better margins in the future.  Or maybe, the manufacturer could provide some other benefit to the distributor. 

If not inventory, how does the distributor show commitment?

For knowledge-based distributors commitment comes by way of investment in (in order of importance) product knowledge, application skills, careful selection of target customers and customer education.  By definition, knowledge-based distributors don’t just ship boxes.  They wrap every transaction in their unique blend of customer application and product knowledge. 

Covering breakdowns in Manufacturing Systems and Logistics…

Covering breakdowns in manufacturing systems does justify inventory.  However, we should set some parameters.  First, we’re not referring to breakdowns with regularly moving “A” products.  In today’s manufacturing environment, these come quite rarely.  Instead, the issue often falls with items which fall further down the line.  Items which are sometimes referred to as “pre-engineered;” the design work is finished, but the build is still done on an as needed basis.  The factory doesn’t necessarily stock all of the parts and pieces of the product so lead times can be lengthy. 

For most distributors, keeping a spare of this type of item is dependent on customer mix and customer usage.  To provide an example, a distributor in Gary, Indiana may have enough steel plants on its account list to justify a part specifically developed for a steel mill, but the guy in South Texas, with only a single small steel facility, may not.  Referring to the recent massive rainfalls in Texas, what happens when that single plant is flooded by 15 inches of rain in a two hour period?  Factory delivery times hamper restarting the plant. 

Most times, this type of emergency requires plenty of scrambling: Calls to the manufacturer, expediting of component parts and occasionally mad scrambles by distributor and factory people alike to find a replacement somewhere.  But there is an option…

A new solution is pushing to the forefront…

Distributors have looked for easy ways to share inventory for eons.  Some of the more progressive manufacturers have created plans for distributors to report inventory back to a central point for better sharing.  In spite of great enthusiasm along the way, the plans have mostly fizzled out with time.  For the most part the reason is simple, the work required didn’t justify the results.   At the same time, I have observed several informal distributor networks develop plans for sharing inventory.  Typically, these are established from the top down at the distributor, owner to owner or president to president.  These guys decide to attack the issue by promising to help one another.  They work, but often the cost of interaction is high because nearly every call involves some kind of touch by high level folks who are often hard to reach on a moment’s notice.  Good idea, but way too much human interface.

Last summer I became aware of a fresh approach to the issue, WarehouseTWO.  WarehouseTWO provides internet technology to an age old issue and takes things a few steps further.  Here’s a short list of the things I like:

• Distributors can get started for Free.  It’s the “freemium” model applied to distribution.  It cost nothing for a distributor to purchase from other distributors.  And, the costs to sell products is nearly free.  For instance, a distributor can list up to 1,000 items online for less than $70 per month (10,000 for $99 per month.)  Plus, there are no transaction fees; the cost is the cost.  A low monthly subscription fee is the only cost to use this service.
• The selling distributor sets the price.  Got overstocks, you can sell them for distributor cost less 10%, 20% or any other price that makes sense.  Other distributors can quickly shop for bargains and help you balance your inventory.  If you normally stock a “D” item and want to improve your turns, you can sell the product for cost plus 10%, 20% or “whatever.” You set the margin.
• This is a Distributor only program.  There are no concerns with your local end-customers “trolling” for bargains or checking out their local distributor’s price on products just purchased. 
• The site automatically limits interaction to only other authorized distributors.  Many distributor contracts prohibit the sale of products to non-authorized distributors.   This is not a source for bootleg materials.  Instead, authorized distributors share inventory within the authorized channel only.

One more point that appeals to our industry is this: Manufacturers can sponsor distributor interaction.  This allows the manufacturer to see what’s in stock throughout its distribution channel without massive IT outlays and without the constant maintenance tied to creating such a site.

Importantly, this outlet provides the subscribing distributor the option of automating the system.  You can easily send broadcast messages out to other distributors, simultaneously search for multiple items or establish a “bargain hunting” list.  And, if you really want to resort to selling on the web, WarehouseTWO allows for uploading a “browser searchable” list that anyone can locate using Google (or Yahoo or something else). 

Finally, I have had conversations with a half dozen distributors already using this service.  They report great results and are quick to report the value is getting better every month.  Why?  More distributors joining the program.  One was quick to point out that nearly every new distributor that joins the network adds a few more new items to the inventory.  One distributor was so enthusiastic he asked me to get the word out to everyone.  Consider it done.  Check out WarehouseTWO at www.WarehouseTWO.com.

 

Discounting based on Quantity?

"Locking in" business without knowing
more about your customer looks more like this.

Let’s think about quantity discounts.  For many folks the idea of “locking in” business by offering up a special discount seems to make sense when future potential is involved.  Here’s how it works.  Acme Manufacturing has yet to purchase your new product but based on your knowledge of the Acme’s size and an intuition that Acme could buy lots of your product, you provide a discount. 

Our analysis of many first time sales situations, indicates a couple of key points:  

First, the discounts are provided unilaterally, with no probing of the customer’s current purchase price.  What’s worse, we see this tactic used with new, emerging technologies and products never before introduced to the customer.  Sometimes, the seller offhandedly informs the customer, “The normal price for this product is $1,000, but I am going to knock off a hundred dollars so your ‘special price’ will be $900.”  Other times, the seller just provides a discount without even mentioning the deal.

Second, sellers provide these special deals without taking time to gather significant information from the customer on the value created by the product.  Many times sellers base their need to discount on information provided about a solution that didn’t really work; assuming something that didn’t work can even be called a solution.  Here’s an example of how that scenario might play out:

The salesperson is called to look at a waterproof motor in use at the customer facility.  The only issue is, the customer’s wash down procedure causes the motor to leak.  The motor fails regularly causing massive headaches, downtime and other electrical issues.  Somewhere along the way, the seller learns the old motor sells for $500 dollars.  The new technology will replace the motor.  Water issues will go away.  The new technology costs about 30 percent more than the failing technology of the past.  And, the customer uses quite a few of this type of motor.  So, the seller assumes they can’t sell their new product for much more than the $500 dollars already being spent.   I believe this is a major mistake.

There are three points sellers must understand…

1. Customers don’t have a true appreciation for discounts they see as “unearned.” 
According to research cited by negotiation expert Tony Perzow of SPASigma, potential customers see no real value in discounts which do not require something in return on their part.  What might be a better approach?  A discount which is tied to a long term commitment, a discount contingent upon placing a multi-piece order or a discount involving purchasing associated products.

2. Once the price level has been set, it is very difficult to raise the price.
Once a price is set, there is little opportunity to raise the price if the customer doesn’t meet your large order criteria; and this happens quite frequently.  Further, a discount provided up-front minimizes the opportunity to profitably provide added features, services or even a deeper discount if the customer does hold the key to big order potential.

3. Most sellers fail to understand the true cost of quantity discounting. 
For example, in the world of distribution, a gross margin of 25 percent is common.  Assuming there are no offsetting cost reductions such as order processing, shipping charges or discounts from your supplier, the math is relatively straight forward.  Using a 25 percent gross margin and a discount of 10 percent for the sake of easy math, we must sell something like 66 percent more product just to break even on gross margin.  Here is the formula:

Current Gross Margin / New Gross Margin = Unit increase required

We have attached a handy table developed by the State Government of Victoria to provide you with a handy reference guide. 

Checking the effect of discounts on the gross margin
If you cut your prices by...	And your present gross margin (%) is...
	0%	15%	20%	25%	30%	35%	40%
5%		50.0%	33.3%	25.0%	20.0%	16.7%	14.3%
6%		66.7%	42.9%	31.6%	25.0%	20.7%	17.6%
8%		114.3%	66.7%	47.1%	36.4%	29.6%	25.0%
10%		200.0%	100.0%	66.7%	50.0%	40.0%	33.3%
12%		400.0%	150.0%	92.3%	66.7%	52.2%	42.9%
15%			300.0%	150.0%	100.0%	75.0%

Of further concern in the distribution industry is that typical net profits run between 2-4 percent.  Shaving margin without some other offsetting factor can create profitability concerns.

There has to be a better way….

Wouldn't it be more appropriate to understand the customer’s situation before providing a discount?  Let’s start with a few questions:

• What is the customer’s problem with the current product used?  Breakdowns, scrap produced, bad data gathered, downtime, rejects or something else?
• What is the value of your solution to the customer?  To answer this, you must think about the cost of downtime, rejects produced, energy wasted, outsourced labor, repair parts consumed, etc.
• Does your solution help the customer avoid other costs?  Travel expenses might come into play here.
• Are the customer’s human resources better used because of your solution?  Referring back to travel expenses listed above, how much greater might the productivity of existing employees be if they weren’t sitting in a drafty airport waiting for the 5:50 AM flight out of town?

Finally and only after calculating the important stuff already listed, should these questions be pondered?

• What is a reasonable estimate of the cost of the previous solution, assuming one existed?
• What are the other costs associated with the old way of doing things?

I know what you’re thinking.  Sometimes, you don’t have time to explore the whole situation.  The customer calls and asks for a price.  What to do?  My suggestion is to stick with the standard cost.  Then begin to explore the situation.  You can always negotiate your price downward later.