Santa Shares All…. Six Lessons for Distributors

For those of you who don’t know, Santa Claus and I have a special relationship. It began way back when I was still knee high to a short elf. It seems my grandfather, who was a jolly sort of guy himself, was somehow connected with Mr. Claus. Imagine being 3 or 4 years old and learning Grandpa and Santa were buddies. Special feeling? You bet. I knew it was real when Santa greeted my Grandpa with, “Hey Red (my Grandpa’s nickname,) how late did you stay down at the Eagles’ Club last night? If they weren’t pals, how in the world could this jolly red suited man know these details?

Santa knew me by name, too. Really! And since that day back in the early 60s, Old Santa and I have enjoyed a close and special friendship. According to Santa, yours truly has managed to make the “nice” list for 5 of my 62 years, but this story is not about me. It’s about distributors.

During a slow point down at the local mall, I managed to grab a few minutes of the jolly old elf’s time. After our normal greeting and a few “Ho, Ho, Hos, Santa took me aside and asked me to share a few pointers with my distributor friends. It was an “everything important in distribution can be learned from Santa” sort of moment. Rather than blast out with bloviating reindeer breath, let me pass on six of Santa’s lessons.

Lesson 1: Segment your Customers
Santa said he learned this lesson some 500 or so years ago. Once he started segmenting his customers into groups, naughty and nice, business picked up. Today, Santa’s North Pole organization carefully tracks customer behavior and provides services accordingly.


Santa believes distributors must understand customer demographics too. The customers, who value your service, buy in the right quantities, display the right kind of buying behaviors and allow you to make a profit, deserve extra nice treatment. Santa and his team of elves carefully insure the “nice” boys and girls get better treatment than the rest. Simply put, distributors can dive more profitable business if they target the right customers.

Lesson 2: Build your own unique brand
The red suit and eight tiny reindeer shtick is part of the whole North Pole Brand. Flash a picture of a slightly overweight guy dressed in a red suit with white fur trim and kids anywhere immediately recognize the brand.

Even Coca-Cola knocked
on Santa's door

Santa and his team of marketing elves first came up with this whole branding deal back in the 1600s. Since then, dozens of marketing gurus came knocking on the North Pole door; each proposing a different strategy. On a side note, you can only imagine what would have happened if Santa would have taken on that Paisley Nehru Jacket pitched sometime in the 1960s. Thankfully, Mr. Claus avoided the temptation of flipping his branding message.

For distributors, this means understanding what you’re known for in the marketplace and carefully advancing the message. Are you known for having a larger stock of hard to find items than your competitors? Is your team more tuned to technical support? Are you good at solving logistics issues? Is your counter more knowledgeable than those of your competitors? It’s time for distributors to stop relying on their supply partners for branding. In the future, distributors must understand what they’re known for and advance the message. It develops a strong and loyal following who are willing to partner.

Lesson 3: Adapt to changing customer styles
When Santa first started up, things were different. Boys and girls were known to whisper their Christmas wishes up the open chimney hearth. Santa had thousands of elves employed at listening posts. It was mostly tedious and time consuming work. Later, the kids wrote their wish list on a piece of paper and tossed it in to the fire with the hopes that Good Saint Nicholas would somehow read their smoke signals.

For most of us, an annual letter to Santa was something of a

tradition. But today, Santa receives requests via email, instant message, phone calls, and the traditional “snail mail." Along the way, Santa has constantly upgraded the way he monitors and processes these incoming orders. He's had to shell out some big bucks on technology and training.

Today, distributor customers communicate in ways unheard of just a decade ago. Inside sales teams receive faxes, emails, and EDI communications at the speed of light.

Santa, who keeps abreast of the younger generation, believes some distributors have missed out on the trend toward communications via instant messaging. Applications currently exist which allow customer instant messages to appear on the inside sales team’s computer screens. This gives customers a new way to communicate with the team and allows inside salespeople to handle multiple customer requests simultaneously. Further, as customers move toward faster and more sophisticated devices, the jolly old elf believes the trend will grow.

While we’re on the subject of mobile devices, distributors need to evaluate some of the applications designed for speeding up customer selection of products. Santa tells me that he is working on a new “app” for next Christmas.

Lesson 4: Don’t forget your warehouse
It’s no secret that Santa operates from a single central distribution facility located in a remote part of the world. One would expect that this could be a disadvantage to the fat man and his organization. However, over the years, Santa has refined his delivery mechanism in order to meet customer needs. North Pole warehouse is equipped with all the modern material handling and tracking tools. Each year literally millions of Red Rider BB guns, electric trains, Easy Bake Ovens and dolls are delivered accurately and on time.

Santa asks distributors to take time to ask how their warehouse today differs from the warehouses of 1983. Does your system employ barcoding, part location, wave picking, or any of the tools which allow you easier throughput and cheaper warehouse operations?

Lesson 5: Never say no
Santa has developed a customer service plan second to none. He has trained his team of salespeople (dressed in Red down at the mall) to never say no. Instead, they say, “Santa will have to check.” There’s a big difference.

One of Santa’s distributor friends (a guy named Jack) once told me this: “I never say no, I just ask; how much you would be willing to pay to make it happen?” Distributor sales and customer service people need to be trained to offer options when the customer’s original request can’t be met.

For instance, if a customer asks for a part that’s not on your line card, do your customer service reps say “we don’t have it?" Would it be better if they asked if a substitution can be made? While this doesn’t seem like “reindeer science," it does provide your organization with additional sales opportunities.

Further, if the customer would like to have something sold by a competitor, do you have a plan? Some customers want you to take ownership of the issue, regardless of cost. Santa thinks that’s a cool concept.

Lesson 6: Understand the cost of services
Finally, Santa wanted to point out the rising cost of value-add services. For eons he assembled dollhouses, set up elaborate train sets and put together back yard swings. It was pretty cheap to do this back in the 1960s. Even though the elves and reindeer work for carrots and peanuts, he has been more reluctant to put things together in today’s business environment. Health care benefits are spiraling out of control up north too. Instead, Santa pushed the work off to the moms and dads of generally good girls and boys.

He will still set things up for the really, really nice kids; the ones who never (ever) pout or cry. The medium nice kids have to pay for services and I don't mean in cookies.

Santa thinks distributors, now more than ever, need to understand the cost of the value-add stuff they provide. As a matter of fact, Santa took time to make one last point. The great bearded one strongly recommends that distributors everywhere read Frank Hurtte’s The Distributor’s Fee-Based Manifesto. He won’t be placing this book under your tree because he still remembers that incident at the golf outing last summer (Santa really does keep track of these things.) Naughty and nice applies to everyone.

Even the naughtiest distributor can order the book in time for Christmas. It’s on Amazon.

Now a word from Santa’s longtime friend and veteran of five seasons of niceness:
December is a joyous time of year. Whether you celebrate Christmas (I do,) Hanukkah’s Festival of Lights (many of my friends do) or anything else, I hope you are blessed with time for friends, family and fun.

And, my Grandpa and Santa really were close friends.

Frank Hurtte, Founding Partner of River Heights Consulting, speaks, writes and consults on distributor issues. He can be reached at frank@riverheightsconsulting.com.
Santa has him on the “naughty list” again.

50 Questions for Distributors

Last week I wrote an article titled “Six Questions that Demand an Answer.”  Sharing the article with a few trusted advisers, I received one consistent bit of feedback best summarized by this response.

“Frank, I agree these are questions we must ask ourselves; they caused me to pause and ponder.  I used them as an exercise with my team to think about our overall strategy.  I believe taking the time to think about our business from an outside perspective to be justified and worthwhile.   Sometimes it’s hard to do this subjectively.  I would like to see more questions just like these.”

The following is my first round of questions.  I have put them into categories to make them easier to digest.  Some will apply to your position, some will not.  I suggest spending a moment visiting these topics with members of your own team.

A note:  The readers of this blog come from a variety of backgrounds, hold a diverse collection of positions within distribution and come from a number of lines of trade (Automation, Industrial, Safety, Power Transmission, Fluid Power, HVAC/R, Building Materials and a lot of others.)  Not all of the questions apply directly to you.  Skip over the questions that apply to other departments or forward them on to your colleagues, but do take a moment to think.

Do you believe your customers’ worlds are changing?

1.       Are customers experiencing new global competition?

2.       Are customers under new pressure to perform financially?

3.       What pressures are your customer’s customers putting on them?

4.       Are there governmental regulations which impact your customers?  

5.       Are all customers experiencing the same changes?

a.       In what ways are they the same and how are they different?

6.       Are some customers experiencing shortages in trained workers?

Do you believe your supply partners’ worlds are changing?

7.       Do they have new competition in the market place?

8.       Is there current product technology under attack by something new?

9.       Have they recently been acquired or have they acquired a new division?

10.   Have they lost market share because they have not expanded into big box stores or alternative channels?

11.   Have they had new leadership come into the company?

12.   Is their stock value under some kind of pressure?

Do you believe change at the customer or supplier level impacts your position?

13.   Which five things are most likely to impact you in the next year?

14.   What five things are likely to impact you in five years?

15.   Do you see major customers or customer segments with no long-term future?

How does your sales effort differ today than in 1990?

16.   How have technology tools changed the customer interaction?

17.   What new positions have been added to the sales team?

18.   Do you segment your customers by industry, size and buying patterns?

19.   How do you know which customers are profitable?

Do you have a sales process?

20.   Do you have a written on-boarding program for new sellers?

21.   Do you have well-written job descriptions which explain expectations, measures of success and critical skills?

22.   Have you developed a product knowledge checklist which describes the level of knowledge sales people should possess to meet management expectations?

23.   Do you have a written sales process which defines the following:

a.       Who should be called on at accounts, including customer management?

b.      Behavior on the call? (such as note taking, recapping of action items)

c.       Frequency of sales calls?

d.      Entry of data from the call into a CRM or other knowledge base?

e.      Etiquette on joint calls?

f.        Use of support staff and specialists?

g.       When to introduce management into accounts?

h.      Quotation follow-up?

i.         What you should know about the customer?

j.        When to deviate from standard price?

24.   Does your company have a pricing process?

a.       Do you believe sales people can truly understand the price point for the thousands of products in your portfolio of products?

b.      How are market price levels established and maintained within your business?

c.       What percentage of your business uses “system” pricing vs. salesperson driven manual overrides?

d.      Does your business have a magic number (ie 15, 20 or 25 percent) which is used as a “safe” margin with customers?

e.      Do you measure each sales person against the percentage of sales falling outside of the pricing process?

What tools are used in the sales process?

25.   Do you have the ability to quickly review customer purchases by product technology?

26.   Do you have the ability to provide your sales people with FOCUS Fraction of Catalog Utilized (sometimes called GAP) analysis?

27.   Do you have a working CRM system in place?

28.   Are you capable of receiving EDI orders without manual intervention?  

Do you offer more customer value than in 1990?

29.   What services do you provide that weren’t available in 1990?

30.   Do you measure the internal cost of these services to your organization?

31.   What new services will you be launching in the next five years?

a.       Have you measured your company’s cost for providing these new services?

b.      Will you be charging a fee (outside of gross margin) for these services?

Is your company’s technology current?

32.   Is your ERP system modern and updated with the latest revisions?

33.   Do you have the ability to track inventory which has not been sold for 180 days?

34.   Do you have the ability to accept orders electronically?

35.   Do you have a mechanism for eCommerce?

Can your warehouse/logistics operation keep pace with changes in the world?

36.   Are items placed by location in your warehouse?

37.   Do you use wave picks to make order processing more efficient?

38.   Are errors (shipping, receiving, lost inventory) tracked in your organization?

39.   Is cycle counting accomplished so that fast moving items are counted at least 4 times per year?

40.   Do you regularly write off dead stock and other unsellable inventory?

41.   Is there a plan for efficiently handling returns and defective materials?

42.   Do you know the cost of running your delivery truck?

43.   Do you use GPS tracking on delivery vehicles to expedite deliveries?

How progressive is your financial model?

44.   Do you do a financial projection based on sales forecast for each year?

45.   Do you provide managers with parameters for measuring their portion of the business against industry standards?

46.   Do you benchmark your financial performance against industry standards using an industry profit report or some other national model?

47.   Do you know the approximate cost of transacting business?

a.       What is the cost of placing an order with a supply-partner?

b.      What is the cost of processing an order?

c.       What is the approximate cost of shipping an order?

d.      How much gross margin is required to break even per month?

48.   Have you developed activity based costing number to determine your most profitable customers?

Do you have a succession plan in place?

49.   If you are the owner and you are at least 55 years old what is your plan for leaving the business?

50.   If you are a salesperson within five years of retiring, what is your plan for passing on your deep knowledge of your customers?

We welcome your comments

Truthfully, we settled on 50 questions because it’s a nice round number.  It could have been, and maybe should have been, 100 questions.  What do you think we left out?  Send us your ideas and well send you a postcard from Iowa. 

If you want to talk about any of these questions, we’d be happy to spend a few minutes talking about your situation. Shoot us an email or pick up the phone.  We can’t wait to hear your thoughts.

The Future of Distribution: Q&A with Frank Hurtte

Looking ahead in Distribution

Perhaps it’s the economy, maybe it’s the weather, could be a coincidence, but a lot of folks are wondering what the future might hold for distributors. Just to give you a flavor, during the past couple of weeks I have heard the term “disintermediation” used as a looming threat from some credible sources.

The following are a number of questions forwarded to me for commentary by a writer for Electrical Wholesaling. These will be combined with the expert opinion of others in the distribution industry and published sometime in the coming months. I will share a link to the complete article when it is available, but in the meantime, here are some of my comments.

Question:
Looking ahead 5 years in the electrical distribution world, some estimate fewer than 200 distributors will exist. What are your thoughts?

First, I believe the distributor model will change. The “safe” size for a “garden variety” electrical distributor has grown much since my first introduction back in the late 70s and it continues to accelerate. Looking back, in the 70s a sub-$10M electrical distributor was quite viable, by the mid-90s the number had grown to about $20M, today the number is probably $50M but in five years anything less than $100M will feel the pressure.

Let me make a point, I don’t see small distributors dropping like flies. Instead, I see an increasing number of “baby-boomer vintage” owners running out of steam and realizing the business probably can’t be passed along without severely inhibiting the operating capitol.

Further, I see a lot of distributors with business models that have morphed into something outside the normal value-add product model. They have added engineering, fee based-services and have also imbedded themselves into their customer’s process in a way which builds their importance to both customers and manufacturers. Their model crosses over the line into what used to be viewed as the duties of manufacturer’s reps and systems integrators.

Back to the question, I believe consolidation will continue. But, I believe the 200 number is pretty low. Over the next five years, I see the number shrinking but something like 25-30%.


Question:
How will the independent distributor survive as it competes against its larger national rivals, many of whom have national contracts? Do you predict a sharp increase in M&A Activity?

First, there will be a sharp increase in M&A activity. For instance, in the past six or eight months there has been a lot of activity in the Rockwell Automation channel. I see more of this into the future, along with the issues I have already outlined.

Along the M&A activity line, I see many distributors in Automation side of the electrical business who are approaching retirement age without strong succession plans. Revisiting the old adage, “you can’t take it with you.” In the next few years, a lot of these owners will face the need to do something. The bigger and aggressively mid-sized distributors in the acquisition mode offer up an exit strategy which may be easier than a succession strategy.

Competing against much larger distributors will require a shift in business model. If a small distributor goes head-to-head with a larger competitor on product availability, price or e-commerce capability they will lose – period. However in the past, larger companies struggle to provide a customized set of services to closely match customer needs. This is particularly true in highly technical areas. I don’t see technology getting easier anytime soon, instead I see technology growing more pervasive.

Finally, some of the smaller distributors will be propped up by manufacturers because the larger guys do a sloppy job of introducing new products. Regardless of all the hoopla, the story from distributor supply partners has remained constant. The larger guys prefer to service the demand for products rather than assist in creating market demand by finding applications for new products or discovering innovative applications for existing products.

Question:
Some “traditional” industrial distributors are trending towards buying companies to complement their current business. Wesco, for example, has been widely known as an electrical distributor, recently bought a safety distributor. They are now an MRO supplier/supply chain strategist. Do you see this as temporary or a growing trend?

In the future there will be very few “pure electrical” distributors. We have already see this as distributors launched into the data-com world a little more than a decade ago. Today we see electrical distributors in the safety, motion control, automation, fluid power, power transmission and the industrial market. Over the course of time, this will accelerate.

Why is this happening? First, for solutions-based distributors, customers are demanding it. They want to buy a full solution not just the electrical components. For MRO/Logistically focused distributors, the emphasis is similar; providing a larger market basket of goods to their customer base.

In the past, distributors have launched out into adjoining lines of trade only to discover that breaking into the field was more difficult than they imagined. For most the move took five years or longer. And, during this time, they struggled to justify inventory. And the product/application expertise required to be credible in the market ate into their bottom line.

Acquiring a distributor already in the space makes more since because it creates a cash flow during the ramp up years. Further, acquiring brings existing relationships with first tier supply partners which are difficult to build from scratch. Lastly, buying someone also brings along the needed expertise to support the sales efforts and drive credibility in the market.

Question:
How important will Big Data be for distributors?

Distributors will need analytics to produce maximum results into the future. In general, the group gets failing results today. Pricing systems are poorly maintained and rarely use state of the art process (like David Bauders’ Strategic Pricing Associates) to find the proper balance between pricing sensitivity and gross margin. Sales efforts are mostly poorly analyzed as most distributors still rely on time consuming manual manipulation of data.

Further, operational issues can now be pushed to “big-data” process. For instance, many distributors still manually enter customer purchase order information into their systems wasting countless hours of highly skilled workers who could be assigned to tasks with better return.

Question:
Considering Amazon Business has focused on logistics and quick delivery, do you feel distributors may overhaul their delivery systems?

First, lots of distributors in the electrical space make customized deliveries without thinking about the type of customer. For instance, they provide free delivery to customers who aren’t really profitable. Lots of times, they roll out their delivery truck for boxes that could be sent UPS for three bucks because the sales team thinks delivery on the truck costs nothing.

Secondly, very few distributors understand what their delivery system costs. Add vehicle cost, fuel cost, driver salaries to all the other variables and you can rack up dollars faster than you expect.

Finally, the local distributor’s biggest differentiator comes with delivering products which are both heavy and lower cost. Amazon might out do us on the 10 ounce sensor that costs 100 bucks, but they can’t handle the bundle of conduit that weighs 500 pounds and sells for 200 dollars. Distributors need to be smart on this. If they find themselves delivering only the heavy (and bulky stuff) without considerable quantities of the lightweight goodies, they are probably losing money.

I see progressive distributors placing a value on deliveries and sometimes charging for big stuff. I see distributors getting better at using all the options available including some of the same advanced logistics as Amazon.

Question:
How will all these changes affect the supply chain and the distributor/customer/manufacturer relationship?

We have to understand the Electrical Wholesaling industry is not a way of life, it’s a business model. As soon as manufacturers determine they can go to market more effectively and efficiently through some other model, they will shift their focus. Regardless of their commitment to distribution, loyalty and all the rest, if reaching customers works better some other way, they’ll be all over it. They have to in order to survive.

We have already seen this process in the lighting industry. With LED technology, the lighting market is changing. The lamp companies don’t necessarily need a distributor to sell something that lasts for twenty years. The replacement lamp business will come to a close in the next ten years if not the next five.

Manufacturers will be forced to demand POS data in order to better understand the flow of their products to market and who buys the stuff after it lands on the distributor’s dock. It’s a premise of modern manufacturing.

Manufactures will insist on better analytics from their distributors. In some instances, supply partners will require additional staffing in the form of product specialists, application engineers and professional marketers to drive new product/technology introductions to the market.

Question:
How does the buyer fit into all these changes? Will expectations change? The focus used to be product, price and availability. How will buyers change their patterns and what this will mean for “relationship selling?” Will relationships still matter?

Relationships – people buy from the folks they trust. Trust doesn’t necessarily belong entirely to people. For instance, I trust Hotels.com. While I am a once in a blue moon customer to the hotel, to Hotels.com, I am a constant repeat customer and am rewarded as such. I believe people trust Amazon because they rarely screw up orders and when they do they fix the issue with zero hassle. Distributors must get the service right and eliminate issues that erode trust.

Pure relationship selling still works for small contractors and other small to mid-sized privately owned companies. In this environment, a relationship with the owner/operator/manager still counts.

Trusting relationships at Fortune 1000 sized companies is fraught with danger. When the chips are down and the buyer must pick between you and keeping their job, you’re out; in a heartbeat.

For larger customers, selling will be about providing an ongoing economic advantage to the customer. This basically boils down to a few items, can the distributor:

• eliminate people from the process? 
• help improve productivity?
• assist in eliminating waste?
• drive down utility or other costs?
• assist in meeting governmental regulations?

This is an economic sell and requires selling to different people.

In the future, upper-quartile distributors will excel at building relationships with upper management people who understand the economics of the sale. Today, very few distributors nurture this level relationship.

Question:
An electrical distributor who relies solely on the sales of electrical products may not survive. What should electrical distributors be doing to try and position themselves for growth-and survival?

Selling electrical products “only” will not kill a distributor, if they are large, they can leverage their suppliers and provide pricing which is near best in class. For small distributors, tying to electrical products “alone” is a recipe for quick financial disaster – most likely during the next major recession. For mid-size distributors, the strategy will equate to longer term stagnation. If the ownership is 50 plus, they will most likely survive till retirement; just don’t encourage the kids to get into the business.

Question:
With the blending of automation, electronics, etc. in the electrical industry, what effect do you foresee this having on the marketplace, specifically do you see new competitors or new forms of competitors on the horizon?

Will there be new competitors? You bet. For those playing in the automation space, expect lots of competitors. The automation space, especially around motion control, lies at the crossroads of fluid power, power transmission and electrical technology. We have already seen lots of conflicts in this market. More to come.

The Internet of Things (IoT) and its industrial cousin, the Industrial Internet of Things (IIoT) promises to be a boom market in the not so distant future. This attracts not only the normal cast of competitors but some biggies like Cisco and others from the IT field. I am optimistic that a few electrical distributors will be big players, but they will be fighting it out with a whole new set of competitors.

Further, the line between some distributor and systems integrator (and even contractors) is blurring. New technology players in technical spaces are turning to SI’s because they got terrible reception from the distributors they approached. In this play, the SI ties product sales to services and replaces many tasks once conducted by distributors.

Finally, there are a host of off-shore companies with plans to break into the US market. They have made the rounds of distributors and have a difficult time getting traction with established wholesalers. They get little respect because they currently don’t have the market share required to produce instant results. But, many of these organizations are big enough and powerful enough to create other alternatives. I believe some will circumvent traditional distribution and thus create new competitors in our market.

What will the future hold?
Changes lots of changes. This doesn’t cover all of the changes but it does touch on quite a few major ones. We are interested to hear from you on your prognostications for the future. What will your world look like in 2025?

Shoot us an email and receive a shiny new post card from Iowa.

InTech Magazine: People are the Right Stuff

This month the fine folks at InTech Magazine were kind enough to ask me to write an editorial on the automation market.  My guess is they really wanted someone who was “long in the tooth” to comment on the cavalcade of changes in product technology – "a back in my day the PLCs ran on kerosene" sort of piece.  

Being a distribution guy, I penned “Selecting an Automation Distributor?  It’s about finding the right stuff”.  In the automation world, over 89% of the customers buy from distributors.  Yet many

are tossing dimes down the drain because they aren’t tapping into the right distributor services. 

Catch us on Lulu.com

In the article I charged customers with asking their distributors these questions:

·         What can your organization do to improve the uptime of my facility?

·         Do you have a plan to help us drive down our cost of doing business?

·         Do you offer one-on-one training for our engineers, technicians, and electricians?

·         How will my support calls be handled? What are the hours of operation?

I went on to say…

The “distribution” of product has not been prominently mentioned anywhere. In today’s world, we have plenty of really good products, quality is a given, and logistics channels move them from one corner of the continent to another in hours. Today, people are the right stuff. If distributors are not actively involved in enabling your people, they are not doing their job.

The whole article is posted here: