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Striving for Excellence

Distributors must become low-cost, high-quality service providers or they won't survive

by Howard Coleman

Do you have a vision and desire to transform your company into an operationally excellent distribution organization? Knowing what separates operationally excellent distributors from the rest of the crowd provides benchmarks against which you can compare your organization in order to achieve a higher level of performance.

Increased competition and greater customer demands mandate that distributors must now become low-cost, high-quality service providers in their industry or they will not survive. Many distributors have tried to maintain strong, long-term relationships with customers by providing them with high-quality products and superior customer service, while at the same time aggressively reducing their unit costs of distribution.

Several companies have either made the shift to this new formula, or are in the process of making the shift. Operationally excellent distributors have been re-engineered for efficiency, productivity, quality of services and profitability.

The constant focus of an operationally excellent distributor becomes working smarter, not faster, and routinely measuring their progress against a series of rigid standards designed to continuously improve their performance. By definition, an operationally excellent distributor must perform at a higher level than the competition to truly differentiate itself from the crowd. This includes setting aggressive corporate goals and strategies designed to continuously improve performance and provide the necessary foundation for success.

Operationally excellent distributors are known for setting what may seem like unrealistic goals. However, they also have detailed action plans and strategies to achieve their goals. Targets such as cutting turnaround time for processing orders in half or increasing inventory turns by 50% or more are commonplace for this group.

Proactive projections of product demand and business levels enable them to anticipate trends and preferences. The operationally excellent distributor uses this information as a guide to achieve and deliver the plan.

Operationally excellent distributors seek to anticipate trends and preferences by providing higher margin, value-added products and services that create markets. They develop market penetration plans at least annually and constantly monitor those plans to measure progress. The company’s functions provide an essential role to allow sales to achieve their goals in their chosen markets. Consequently, operations must be tied into the planning process so proper inventory levels and internal process efficiencies are consistent with anticipated business levels.

Operationally excellent distributors have shifted the inventory business model toward proactive inventory management. The operating philosophy in this model is “I can’t have what I don’t sell,” rather than the traditional “I can’t sell what I don’t have.” GMROI and product ranking by comparative contribution are the overall driving force in making inventory investments.

The outside sale force follows a consistent consultative selling approach, and utilizes Sales Force Automation (SFA) tools. Inside sales/customer service personnel become a single point of customer and salesperson contact without wasting time checking and researching orders.

Management spends less time micro-managing and more time directing and leading the efforts of a motivated staff. Operationally excellent distributors develop strategic relationships with suppliers designed to reduce overall costs of the supply channel by utilizing EDI capabilities or even Vendor Managed Inventory (VMI) to their fullest extent.

Performance metrics motivate staff toward reducing costs, providing superior customer service and possessing the unique selling propositions that differentiate themselves in the marketplace.

Streamlined workflow processes determine ultimate success in exceeding expectations of customers. All internal disciplines within the operation, from sales, inside sales, order entry, purchasing, warehouse picking, packing and delivery, invoicing and returns, are re-engineered to reduce the company’s unit costs of distribution.

Lean Thinking
As distributors try to improve their processes with technology, they find themselves working with policies and procedures designed for the old model, not only for inventory management, but for most of their internal operating work flow processes. In implementing new technology, distributors seeking to be operationally excellent first take a fresh look at their processes to identify bottlenecks and redundant activities. They employ the “lean thinking” concepts and methods that have become more ingrained within the distribution environment. They target lean initiatives to eliminate all non-value-added activities and inventory, removing them step by step. This enables them to redesign workflow so the new technology can function properly. They re-engineer all key work flow processes and develop appropriate decision points, internal controls and management information systems. The objective is to maximize the productivity of all processes, eliminate bottlenecks, improve inventory management capabilities and improve overall systems utilization.

State-of-the-art technology takes advantage of radio frequency (RF) and advanced bar coding systems for automated storage and distribution capabilities.

Once processes have been re-engineered to support the new technology, the operationally excellent distributor can bring a host of new technologies to bear. Major tools used by operationally excellent distributors include:

Automated Picking
Effective utilization of RF and bar code scanning technology allows for truly “paperless” warehousing and distribution capabilities. RF allows the computer system to send picking instructions directly to designated pickers through their handheld devices. The system directs what orders to pick, the sequence in which to pick them, storage locations to pick product from, and ensures correct picking by verifying that the bar code identification specified matches the actual item picked.

Companies that have successfully integrated this capability report dramatic improvements in overall order accuracy, elimination of shipments not billed, an ability to hire less skilled and less expensive picking labor, dramatic improvements in the time necessary to pick orders and even the elimination of the order checking functions.

Packing, Staging, Loading and Logistics Management
The use of computer-generated shipping routes, direct staging and loading manifests are critical to the success of the operation. Loading manifests identify all packages /cartons with their assigned carrier / delivery vehicle, carrier staging location and loading sequence. This dramatically reduces the amount of effort required. Consequently, trucks leave earlier while the loading staff can be reduced.

Operationally excellent distributors also track and analyze their actual costs per delivery to more adequately allocate delivery costs to specific customers. For example, customers that routinely order small quantities of low-margin products or have inefficient receiving docks causing wait time, or are in isolated geographic regions, are scrutinized to ensure proper cost allocation in the distributor’s overall business mix.

Customer Invoice Processing
Paperless warehousing and distribution eliminates office copies of orders. Pickers confirm ship quantities as they scan the product. As a result, customers are billed only for the picker’s actual pick quantity. This virtually eliminates billing mistakes and eliminates the need to archive paper copies of orders.

In the paperless environment, there is no need for billing data entry, proofs of deliveries, credit expediting, and billing error correction. Accordingly, distributors that have implemented paperless environments are significantly reducing invoicing and filing staff.

Product Receipt, Storage and Accounts Payable
All products are scanned immediately at point of receipt. The system immediately knows what’s in the building, so the company can eliminate all internal receiving documents, reduce back orders, improve inventory turns and avoid paying for product that has not been received.

Arduous tasks performed by the accounts payable staff, such as obtaining paperwork from the receiving department and researching internal support documents, are eliminated. Consequently, operationally excellent distributors can reduce receiving and A/P staff headcount.

Inventory Accuracy and Cycle Counting
Improvements in recording, tracking and controlling workflow processes allow for a greater level of inventory accuracy. Operationally excellent distributors no longer perform traditional physical inventory counting. Discrepancies of either count or storage location uncovered during picking or stock put-away activities automatically generate a cycle count check in the system. This allows errors to be corrected on a daily basis, substantially improving inventory accuracy, improving cash flow and inventory turns. When used effectively, operationally excellent distributors report 98%+ inventory accuracy levels.

Supply Chain and Purchasing Management
Operationally excellent distributors use supply chain management techniques to improve their strategic relationship with their suppliers; EDI increases efficiency and lowers the cost of ordering, price changing, receiving, invoicing and payment.

Insides Sales/Customer Service
The role of the inside salesperson has evolved. Customers increasingly want their customer service person to provide a single point of contact for all of their questions, including product use/application, order status, credit, returns, billing, problem solving, complaint handling and consultative selling. In order for this to be effective, the operationally excellent distributor must ensure that the inside sales/customer service staff is plugged in to the company’s strategy and tactics like never before.

In poorly managed environments, up to 50% of their time can be spent correcting mistakes and pacifying customers. In an operationally excellent environment, 90% of the time, inside sales/customer service staff can be performing more value-added customer service.

Optimization of Management’s Roles
Historically, distribution management primarily focused on micro-managing line work, creating customer service exceptions (delivery, price, credit, etc.), excusing service blunders, looking for “superstar” personnel who had the ability to operate in a hectic environment, and worrying about meeting the increasing service demands of the customer. In an operationally excellent distributor, management focuses on proactively meeting with customers and vendors, coaching to solve problems, leading, planning, staffing and developing more consistent performance results among staff personnel.

Utilization of Performance Metrics
Activity-based costing and performance metrics are widely used as part of the continuous improvement process necessary to reduce costs and improve customer service. In an operationally excellent distributor, formal measurement systems measure inventory accuracy, order fill-rates, and order processing costs, etc. This allows management to consistently focus on improving the operation’s effectiveness.

Howard Coleman is principal of MCA Associates, a management consulting firm that works with wholesale distribution companies. Reach him at (203) 732-0603 or hcoleman@mcaassociates.com or at www.mcaassociates.com.

This article originally appeared in the Jan./Feb. 2010 edition of Industrial Supply magazine. Copyright 2010, Direct Business Media, LLC.

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