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Skating into the future

Here are four critical skills to move your distribution company in the right direction

By Frank Hurtte

Have you ever heard of a skater? We’re not talking about the colorful shenanigans of the Bay City Bombers’ legendary Joanie “The Blonde Bomber” Weston. Same skates, different industry; we speak instead of warehouse skaters employed in wholesale distribution.

For those who joined our industry after 1980, this is going to sound crazy. Just a couple of decades ago, the wholesale distribution industry employed skaters. They zipped from the inside sales bullpen out to remote areas of the warehouse to confirm that parts were on hand. In a day before computers (and other tools we take for granted), this was considered state-of-the-art customer service.

While meeting with a select group of distributor managers, we all shared a laugh as one attendee told a story about his start in the industry. This led to a discussion of the acceleration of change in our business. Wrap your mind around this: a few successful wholesalers didn’t fully computerize until the mid-1990s (and they took pride in the fact).
Further shifts zoom toward us at an ever increasing rate. In days of old, we had years, maybe even decades, to adapt to changes. That is a luxury that skated out the door some time ago. Preparing and embracing future trends is now a critical skill.

With that in mind, I implore you to invest the next four minutes thinking about future needs.

Customer Segmentation
Most distributors work just a handful of category segmentations. This typically includes contractors, end-users and OEMs. Sometimes governmental bodies and institutions are tossed in for good measure. Sub-categorization (when it exists) is based on size.

Unfortunately, almost no one does a credible job of managing. Experience indicates salespeople instinctively move customers to larger status to drive lower prices. Almost no one has an active customer ranked as a small end-user (which should be the highest gross margin). Even tiny house accounts somehow migrate into the next size categories.

Research done by industry pioneer David Bauders and his Strategic Pricing Associates group indicates distributors continue to give away margin dollars by failing to recognize price sensitivities based around customer segmentation. The analytics from distributors across all lines of trade reveal tiny customers receiving unwarranted discounts. Bauders’ team boasts a track record of adding a two or more points to the gross margin of these companies.

But segmentation isn’t just about discount levels. Loss of segmentation also plays havoc on any advanced marketing activities. Our wide array of products doesn’t universally appeal to every customer. The most productive salespeople target by carefully matching product to customer. Targeting creates an environment where customers value their product suggestions because the salesperson is almost always right in their assumptions of customer need.

Marketing departments must apply a similar process. For example, a “Summer Specials” brochure designed for mass distribution is far less attractive than a flier customized to showcase the needs of a hotel maintenance staff. Breakthroughs in e-mail capability allow the marketing department to send an e-mail to a narrow slice of your customer base determined on the customer segmentation.

CRM systems, social media and all the other goodies we hear about require segmentation. And this information must be managed, upgraded and constantly scrubbed for accuracy and changes.

Failure to master this critical skill leads to loss of competitive advantage. You’ll lose margin dollars, communicating with customers will be more expensive and you’ll miss out on the new wave of advanced technology. Rarely will a consultant instruct you to not spend money, but don’t spend a dime on new CRM systems or other systems until you have developed this skill.

Develop a cost-effective mechanism for lower-skill work
Regardless of what government statistics show, we’re facing a labor shortage. Our industry faces a shortage of skilled solution-providing salespeople, and the compensation for this type of person continues to rise. A recent study conducted for the distributor association responsible for automation products indicates sales volume of the typical salesperson remained the same over the past decade (2001 to 2010).

Think about it. In spite of massive investments in technology – iPhones, iPads, CRM and ERP systems – 10 years passed and highly qualified salespeople still maxed out at the same business level. This does not compute.

I believe the problem stems in part from customer demographic changes. In the 1990s, many customers trimmed their technical staff, choosing to rely on distributor partners as a source of technology information. This is good for distributors because it provided us with job security.

Over the past decade, these customers cut back on administrative and clerical-based employees. This put distributors in the position of handling lower-skill, non-technical tasks once handled exclusively by customers.

As an example, for many years, customers employed clerical workers who maintained order in their storerooms. This equated to multiple people taking inventories, developing order quantities, straightening and maintaining parts to keep these facilities running. But customers have eliminated or downsized these positions to the bone. Distributors, anxious to provide new value-added service, lined up to assume the duties. The most likely person to handle the task was the distributor salesperson already regularly on site. Here is where issues develop.

Our industry placed a highly compensated (and relatively scarce) solution-providing expert into the functional role of a $9/hour employee. The salesperson, taught to provide value, spent two to three hours per month handling this task. Regrettably, this takes the salesperson away from his or her most important activity, generating new business by solving important customer problems.

The work going into customer storerooms is only one of a continuing list of low-skill tasks siphoning away sales time. By focusing the efforts of those who work within our organization we can drive tasks to the best resource within our organizations. We are not advocating that you step away from these functions; they remain important to our customers. Instead, focus your most expensive human resources toward the most important work. Match job and skill level to achieve the greatest efficiency.

How do you accomplish this? Consider this exhibit No. 47 in the case for building a sales process. It no longer makes sense to allow work assignments to be driven entirely by chance and the dynamics of your staff. Management owes it to your company to take on the challenge of building a process playbook carefully matching functionality with task. This, too, is a critical distribution skill.

Understand and prove your value
Brace yourself – value-added selling is dead. Why? Because value-added selling encourages the indiscriminate distribution of value without taking the important step of understanding its meaning to the customer. For the past 20 years, our people have merrily skipped down life’s lane, spreading good will and extra value everywhere. While this feels good (and arguably drives good Karma), the sad truth is we still fight to justify our prices.

Purchasing types openly pit your high-value efforts against the guy who does nothing to contribute to their bottom line. Every time you get a last look at the quote, you are really being given an opportunity to provide your value at the “do nothing” guy’s price.

By learning how our value impacts the customer’s bottom line, we can differentiate ourselves from the pack. We’re talking about real value. Not some feel good sort of thing, but in a specific measurable term – money. If you measure and prove the value you provide, you become price proof. Our experience indicates that some distributors deliver 50 cents in additional bottom-line value with every dollar the customer spends. When presented in the right way, this value trumps the 5 or 10 percent price chop executed by the competition. Your margins stick, your own bottom line improves and life is good for the customer.

Understanding, measuring and proving specific value points will become a critical skill for knowledge-based distributors in the near-term future. Unless you can compete with the biggest logistics providers in our industry (and I don’t think you can), you had better take time to develop a process for proving your value.

Charging for services
Understanding the value of your services to the customer isn’t enough. We as an industry must realize that service is valuable. Just like the inventory we keep in the warehouse, this stuff is money. We have procedures for pulling inventory out of stock. Your salespeople aren’t authorized to give away product samples whenever the urge arises. Instead, they stop by your office and justify the cost of “free sample” against commercial situations and future business. They fill out a warehouse form defining the cost. Everyone knows inventory dollars are real dollars.

Now, let’s switch gears. Interviews of highly-compensated distributor technical specialists for our book “The Distributor Specialist: Customer Champion, Profit Generator!” revealed frustration in the way salespeople give away specialist time. Accounts with little or no potential received huge blocks of specialist time that could otherwise be allocated to high-potential customers. It seemed as though everyone had the ability to give away their service without a great deal of management oversight.

Here is the tough part: not every customer can generate the kind of gross margins needed to pay for your service. But we can’t walk away leaving them high and dry. It’s not their fault, it’s the breakdown of a 100-year-old model: service for gross margin. They just don’t generate enough GM to foot the bill.

We need to develop plans for moving (at least some) of these customers to a pay-for-service model. Our work with those in the vanguard of our industry indicates the biggest push back against this plan comes from our sales teams. Managing service as if it had a value creates anxiety for salespeople used to giving it away. To make it work, distributor leaders need to develop a solid game plan with documented policy and procedures. In many ways these will mirror your policy for giving away stock from inventory. Failure to develop this critical skill will create an environment where profitable customers continue to pay for those who drain your service bandwidth. Eventually somebody without the cadre of profit sucking small customers will blow you out of the market. Trust me, this has become a critical skill.

Skating isn’t a critical skill anymore
Long ago some “consultant dude” of the 1950s probably railed on for more and better trained skaters. Distributors who put them to work may have outperformed their brethren for a while. The point is, in bygone days, we had lots of time to get the new skills into place. Not true today. The hundreds of distributors that have adopted these skills today will gain advantage over the rest of their peers. They will survive. Where will you be?

Frank Hurtte, founder of River Heights Consulting, brings 30 years of distribution industry experience and a lifetime in sales. Reach him at (563) 514-1104 or frankehurtte@riverheightsconsulting.com.

This article originally appeared in the July/August 2011 issue of Industrial Supply magazine. Copyright 2011, Direct Business Media.

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