Keep the machine rolling
by Frank Hurtte
Distribution might be described as a complex machine with lots of moving parts, similar to a factory running a complicated process. Motors whirl, pumps, fans, and machine tools spin and someone is responsible for ensuring it runs smoothly and effectively. Back in the old days that person in charge would simply wait until the machine broke before rushing in to fix the situation. That business climate has changed.
Today’s business climate calls for more productivity, greater throughput and maximization of assets. Reacting to breakdowns and then hustling to fix things isn’t an attractive option. When breakdowns occur at the wrong time, labor costs soar, deliveries get delayed, and commercial issues arise. Competition has pushed that type of facility to the sidelines.
Adding environmental sensors to measure things like temperature, pressure, lubrication life and mechanical alignment provide the kind of data required for making machine-life expectation decisions. Display the sensor data in an easy to understand format and the result is what experts call a descriptive analytic. Now assume the person running the factory has information that allows them to better understand an unexpected breakdown, like how poor lubrication leads to a higher temperature, and the result is a diagnostic analytic. Both descriptive and diagnostic analytics deal with past and present situations. But let’s take this factory into the 21st century.
It’s easy to imagine an example of future-facing predictive analytics. A few forward-thinking distributors have begun selling Industrial Internet of things (IIoT) and Artificial Intelligence (AI) combinations which not only provide information on when a system is about to fail. They’re also predicting future failures using the same data.
But this isn’t a story about the products we should be selling, instead consider this analogy when thinking about our business. Let’s explore some of the analytics needed to track the complex machine called distribution.
Customer-based analytics
Back in the dark ages, the time required to generate meaningful data, on much more than topline sales and gross margin, precluded any kind of real analysis. Thinking back to our complex machine analogy, distributors were in the “run it till it breaks” mode. Managers and salespeople alike were often surprised when a customer had migrated to a new supplier.
Sadly, I still find distributors who operate in this fashion. I have logs of emergency calls seeking advice on how to fix relationships with customers. Customers who, in hindsight, previously demonstrated symptoms of a relationship headed in the wrong direction. What’s worse, many of these distributors have the right tools for developing analytics but for some reason don’t use them with regularity or vigor.
The following is a list of analytics I believe should be monitored, and why:
Number of Product Lines/Categories Purchased by Customer: It could be said, the more product lines the customer purchases, the stronger the relationship. The situation indicates the customer feels your organization is trustworthy, provides outstanding service and is a logical choice as a supply partner. Extending this further, customers who buy more than a few product lines become easier to serve. Your team understands more about customer applications and service requirements.
When a customer purchases only a few product lines, it might mean you have an exclusive or near-exclusive on that specific product offering. Further, in a world of special pricing arrangements, it could mean they prefer other suppliers, but you happen to have the lowest price on one or two items.
Pushing past the customer preference side, the situation may indicate your salesperson is not properly presenting portions of your line card to the customer. Deep dives with dozens of distributors reveal situations where sellers chose not to introduce entire sections of the distributor’s offering to their customers. Tracking and measuring this phenomenon provides a better overall understanding of the customer situation.
Changes in Product Line/Category Sales Dollars by Customer: This situation adds some depth to the number of product lines sold mentioned above. Consider purchases made by one of your best customers. They purchase the strongest “flagship” product lines your organization is noted for along with dozens of other lesser lines from other manufacturers. Smart competitors find it very difficult to attack your strength, so they focus their efforts on the lesser lines; while chipping away at your sales to the customer.
Research reveals these smaller product purchases went undetected because the customer spend for the major products remained strong. This includes lost sales that went unnoticed for well over a year.
One might wonder about the subliminal message sent to an important customer when a shift of several products to a competitor was not addressed for over a year. Moreover, one might wonder if the sale might have been salvaged if the distributor had noticed sooner.
Unused/Underused Special Pricing Agreements by Customer: Special Pricing Agreements (SPAs) have swept throughout the industry over the past decade. Distributors have become pretty good at handling the transactions with their suppliers and the early reports of money slipping through the distributor’s hands have largely disappeared. The missing ingredient seems to fall in the monitoring of how the SPAs are used. Through this proliferation of agreements, very few distributors monitor exactly how the customer makes use of the SPA.
Has your sales group and a supply partner established a special price that is not used? If so, it is important to determine why. Perhaps a competitor offered a better deal. Maybe the customer was only probing your team to see how easily a lower price could be negotiated.
Did you negotiate a lower price because the customer offered to reward you with additional business, but the new orders never flowed? Again, this is an area for investigation.
Seller-based analytics
Earlier we alluded to the common situation of a salesperson not properly selling the complete product offering of the distributor. We’ll touch on that one and a few other important analytics for sellers.
Sales of Product Lines by Seller: Everyone has a favorite product line; most see it as an easy sell. Some struggle to sell products they see as somehow inferior to the competition. But, in a solution selling environment, the proper question should be: will the product solve the customer’s problem? If the answer is yes, the product is applicable. Others refuse to sell products based on their feelings for the supplier’s sales team, which should only be reserved for management.
There are cases where salespeople stray from actively selling a product or technology because they don’t fully understand how to apply the offering. This is a training issue. Some sellers fear selling new products launched by well-established supply partners. Deep down they believe they are shielding their customers from products that may contain some unknown flaw. One can only imagine how this impacts new product launches and the associated inventory issues when management commits to stocking the new items.
Developing an analytic which points out poor performance across an entire sales territory (versus the company as a whole) provides an early warning for these issues.
Customers Up vs. Customer Down by Salesperson: Recognizing the current performance of a salesperson is a critical skill for the management team. Since selling is a human-based, high contact sport, it is easy to understand how a seller might go through performance peaks and valleys. Bad habits develop and demanding customers create unhealthy time pressures.
At the same time, a few big projects might skew the overall results. Simply stated, the bottom-line sales/gross margin numbers might tell the whole story. It’s important to see a list of accounts, large and small, that are performing higher or lower than their 12-month rolling average. The trends of up vs. down will provide both the salesperson and management with ideas for the future. It also allows both to understand slumps before they get truly problematic.
Number of Orders Sold Below System Price: If you don’t have well-maintained pricing in your system, fix it. If you do, be sure to track the number of sales made below system pricing. Things like projects, SPAs, and other noise will appear in the data, but the information will allow for quick adjustments for those instances where margin erosion is the result of human error.
Supply partner Related Analytics
Being the “middleman” in the supply chain, it’s important to measure and track some of the touchpoints tied to the backside of this business. There are dozens of things to consider when thinking about suppliers. My book, The Distributor’s Annual Planning Workbook, includes a section of metrics tied to providing supply partners with objective feedback on their performance, but for the sake of brevity, the analytics are narrowed down to just a couple glaring issues.
Special Pricing Agreements by Supply Partner: While SPAs play an important role in the current distributor/supplier relationship, they do present extra cost to the distributor. First, most times SPAs come with an implied margin reduction by the distributor, impacting overall profitability. Second, the administration of the agreements adds to distributor overhead. Finally, the current ship and debit model used by most manufacturers ties up the distributor’s money for an additional 30 to 45 days on average.
Research indicates some distributors have supply partners where over 80 percent of their business is channeled through these agreements. A discussion is necessary with these partners about shifting to a lower into-stock price. It seems the whole SPA thing was originally designed to cover pricing exceptions rather than adjusting for market changes. One potential solution might be a reserve program where the distributor submits extra money for the sales made at “book price” rather than waiting for a debit later.
Co-op Dollars Claimed by Supplier: Manufacturers often offer co-op dollars for marketing and sales activities. Distributors often fail to take full advantage of the programs or hastily take advantage of the programs in the latter part of the year. Experience dictates that many of these late orders are simply used to stock up on trinkets rather than spending the money wisely.
Back in the May/June 2019 edition of this publication, I went on record with plans for distributors and their manufacturing partners to move marketing plans into the 21st century with digital efforts to identify new customers and expand their base within existing customers. Digital marketing efforts over trinkets provide real analytics for expanding our business. I challenge anyone to provide analytics tying the gift of golf balls to sales growth.
Distributor Digitalization and Analytics
Since last year, hundreds of small to midsized distributors launched a webstore. While not a substantial portion of their business (yet), sales are starting to flow. Most view their webstore as a nebulous extension of their business, but there is a tie in.
Customer Product Searches: Analytics allow distributors to determine what customers are searching for whether they buy the product online, call in an order or go to a competitor. For most systems, the customer must log in to see pricing and inventory. Armed with this information, a seller could understand potential new project needs or arm themselves for future sales calls.
Thinking further, a tech-savvy distributor might analyze products studied online and not purchased to determine root causes. Inventory issues, price points, and other factors may have led the customer to purchase the product elsewhere. This will ultimately be a core competency of the future.
Make 2020 the Year for Analytics
While this is just a sampling of the analytics available to distributors, I believe it’s time for distributor leadership to insist on analytics and data-driven decisions. While I respect the opinion of all the battle-hardened veterans of this industry, the truth is our industry has never been like this before. Analytics need to be the bedrock of our decisions.
Straight talk, common sense and powerful interactions all describe Frank Hurtte. Frank speaks and consults on the new reality facing distribution. He has a new book out – “Plan on Breaking Through – Strategic Planning for Accounts.” Contact Frank at frank@riverheightsconsulting.com, (563) 514-1104 or at riverheightsconsulting.com.
This article originally appeared in the Jan./Feb. 2020 issue of Industrial Supply magazine. Copyright 2020, Direct Business Media.
INDUSTRIAL SUPPLY MAGAZINE
The March/April issue of Industrial Supply magazine features an in-depth cover story about Joyce Lansdale and Vallen. Plus, we're featuring articles by contributing writers Dirk Beveridge, Frank Hurtte, and David Kahle, as well as interviews with numerous product and distribution industry experts.
