An Epicor Briefing Paper

Three New Year’s Resolutions that Distributors Should Stick With

2 | Three New Year’s Resolutions that Distributors Should Stick With

New Year resolutions are tricky... as a society, we almost never achieve them, yet we continue to make them, year after year. Research has shown that 40-45 percent of American adults make one or more resolutions each year. The most common resolutions involve weight loss, exercise, and smoking. However, less than half of us are able to maintain those resolutions for more than six months, and only 8 percent of people are successful each year in achieving their resolutions.1 While those are surprising statistics, the good news is that people who explicitly make resolutions are 10 times more likely to attain their goals than people who don't. So there appears to be value in setting personal goals each year. When it comes to your business, setting goals is imperative. Unlike individual resolutions, successful companies stick to their goals with organizational discipline, top-down leadership and support, and systems of measurement. Goal execution becomes part of the culture for those who desire to thrive. Recent trends in the distribution industry are forcing companies to continually re-evaluate their processes and value propositions and strategically chart new courses. With that in mind, there are three significant resolutions that distributors can't afford to ignore as they enter the New Year:

1. Stop treating inventory as your competitive advantage 2. Stop always saying “Yes” to all customers 3. Stop allowing field sales to direct themselves

The following pages contain support for these resolutions from a number of thought leaders in the wholesale distribution industry. Achieving any one of these resolutions will put your distributorship on a better footing, but achieving all three will surely differentiate your business from the competition and open up new avenues for profitability.  

1Sources: http://www.proactivechange.com/resolutions/statistics.htm and http://www.steveshapiro.com/2008/12/11/interesting-new-years-resolution-statistics/

3 | Three New Year’s Resolutions that Distributors Should Stick With

Resolution #1: "I will stop treating inventory as my competitive advantage."

Weight loss is not only a good New Year's resolution for people who aspire to be healthier; it's also a goal of many distributors in regards to their over-investment in inventory. The reason for this over-investment is that too many distributors view their inventory as their primary competitive advantage. "Instead of being an inventory storage house that matches the manufacturer to customer, distributors have an opportunity right now to become the intellectual controller of the supply chain," suggests Dr. Barry Lawrence, Professor of Industrial Distribution at Texas A&M University. "The concept of 'just-in-time' has played out. To differentiate themselves, distributors should look to take over their customers' processes, introducing reliability and true value-add to the partnership." While distributors will always want to ensure their customers get the products they need, it may not have to be through inventory that the distributor is forced to own. Even in the case of Vendor Managed Inventory (VMI), the distributor has the option of having the customer own the inventory, while the distributor improves process management with the aid of technology and analytics. According to Jon Schreibfeder, President of Effective Inventory Management, "If you stop treating your inventory as your true competitive advantage, you can cease stocking every location with every item you carry, and instead rely upon a central warehousing model for your high-volume items." Like milk for a grocery store, there are some items (A & B items) that distributors must never run out of and should only trust to their own people. But for other inventory needs, an intelligent relationship with a master distributor may be a good option, assuming reliable on-time delivery and complete traceability of product back through the supply chain. "Technology is moving to the cloud. It's not unreasonable to think a good portion of your inventory will, as well," says Mike Marks, Principal at Indian River Consulting Group. One type of value-add that Dr. Lawrence sees as a prime opportunity for distributors is taking on more postponed (i.e., “finishing touch”) manufacturing to meet localized customer needs. "Customers expect a higher degree of differentiation in products than some manufacturers can provide, because many of them have moved their operations overseas and lack a sales and marketing force in each region to understand the customers' localized needs," explains Dr. Lawrence. "If distributors can gain their manufacturers' trust and make the resource investment, they can turn this into a profitable competitive advantage." “There are a number of innovative ways in which distributors can create differentiation without thinking of their inventory as the vehicle," says Guy Blissett, Wholesale Distribution Lead at IBM® and Fellow at NAW's Institute for Distribution Excellence. "The trick is to make sure you have the right people in your organization that can align operations with your strategy and sell value and services, and not just inventory." Or as Tom Gale, Publisher of Modern Distribution Management suggests, "Stop selling and start marketing. Historically, inventory has received much more attention than marketing. A shift will occur in the next five years, where distributors will focus more resources on marketing and creating differentiation through process innovation and greater control of the supply chain." "Distributors can't continue to be a commodity player. They have to deliver value," warns Dr. Lawrence. "There can only be one true winner in the Wal-Mart commodity war, and that's Wal-Mart."

4 | Three New Year’s Resolutions that Distributors Should Stick With

Resolution #2: "I will stop always saying 'Yes' to all customers."

Quitting smoking is one of the most popular New Year's resolutions that people make. Just as smoking is considered a bad habit, so is saying "yes" to all customers, all the time. According to Blissett, "Distributors have to confidently, selectively, and smartly say 'no' to some customer inquiries and requests." In a culture that has promulgated such myths as "The customer is always right" and "All customers are equal," Blissett's recommendation can be a tough pill to swallow. The key is to have the analytics and business intelligence on hand to know when to say "yes" or "no" to certain customers. For example, how do you determine if you're going to give a price break to a customer when they ask? Is the decision left up to the whim of the sales rep or manager that is trying to secure the order, or have you analyzed the customer's past order volume, average days to pay, and overall profitability contributions to your business? In these scenarios, the transaction costs are often greater than the gross margin retained. Continually saying "yes" to discounts for undeserving customers erodes the profits created by your most valued accounts. David Bauders, President of Strategic Pricing Associates, has done extensive work with distributors on disciplined pricing strategies. He understands as well as anyone that distributors often say "yes" to the wrong customers too often. "When customers don't get the answer they want, their complaints are something to be taken seriously," says Bauders. "But if you retired from your distribution business after a 30-year career and never heard one customer complaint, you probably worked 10 years longer than you had to. Saying 'yes' to a customer's request for a discount because they ordered one or two SKUs in large volume may not be the smartest decision for your business." In order to confidently say "no" to certain customer requests, distributors must have the tools in place to stratify their customer base and measure true profitability based on each customer's cost to serve. "Stop trying to compete against big boxes for the lowest end of the market," suggests Dr. Lawrence. "If the customer wants you to carry slow-moving inventory, they should be paying for it." If you consider that, on average, 80 percent of a distributor's sales come from only 10-13 percent of their items, and 60 percent of their items on the shelf are only stocked for sporadic usage, there is an awful lot of inventory on hand that is eating up cash flow simply because distributors have a hard time saying "no." Putting cash resources into more productive functions can fundamentally shift a distributor's competitive advantage and improve overall profitability. In other words, there is a time and place for saying "no" to the customer, no matter how difficult it may seem. The key to this is getting the customer to understand why you're saying "no," and to work with them to create a mutually beneficial relationship, rather than tacitly allowing them to continually erode your profits. When you don't say "yes" to every phone call that comes in, you can narrow the focus of what you are doing to something that will be different from what everyone else offers.  

5 | Three New Year’s Resolutions that Distributors Should Stick With

Resolution #3: "I will stop allowing field sales to direct themselves."

If people were serious about maintaining a consistent and effective exercise regimen as a New Year's resolution, they'd probably hire a personal trainer who knows best which exercises will produce the optimum results. However, left to their own devices, they often waste time and effort chasing the wrong paths to peak physical fitness. Similarly, too many distributors fail to maximize the profitability of their customer accounts because they leave the day-to-day decisions about what's best for the business to their field sales team. "We've left it up to field sales to do mass customizations when it comes to customer accounts," says Marks. "That needs to change. Rather than allowing field sales to dictate what accounts they should go after and what products and customized service should be provided to each account, the management team needs to relay the marching orders." Of course, the marching orders to which Marks refers should be based on a solid understanding of which products and brands have superior margins and are the best fit for specific accounts and markets. "Business development is a responsibility of the company, not just sales," notes Marks. "Their orders should not be, 'Just go out and sell something!'" Traditionally, the field sales rep was the gatekeeper of all knowledge about each customer, and therefore assumed to be the best person to make decisions about servicing individual accounts. Technology has changed that assumption. Predictive analytics and Business Intelligence (BI) applications provide upper management with insight into what's really going on with each account. They now have access to better information about the potential of different customers, products, and markets, and are able to make better decisions to support company profitability. Therefore, the opinions of the field sales reps about their accounts are no longer the key asset they bring to the distributorship for which they work. "While you don't want your sales force to define your value proposition, you don't want to dictate to them, either," warns Dr. Lawrence. "Distributors must educate and involve sales in the analytical process, or else they will sabotage the initiative." Many distributors would be the first to admit they do not focus enough attention or resources on sales force training. The art of listening, identifying problems, and determining how to best solve those problems for the customer is a skill set required of every top-performing field sales rep. "When we stop trying to put people inside our customers' operations, our value diminishes," suggests Dr. Lawrence. “Outside sales reps need to focus their efforts on consultative selling. More than just product knowledge, this requires a technically competent and adept sales force." "Historically, a distributor's pitch was around execution differentiation," reflects Marks. "In other words, 'I do the same thing, but I don't make as many mistakes as the other guy.' A shift must occur where distributors are able to strategically determine which dollars are more important than others, and how they can increase each customer's cost (and therefore reluctance) to switch to another supplier." "Your biggest threat to making this shift in focus is your field salespeople," Blissett agrees. "You need to change their perspective on what is most important to your company's profitability if you are to succeed going forward."  

6 | Three New Year’s Resolutions that Distributors Should Stick With

Conclusion

Making fundamental changes in the way you do business requires commitment, but the technology-enabled distributor is at a distinct advantage in following through on establishing better controls and creating meaningful differentiation from competitors. Distributors that stick to these resolutions can expect to see measurable results in the New Year, and for years to come. Information and quotes for this paper were excerpted from an expert panel discussion at the annual Distribution Executive Forum hosted by Epicor Software Corporation. The theme of the 2011 Executive Forum was “Distribution 2.0,” an exploration of the form and format of the next-generation wholesale distributor, focusing on technology, industry trends, business models, and organizational culture.

About Epicor Epicor Software Corporation is a global leader delivering business software solutions to the manufacturing, distribution, retail, and services industries. With nearly 40 years of experience, Epicor has more than 20,000 customers in over 150 countries. Epicor solutions enable companies to drive increased efficiency and improve profitability. With a history of innovation, industry expertise and passion for excellence, Epicor inspires customers to build lasting competitive advantage. Epicor provides the single point of accountability that local, regional, and global businesses demand. For more information, visit www.epicor.com.

The contents of this document are for informational purposes only and are subject to change without notice. Epicor Software Corporation and Activant Solutions Inc. make no guarantee, representations or warranties with regard to the enclosed information and specifically disclaim, to the full extent of the law, any applicable implied warranties, such as fitness for a particular purpose, merchantability, satisfactory quality or reasonable skill and care. This document and its contents, including the viewpoints, dates and functional content expressed herein are believed to be accurate as of its date of publication, December, 2011. The usage of any Epicor or Activant software shall be pursuant to the applicable end user license agreement and the performance of any consulting services by Epicor/Activant personnel shall be pursuant to applicable standard services terms and conditions. Usage of the solution(s) described in this document with other Epicor software or third party products may require the purchase of licenses for such other products. Epicor and Activant are registered trademarks and/or trademarks of Epicor Software Corporation and Activant Solutions Inc., respectively, in the United States, certain other countries and/or the EU. All other trademarks mentioned are the property of their respective owners. Copyright © 2011 Epicor Software Corporation. All rights reserved. Job # 1255.

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