VOLUME ONE
INTELLIGENT DISTRIBUTION MAKING YOUR BUSINESS MORE COMMERCIALLY EFFECTIVE
QUALIFICATIONS, ASSUMPTIONS, AND LIMITING CONDITIONS Neither Oliver Wyman nor NAW shall have any liability to any third party in respect of this report or any actions taken or decisions made as a consequence of the results, advice, or recommendations set forth herein. The opinions expressed herein are valid only for the purpose stated herein and as of the date hereof. Information furnished by others, upon which all or portions of this report are based, is believed to be reliable but has not been verified. No warranty is given as to the accuracy of such information. Public information and industry and statistical data are from sources Oliver Wyman and NAW deem to be reliable; however, no representation as to the accuracy or completeness of such information is made. No responsibility is taken for changes in market conditions or laws or regulations and no obligation is assumed to revise this report to reflect changes, events or conditions, which occur subsequent to the date hereof.
It’s not enough to be good at something; you have to be good at everything, and excellent at the most important things.
CONTENTS
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AMAZON IN WHOLESALE DISTRIBUTION OVERBLOWN HYPE OR GAME-CHANGER?
19
UNLOCKING HIDDEN PROFITS SECRETS TO GENERATING NEW DEMAND
29
BEWARE THE PRICING MYTHS BUSTING MYTHS TO GROW PROFITS
39
45
55
67
GETTING “QUICK WINS” TO WORKDRIVING LASTING MARGIN IMPROVEMENT IN 90 DAYS OR LESS
THE SALES FORCE EFFECTIVENESS PARADOX WHY SALES FORCES STILL PRODUCE 80% OF THEIR VALUE FROM 20% OF THEIR ACTIVITIES
MAKING SCIENTIFIC PRICING ACTUALLY DELIVER 3 CAPABILITIES, 3 ENABLERS, 3 POINTS OF MARGIN
PURCHASING COST REDUCTION WHAT DISTRIBUTORS CAN LEARN FROM LEADING RETAILERS AND MANUFACTURERS
INTRODUCTION Over recent years, my team has had many conversations with senior executives in wholesale and distribution companies and have worked with them to increase their company’s commercial effectiveness in ways that result in clear profit improvement and shareholder value. So we know that your business is difficult to run: difficult because you have a large customer base under constant pressure in their own businesses; difficult because of changing economics and technologies; and difficult because of the multitude of different products you stock to and from geographically dispersed locations. This is why I want to share with you the Oliver Wyman vision of intelligent distributor commercial effectiveness – where taking a future-looking, scientific approach to wholesale distribution enables you to not only keep up with the competition but break away from them and truly differentiate your business. An intelligent distributor is a company where the customer-facing business – sales force, pricing, segmentation – is linked and integrated to the back-room operations – the supply chain and supporting systems. An intelligent distributor has best practices as the bedrock of the business, with the talent and culture to support innovation.
KEVIN McCARTEN Partner Kevin McCarten leads the firm’s wholesale and distribution practice, where he and his team are focused on addressing the challenges faced by B2B distributors, wholesalers, and companies offering multi-site services and custom manufacturing.
In this compendium I have selected a series of articles that highlight the most important commercial steps towards becoming an intelligent distributor. Several of these pieces have been the direct result of our work with the National Association of Wholesaler-Distributors in the US, where we learned that while some companies are showing innovation and capabilities in specific areas, few have developed and implemented best practices across every facet of the business. This is not a criticism – it is a call for action to take the opportunity for development, differentiation, and future success. I hope these perspectives can initiate new discussions within your company and arm you with a suite of practical steps that will have measurable and lasting impact on the growth and longevity of your business.
Kevin McCarten 5
By the time customers call you today, they have now already done the majority of the research. They want the easiest way to accomplish the task – that’s where the market is going. We are trying to get ahead and create the customer experience of the future. – CEO, $BN DISTRIBUTION COMPANY
AMAZON IN WHOLESALE DISTRIBUTION OVERBLOWN HYPE OR GAME-CHANGER? Over the past 15 years or so, the emergence of online players like Amazon and Expedia has transformed many B2C sectors, from books and music, to electronics and travel. With US e-commerce sales of goods at some $210BN+ in 2012 and Amazon alone accounting for $35BN sales in the US and over $60BN worldwide, it is hard to argue that Amazon does not now represent a formidable competitor in those areas where it chooses to focus. What, then, to make of Amazon’s entry into B2B distribution with AmazonSupply in April 2012, or Google’s beta-test of Google Shopping for Suppliers, which ran from January 2013 to June 2014? To what extent do these represent early moves of disruptive game-changers, or will they turn out to be limited incursions in a set of complex sectors where local presence, technical knowledge, and personal customer relationships will always win?
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WHAT WE HEAR AND SEE In our discussions with more than 25 CEOs of billion-dollar distribution businesses in recent months, we have heard a broad range of views. Around a third are skeptical that e-commerce will have a major impact on their business: often because their product is too difficult for a new entrant like Amazon to warehouse and ship, and sometimes because of value-added services that they feel cannot be provided except through a direct local relationship. This view is reinforced in some cases by work their businesses have done to provide online ordering platforms that have seen limited uptake. Other CEOs take a different view. In some cases they are already competing head-to-head with AmazonSupply in certain categories. Many are keenly aware of how customer behavior is changing in influencing sales. To quote one: “By the time customers call you today, they have now already done the majority of the research. They want the easiest way to accomplish the task – that’s where the market is going. We are trying to get ahead and create the customer experience of the future.” Within this group, of those CEOs intending to build greater barriers to online competitors, about half feel they are on the right path, while half are struggling. Such concerns are underpinned by some interesting facts: •• In B2C, in 2012, US sales that were influenced by online research, at $1,200BN, already account for around 6x the sales transacted online •• In B2B, 45% of professional buyers have already purchased from AmazonSupply. Additionally, 85% of buyers state they will always buy a lower-cost option online, despite loyalty to their current supplier •• 90% of younger procurement buyers (aged 18–35) make B2B purchases online, compared to only 29% of older procurement buyers (aged 60 and over). See Exhibit 1.
Exhibit 1: Younger procurement buyers – the future of the B2B customer base – are far more likely to use online platforms than their older counterparts Respondents by age making B2B purchases online in the US
29%
AGED 60+
45%
68%
90%
AGED 46-60
AGED 36–45
AGED 18–35
Source: 2013 State of B2B Procurement, Acquity Group
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It is also worth bearing in mind that Amazon in particular has a track record of taking a long view in establishing a competitive position. In 1997 Jeff Bezos stated, “It’s all about the long term… We may make decisions and weigh trade-offs differently than some companies.” More recently he was quoted as saying, “Percentage margins are not one of the things we are seeking to optimize…” Amazon’s history of always seeking to have the most competitive price in the market by applying advanced trading algorithms to “real time”competitor price data is well known.
HYPE OR THREAT? If you cut through the hype, we believe that there is a steady and inevitable online and multichannel transformation underway. As with most things in business, it’s pretty simple: it starts with customers and their needs. Customers increasingly value quick, simple, effective ways of interacting to get the products and services they need, as well as new value-added services that were not possible previously. As one CEO put it, “Our customers have already been trained by Amazon [in B2C] on what good looks like. That’s what we have to compete with.” We believe this multi-channel shift will eventually affect nearly every type of product in B2B distribution. Some sectors, though, are likely to feel the competitive impact much more quickly and acutely than others. Sectors characterized by small, high-value, low-weight, easy-tohandle-and-ship products that are readily specified and do not require specific physical services to deliver are much more amenable to an Amazon entry. Unsurprising, then, that AmazonSupply has launched with an industrial parts offer – a category which meets all of the above criteria – rather than, say, industrial chemicals, that fails most of the above tests (see Exhibit 2).
Exhibit 2: Example analysis of which categories are more immediately prone to a new online threat
Product driven
Customer driven
INDUSTRIAL CHEMICALS
INDUSTRIAL PARTS
Intrinsic “shipability”
Much lower-value, heavy, bulky product – requiring local supply chain density
Typically high-value, light, smaller product – easy to ship via common carrier
Handling requirements
Often requires specialist equipment/ handling/certification
Straightforward
Technical guidance
Numerous products require technical guidance and support
Many products easily “bought to specification”
Product selection
Typical customer buys a small number of predictable products – enabling local SKU counts of 100s or 1,000s only
Customers can buy across many 1,000s of SKUs
Value-added services
Diluting, blending, cleaning, etc. are widespread and require physical presence
Real-time availability, tracking, inventory management, etc. can often be executed remotely
Not an obvious category for an online-only business to attack
Online platform and remote DCs wellsuited to meet many customer needs
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It would be a mistake, though, to think that the competition from online players is “binary” in nature. The question is not whether they will be a threat, rather it is which customers, purchase occasions, and categories will be targeted first. Consider the lesson from the mass merchant retail clubs. In a number of categories, Amazon already has a comparable or broader range than the established club stores such as Costco. In addition, Amazon’s Subscribe and Save service, which delivers frequently purchased high-value items such as razor blades and diapers automatically every month or so (unless the customer pro-actively updates or skips the order), is already “hollowing out” shoppers’ baskets at the clubs and reducing trip frequency. There is a ready read-across to non-core categories such as personal protective equipment in industrial gas distribution or non-food items in food service. While the core business may not be at threat, such adjacent categories can often drive around 20–30% of dollar gross margin. That’s a lot to have to make up in other core and often lower-margin categories. Such customer unbundling also acts to undermine “full service” customer relationships. The key battle is one of consideration rate, i.e., for what percentage of customers are you the first place they will go (whether physically or online) when the customer thinks about purchasing a product in a specific category? In B2C of course, Amazon has already comprehensively won the consideration rate battle in many categories through its aggressively low prices, huge range, consistent meeting of fulfillment promises, and “no quibble” returns. So much so that many customers now never check prices or range anywhere else. As one looks ahead, compared to most traditional offline distributors, AmazonSupply by our reckoning starts with an SG&A cost advantage of some 20% or more to its scale and lack of local operations and field sales, as well as a business model built on operating margins (currently less than 2%) that are a fraction of those in more established competitors. It is, then, no surprise that one can already see more competitive pricing on many items at AmazonSupply.
The question is not whether AmazonSupply will be a threat, rather it is which customers, purchase occasions, and categories will be attacked first.
Exhibit 3: Building a compelling range – AmazonSupply has been growing its product selection, doubling its breadth in just over a year
500,000+
600,000+
750,000+
2,250,000+
JUNE 2012
JANUARY 2013
JULY 2013
JULY 2014
PRODUCT SELECTION FOR A FEW REPRESENTATIVE CATEGORIES AMAZON
GRAINGER
MSC
WB MASON
15K+ products
9K+ products
31K + products
–
39K+ products
55K+ products
55K + products
–
50K+ products
38K+ products
17K + products
–
9K+ products
–
–
1K+ products
5K+ products
–
Abrasives
Fasteners
Hand tools
Paper
Office furniture
– 3K+ products
Note: Product selection compared on 15 December 2013
Similarly, while AmazonSupply is still at an early stage of growth, one can already see the beginning of a compelling range in those categories where it has started to focus (Exhibit 3). Finally, one needs to take into account Amazon’s substantial investment in building around ten distribution centers per year since 2010 close to major cities. Our estimate is that by 2015 Amazon will be able to reach more than 50% of the US population with same-day delivery. As one looks ahead, our view is that AmazonSupply, for one, will represent a new player in the competitive ecosystem for the majority of wholesale distribution product verticals, and that a new competitive equilibrium will therefore evolve. 11
SO HOW MIGHT YOUR COMPETITIVE ECOSYSTEM EVOLVE? We have of course already roughly characterized two business models: the traditional distributor with local presence and fulfillment, field sales, expert knowledge, and established relationships; and the online distributor (e.g., AmazonSupply) with more centralized operations and fulfillment, and no pretense to technical knowledge or field sales. A natural third model is the omni-channel distributor: a model defined by enabling customers to get the information they need and place orders across the web, phone, mobile devices, and in person in a seamless and integrated way. This omni-channel model is where a number of CEOs are already working hard to take their businesses in the next two to three years. Our sense, though, is that AmazonSupply is not the only new business model many will face.
It might be interesting to consider how you would react if your main competitor tomorrow announced a major fulfillment partnership with AmazonSupply.
From January 2013 to June 2014, Google ran Google Shopping for Suppliers (in addition to Google Shopping) as a test service targeted at B2B companies. It was essentially an online catalog in three test categories, with detailed structured technical data comparable across products and suppliers. The revenue model had suppliers pay $1,000 to be verified and those that were verified would appear higher on search rankings (although throughout the test the fee was waived). The customer concept seemed appealing: a truly comprehensive, fully up-to-date product catalog that is as easy to search as Google. While the testing has now completed, many of the learnings will be transferred through into the main Google Shopping and Google AdWords businesses, meaning Google is likely retain a stake in the wholesale and distribution supply market. One might also expect, in some categories, the advent of a meta-search business model offering price comparison searches similar to those in B2C sectors such as travel (e.g., Kayak) or insurance (e.g., insurance.com). We are also seeing attempts to establish online marketplaces for specific customer types (e.g., “The Supply Place, Powered By Ace”). Lastly one can also anticipate the disruption to traditional supply chains. Some manufacturers are already using the web to go direct to customers and reduce reliance on channel partners. In other instances, one sees potentially powerful new partnerships evolving (e.g., Grainger partnering with Lowes to fulfill MRO supplies for its B2B customers). It might be interesting to consider how you would react if your main competitor tomorrow announced a major fulfillment partnership with AmazonSupply.
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POSITIONING YOUR BUSINESS TO SURVIVE (AND HOPEFULLY THRIVE) We have seen a few versions of this movie before. To highlight one: in grocery retail much of the story of the last 20 years or so has been how the progressive roll-out of Walmart Supercenters across North America has challenged one regional chain after another. The arrival of a disruptivescale competitor with a low-cost base, compelling range advantage, and SKU prices often some 15–20% below those of the existing players has driven a dramatic shake-up in most markets. The most typical pattern is a polarization of incumbents. Those grocers with relatively undifferentiated offers, many of whom cut prices or increased promotional activity in order to try to compete, typically did not make it. (Although long run price elasticity is high, in the short run it is lower. So those that invested only in price did not see enough volume increase fast enough to compensate for the short-term margin loss due to lower prices – exacerbating their financial bind.) Those who instead invested thoughtfully in quality, freshness, and alternative formats and who critically stayed sufficiently in touch with Walmart on price (within roughly 10% or less) have generally grown sales. Today in many markets there are only one or two strong conventional grocers left alongside Walmart, but they have thrived at the expense of the players that have left these markets (Exhibit 4).
Exhibit 4: The key to surviving Walmart’s entry into a local grocery market has been a strong offer perception combined with “good enough’”or better value perception The customer perception map: a typical pattern for a retail sector OFFER LEADERS Strong assortment, great product quality and/or high levels of service put these retailers in a strong position to defend against the Walmart threat. Typically around 2 in 10 retailers fall into this category. LAGGARDS Retailers in this region are poorly regarded by customers, and are in trouble even without a new competitor. Only around 1 in 10 retailers are in this position at any given time – in part because they don’t tend to survive long.
Strong
CUSTOMER FAVORITES Very well placed to win share from all local competitors, including the value leader(s). Typically only 1 in 10 retailers are in this position. “THE PACK” Around 4 in 10 retailers are typically viewed by customers as ‘average’ – a weak starting point. A few break out to become customer favorites or offer leaders, while others slip into the laggard zone.
OFFER
Weak Weak
VALUE
Strong
VALUE LEADERS Price leadership is highly effective against established rivals. A customer perception positioning often defined by Walmart. Today around 2 in 10 retailers are in this position.
Note The above exhibit is an illustrative example of Oliver Wyman’s Customer Perception Map – a powerful tool for understanding customer perception, predicting share growth/decline, and informing customer-facing strategy
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SO WHAT SHOULD YOU DO? Responding to the changing environment is not only about digital capabilities. It is about robustly understanding what customers want and need, and then delivering it better and faster than your competitors. As the grocery story illustrates, the good news is that you don’t need to outrun the low cost “bear.” But you will need to outrun your “friends” in the industry. If new online entrants start to take significant share, the remaining available market will shrink. Growing your business will require you to take an ever greater share of what is left, and potentially to expand your perimeter. If this is striking an immediate chord, and even if it’s not, there are six elements that we suggest need to be part of a credible plan.
The good news is that you don’t need to outrun the low cost “bear.” But you will need to outrun your “friends” in the industry.
1. PLAY THE MOVIE FORWARD, BOLDLY What could an online-only player like Amazon do to your sector if they got serious? Work this through at the level of customers, purchase occasions, and categories. Which will be the early battlegrounds? Which customers and occasions are core and must be held at all costs? What will cause your key vendors to partner with you, vs your competitor, vs Amazon, vs sell direct? What could be the new competitive equilibrium? (Hint: if your scenarios don’t involve you or a competitor exiting the market or merging, you are not being bold enough.) Example: One distributor is “inventing” how their customers will behave going forward. By mapping customers’ economics and anticipating online innovation, they are predicting new service and solutions offers, and working hard to stay ahead of this curve.
2. GET CRYSTAL CLEAR ON WHAT YOU NEED TO DO TO WIN THE CONSIDERATION BATTLE If your prices are more than 10% above Amazon, it’s time to review your pricing policy – but carefully, reflecting on the grocery lesson about short vs long-term price sensitivity above. If you can’t fulfill next-day delivery on 90%+ of your SKUs, it’s time to review your supply chain. How might you leverage your technical knowledge and local service to defend the first battleground categories? Own brand products and exclusive brand supply relationships may have an important role to play here too. Example: Several distributors are explicitly focusing on: achieving 90–100% same or next-day product availability, up-skilling the sales force to provide more customer advisory support, and consolidating vendors to minimize delivery disruptions to important customers.
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3. STAY VERY CLOSE TO BOTH YOUR CUSTOMERS AND COMPETITORS Do you collect monthly customer feedback on your local service performance? Do you know how customers rate you vs competitors on key dimensions such as value, product quality, service, and technical support, and can you translate that into a “customer perception map” vs AmazonSupply? Are you tracking competitor pricing in the field and online? Do you have tools to help you spot missed orders or customers at risk? Example: One distributor tracks customer satisfaction every month in every branch, has a scale mystery shopping program, and tracks fill rates and customer service issues to create a monthly customer dashboard.
4. GET SERIOUS ABOUT CUSTOMER STICKINESS What information, services, and apps could you deliver in a better way to core customers in a multi-channel world in order to save them time or make them more productive? What service activities can you automate online, cutting costs and driving up sales? Can you create new pricing constructs that defend against SKU by SKU cherry-picking?
We are already seeing the early stages of a wave of innovation as the most forwardthinking wholesale distribution businesses invest significant time and resources into becoming potent omnichannel competitors.
Example: Several distributors are delivering services to keep the customer on the shop floor, not in the back office (e.g., back office apps, CRM, and sales/inventory reporting). One is hosting dozens of customer websites using their infrastructure. Another has innovated a “whole basket” pricing construct that is delivering 20%+ customer sales growth in an otherwise flat market.
5. GO ON THE OFFENSIVE Once you have a robust online catalog and transaction engine, why not “re-skin” it for B2C? Once you have the fulfillment model, why not start adding more adjacent product categories? Then why not get serious about customer acquisition through pay-per-click engineering, affiliates, targeted email promotions, etc.? Should you consider acting as the fulfillment partner for AmazonSupply or a large B2C player? Example: Several distributors are driving e-commerce across wholesale and retail, and managing the challenge of competing with their customers.
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6. START THINKING “MOBILE FIRST” We are right now living in the first year when there are more smart mobile devices connected to the internet than PCs. Mobile commerce is forecasted to quadruple in the next five years. In distribution businesses most customers are, by nature, already mobile – whether on a building site, a shop floor, in a commercial kitchen, etc. Delivering simple, relevant, highly personalized information, services, and ordering capability to customers while they are going about their business will be a competitive game-changer. Examples: Distributors are already enabling access to product technical information, real-time product availability, ordering, order status tracking, etc. on mobile devices. Getting just the right information to the field sales force can also be hugely powerful. One distributor has real-time customer order history, statistically predicted orders and customers at risk, next product to sell recommendations, and next prospect to call on insights available to their sales force on iPads.
While customers are happy to benefit from offline services and advice, superior online pricing and assortment nearly always wins in securing the final purchase.
AND HOW SHOULD YOU DO IT? If the above is about “the what,” the final question we have discussed with a number of CEOs is about “the how.” How to move with sufficient imagination, pace, and flexibility; and how to recruit and inspire some very different talent? One recipe comes from the digital disruptors themselves. Both Amazon and Google have set up wholly separate divisions with the explicit aim of inventing the future, fast – and allowing bold failures on the path to bold successes. In Amazon’s case, the genesis was in 2006 when Jeff Bezos picked up the Sony e-reader and saw a huge risk to Amazon’s core business. He rapidly established Lab 126 and, 18 months later, the first Kindle was launched. Walmart is right now seeking to apply the same approach with a wholly separate division based in Silicon Valley (a long way physically and culturally from Bentonville, AR) focused on rapidly reinventing its online business in the face of the expansion of AmazonFresh. Closer to home, Grainger established its online division more than 15 years ago. Great care is required in managing what follows. As the new organization successfully challenges the status quo and builds momentum, should it be left alone, should it be integrated into the old business (or maybe better, vice versa), or should it become an ongoing source of innovation that “hands over” lines of business when they hit critical mass? The experience of those sectors that have gone online earliest and fastest (travel, consumer electronics, etc.) is that customers who shop across channels have little tolerance for price and offer inconsistencies. Moreover, while customers are happy to benefit from offline services and advice, superior online pricing and assortment nearly always wins in securing the final purchase.
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CONCLUSION In our view AmazonSupply, Google Shopping, and quite possibly one or two more new entrants will have a profound effect on many wholesale distribution sectors over the coming five years. In many (but maybe not all) sectors, a new competitive equilibrium will be established. History suggests that those that act to strengthen a differentiated high-quality yet goodvalue customer proposition and which adapt fastest to the opportunities created in a multi-channel world will see their businesses flourish. Those that do not will see their businesses struggle. We are already seeing the early stages of a wave of innovation as the most forward-thinking wholesale distribution businesses invest significant time and resources into becoming potent omni-channel competitors. If your business does not yet have a credible plan to survive and thrive in the new ecosystem, there may be less time than you think.
When you discover a problem, you discover a business. – HENK KWAKMAN, FORMER CEO OF NESPRESSO
This article is drawn from Adrian Slywotzky and Karl Weber’s book Demand – Creating What People Love Before They Know They Want It. Crown Business, 2011
UNLOCKING HIDDEN PROFITS SECRETS TO GENERATING NEW DEMAND In today’s competitive market, most companies are struggling to drive profitable growth in their core customer base. Generating and harnessing demand for new propositions is critical to driving breakaway performance in this environment. Driving profitable growth is tough. Once you strip out growth from price increases, mergers and acquisitions, and international expansion to look at a business’s “core growth,” you often find that this growth has been sluggish or even negative over recent years (see Exhibit 1). This is not simply a result of the Great Recession, although this has clearly hit some sectors hard. In fact, it has been an issue for many businesses since the end of the 1990s, not just wholesalers and distributors. We regularly talk to CEOs struggling to hold on to their core customer base, let alone profitably grow them.
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Yet, despite this weak background, some businesses have managed to generate outstanding growth of 6–10 times that of their market. They have done this by innovating: new propositions, new services, and game-changing products that have found pools of untapped customer demand. This paper looks at the five key lessons to be learned from these “demand creators” and how they are being applied today by the more innovative distribution companies†.1 1. Customer and supplier hassles are the source of untapped demand 2. New propositions need a team, processes, and the right culture to incubate 3. Don’t stop innovating and iterating until it’s magnetic 4. Identify techniques to get around the inevitable customer inertia 5. Don’t launch before you are ready – then scale, fast. Exhibit 1: Demonstration of sluggish core growth in many distribution and wholesale sectors Our analysis found that, after stripping away growth from acquisitions and international expansion, core growth has been meager at best DISTRIBUTION SECTOR1
2008– 2013
INTERNATIONAL GROWTH2 ACQUISITIONS3
PRICE INCREASES4
ESTIMATED CORE GROWTH
Electronics 9.4% –
1.8%
–
3.9%
+
0.0%
=
3.7%
6.0% –
0.4%
–
1.2%
–
0.4%
=
4.0%
5.3% –
1.5%
–
0.9%
–
0.9%
=
1.9%
3.1% –
0.2%
–
0.3%
–
1.2%
=
1.4%
2.0% –
2.5%
+
1.0%
–
3.0%
=
-2.3%
2.0% –
2.2%
–
0.4%
–
0.2%
=
-0.8%
0.2% –
1.4%
–
0.9%
–
0.7%
=
-2.8%
Food
Building materials
Pharmaceuticals
Industrial chemicals
Industrial parts
Electricals
Average = 0.8% Source: Company 10-Ks, annual reports, and US Bureau of Labor Statistics. 1. Each sector is comprised of three leading publicly listed multibillion-dollar distribution companies, primarily based in the US 2. Growth from base international revenues in 2008, along with international acquisitions 3. Net change in revenue caused by domestic acquisitions and disposals 4. Estimated from the change in Producer Price Index for the associated industry † Several of the lessons and examples are drawn from research published by Oliver Wyman in Demand: Creating what people love before they know they want it by Adrian Slywotzky and Karl Weber.
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Lesson 1: CUSTOMER AND SUPPLIER HASSLES ARE THE SOURCE OF UNTAPPED DEMAND Managerial attention is first and foremost on the products and services you deliver today. To generate breakthrough demand, companies need to spot unmet client needs before competitors. This is easier said than done. It requires you to look beyond your current business into the wider “business system” in which your products are sold and look for hassles that you could solve for your customers, or suppliers. Take surgical equipment distribution as an example. In the past, surgical teams sourced protective equipment, gowns, and surgical instruments from multiple manufacturers, sterilized them, and brought these different parts together for each operation. Distributors focused on getting the right range of equipment at the lowest price, delivered on time when the customer ordered them. Yet, this left the surgical team with some significant hassles:
To generate breakthrough demand, companies need to spot unmet client needs before competitors.
•• Missing protective wear or tools for the operation •• Incorrect instruments •• Incomplete sanitization of instruments before use •• Accounting for individual surgeon brand preferences •• Post-operation disposal and recycling. Each of these issues could increase operation set-up times, increase risk of infection to the patient, add to costs in the hospital, or even jeopardize patient safety. These hassles, however, also presented a major opportunity. Innovative equipment suppliers have become “value added distributors” by providing custom procedure trays (Exhibit 2). These trays contain in one pre-sealed pack all the single-use medical devices needed for a specific procedure. The value proposition to the hospital is clear: shorter set-up times, less unused equipment, less packaging waste, and reduced costs. For the distributor, the trays offer a significantly higher margin than selling the constituent products, and a broader product range than before. This lesson applies equally to your suppliers who may also experience hassles that reduce their margin or increase their risk. Mapping hassles systematically using a “hassle map” (Exhibit 3), can often be the first and richest source of ideas to identify next-generation demand. Exhibit 2: Procedure packs – sterile, sealed packages containing all single-use equipment for a specific operation From...
...To
Multiple surgical items need to be gathered, sterilized, and disposed of.
A pre-sterilized, single-use procedure pack solves hassles in the operating theatre.
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Exhibit 3: A hassle map for chefs planning their menus FROM...
How should I redesign my menu this summer?
What’s the nutritional content of the dish?
How should I vary my menu over the season?
How should I innovate new dishes?
What are the trending foods in my area?
What prices should I set the dishes at?
What’s my gross profit?
How long do they take to prepare?
How do I keep track of the recipes?
Are the ingredients in stock? Where?
How do I train my kitchen brigade to prepare?
How should I scale up/down with portion sizes?
What happens to my gross profit if I change an ingredient?
How do I place an order with the right suppliers?
...TO Open an app to select recipes you and your customers love
Have costs, gross margin, and nutritional information to hand
Click button to order ingredients or print off a menu
Simple applications from distributors and software providers are simplifying the hassles above
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Lesson 2: NEW PROPOSITIONS NEED A TEAM, PROCESSES, AND THE RIGHT CULTURE TO INCUBATE Demand innovation is as challenging as new product innovation and requires the right level of resourcing: consider the contrast between efforts we have seen in one business to generate the next $1BN, shown in Exhibit 4. Too often companies default into the ”growth initiative” mode, unwilling to free up their best teams to work on new propositions. New propositions are also often threatening to the core business itself and risk being killed off by managers. The best demand innovators address these issues head on. Take Amazon’s creation of the Kindle as an example. Amazon realized that, if the Kindle team were based in Seattle sitting next to the teams selling traditional media, the Kindle would be seen as too big a threat to the core business and quietly killed. In addition, Silicon Valley was home to the resources required to move away from logistics and distribution and towards becoming a great device manufacturer. For these reasons, Amazon’s Lab126 was set up near to Apple’s headquarters in California as an entrepreneurial start-up, with Amazon providing the investment dollars. Or take Nalco, originally a chemicals business focused on water treatment and hygiene, which branched out from chemical sales to technical services. Nalco developed a technical solution that both monitored water quality and added the appropriate amount of Nalco’s chemicals. The benefits to the customer were less downtime of their plants and less chemical use. While this service was clearly valuable to customers, it posed a threat to Nalco’s core chemical revenue streams. So the company decided to incubate this new service in a completely separate team and developed specialist sales forces. The result: a unique service built up over 20 years and counting, with overall sales linked to customers using the solution being 2–3 times more profitable than what had been sold before. Thinking now to your business, once you have identified the customer hassles behind next-generation demand, consider the structure of your innovation team: •• Is it well resourced with your best talent? •• Do they have a clear stage-gate process for assessing and accelerating/prioritizing/ dropping innovation concepts? •• Are they appropriately incentivized for success? •• Are you really willing to provide sufficient investment for it to launch, improve, and scale its offers? Exhibit 4: Contrasting efforts seen by Oliver Wyman by a business keen to generate the next $1BN in sales GOAL: $1BN+ IN NEW REVENUE
INVESTMENT
New product R&D
•• Dedicated brand or product development team •• $300MM on each new product
•• System to track and ensure success
New car platform
•• 1,000+ specialized employees and best suppliers •• $500MM of investment
•• Gated process with senior executive review focused on fine-tuning, not pass/fail
Entrepreneurial start-up
•• 10–30 people •• 100-hour work weeks
•• The best talent •• $MM of venture capital investment
Growth initiative
•• 10s of staff, often B-players •• Minimal investment
•• Presumption of failure, mind-set is to “poke holes”
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Lesson 3: DON’T STOP INNOVATING AND ITERATING UNTIL IT’S MAGNETIC The list of functionally useful but fundamentally unsuccessful new propositions is long. Propositions that appear to be great on paper fall at the first hurdle and don’t get the expected customer traction. At this stage, managers often conclude that to invest further would be to pour “good money after bad” and decide to call time. Truly innovative new propositions require extreme patience, careful risk management, and a combination of emotional customer appeal as well as functional excellence. There is no substitute for testing prototype propositions with customers, be it with panels or through friendly relationships (see Exhibit 5). Take a client of ours in the electronics manufacturing and sales industry. It is recognized as a leader in innovation, spending over $300MM a year in R&D with highly qualified PhD-caliber employees. It created a new product, whose functionality was far superior to anything else on the market. This product was patented and the manufacturing process was secret. Yet early versions of the product achieved no traction in the end-market installers and end users. Further investigation identified that the product’s functional requirements were only a small part of a broader proposition needed to make the offer magnetic. For example, customers were uncertain about whether the new product was future proof, how it worked with other products in our client’s system, and its interoperability with solutions from leading manufacturers such as Cisco. We found that our client was able to create a package that became the market standard, containing: •• Branded, interoperable products •• Future-proofing guarantees •• Endorsement from other leading vendors. This system has generated an estimated $500MM in market value for the business since its launch.
Exhibit 5: Proven customer research techniques to make your offer magnetic
A
B
C
Offer Offer 2 1
Customer feedback sessions feature product story boards and solicit input from would-be buyers. Storyboards contain realistic mock-ups of what the offers might look like, feel like, and include. Customer feedback is gathered from there.
In-market testing puts different prototypes out in the market and tests which does best. Though potentially more time-consuming and expensive, this approach offers the most real-life data on customer impressions.
Virtual marketplace simulation to quantify likely uptake and optimal offer combinations. Strategic choice analysis that invites respondents to trade off between competing offers and reveal a preference for one versus another.
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Lesson 4: IDENTIFY TECHNIQUES TO GET AROUND THE INEVITABLE CUSTOMER INERTIA Once you have a magnetic proposition, you still need to convince customers to adopt it. B2B customers are often reluctant to try something new. Many are naturally distrustful of new offers from suppliers, fearing they may lose out through changes in terms, conditions, or pricing on their core purchases. Our experience has found that you need to do four things to overcome the inertia: 1. Make it easy: remove barriers to signing up to the new offer 2. Provide reassurances (sometimes financial) that it will work and that downsides will be covered 3. Use early adopters as advocates for the proposition 4. Provide incentives to customers to use the new proposition. In our experience, the sales force may need several rounds of training on a new proposition to be able to get customers over this inertia. In the case study below, 3–6 months of training, role play, and practice to deliver the pitch got conversion to as high as 90%.
CASE STUDY 1
DEVISING A NEW PROPOSITION IN FOOD SERVICE Based on trial feedback, the offer resonated with customers, solving ordering hassles and helping them manage their margins. However, when it came to selling the proposition, many customers were either skeptical of the benefits and hassle of signing up, or used it as an opportunity to negotiate prices down to reduce the perceived risk. The company overcame this inertia by following the four points shown in Lesson 4: 1. Make it easy: the company invested significant time in designing sign-up to be quick and efficient, completed in one short sales visit. 2. Provide reassurances: the company provided customer testimonials and money back guarantees vs competitor offers. 3. Use early adopters as advocates: early sign-ups were encouraged to recommend other local businesses to sign up. 4. Provide incentives: for valuable customers, the company provided time-limited teaser offers to encourage adoption without long-term discounting.
Lesson 5: DON’T LAUNCH BEFORE YOU ARE READY – THEN SCALE, FAST Nothing can kill a good proposition faster than an inability to deliver on your promises to the customer. And nothing will frustrate you more than an inability to scale up your winning proposition. But how can you avoid these issues? Launching well requires a high degree of discipline and focus on some key areas: •• Planning: be rigorous in planning and monitoring all aspects of the launch, including the IT systems you require to support it. Set pilot standards by which you judge readiness to launch – 75% right just isn’t good enough here! •• Piloting: thoroughly test the launch with dress rehearsals of each element of the proposition and the supporting infrastructure. •• People: overinvest in people to support planning, training, execution, and assessment. Assuming the pilot is successful versus your standards, you will want to rapidly scale it up. This means having systems and sales approaches that can be scaled up, a roll-out plan, and the resources to do it. All of these things should be considered as part of your pilot so they can be anticipated.
CONCLUSION In a competitive environment where most companies are struggling to drive profitable growth in their core customer base, generating and harnessing demand for new propositions is critical to breakaway performance. However, creating the environment to systematically design and launch winning new propositions is challenging at the same time as running your existing business. Looking at successful innovators from the wholesale and distribution industry and beyond, we have identified five lessons to follow to institutionalize innovation in a company. 1. The first lesson is to look for innovative ways to solve customer and supplier hassles to generate demand for new products or services and build customer loyalty. 2. To turn the idea into reality, your organization needs to create an environment (culture, people, and process) that helps you systematically develop and refine propositions. 3. This environment needs to be designed to keep refining and testing the idea until it is “magnetic” – functionally good is not enough. You need something customers love. 4. To sell your winning proposition, you must also make sure you plan how to overcome the natural B2B customer inertia around changing their behavior. This means making it easy to buy the new proposition and providing appropriate reassurances and incentives to the buyer. 5. Finally, your organization needs to be skilled at launching well and scaling fast. This requires rigorous planning, and careful piloting with high standards to measure success. Generating new demand and unlocking profitable growth can be a reality for any company, but it requires disciplined application of a different approach to managing and incrementally improving your core business.
FURTHER READING DEMAND: CREATING WHAT PEOPLE LOVE BEFORE THEY KNOW THEY WANT IT by Adrian Slywotzky with Karl Weber This book explores the critical role of demand creation in today’s economy and analyzes how some companies’ products are doing exponentially better than their competitors’ by creating “magnetic” products and services. In an economy that’s increasingly demanddriven, understanding what Adrian calls the customers’ “hassle map” to create a product they love will be the key to success for both B2B and B2C companies.
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Pricing is at the heart of our proposition. It needs to be very clear and accurate… …it is absolutely essential to everything; if we get it right it provides huge dividends. Pricing is very high stakes; there aren’t many things more fundamental. – CEO OF A FOOD DISTRIBUTION COMPANY
BEWARE THE PRICING MYTHS BUSTING MYTHS TO GROW PROFITS In distribution and wholesale, pricing decisions make senior managers anxious. They’re tricky to get right, and the stakes are high: it’s difficult to know which prices will attract business without hurting the bottom line, particularly when faced with thousands of customers, hundreds of products, and a wide range of local competitive environments. Given this complexity, it’s not surprising that so many businesses tell us they struggle with pricing. One executive summed it up neatly: “Although pricing is one of the most basic things we do, it’s also one of the scariest.” So it’s rare for senior managers to examine their pricing practices to see whether they’re doing all they could for the business. Usually, they aren’t: because although tried-and-trusted pricing rules might seem safe, these rules weren’t designed to cope with the complexity and competitive intensity that characterizes business today. In fact, they may not even have been right to begin with. By sticking to a set of outdated beliefs, or myths, about pricing, many businesses undermine their performance to the tune of millions of dollars a year. This paper looks at five of the most common pricing myths we hear and explores how, by “busting” them, executives have been able to unlock a powerful and profitable competitive advantage.
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Myth 1: PRICING DECISIONS ARE BEST HANDLED BY THE FIELD Reality: COMPANIES CAN’T AFFORD TO LET THE SALES FORCE FLY SOLO WHEN IT COMES TO PRICING Why shouldn’t companies leave pricing decisions to the field? After all, the sales force is closest to the action, meeting customers and battling competitors daily. Surely, nobody in headquarters can keep up with so many customers, products, and competitors. And, really, isn’t it the sales force’s job to negotiate prices? Of course, salespeople are critical to establishing relationships, pitching new products, and managing service. But when it comes to pricing, companies can’t afford to let them fly solo. Salespeople simply cannot see the same kind of systemic insights that headquarters can, from customer price sensitivity and “walk away” points, to how best to price products versus competitors in order to drive profits. Moreover, customer frustration can result from a localized sales force setting prices that seem inconsistent and illogical.
Keep salespeople empowered to negotiate prices, but support them with insights from the center.
Consider the industrial rental company that provided its salespeople with regional catalogs and the freedom to price as they wished. On the surface, customers received individual treatment and gross margin seemed reasonable. In reality, salespeople were either pricing purely on instinct or drowning in incomplete information. They lacked effective guidelines and had limited knowledge of what clients truly valued – or the cost of delivering that value.
As a result, many deals were underpriced or even lost money at the EBIT level. This is not an anomaly; we have observed many companies in various industries dealing with similar issues. The best solution, we have found, is to keep salespeople empowered to negotiate prices, but to support them with insights from the center. It all hinges on a central team turning insights on customers, products, and markets into simple but effective guidelines and tools for the sales force to drive profitable growth.
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Exhibit 1: A distributor found its standard SKUs, whose prices were set centrally, made higher margins than its unique, differentiated SKUs. The unique SKUs were priced locally, missing the premium they deserved Unique SKUs: lower margins Limited pricing No pricing guidance guidance
Standard SKUs: higher margins Sales force provided with specific pricing guidance from the center 40 Action: refine central guidance to drive margin
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Action: apply stronger pricing guidance to build up margin
Action: introduce pricing guidelines from the center
20
10
0 Batteries
Switches
Category 3
Category Category Category 4 5 6 PRODUCT CATEGORY
Category 7
Category 8
Category 9
Exhibit 1 shows an example of central insights being used to guide local actions. An electrical distributor was giving its sales force inconsistent pricing guidance across its product range. Prices for the standard range were specified centrally. Pricing the unique and differentiated products was left to the sales force, with limited or no central guidance. When we profiled the margins earned on different products, we found that the centrally priced, standard products earned the highest margins. The unique but locally priced products were not earning the premiums they deserved. These insights helped the center guide the sales force into raising prices on the unique products, without significantly affecting volume.
This work helped drive EBIT growth worth 1.5% of revenue.
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Myth 2: “COST PLUS” IS THE SAFEST BASIS FOR SETTING PRICES Reality: COST-PLUS PRICING IS NOT ALWAYS AS SAFE AS IT SEEMS A cost-plus approach seems like an effective way to set prices. It normally ensures companies consistently reap a markup above their costs. It is also straightforward for management to set up and for salespeople to execute. Moreover, unlike value-based pricing, it does not rely on a complex analysis of competitors, products, and customers. But in our experience, cost-plus pricing is not as safe as executives might think, and many companies have missed profit opportunities or even lost money because of it. The problem is that many businesses lack a good understanding of their true costs. Take one of our outsourced service clients. The company took pricing and account management decisions based on the gross margin of its products and an average allocation of cost to serve. When the costs to serve were linked back to the accounts responsible for them (as seen in Exhibit 2), it soon became clear that the average allocation had been misleading. Actions taken with the old average allocation had often been risky or even harmful. The new, “true,” allocation fixed this issue and unearthed a set of loss-making accounts. Tackling loss-making and low-profit accounts alone was worth around $4MM of additional EBIT on a base of approximately $50MM EBIT. Hence cost-plus pricing is not always as safe as it might seem. In fact, it can cause a business to lose money on some of its accounts without realizing it.
Exhibit 2: Moving from an average cost allocation by site to a true allocation helped this company identify mispriced accounts “Standard” cost allocation: logistics
Pragmatic “true” cost allocation: logistics
LOGISTICS COSTS AS % OF AMOUNT PURCHASED
LOGISTICS COSTS AS % OF AMOUNT PURCHASED
40%
40%
35%
35%
1. Vendor funding allocations
30%
30%
25%
25%
2. Logistics costs allocated based on true drivers of in-bound logistics
20%
20%
15%
15%
10%
10%
5%
5%
3. Activity-based overhead allocations
0%
0% 10k
100k
1,000k
10,000k
TOTAL SALES (LOG SCALE)
Key changes
10k
100k
1,000k
10,000k
TOTAL SALES (LOG SCALE)
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Myth 3: TRACKING COMPETITOR PRICES IS NOT WORTH THE EFFORT Reality: PRAGMATIC USE OF READILY AVAILABLE INFORMATION CAN PRODUCE INSIGHTS THAT PAY FOR THEMSELVES SEVERAL TIMES OVER On the surface, tracking competitor prices seems so complex as to be overwhelming, with so many competitors, products, and types of customers to monitor, not to mention frequent price changes. However, the process can be made much less daunting by splitting it into two fundamental tasks: systematic collection of competitor prices, and a central system for data management and analysis. Implemented properly, the insights gained can pay out within just six months and enable much greater long-term returns, making the process well worth the effort. Consider a distribution client of ours that was reviewing its product prices. Feedback from the field indicated prices were uncompetitive, but the executives were wary of overreacting and giving margin away. They wanted to know how competitors were really priced, but this seemed impossible given the thousands of products and clients involved. That was when the executives realized they were sitting on a gold mine of data. Many sales bids involved a partially open comparison between their prices and those of competitors. Moreover, many competitors regularly published catalogs revealing the “shape” of their pricing and putting an upper limit on individual prices. To harness the information, the firm set up a small central team to collect and compare competitor prices with in-house products. The data yielded valuable insights that could then be relayed to the sales force, including where products were really over- or under priced. Over the course of a few months, the initiative created a real competitive edge. Not only did it assist formal bids, it also gave a good view of pricing versus the market over time, informing the pricing strategy. The data also triggered a series of promotions, targeting products for which the company was competitively priced. All told, the initiative supported EBIT improvements worth half a point of sales, more than offsetting the up-front cost.
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Myth 4: “QUICK WINS” ARE TOO RISKY TO ATTEMPT Reality: REAL VALUE CAN BE DRIVEN QUICKLY BY FOCUSING ON PRAGMATIC ACTIONS AND BEING SYSTEMATIC What company wouldn’t want to improve its margins in a matter of months with some pricing “quick wins”? But as any experienced executive knows, such price changes are fraught with pitfalls. On the one hand, rapid, across-the-board price hikes often upset customers, leading to defections or the cherry-picking of lower-margin products that remain competitively priced. On the other hand, tailoring price changes to individual customers and the products they buy takes time, making gains anything but “quick.” Indeed, in our experience, many quick win programs end up being a waste of time, and fail to achieve the targeted impact. But when companies avoid sweeping changes and focus instead on insights and pragmatic actions, we have seen impressive results.
When companies avoid sweeping changes and focus instead on insights and pragmatic actions, we have seen impressive results.
In one example, an industrial distributor was under pressure from competitors undercutting its prices. To counter that threat and to build a “war chest” of cash, the firm launched a 90-day quick win plan. During the first month, it examined readily available internal data for the telltale signs of opportunities, such as: •• Unprofitable accounts once cost to serve had been properly allocated •• Customers not buying the full range of products they needed •• Expensively priced products with high price sensitivity. Exhibit 3, taken from another distributor, illustrates this type of analysis. It shows how sensitive different customer segments are to price changes on the products they buy, highlighting opportunities to boost profits by raising some prices (with limited impact on volume) and lowering others (driving significant volume uplift).
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Exhibit 3: An illustration of how differences in price sensitivity between product categories
and customer segments can be used to identify pricing opportunities PRODUCT CATEGORIES Insight: resellers have high sensitivity to price of piping
Piping Category 2 Category 3
Action: price down if competitive position allows
Category 4 Category 5 Category 6 Category 7
Higher-price sensitivity
Category 8 Category 9 Category 10 Category 11
Insight: resellers have low sensitivity to price of measuring instruments
Category 12 Category 13 Measuring Instruments
Action: price up if competitive position allows
Lower-price sensitivity
Resellers
Industrial user
Segment 3
Segment 4
Segment 5
Segment 6
Segment 7
Segment 8
Category 15
Key
CUSTOMER SEGMENTS
In the second month, the industrial distributor developed simple, practical campaigns to address the opportunities. To sell extra products, for example, price points were set and sales pitches, processes, and training prepared. The final month was used for building buyin, training, implementation, and support. A key success factor in the final month was the formation of a small central team to track the program’s progress and adjust course where necessary. This included measuring the impact of price changes on margin and volume and refining some of the changes. Overall, the program drove an annualized EBIT improvement of ~$25MM on a sales base of approximately $2.5BN – a true set of quick wins.
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Myth 5: PRICE INCREASES ABOVE INDUSTRY INFLATION ARE LIKELY TO FAIL Reality: ABOVE-INFLATION PRICE RISES REQUIRE CAREFUL ORCHESTRATION OF PRODUCT PRICING, SALES EXECUTION, AND CUSTOMER COMMUNICATION Many companies are wary of increasing their prices above industry inflation levels, often because of past failures in trying to do so. Customers always resist price rises and, without the justification of inflation, they often refuse the increase or take their business elsewhere. Moreover, some contracts stipulate the use of industry inflation metrics to regulate price changes. But what if a company’s products are underpriced to begin with or its costs have surged due to the expense of providing value-added services? The truth is that above-inflation price rises are indeed likely to fail unless they are implemented deftly. Consider the food service company whose costs of serving customers rose above inflation. In response, executives implemented several rounds of across-the-board price hikes in quick succession, all of which failed to stick. Then the company tried a different approach. Firstly, it placed a four-month moratorium on price increases to build back customer trust. Next, instead of implementing a “blanket” price hike, it tailored increases to individual products based on their inflation, price sensitivity, and competitive environment. Crucially, when putting those price increases into effect, salespeople avoided “going in high” and negotiating down: instead they communicated the target increases with clear justification for why they were necessary, which strengthened client trust. And lastly, executives closely managed the performance of the sales force in landing the increases. This allowed them to implement a price rise that was on average 2% above inflation, all during a recession. While impressive, such results are not unique. Indeed, we have seen other businesses take this approach in different industries to achieve increases 3% or more above inflation.
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CONCLUSION In all these situations, cutting through complexity and myth to improve a company’s pricing capabilities proved to be more achievable than one might think. Many companies, for instance, already have the data they need to move away from cost-plus pricing or to start tracking competitor prices. To be sure, developing the capabilities to use that data is not trivial, but we have seen companies succeed and reap the rewards. Such businesses often have several things in common: •• Centralized capabilities that regularly analyze internal and external information to understand customer, market, and product trends •• Robust processes and easy-to-use decision support tools to turn insights into clear guidance for the sales force •• Leadership from the top, with senior executives emphasizing the importance of the program, and frequently communicating successes and new learnings. For these types of companies, there’s no time to rely on myths; they’re too busy maximizing their profits and outpacing their competitors. So, is it time to ask yourself what myths might be holding back your company’s profitability?
We thought we were doing all we could to close the margin gap but we barely moved the needle. When we finally got our pricing quick win program right, I was amazed by how much we got and how quickly it came.
– REGIONAL SALES HEAD, $BN US DISTRIBUTOR
GETTING “QUICK WINS” TO WORK DRIVING LASTING MARGIN IMPROVEMENT IN 90 DAYS OR LESS You are a senior executive at a major distributor running a P&L. For the past couple of quarters, results have been worse than expected – and now you need cash, fast. But the problem is that you’ve already picked the low hanging fruit and your sales force and product and ops teams are tired of hearing leadership ask for yet another push. So what now? We have often found that, even after executives have employed many of the classic tactics, such as tightening expenses, pressing vendors for cost reductions, and even broad price increases, it is still possible to generate substantial value within weeks through a “quick win” program that takes a more rigorous, fact-based view of the business. Two recent examples provide a good illustration. In the first case, an environmental services business generated $40MM of margin (1.4% of revenue) within six months by carefully analyzing unprofitable customers, then pricing up those who were unlikely to be pricesensitive. In the second, a food service distributor improved its bottom line by $25MM (1.6% of COGS) within eight months by setting up a robust vendor negotiation program, based on more actionable analytics. But achieving such impact so quickly is far easier said than done. There is a lot of appropriate skepticism around many so-called quick win programs. How, then, to successfully capture the promised quick wins and to avoid slipping back after the initial push?
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QUICK WIN CHECKLIST PRICING AND CONTRACT TERMS
Cut the negative contribution tail of customers and products Raise prices on customers that are underpriced versus peers Raise prices on specialty and niche products with a differentiated proposition Raise prices where cost increases have not been sufficiently passed through Reduce prices in return for new volume or share growth deals with large customers Introduce specific service fees Tighten contract term compliance, and follow up on missed charges Deploy a series of targeted discounts or promotions.
SALES
Share weekly sales force performance vs peers and hard wire incentives Give the sales force prioritized prospect lists Identify and proactively follow up on missed customer orders Reassign accounts across sales reps to focus on areas of opportunity Support sales reps with information on “next product to sell” Systematically call customers with good news (e.g., price reductions) to prompt orders.
COST
Identify suppliers with limited market power and push to reduce costs
Renegotiate supplier costs on non-critical items
Renegotiate central contracts on GNFR (goods not for resale).
Address “high cost to serve” customers where the costs are not driven by customer needs
Track and promptly capture the benefits of suppliers’ cost reductions Select partner suppliers and offer them increased spend in exchange for better deals Conduct cost deep dives on top product categories – understand cost drivers and identify savings
CREATING LASTING MARGIN IMPROVEMENT Most successful quick win programs do three things well: 1. Drill the data and do the math 2. Make execution really simple 3. Create an effective feedback loop
1. DRILL THE DATA AND DO THE MATH Companies often see a range of possibilities for quick wins, but thoughtful analysis will highlight the most impactful ones. This is important to both build conviction in the business and avoid wasted efforts. Identifying the best opportunities relies on two capabilities. The first is the technical ability to rapidly access and join up enterprise-wide data, often from multiple unconnected systems. The second is the experienced analytical expertise to “do the math” and find the high impact actions. Without either of these, companies could easily misdiagnose or miss the most lucrative opportunities – or worse still, fail to convince leadership that an opportunity exists.
“We’ve sat on the opportunity for years because we’ve never had the analytics to validate and act on it.” – PRESIDENT OF CONTRACT SALES $BN US DISTRIBUTOR
In many cases, companies have all the necessary data somewhere in the systems but often give up too quickly because they are stumped by technical challenges and can’t see a ready way to the insight they need. Take our environmental services example. The necessary data was stored across three DOSbased legacy systems and more than 100 separate databases. The IT function had quoted three years (and a substantial investment) to bring this information together. A different approach, with a focused technical SWAT team, yielded actionable analysis within six weeks and the first bottom line impacts within three months. With the key data assembled, companies need experienced analytical resource with relevant expertise that can cut through the mass of data and complexity, and drive out the most actionable insights. Consider a chemical distributor, with antiquated legacy systems, where the only insight into customer orders was gleaned by the small number of committed sales reps prepared to spend hours examining dot-matrix-style printouts of transactions. By importing the right statistical expertise from a different distribution sector, the company was able to systematically identify missed order opportunities across thousands of customers within four weeks. Within eight weeks it deployed a desktop tool allowing reps to access this insight easily and automatically, turning a quick win into a sustainable upside.
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2. MAKE EXECUTION REALLY SIMPLE Companies often struggle with keeping quick win programs impactful yet simple to execute. We have seen numerous quick win programs abandoned because the execution complexity overwhelmed a busy sales force, operations team, or purchasing team. Our experience is that managers often think they have kept it simple to execute, but they haven’t fully engaged those who actually have to make it happen. Take the example of a large US distribution company that conducted an extensive customer peer-pricing analysis to identify opportunities to price up specific customers. With the opportunities in hand, managers mistakenly assumed that all they had to do was to put that information into the hands of their empowered sales force. However, few reps took any action and the initiative stalled. The problem was that the execution process for the sales reps was far too complex. In order to push any changes through, reps were required to use multiple IT systems and make several judgment calls on prices. Additionally, little time had been spent engaging them in either the rationale or logic behind the analysis, or the process for turning the analysis into actionable price changes. Not surprisingly, few reps “bought in” and little changed. To address this issue, the company quickly redesigned and built an execution process that was much simpler for reps: all they had to do was hit a button to approve or reject a suggested price increase and a central pricing team would handle the rest. To build buy-in, the company also conducted a rapid series of road shows building confidence around the quality of the opportunities and simplicity of execution. The result: a $25MM improvement in margin run rate (0.5% of sales) in just four months.
“Our first attempt stalled because what looked like a simple price execution process to us was in reality fairly cumbersome for sales reps.” – CFO OF A $BN FOOD DISTRIBUTOR
3. CREATE AN EFFECTIVE FEEDBACK LOOP Few companies make an adequate effort to track the impact of a quick-win initiative and understand what is working, and what isn’t. Yet a thoughtful and accurate feedback loop can often add 50–75% more value to the program. Take the earlier example of the food service distributor that achieved a significant reduction in COGS. A team of analytical experts used granular insight and analytics to identify savings opportunities and set detailed cost reduction targets. Based on this, the company launched a wave of supplier negotiations led by the buying group. Every negotiation had a clear “ask” and the buyers were armed with analytical reports customized specifically to support each ask.
An effective feedback loop can often add 50–75% more value.
In parallel, the analytical team developed detailed tracking and reporting on the program. This drove several benefits. Weekly reports on costs savings vs targets (across different categories and buyers) allowed the executive team to actively manage the program “in flight.” They could quickly see which buyers were delivering and which buyers needed help (or an extra push). A process to share weekly success stories and cost savings was put in place. Learning on what was working was rapidly shared across buyers, building momentum and confidence in the early stages of the program. The company subsequently compiled a negotiation playbook for all buyers based on the learning from the program. In parallel, it is automating the most powerful analytical approaches to be available to buyers on their workbench at the push of a button. Not only was the company able to actively manage and refine its quick win program by tracking and monitoring the results, it was also able to use what it learned to build a sustainable high-capability process.
CONCLUSION The “data and the math” is often the most fundamental building block, and the toughest. Many distribution businesses lack the technical ability to cut through messy IT systems, or lack the experienced analysts who know just what to look for. But for those that manage to navigate these challenges, the payoff can be real and fast. The most successful quick win programs do more than just temporarily boost the bottom line; often they serve to ignite and fund true performance transformations – catalyzing sustained capability development and organizational momentum over several years.
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I know there is a better way to do it, and I know that pricing can be the biggest thing we do this year to drive profits, but I’m not sure where to begin. – PRESIDENT OF A $2BN DISTRIBUTOR
MAKING SCIENTIFIC PRICING ACTUALLY DELIVER 3 CAPABILITIES, 3 ENABLERS, 3 POINTS OF MARGIN You may be in a similar situation: you may have experimented or trialed different ways of pricing; you may be unsure if you are using the right tools; you may be asking if you have a team with the right capabilities to win. Adding to the uncertainty: •• Opinions in your business may be running strong about what has worked in the past or apparent lessons from other industries. •• You may be cautious about importing ideas from consumer sectors as pricing in those businesses has few similarities to a complex business-to-business (B2B) distributor. •• As your sales mix shifts to more services and solutions, you realize that your approach to pricing products has limited relevance to your new offerings. •• You may also be considering a software solution that will “solve your problems,” but worry that it’s going to be a “black box” that you have little visibility or control over. This paper summarizes the best approaches that we have seen distribution companies use to improve pricing, and outlines a basic methodology which we have seen work successfully many times. The key? Firstly, developing a robust understanding of the powerful and practical science behind pricing, specifically: your cost dynamics, price sensitivity and local market competitiveness. Secondly, engaging the business – particularly the sales force – in the solution. Thirdly, building pricing competence at the corporate center, including better processes and decision support tools to sustain the benefits. The focus of the paper is on the mass of mid-size customers that can make up 50–80%+ of distribution businesses, not the “national accounts” or “strategic partnerships” which, due to their importance, are always carefully negotiated one-offs. 45
WHY PRICING IS WORTH THE EFFORT: COMPLEXITY = OPPORTUNITY Distribution businesses are extremely difficult to price well because they combine high degrees of complexity (thousands of products, many sites, many markets with different competitors, thousands of customers) with the structural challenge of a distributed sales force with differing pricing beliefs and capabilities, complex terms and conditions, and customer-specific propositions. Yet getting pricing right is critical: Exhibit 1 shows that, in a typical distribution business, pricing is cited by up to 80% of customers as the reason they switched suppliers. After working with many distributors in recent years, we have learned something about cutting through this complexity to craft a practical pricing regime that works. It is based on simple principles, keeps only the required complexity contained in the center of the organization, and actually makes the sales force’s life easier.
In a typical distribution business, pricing is cited by up to 80% of customers as the reason they switched suppliers.
In addition, it enables a critical role for senior business leadership to be able to steer pricing in a genuinely strategic way – either to take share without sacrificing margin, or to take margin without losing overall share and competitiveness.
Exhibit 1: In this distributor, 80% of lapsed customers cited price as the main reason for their departure REASONS FOR SWITCHING FOOD SERVICE WHOLESALER (SURVEY) Price 80%
Other 9% Missing items 2% Minimum order quantity 4.5%
Key pricing hassles identified by customers: • Price variation over time • Poor perception of value for money • Poor headline prices • Rebate errors.
Poor relationship 4.5%
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POWERFUL YET PRACTICAL PRICING SCIENCE The distribution companies with the best pricing outcomes are those that have a clear plan for shareholder value growth. They have selected a specific trade-off of margin growth vs revenue growth, and they are are thoughtfully driving the business via a targeted mix of the elements below: ••
New customer acquisition: attracting and retaining more valuable customers, and increasing share in the most attractive customer segments
••
Growing share of customer spend: proactively cross-selling the right incremental products and services
••
Mix management: improving the mix of products and services sold, and up-selling to increase margins, particularly for low profitability customers
••
Cutting churn: rewarding valuable, loyal customers and retaining their business
••
Cutting unnecessary price giveaways: getting product prices right, and reducing margin leakage by the sales force
••
Reducing cost to serve: encouraging “win-wins” using rebates or fees to incentivize customers into lower cost-to-serve behaviors such as online ordering, alternative delivery slots, etc.
The distribution companies with the best pricing outcomes are those that have a clear plan for shareholder value growth.
There are three key required capabilities to develop before you can set the right targets and manage your sales force to achieve them.
1. A SOLID UNDERSTANDING OF COST DYNAMICS AND PROFITABILITY This doesn’t mean cost-plus pricing. Instead, it means having a detailed knowledge of all cost-to-serve components and dynamics, across all of the services and products you offer, and where you are really making money at a customer, product, and vendor level. This is the true foundation on which all pricing improvements stand. Data for this analysis usually exists, but is not always well used and understood.
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2. AN EMPIRICAL UNDERSTANDING OF PRICE SENSITIVITY This is about how customers will respond to changes in price vs competitors in the market for specific products. Products, for instance, are never uniformly price sensitive. Customer responses typically vary in predictable ways according to factors such as overall item value, purchase frequency, degree of “commodity vs specialty,” market share, and local competition (Exhibit 2). Getting these factors right and pricing with as much specificity as possible in each customer-product-local market situation is the key. Real-time pricing experiments are the the best way to quantify price sensitivity, but a great deal can be achieved with good data, thoughtful models, and experience.
3. ROBUST TRACKING OF COMPETITIVE PRICES In B2B businesses, because much pricing is negotiated and “private,” competitive information feels hard to get. Yet we have found that much more data is already readily available than you might expect. Sources include capture by the sales force (e.g., in “meet or beat” bid processes), published prices (particularly online catalogs), and competitor cost analysis.
Exhibit 2: Price sensitivity is not uniform... products can vary up to 10x in their sensitivity to price depending on which customers are buying them and in which markets you compete. This figure shows an example from chemical distribution PRODUCT
MARKET
CUSTOMER INDUSTRY
MOST PRICE SENSITIVE
LEAST PRICE SENSITIVE
• Chemical 1
• Los Angeles
• Caustic Soda
• City 2
• Chemical 3
• City 3
• Chemical 4
• City 4
• Chemical 5
• City 5
• Industry 1 • Industry 2
• Industry 3 • Consumer • Products
Distributors with these three foundational capabilities are then in a powerful position to steer the business to better pricing outcomes. For example, low price sensitivity products, where margins are low and prices are below competition, are obvious candidates for price increases.
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ENGAGE THE BUSINESS, PARTICULARLY THE SALES FORCE Too often we have seen pricing initiatives and tools created at HQ and “thrown over the fence” for product or sales managers to implement. Unsurprisingly, the typical result is a high degree of skepticism from the field, low usage of tools, and limited if any impact. How then to avoid this all too typical outcome? In our experience there are four key elements. Firstly, position the program as being about “decision support” not “decision control.” The role of HQ is to enable each sales professional with pricing intelligence from hundreds of similar customer-product pricing outcomes, distilled into a simple target price range for that unique situation, alongside a select number of other key insights. It is then the job of the empowered sales professional to achieve the best pricing outcome they can, as they and only they are in discussion with that customer in that individual competitive context. Secondly, share ownership of the journey. Fully engage senior sales leaders early on in program objectives and approach. Start with how the field are trying to do their jobs today, listen hard to their requirements and frustrations, and actively design the new processes around how they need to work. In our experience, the most successful programs adopt a “by the field, for the field” mind-set in which a truly representative group of sales colleagues are deeply involved in process and tool design. Thirdly, adopt an agile development approach. Once the science is cracked, get the first version of processes and tools designed and working in weeks, not months or years. Try them out with the field. Iterate and improve on a weekly cycle, and get a full local pilot up and running a few weeks later. This enables much greater and faster learning, as well as hugely improved time to value compared to a traditional development process with many months to collect requirements and then many more months to design, develop, and test remote from the field, before then releasing something that typically disappoints. The other key benefit of an agile approach is that the field are actively engaged, feel listened to, and foster a strong sense of ownership. Finally, get some visible quick wins early. Stories of successful pilots and first waves of repricing should be shared broadly in the organization. Sales colleagues who are achieving stronger sales, better margins, and greater incentive payments will tell other colleagues who are not part of the pilot. Word spreads and excitement builds. At this point, the change process becomes straightforward as the new processes and tools are literally “pulled” by other sales colleagues who want to adopt the new approach and share in the success.
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MAKE IT SUSTAINABLE: PRICING ORGANIZATION, PROCESSES, TOOLS, AND INCENTIVES Getting the foundations built to support a robust pricing approach and engaging the business is only half the battle because pricing effectiveness is not a one-time fix. Distributors with the strongest pricing outcomes build sustainable capabilities to maintain pricing advantage versus competitors.
ORGANIZATION Because many businesses lack a competency center for pricing, a common question is, “What should our pricing team look like?” Best-in-class pricing is a difficult, technical, and quantitative capability that requires real expertise. The job of the pricing team is to own the science and tools, and to champion the processes and disciplines behind them. (See Exhibit 3.) A very rough rule of thumb in complex distribution businesses is that each $250MM of annual revenue requires an additional full-time equivalent specialist in the pricing team. The pricing leader needs to have senior status in the organization – comparable with any functional director or the SVP of sales – because he or she will have critical influence over business performance.
Distributors with the strongest pricing outcomes build sustainable capabilities to maintain pricing advantage versus competitors.
Exhibit 3: Example structure and roles within a pricing team PRICING LEADER Senior leader and champion of pricing best practice
FIELD SUPPORT
PRICING ANALYTICS
Drives pricing best practice through the organization
Understands and develops pricing intellectual capital
Maintains core pricing and commercial data sets
First line of support for queries
Informs pricing strategy
Provides ongoing reporting of market intelligence, pricing activities, and outcomes
Performs ad hoc analysis to crack pricing questions as they arise
DATA REPORTING AND INTEGRITY
TOOL AND PROCESS MANAGEMENT
Specifies, manages, and develops pricing systems and tools Often a mix of pricing specialists and IT experts
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PROCESS AND TOOLS The market for B2B pricing software remains fragmented with no accepted standard. In our experience, the tools that deliver the greatest value to the bottom line and fastest time to impact have been those with “agile” builds that were driven in-house or by selected third parties in close collaboration with pricing decision makers. (See Exhibit 4 for alternative approaches to pricing tools.)
Agile builds can be powerfully energizing for the sales force.
There are several reasons why this approach seems to yield the best results. The main learning is that such agile builds – designed around the unique characteristics of the business and how the field need to work – can be powerfully energizing for the sales force. When compared to a lengthy configuration of off-the-shelf pricing software with already designed-in processes, the difference is stark. As one sales leader recently told us of an agile build, “It saved me time, helped me win more business at better prices, and made me more money. What is there not to like about that?” A final critical learning is that, in distribution businesses especially, pricing logic should be kept outside the ERP. We have seen too many distributors desperately frustrated either because the legacy ERP cannot support the new pricing model or, worse, many tens of millions of dollars were overspent on a new ERP implementation because of unnecessarily complex pricing logic built into their ERP where it does not belong.
INCENTIVES Finally, distributors need to appropriately align sales incentive plans (SIPs) with pricing as well as sales objectives. Schemes with a low variable component and those that enable incentives to be earned several years after the original sale was made typically do little to drive focused growth. Similarly, SIPs that rely on sales colleagues having full visibility of gross margins tend to drive cost-plus pricing behavior at relatively uniform margin rates, as sales professionals always want to make the sale and typically have in mind a particular “minimum acceptable” margin percentage that they can drop to. In contrast, SIPs with a significant variable component linked to differentiated pricing targets or “deal scores” can be very effective at driving both sales and appropriate pricing behavior. However, there is never a single right answer to incentives. Typically SIPs evolve over time as both business objectives and the ability to report frequently on specific sales and pricing metrics evolve.
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Exhibit 4: Alternative approaches to pricing tools. Quite different approaches and outcomes that are often not well understood
BUSINESS OBJECTIVE
TRADITIONAL PRICING SOFTWARE
CONFIGURE PRICE QUOTE
BUILD: IN-HOUSE IT APPROACH
BUILD: AGILE APPROACH
End-to-end price management
Complex offer price control
Control our own destiny
High impact decision intelligence fast
Addressed separately
Addressed separately
Pricing intelligence How smart are the prices? Do they drive margin/volume impact? Process simplification Is the solution userfriendly? Does it improve the speed of quoting? Business customization Is the solution customizable for specific needs of your sales force and customers? Development time How long does the solution take to develop? Cost
Bottom line
Medium
Low
High
Medium
Intelligence varies by vendor, significant configuration of “pre-wired” process
Fast to implement, lower cost, but limited value beyond point of sale “control”
Highly customizable, long time to uncertain value
Highly customizable, high value, fast time to value
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CONCLUSION Making scientific pricing actually deliver in distribution businesses is a high-value but tough problem because of the sheer product, customer and local complexity, and the need to deliver in a simple sustainable way through a field sales force. There is a tried-and-tested way of getting the value out with three components: 1. Figuring out the right answer using powerful yet practical pricing science: true cost dynamics, empirical price sensitivity, and local market competitiveness 2. Engaging with the business, particularly the sales force, in designing the solution 3. Putting the right organization, tools, and processes behind the science to sustain the solution. Pricing remains one of the most valuable and fastest-to-impact levers for most distribution businesses. With typically up to three percentage points of profit and five points of sales growth available, it is definitely a hill where the view is worth the climb.
We have put a huge amount of investment into technology and enablers for the sales force, yet the sales productivity number is the same now as it was ten years ago. – CEO $BN DISTRIBUTOR
THE SALES FORCE EFFECTIVENESS PARADOX WHY SALES FORCES STILL PRODUCE 80% OF THEIR VALUE FROM 20% OF THEIR ACTIVITIES In our recent interviews with 25 CEOs of billion-dollar distributors, we’ve heard a consistent theme: that sales force effectiveness is one of their highest priority issues, and that they are frustrated. Many have made substantial investments in a broad range of sales enablers such as sales force automation platforms, solution selling, challenger training, or in some cases large-scale ERP replatforming programs. Yet an inconvenient truth remains: few companies have managed to ignite a profitable sales growth engine. Indeed many CEOs tell us that their sales productivity metrics have remained largely unchanged for years. Further, now more than ever, they see the need for real improvement to offset slow market growth and to out-sell their competitors, including new online players. In this paper, we talk about what’s behind this frustration and what to do about it. We’ll focus in our examples on the mass of mid-size customers that can make up 50–80%+ of a distributor’s revenue since it is in that part of the business that this challenge is most acute. However, many of the same principles also apply to larger “national accounts” or “strategic partnerships.”
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SO WHAT’S GOING ON? For the most part, our experience suggests that many companies have been trying to solve the wrong problem. Or, more fairly put, they’ve been solving useful problems but missing three core underlying issues. Firstly, individual field sales professionals are still largely in control of where they spend their time. Despite all manner of attention on detailed tracking of pipeline opportunities, customer rostering, territory assignments, selling process review, etc., the day-to-day reality is that it is still often largely up to the individual rep to decide how much time he or she should spend selling and servicing each customer and which opportunities to pursue. Of course it often may not feel like such an active choice. In any week, sales professionals are often “on the run” between a few demanding customers, a set of opportunities that need urgent attention, and the need to navigate a maze of internal admin as they try to get their customers the quote, the service, or the product that they need. On a good day, they’ll call on one or two prospective customers but typically with insufficient preparation or insight because of everything else they are trying to manage. The result is a picture like Exhibit 1. The second issue is that sales professionals often may not know where the greatest opportunities lie. While some may have good intuition, this can often be overshadowed by “easy sale” behavior. Consider a waste industry example. Most sales professionals understand that restaurants serving Asian food are low profit customers for waste companies. Costs are heavily driven by disposal weight, and so customers like Asian restaurants that regularly fill the container with large quantities of heavy wet waste are structurally low margin. Yet despite such sales force intuition, a huge amount of sales force time is nonetheless spent on these restaurants. Why? Because restaurants are easy to find, their owners are easy to access, and restaurants are almost always ready to sign up to a new deal as long as it saves them money. When you do the math to understand the true lifetime value of acquiring an average Asian restaurant vs another group like real estate operators, you see a huge difference: close to 8x in lifetime value per sale. (See Exhibit 2.) Some 2–3 percentage points of operating margin improvement are often available from “out-mixing” competitors – focusing the sales force on the best highest lifetime value customers – if you are one of the first to act on such insight. This approach is commonplace in many financial services sectors, for instance, yet we find few distribution companies have yet done the work to understand what makes one customer type more valuable than another over a multi-year period. Compounding this is an issue that many sales leaders come across: what’s in the sales automation system is rarely a good reflection of all the opportunities out there. At best such systems tend to capture only around 80% of the opportunities, often several weeks out of date, with opportunities themselves mostly self-reported by the sales team with only partial data. This makes it even harder to optimize a sales force system inadvertently focused on selling average- to low-value business.
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The third issue is that the nature of sales is changing, fast. Already nearly 60% of new B2B purchases are first researched by customers online before they make contact with a company, and 90% of younger (under the age of 35) procurement buyers now make B2B purchases online. [See Amazon in Wholesale Distribution.] Customers want fewer visits than ever before – and very often fewer visits than the sales force thinks they need. Rather many customers increasingly want to interact with distributors in an “omni-channel” way: selecting the phone, website, tablet app, web chat, or in-person interaction that best suits who they are, where they are, and what they are trying to get done.
Already nearly 60% of new B2B purchases are first researched by customers online before they make contact with a company.
When they do show up, sales professionals are expected to understand the customer’s business, to bring real incremental value and expertise, and to be armed with data and insight on all of that customer’s interactions with their business.
TIME FOR A CHANGE So what’s required to break through this paradox? We’ve seen a small number of companies unlock sales productivity improvements equivalent to ten points of market share and three points of margin improvement by taking a more disciplined, six-step approach: using powerful analytical insights to reshape day-to-day activities as well as long-term capabilities.
Exhibit 1: Sales force time allocation example 100%
75%
In this distributor, less than 13% of total time was spent in face-to-face selling
50%
25%
NON-SELLING
Selling time face-to-face
Relationship building
Training customers
Prospecting
Face-to-face time
Planning
Customer
Pricing
Administration
Other
Travel
Total time
0%
SELLING
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1. FIGURE OUT WHAT YOUR SALES FORCE ACTUALLY DOES AND FREE UP SELLING TIME Build the picture of how your sales force spends its time in an average week or month. While the most accurate answers will come from asking sales professionals to keep diaries, downloading Outlook calendars and the like, you can get to a first high-level answer in a week or so through a simple survey of a sample of the sales force or managers. The chances are that you’ll find a large amount of time dedicated to “admin” and non-sales activities (Exhibit 1). Be ready for this and ask your sales force in advance to categorize the most common causes (e.g., pricing process, chasing approvals, research for customer, etc.). This will give you a better sense of what you need to do to drive up effective selling time. In one example, we saw a huge amount of sales force time consumed by customer service. In another example, we found that some sales reps spent close to a third of their time travelling to and from customers, because accounts had been allocated without giving full consideration to travel time. If you have already invested in a sales force automation system like salesforce.com or CRM Dynamics, then this type of analysis should be easy in theory. However, you may find low or at best patchy adoption of the tools across sales professionals (40 percent or less in many cases). See step 4. Exhibit 2: Example drivers of customer lifetime value in commercial waste hauling ACQUISITION PRICE SENSITIVITY Agriculture Forestry/Mining Construction & Basic Manuf. Heavy Manufacturing Transport Courier and Utilities Wholesale – Durable Goods Wholesale – Other Wholesale – Food Consumer Retail Restaurants – Asian Restaurants – Fast Food and Coffee Restaurants – Pizza Subs BBQ Restaurants – Steakhouse Dinners Drinking Places Financial Institutions and Prof. Svc. Entertainment Services Hotels and Motels Automotive – Dealers Automotive – Services Real Estate – Operators Health Facilities and Health Related Social Services Education Services Residential and Membership Org. Government Inst. and Other Wood and Pulp Products Printing and Publishing Manufacturing – Chemical
RETENTION PRICE SENSITIVITY
QUIT RATE
SALES/ MARGIN (ANNUAL)
LIFETIME VALUE
...
...
...
...
...
2.4
1.3
6.8%
$260/25
$1,650
3x
1x
0.8
1.4
3.0%
$560/120
$11,700
...
...
...
...
...
2x 2–5x 8x
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2. DO THE MATH AND ALIGN SALES FOCUS AGAINST CUSTOMER POTENTIAL This is in some ways the most important diagnostic step and one that you will want to repeat on a regular basis. The first analyses you will want to see are those highlighted in Exhibits 1 and 2. Figuring out lifetime value with properly allocated route and handling costs, churn and acquisition, etc. is of course not simple. Indeed, we’ve heard some CIOs argue that such analysis will take three years and a new ERP system to deliver. Our experience is that most of the data you will need will exist in your business somewhere, and that if you task the right highly capable individuals with the challenge, a good first cut is possible in as little as 2–4 weeks. If you then bring the picture of customer potential together with the view of how the sales force is deployed, you can create a picture like that in Exhibit 3, which immediately highlights first order opportunities to better match sales capacity against customer value and potential. When you’re ready to go further, it’s time to take a long hard look at your productivity gradients through two lenses: customer and sales person. A helpful way to think about the customer angle is to separate out the three core drivers: customer acquisition rate, customer sales and margin growth, and customer retention and churn. You will find huge variation in each, particularly if you then slice by market. Together these graphs will reveal the structural potency of your proposition to each customer segment and market. In places where you have a strong proposition and sales pitch, you will be winning customers, growing share, and seeing low churn. In other places, you will see unexpectedly high churn and low acquisition – reflecting stronger competition and perhaps that what you are selling is overpriced. A whole host of “to dos” will flow from this analysis. However, from a selling perspective, the immediate imperative will be to focus more sales time on those customers and markets with highest lifetime value, where you have proven you can win and retain business, and where there is still significant share left to take. Then taking a hard look at individual sales person productivity – now with the ability to control for customer mix – will tell you who is most capable of driving sales harder, and who needs help or attention.
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3. DO THE HOMEWORK ON HOW CUSTOMERS WANT TO BUY AND BE SERVED Understanding how your customers want to be served is an important piece of information that is often overlooked. Getting it right can help increase sales by making your customers happier and at the same time reduce costs by focusing your resources more effectively. In the short term, there’s a key piece of understanding you will want around how often your customers want to see a sales person and how much they would prefer to do by phone, or with your existing online offer. It’s not unusual to discover that your field sales force is spending double the time physically calling on customers vs what customers want. If so, that’s not a bad thing. In theory your sales productivity just doubled. Of course, in practice, such responses may reflect the limited value your sales force is seen as bringing. In the medium term, the chances are that a fundamental re-imagining and re-engineering of your whole customer engagement model – including the role of the sales force – will be required. We’ll address this topic more fully in a forthcoming paper. Start to build the knowledge you need for that exercise now: at the same time as you ask customers how they would like to be served (as they think about your business), ask them what their ideal future vendor partner would do, and test out a few of your leading hypotheses. Exhibit 3: Allocation of sales capacity against opportunity Some territories are overcovered, some undercovered REPS FOR EVERY $MM 0.7 0.6 Overcovered: reduce resources
0.5 0.4 0.3 0.2
Undercovered: increase resources
0.1 0.0 0
10
20
30
40
50
60
70
80
CUMULATIVE OPPORTUNITY ($MM)
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4. GIVE SALES PROFESSIONALS TOOLS AND PROCESSES THEY LOVE All too often with sales tools and processes, we see frustration. In the center, sales leaders get frustrated because they put huge effort into new systems, processes, and reporting, only to see rejection and low adoption from the field. “It’s all there, if only they would actually use it,” is a common refrain. Meanwhile, in the field, one hears a different story: one of complexity, of the sales force not being able to find what they need fast, of new tools and processes taking so long that they are not worth using, and of low confidence in the validity of any new sets of numbers and reports. Why does this happen so often? A lot traces back to two causes. First is a lack of meaningful engagement of the field when new approaches are developed: “It often feels like another report or process got thrown over the wall at us.” Second is broad adoption of off-theshelf software tools with “vanilla” capabilities that are not built around what the sales force wants and needs. Thus sales professionals default to doing what they know and personally find most productive, resulting in as many different ways of working as there are sales professionals. There is a better way. It is rooted in a “by the field, for the field” methodology and an agile approach to tool development. This mind-set can deliver powerful bespoke tools and processes in a matter of weeks. On the tool side, it focuses on providing just the right insights and information to the sales person, and no more, tailored to how the field wants and needs to work. Like Apple products, the aim is for the tools to be so simple that there is no need for a manual. Importantly the approach is focused on decision support: empowering the sales professional with real insight, but recognizing that only he or she knows the customer and can make the final judgment call. See Exhibit 4 for an example of a tool developed in this way to provide the highest priority sales leads and issues each week for a sales professional to review. When you get this right, the “pitch” to the field is thus both simple and powerful: “Here’s a new way of working, designed by experienced fellow sales professionals, that will save you time and make you more successful.” That’s pretty hard to argue with.
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Exhibit 4: Example sales opportunity prioritization tool
Monday morning dashboard provides simple, intuitive, and actionable insight on the most valuable opportunities. The tool uses sophisticated algorithms to supplement sales reps’ judgment and helps them determine which customers to call and visit that week.
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5. ATTACK ONLY THE MOST IMPACTFUL CAPABILITY CHALLENGES We often encounter one of two legacy situations. In the first, distributors have signed up to one or more “cookie cutter” or “fashionable” sales approaches over several years leading to a disjointed overall sales process, out of step with what really matters and will drive value. In the second, distributors have conducted some form of sales diagnostic and then come away with a long “laundry list” of areas to address – effectively taking an “everything is broken and everything needs to be fixed” approach. The most successful players, we have found, take a hard look at the data on what is actually going on in their business (steps 1–3) and then go after the highest-priority areas. For instance, if you have not previously understood “true” customer lifetime value potential and sales productivity, you will probably want to act on sales resource allocation and reshape your field execution model. If you have properly understood market deal flow and concluded you are not winning your fair share of contracts despite a competitive offer, you may want to act on demand generation and drive upstream lead incubation. Similarly, if you find huge gradients of sales professional productivity focused on the same types of customer and product that aren’t obviously related to experience, it’s probably time to look to sales force recruitment and incentives to revitalize your selling capability. The most important point is to pick the few areas that will have the biggest impact for your organization and get started in a focused way.
6. THINK BOLD, BE DIFFERENT, AND PROTECT IT Those companies that truly break away don’t do it by putting the sales force through the same training programs as everyone else or installing the same generic software platforms. They break through by building a sustained advantage in typically two or more of four areas: unique data, better insights, better ways of working, and stronger sales professionals. (And often it is investment in the first three areas that attracts stronger sales professionals who see tangible evidence of a company that is on a transformational journey and backing the sales force.) Better insights are always possible – and don’t require a big new technology investment or platform. We have, for instance, never yet seen a distributor that is fully leveraging the power of even its own internal data – whether order history, customer data, cost-to-serve data, web event logs, etc. There are also increasingly powerful external data sources that can drive valuable insights on markets and potential customers. The trick is to hone the insights that you need and to bring them to bear at just the right moment to inform each key commercial decision. Similarly, develop your own ways of working “by the field, for the field.” If you don’t have a center of excellence to support the field with insight and advice, build one. Encourage experimentation and pilots. Expect a few (controlled and fast) failures on the way to even greater successes. Above all, set high standards, clear targets, and a high “clock speed” for execution and innovation.
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CONCLUSION Many distributors have put significant efforts into driving sales productivity with, at best, limited returns. Our experience suggests this is often because individual field sales professionals are still largely in control of where they spend their time, and lack immediately actionable insights to enable them to be more productive. Moreover the nature of sales and customer expectations is changing fast. Profitably re-igniting the sales engine doesn’t need a large up-front cash investment. Nor does it require addressing huge data or system complexity to get substantial benefits out in the first phase. We have seen distributors drive dramatic top and bottom line improvements by taking a disciplined approach to understanding the core productivity drivers: where the sales force spends its time, where customer lifetime values are greatest and least, and how customers want to be engaged. They then build processes and tools that the sales force loves, attack only the most important organizational capability gaps, and act boldly in building a unique capability that is not readily copied. It’s real work for sure. But for a $2BN business, such approaches can drive $400MM+ in incremental high-value sales over three years. That prize is worth attention.
Our GFR cost reduction program delivered a 23% increase in group profits in its first year by transforming the way we negotiate with our vendors. However, the really big savings have come since then by working with our largest vendors to take cost out.
– CPO, $BN FOOD SERVICE BUSINESS
PURCHASING COST REDUCTION WHAT DISTRIBUTORS CAN LEARN FROM LEADING RETAILERS AND MANUFACTURERS Distributors and wholesalers are in a brutal business. Many operate on thin net margins, typically between 3% and 5%, with revenues under constant pressure. But some companies have been figuring out how to thrive by driving down cost of goods sold (COGS) while at the same time fostering critical vendor partnerships in such a demanding environment. What is their secret? A large part of the answer comes from their ability to reduce costs by learning from two industries renowned for their skills in purchasing: retail and manufacturing. By adopting a pragmatic strategy that combines the best of both approaches, our experience is that distributors and wholesalers can reap substantial value. Generally speaking, goods for resale (GFR) can account for up to 80% or more of a distributor’s cost base. By using a more sophisticated approach, our experience is that a typical distributor can achieve 7–10% savings from GFR cost-reduction programs, potentially doubling net profits. (For distributors that buy a significant proportion of commodity items, typical savings percentages are of course lower, although the impact can still transform the bottom line.) Top retailers have sophisticated negotiation approaches aimed at squeezing out the best possible deals from their vendors. In contrast, leading manufacturers work hand in hand with their vendors on the intricate task of finding new efficiency gains together. Distributors often find themselves sitting in the middle, without the depth of capability deployed by either retailers or manufacturers. They are often not organized for success, with a good deal of purchasing happening locally – making it difficult to create valuable insights and pool purchasing volumes. As a result, they leave considerable money on the table. How, then, to combine the best of those two approaches in the unique sector that is wholesale distribution? 67
A TALE OF TWO APPROACHES That these two approaches could hardly be more different from each other makes their linkage a challenge. Essentially, retail buying reflects a “trader” mentality, whereas manufacturer purchasing requires an “engineering” mind-set. In retail buying, the primary focus is on maximizing the difference between what consumers will pay and what vendors will accept as payment for their products. Negotiations are thus typically characterized by deal making that frequently involves aggressive, confrontational tactics. Generally, retail buyers are reluctant to commit to multi-year deals with vendors, wanting the flexibility to switch between brands. Indeed, this threat of de-listing is often used as a powerful lever to increase bargaining power. While retailers often deploy sophisticated approaches, the basic goal is to maximize negotiation leverage, and most retail buyers have little interest in what goes on behind the scenes in the production facilities or supply chains of their vendors. Manufacturer buying is completely different. When producing complex products, such as cars, planes, or industrial equipment, it is essential to work closely with vendors, resulting in a mutual dependency that both parties understand well and from which both parties benefit. Generally, the relationships are characterized by an extremely high level of trust and detailed information sharing. Both manufacturer and vendor constantly seek small, even tiny, improvements (for example, shaving a millimeter off the thickness of a component) that will drive out cost and achieve performance benefits for the overall system. As such, vendor relationships are true partnerships, expected to last for many years and underpinned by multi-year contracts.
ACHIEVING THE BEST OF BOTH WORLDS For distributors, achieving world-class purchasing on a par with leading retailers and manufacturers can be a long, difficult journey. One challenge is that there isn’t a single unified solution: distributors need to pragmatically deploy multiple approaches depending on their product and vendor characteristics. Moreover, many distributors find that they need to rethink what they are purchasing where, and how, in order to extract the full benefits. That makes getting the money a substantial effort, unless you organize effectively. Having observed various distributors attack the GFR challenge in recent years, we have captured those tools that have proven to be the most effective, and codified them into a “Purchasing Periodic Table” (Exhibit 1). Note that the elements of the table are grouped into two major clusters. The first is aligned to the retailer approach where the focus is “taking margin out of vendors:” picking the right vendors and maximizing your negotiating position to get the best possible deals. The second cluster is aligned to the manufacturer approach where the focus is “taking cost out of the system:” attacking the larger part of the cost base that is the vendors’ costs, rather than just their margins, by challenging and working on topics such as product specifications and manufacturing efficiency.
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Exhibit 1: Purchasing Periodic Table. For the typical distributor, the most effective approaches we have seen start on the left and move to the right TAKE MARGIN OUT OF VENDORS Maximize negotiating effectiveness
TAKE COST OUT OF THE SYSTEM
Optimize supply base
Reduce total cost of ownership
Rationalize requirements & specifications
Redesign the system
Competitive tendering
Vendor consolidation
Middle-man removal/ consolidation
Reverse cost engineering
Use vendor assets to reduce costs
Product design to cost
Change the organization’s boundaries
Auctioning
New supplier introduction and development
Global/low-cost country sourcing
Complexity reduction
Vendor-led TCO innovation
Product standardization
Vendors’ business design innovation
Bargaining power analysis
Target pricing
Strategic supply alliances, JVs, and partnerships
Grey market sourcing
Commodity cost management
Vendor-managed inventory
Product substitution
Next-generation technology
Volume commitments/ base loading
Dynamic/ automated negotiation
Vendor tiering and share management
Vendor disaggregation
Logistics optimization
Procurement outsourcing
Wastage reduction
End-user demand engineering
Benchmarking
Vendor metrics and incentives
Backwards integration
Buying for vendors
Minimizing transaction costs
Packaging elimination/reuse
Network redesign
Research and market intelligence
Risk and profit sharing
Vendor consortia buying
SKU/catalog rationalization
Transport mileage reduction
Client TCO reduction
Competitor comparisons
Commodity price/FX management
Smart forecasting and planning
Information superiority
Vendor economic modeling
Contract compliance and auditing
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For the typical distributor, the most effective approaches we have seen start on the left and move to the right. In other words, first mastering the best of the negotiation techniques used by top retailers. In other words, they first master the best of the negotiation techniques used by top retailers. Then they introduce the “cost out” approaches used by leading manufacturers, working with the selected partners to achieve cost savings beyond those achievable just through a negotiation approach. Achieving the full potential of 7–10% cost savings may take two to three years, but much can be achieved in as little as five to six months.
A TWO-STAGE METHODOLOGY 1. REALIGN AND RESHAPE THE VENDOR BASE The first step is to explain your growth strategy and describe how your company will be reshaping its vendor base to focus on fewer partners. Tell vendors that the transition will result in “big winners” and “big losers.” But before vendors can even be considered as partners, you will be thoroughly reviewing the potential candidates. To prepare for your negotiations with vendors, you will need to do some real analysis to identify the opportunities for savings. You should look in detail at how vendors have been performing and examine the competitiveness of their offerings. Consider, for example, the evolution of their prices compared to changes in their input costs, their delivery performance, their margins versus the competition, and so on. You will need to describe to each vendor how it needs to realign its proposition to your expectations. A vendor might, for instance, have to atone for overcharging and underperformance in the past. You can emphasize that complying is necessary for moving to the next stage. Of course, such discussions are difficult, but you can minimize any pushback by anchoring your arguments on robust, fact-based analyses that vendors cannot dispute. This analysis package is the critical foundation of a successful program (Exhibits 2 and 3).
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Exhibit 2: Analytical insights. Category and product managers already have lots of data – what they need is the right insightful analysis, delivered in a way that is easy for them to use. For example:
Overall summary of vendor’s sales and margin by category
Comparison of vendor’s cost evolution vs Comparison of vendor’s sales and their known input cost changes margin performance by brand vs. competitor brands
Exhibit 3: Negotiation planning and support . Example of Oliver Wyman tool that: i) enables and underpins a highly structured negotiation process and ii) auto-generates a wide range of compelling analyses to provide negotiating leverage at the touch of a button 1. Develop category strategies based on category and brand performance
Category performance Materials used for the category strategy workshop; detailed performance by category 2. Develop negotiation plans based on a summary of vendor performance
Negotiation plans A one-page summary of vendorcategory performance with key negotiating points highlighted
Brand performance Brand-level data of vendorcategory performance for developing negotiation plans
3. Build negotiation arguments based on detailed analysis of vendor performance
Vendor performance within category Full vendor-category performance detail for developing negotiation plans
Vendor performance across categories Brief overview of vendor performance across categories and across desks
4. Produce disguised reports to use in the room with vendors
Disguised charts and reports to share with vendors Potentially sharable charts with labels removed
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CASE STUDY 1
BENEFITS OF ADOPTING A RIGOROUS, ANALYTICAL APPROACH TO VENDOR NEGOTIATIONS The largest vendor of a $BN+ food service company had put through a series of price rises and was pushing for more. The vendor argued that it was merely passing along some of its costs from a rise in commodity prices (see Exhibit 4). However, a detailed analysis – taking into account the actual cost changes for the ingredients in the correct proportions in the ordered items – showed that the vendor’s costs had fallen by more than 10%, driven by a 19% fall in the cost of raw materials, offset by higher fuel prices and wages. If the vendor’s prices had tracked input costs, the company’s costs would have been lower by some $4MM. The negotiation outcome was a substantial and immediate price reduction plus an up-front compensatory payment equivalent to 20% of the annual spend with the vendor. This negotiation was a major contributor to the overall program, which delivered more than $15MM in savings.
Exhibit 4: Example commodity price analysis used in vendor negotiations INPUT COST INDEXED TO JAN 2008 140 Price charged to the B2B company
130
5% price rise 7% price rise
120 10% price rise
110
Vendor input cost (Brand A)
100 90 Vendor input cost (Brand B)
80 70 60 Jan-08
Apr-08
Aug-08
Dec-08
Mar-09
Jul-09
Nov-09
Feb-10
Jun-10
Vendors that you believe have the potential to be future partners will need to submit their best possible proposals to be considered for a multi-year contract or “memorandum of understanding.” You should focus the process by providing clear guidance on what each vendor needs to do to protect its existing business. For example, if your margins with a particular vendor are below the category average, the vendor must rectify that to remain in consideration. You should suggest what each vendor might propose in exchange for growing its business with your company. You might, for instance, agree to share the additional profits that a vendor attains from the future higher volume based on an analysis of that firm’s variable margins. (Note the right answer is rarely a simple 50/50 split when you consider the leverage that increased volume typically has on a manufacturer’s gross margin given their larger fixed cost base.) This process of reshaping the vendor base also presents the opportunity to consider new vendors, including those from new, and potentially lower cost, countries.
“We successfully persuaded our branded footwear vendor to cut prices on key styles by over 10% based on our detailed analysis of costs and margins.” – CEO, $BN CLOTHING AND FOOTWEAR BUSINESS
The outcome should be a significant consolidation in your vendor base, allowing some vendors to achieve significant growth and your business to benefit from multiple “more for more” agreements. Those benefits will often take time to fully accrue as you clear stock, evaluate new SKUs from partner vendors, establish new supply chains, and so on. Success depends on vendors truly believing that their business is at significant risk if they don’t comply – that is, they will automatically become “big losers.” Many distributors that have distribution agreements with powerful brands mistakenly think they have little clout to negotiate. In contrast, we have seen that the approaches described here can be deployed with equal effectiveness when applied with the right analysis, process, and tools. The scale of benefits you can achieve from this stage will depend on the characteristics of your sector and the sophistication of your starting point. In some cases, 6–8% GFR savings are achievable just from improved vendor negotiations; in other cases 3% or 4% may be the limit.
2. WRING OUT COSTS Distributors then face a substantial opportunity to reduce costs further, with the benefits being shared between them and the vendor. Typical areas where waste and inefficiencies can be eliminated are: the supply chain, from raw materials to manufacturing and logistics; product specifications, including materials, design, accessories, and packaging; and the interface between distributor and manufacturer, particularly with regards to order quantities and the efficiency of processes such as forecasting, ordering, and payment.
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Most responsibilities for achieving the savings will sit with the vendor, although some will reside with the distributor or will require joint work between the two parties. The opportunities will be very different depending on the characteristics of the vendor. For small vendors selling high valueadd products (and for which the distributor accounts for a large percentage of the turnover), the opportunity for cost reductions will likely be large. For major global brands and true commodity items (fuel, basic chemicals, commodity food, etc.), the opportunities will typically be much more limited in percentage terms, although the potential dollar savings may still be very large.
CASE STUDY 2
PARTNERSHIP WORKING TO IMPROVE EFFICIENCY AND DECREASE COSTS A multi-national home improvement distributor was working closely with a key vendor to identify cost reduction opportunities. Together, they spotted the potential benefits from optimizing order quantities. The products were made to order for the distributor in batches. Small orders meant the manufacturer needed to set up a production line then shut down and clean it just a few hours later. Unit manufacturing costs would reduce as the order size increased until a second production line was needed, which would increase unit costs again (see Exhibit 5). Analysis showed that orders were not being placed in a way that minimized production cost: only 8% of orders were within 10% of the most efficient level, 22% were above, and 70% below (Exhibit 6). The companies also factored in storage and delivery costs to minimize total costs. Because of their partnership, the distributor could recognize which order quantities minimized total cost, with the subsequent savings shared between the two parties. This was a key component of an overall program that delivered a total cost reduction of over 7% across all products. Exhibit 5
Exhibit 6
UNIT COST ($) 1.80
PERCENTAGE OF ORDERS RECEIVED 30 Low cost zone
1.70
1st production line running continuously, 2nd production line making batches
1.60
1.50
20
Low cost zone
10
1.40
1.30 1.20 0
Single production line making batches 20
40
0 60
ORDER QUANTITY (THOUSANDS)
80
100
Under 10 10–20
20–30
30–40
40–50
50–60
ORDER QUANTITY (THOUSANDS)
60–70 Over 70 (2nd prod. line)
THE DELIVERY CHALLENGE The task of working with partners to wring out costs can be challenging and time consuming. We have seen several distributors achieve limited success and end up reverting to ever more aggressive, non-fact-based negotiations. In the long run, that tactic becomes counterproductive, particularly with partner vendors who have earned the right to be “big winners.” Vendors that are continually forced to slash margins will inevitably either start cutting corners on product quality or service, or start investing in your competitors instead. Successful programs therefore take time and discipline to achieve their full potential, although sizeable “quick wins” can almost always be achieved with the right approach.
Sizeable quick wins can almost always be achieved with the right approach.
In our experience, we have found that success depends on four critical factors:
1. COMMUNICATION Effective vendor co-operation is based on great communication, real understanding, and enlightened self-interest. Vendors need to understand that cost cutting is absolutely necessary and that non-compliance will inevitably lead to loss of their partner status. To emphasize that point, you should embed annual targets for minimum cost reductions in multi-year agreements.
2. TIGHTLY STRUCTURED NEGOTIATION AND PLANNING PROCESSES An efficient and structured approach is necessary so that vendors can fully understand what is required from them, and by when – whether as part of the initial structured negotiation round or as part of an annual joint business plan. You should monitor their progress (as well as your own) and track results versus the plan at each stage.
3. ROBUST DATA AND EFFECTIVE ANALYSIS TOOLS Getting all the necessary information and talking points for negotiation into the hands of the buyer or product manager quickly and efficiently is essential. The most effective programs use analytical tools that can generate all relevant vendor facts and prioritized insights “at the touch of a button” (see Exhibit 3).
4. ADDRESSING ORGANIZATION AND CAPABILITY GAPS The product and purchasing organization will typically need to evolve and embrace new approaches. Yet great progress can be made initially without large-scale restructuring or hiring. Creating a small expert set of buyer “champions” to manage the overall process and support other product managers in negotiations can go a long way.
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But the ball isn’t only in the vendor’s court. Distributors can often play a large role in wringing out costs, particularly when a vendor is comparatively small. You might, for example, be a much larger buyer of raw materials, energy, or other items needed by the vendor. In such cases, by enabling that vendor to share your purchasing power, you can help it reduce its costs. The vendor would then improve its margins with all of its customers, and you should argue for a share of those savings too. Although the work to wring out costs can yield big savings, there is a danger that vendors seek to take advantage of their partner status, especially if the competitive tension they experienced during the first stage has faded. You will need to put in place mechanisms to avoid this, such as “best price guarantees” in your partner agreements so that you have the opportunity to find the best prices for products (through benchmarking, competitive tendering, or reverse auctions) and your partner will need to match those prices in order to retain its status.
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CONCLUSION Driving down GFR costs while at the same time maintaining or improving critical vendor relationships is a tough challenge for any business. In the complex and often “local” world of wholesale distribution, it is tougher still. Yet a small number of distributors have looked beyond traditional industry approaches to learn from the purchasing methods used by leading retailers and manufacturers. These distributors have typically achieved a 7–10% reduction in non-commodity GFR costs and unlocked a new wave of productive partnership and collaboration with their vendors. The key is to first select the right purchasing tools for the distributor’s unique circumstances (from a “periodic table” or similar) and then apply them in a thoughtful sequence – starting by reshaping the vendor base to take margin out of vendors, and then progressively engineering cost out of the system with the vendor base that remains. Core to achieving enduring savings are effective communication, a tightly structured negotiation process, robust data and analysis tools, and a sequential upgrade of organization and capability. For many distributors, these types of benefits are not only compelling, they can also serve to step change growth by enabling the business to be more competitive on those products that matter most to customers.
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ABOUT OLIVER WYMAN Oliver Wyman is a global leader in management consulting that combines deep industry knowledge with specialized expertise in strategy, operations, risk management, and organization transformation. In the Distribution and Wholesale practice, we draw on unrivaled customer and strategic insight and state-of-the-art analytical techniques to deliver better results for our clients. We understand what it takes to win in distribution and wholesale: an obsession with attracting, serving, and growing customers, constant dedication to operational excellence, and a relentless drive to improve capabilities. We have a track record of helping clients win in this environment, creating real competitive advantage and driving significant growth. We believe our hands-on approach to making change happen is truly unique – and over the last 25 years, we’ve built our business by helping distributors and wholesalers build theirs. Oliver Wyman is a strategic advisor to the NAW and sponsors a number of NAW roundtable events for companies with revenues $1BN+. www.oliverwyman.com
ABOUT NAW The National Association of Wholesaler-Distributors (NAW) is the national voice of the Wholesale Distribution industry in Washington, DC. NAW is uniquely positioned to provide wide access to and exchange of leading-edge information and high-quality services among noncompeting peers within its membership. Its highly endorsed Billion Dollar Company program focuses on networking CEOs and their Direct Reports across industry segments in a noncompetitive environment where wholesale distribution executives can exchange ideas with peers in other lines of trade. In addition, NAW provides real value to its members by advocating the interests of distribution companies before the government; providing groundbreaking, distribution-specific research and strategic management best practices via publications and webcasts; and giving access to leading-edge products and services highly valued by industry peers. www.naw.org
CONTACTS RICHARD BALABAN Partner
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