With economic uncertainty, margin pressures generated by competitive pricing environments, commodity increases and increasing operational expenses all challenging channel profitability, it's more difficult than ever to achieve a 5 percent net profit for a distributor.
To achieve this goal, aside from revenue generation, distributors need to seek strategies to drive operational improvement. By streamlining processes, utilizing technology and effectively managing inventory, distributors can reduce waste within their organizations and enable the “back of the house” to help put profit on the bottom line.
The operational conundrum
While many distributors believe they are operationally sound and are comfortable with their level of profitability, others seek more but are frequently stymied in their endeavors. The “Channel Challenges” survey by Allen Ray Associates, Kennedale, Texas, and Channel Marketing Group, Raleigh, N.C., conducted earlier this year solicited input from manufacturers, distributors and reps. It was supported by more than 80 interviews and revealed a few operational areas inhibiting channel profitability. We define “channel” as the relationships that distributors have with their reps and manufacturers (and vice versa).
The survey covered five operationally oriented areas. These included data synchronization, pricing, EDI, inventory management and web services. Each plays a role in helping improve profitability as they become pervasive within each channel member's operation.
While IDEA, Rosslyn, Va., celebrates its 10th anniversary this year with several important successes, there have been many challenges along the way. The IDX, which helps users exchange e-commerce documents via EDI, is an unequivocal success, with many users benefiting operationally and financially. On the other hand, the industry data warehouse (IDW) has had mixed results. Some companies rely on it exclusively, while others have had implementation problems and have concerns about its industry coverage and its inability to thus far reach a broader audience.
Data synchronization is important to facilitate electronic interaction, which streamlines interactions and reduces efforts. With 3,000-plus distributors in the electrical channel, most believe that multiple data distribution sources must be utilized to enable manufacturers and reps to interact with the widest network of distributors.
The Channel Challenges survey asked respondents how important data synchronization is to them and the amount of resources (people, quantified in dollars, and outside expenses) they now allocate to it. While the majority of manufacturer and distributor respondents said data synchronization was important, the amount that they invested in it varied quite a bit. See “Investment in Data Synchronization” chart on page 52.
It's evident that manufacturers believe they can better facilitate the data process by sending information directly to distributors. 82.9 percent of responding distributors said they receive data either directly from manufacturers or through their reps. This is in conjunction with data they receive from IDEA and/or Trade Service Corp., San Diego. While the commitment is there, the investment level needed to achieve synchronization appears to be lacking. This could be a reflection of economic conditions and the need to invest in revenue generating initiatives or of a broader sense that, “If it isn't too broke, let's keep it the way it is.”
Benefits are apparent. Said one manufacturer, “We have spent a pretty good amount of money to clean up and certify our data for IDW. Our payback has been to lessen our head count in order entry/customer service. It has increased the amount of business and claims for our very largest distributors.” Conversely, some distributors have used the same formatted data to drive their business and have built processes around this data, enabling them to operate efficiently for many years. According to a Rockwell distributor, “Our business routines and website are built around Trade Service data. It's important to our company right now that we not enter into an unknown area of cost.” This company uses IDEA for Rockwell data.
Many manufacturers recognize the challenge of distributing data to a wide array of distributors. Said one executive, “Because we have a saturation sales policy we will continue to send data to Trade Service. There is an advantage to Trade Service having and distributing our data.”
Additionally, reps feel they could benefit from having the same product and pricing data that their manufacturers and distributors have. Almost 50 percent of responding reps believe having the same data would save them at least 20 percent of their time — time that could be reallocated to calling on customers.
The bottom line is that the data supplied to the channel by manufacturers needs to be consistent throughout the channel and distributors will gather the data from wherever is easiest for them and least disruptive to their processes.
Over the past few years, concurrent with national chains growth, pricing strategies and claimback processes have grown in importance. Historically, the industry has used market-based pricing, and 52 percent of manufacturers affirmed that this pricing strategy enables them to maximize profitability and stated that their cost-structure changes across territories. The geographical growth of distributors makes market-based pricing much more difficult to manage and, once changed for a distributor in a marketplace, becomes a competitive disadvantage for others.
Additionally, the claimback process (special pricing authorizations commonly called “SPAs”) historically has been a paper-based process. Many manufacturers believe a significant percentage of distributors will not seek claims due them. Some manufacturers have told us that at least 15 percent of eligible SPAs are never claimed, which ends up improving vendor profitability. Additionally, filing delays generate cash flow for manufacturers. NAED's SPA task force attempted to suggest a process to facilitate this, but increased utilization of EDI is driving change in this environment. To address these issues, responding distributors desire change in manufacturer pricing strategies: 46.7 percent desire net pricing and 43.3 percent want one price across their geographic footprint. Only 13.3 percent understand the manufacturer's position and support market-based pricing.
The claimback/SPA process can be laborious as well as costly. Reps lose valuable sales time, and 27.7 percent of the rep respondents said supporting SPAs takes them a half-day to one full day per week to administer SPAs, while 28.8 percent of the respondents said the process takes them one-to-two days. According to a rep who questioned if NAED sought rep input into the SPA process, “The real truth is that my firm spends approximately two-to-four days per month cleaning pricing issues and claims.”
For distributors who do receive nets, or for that matter any pricing directly from manufacturers, they are inundated with Excel spreadsheets, especially in this era of price increases. Said one West Coast distributor, “We get approximately 40 to 45 Excel files in per month from various manufacturers.” With this type of load, many distributors have personnel devoted to price update management, an incremental expense.
Reps also have direct connects for price updates. 62.9 percent download pricing from manufacturer websites and 88.7 percent receive emails with Excel attachments. Only 8 percent of the rep respondents receive updates via EDI. While many distributors are using EDI to place orders with manufacturers, increased usage of EDI for invoicing, claimbacks and other transactional interactions can improve efficiency and throughput if integrated into internal operations.
EDI can be a very effective strategy for reducing transactional expenses if it's integrated into a company's ERP system to enable system-to-system communication. Sending (or receiving) something electronically and then printing it out is inefficient and costly. Companies effectively using EDI report improved profitability.
Distributors who work with manufacturers that offer EDI should seek to implement a number of different transaction sets to improve productivity and reduce costs. When we asked about EDI, 23.6 percent of manufacturers said they offer two to four transaction sets; another 23.6 percent offer five-to seven sets; 14.5 percent offer eight-to-12 sets; and 16.4 percent offer more than 13 transaction sets. Distributors who belong to marketing groups can easily identify which of their suppliers offer what sets. Manufacturers, unfortunately, do not do a good job of communicating this (as reps don't get compensated for promoting EDI).
From a distributor perspective, 15.2 percent of distributors were doing EDI with six-to-10 manufacturers; 24.2 percent with 11-to-20 companies; 9 percent with 21-to-30 companies; and 15.2 percent were doing some EDI with more than 31 companies. EDI is growing, and it's probably one of the quickest ways to improve efficiency, reduce costs and generate better information.
When business slows down, the question of inventory arises. Manufacturers book sales when inventory is shipped. When times are uncertain, many distributors focus on cash flow and seek to manage their inventory. Fuel surcharges and increasing minimum orders are further complicating the matter.
As can be seen in the chart on page 51, “Distributor Inventory: Different Perceptions,” a significant difference in perception exists on how much inventory distributors stock. This could be attributed to differing stakeholder interests. Distributors for the most part are entrepreneurial and need to focus on managing their cash flow. Manufacturer personnel are judged on revenues and reps are caught in the middle.
Adding profits through operational efficiency
Given the pressure on gross margins, it becomes more imperative for operations throughout an organization to improve efficiency. This can only be achieved through quality data, efficient pricing communication, effective usage of technology and well managed inventories. Internal departments, including IT, accounting, pricing and the warehouse, should consider how they could add value to their organizations and generate profit from their departments. An alternative definition of profit can be reduction of loss. If departments represent a lower overhead cost, they contribute to corporate profitability.
Allen Ray is principal of Allen Ray Associates, Kennedale, Texas. His firm helps companies improve profitability through effective pricing strategies and streamlining business processes through effective eBusiness utilization. Ray can be reached at (817) 704-0068 or [email protected].
David Gordon is a principal of Channel Marketing Group, Raleigh, N.C. Channel Marketing Group develops growth strategies for manufacturers and distributors. He can be reached at (919) 488-8635 or [email protected].
Check out their blog at www.electricaltrends.com.