Friday, December 18, 2009

After the Recession for Distributors - Funded Sales Resources

Think about the Great Ice Age – before the great sheets of ice enveloped much of Europe and North America, great Dinosaurs roamed the planet. After the ice cleared away a new breed of highly adaptive animal took over – the mammal. Without being overly graphic, this hardy new breed later gnawed on the frozen bodies of the regal creatures that once reined supreme. The Ice Age was a game changer.

Recessions are game changers. What worked on one side of the recessionary dip will not work on the other. I have been challenged to outline some of the metamorphosis associated with the other side. Earlier this week, I exchanged a few thoughts with Craig Justice of Alliance International on “the funded head”. Mr. Justice, wrote a blog covering his very successful experience with the concept click here.

Because Mr. Justice lives in the wine country high on a mountain in rural San Diego County California, I conjure up thoughts of vintage Orson Wells stating “We sell no wine before its time.” The funded head, I believe, is an idea whose time has come. Let’s explore.

First what is a funded head?
A “funded head” is a distributor employee (at least in part) paid for by a supply partner. Here’s how it works: The distributor hires a new person and focuses their attention on the supplier’s line. While employed and managed by the distributor, a certain amount of direction comes from the supplier.

Why would anyone want to use them? Why not just hire a direct employee?
Funded heads are more efficient than a direct employee. Because distributors operate on a smaller company environment, the cost of adding another head at the distributor end turns out to cost less. Depending on the industry, adding a distributor employee tracks between 25-30% less than an equivalent at a Fortune 1000 sized supplier.

Further, a great deal of natural effort is lost in the interaction with the distributor. Whether we like it or not, new supplier sales people must “earn the trust” of their channel partners. Internal resources – customer lists, CRM access, POS sales data and all the rest – are “filtered”. Access to distributor sales people takes time to build. Perhaps more critically, distributor management face time is constrained. Within this concept, instant traction, fast results and lower cost are exchanged for direct management.

Plus there are other advantages for the supplier. In times when controlling head counts are important – a funded head eliminates the cost of benefits, office, company car and travel expenses. Further, funded heads are temporary. At the end of the program, the employee becomes the responsibility of the channel partner.

Why is now the right time?
I began this argument with the point – this is an idea whose time has come. Bold statement? I don’t think so. As we move out of the economic doldrums of the past 18 months, we face a whole new game. Customers are reevaluating their suppliers and the company who reacts most quickly picks up valuable marketshare.

Properly done, a funded head scenario has an advantage. Today, there are many qualified candidates available in the market. Because of local networks – business and social – distributors know who these people are and how to reach them… quickly. No lengthy interview trips, no delays at the HR department and (usually) no relocation costs are involved. But wait there’s more. Many of these qualified candidates already have a rudimentary idea of the local market. Sometimes, they may even have a history with the customers you want to reach. The growth side of the economy is the right time to use this advantage to seize opportunities.

Why don’t the distributors just hire the people themselves?
Here’s the situation, it’s all about cash flow. Coming out of a recession, distributors want to use their available cash to finance increased accounts receivables and inventory. The current financial climate impacts the distributor – bank relationship. The banks of all but the largest distributors are questioning the distributor’s line of credit. Growing the business is important but only if they have the cash to fund it. A funded head, frees up a portion of their cash reserves to support their supplier’s business in bank friendly ways. Most likely, the distributor might add another person, but the funded head puts the person in place – early. And, the advantage goes to the fast responders.

What is the right way to get started?
Understanding is the root of a good program. You must come to a strong understanding of goals and expectations prior to the program. To this end, an agreement needs to be laid out which defines:
The skill set
Educational background, personality type, and previous experience must be defined. If you are targeting a competitor, outline which competitor’s previous employees should be considered.
The interview process
I personally believe the funding company needs to play at least some role in the process. Rights of refusal need to be laid out carefully.
Product training and building connections with factory level people can be critical for success. Define when and where the training will be held and who pays for it. If additional training is needed down the road, this must be laid out as well.
Goals, Metrics and Reporting
No metrics equates to a bad program. Define success and measure against a predetermined set of goals. Because the supplier plays a role in funding the person, advanced information to be reported needs defined. Detailed targeting, POS and margin information are all set ahead of the program.

Recommendations on the person…
Having seen these programs in an up front and personal manner, I have a few recommendations as to what works and doesn’t work. This absolutely cannot be a “rebranded” person. I have nothing against that really promising inside sales guy or the warehouse worker that’s showing a lot of initiative, but this type of person is too easily pulled off course. And when the role is only 50% funded, some will be tempted to try to use this arrangement. There may be exceptions, but for the most part – there are too many opportunities for failure.

There has to be a migration plan
What’s a migration plan? I believe it’s the answer to a number of questions about the future. Here are things that need to be developed:
What happens if the person selected just does not work out?You hope it doesn’t happen. You go through a great deal of pain to prevent it, but sometimes we make hiring mistakes. What happens if the person doesn’t meet expectations? Since the supplier has a financial hand in this person, both distributor and supplier need to preload some expectations. Remember, no surprises…
What happens in one year (or two or three)?
Does the funding go away? Are there ways it can be extended – growth goals, new account conversion etc. Defining this saves frustrations.
What happens to the employee once the program ends?
Ideally the distributor will reach the point where the person is a good investment for their organization and keeps the employee “plugged in” continuing to chug out results for the supply partner. All too many times, these programs are used to “warehouse” employees for some other use. This probably isn’t what the supplier has in mind.
What can be expected of the distributor for taking part in the program?Again expectations are critical. These need to be ironed out before the fact to remove emotions should something happen.

Before we head down the road…
I am an ardent supporter of a scientific sales process. Plus, I am the leading proponent of using distributor specialists to drive the sales process. Throughout much of this article, I waxed on as though you are adding a generic salesperson. For some distributors this may work. However, for a good many distributors and their suppliers, adding a funded head specialist makes far greater sense. Our research shows that upper quartile distributors – the ones who out performed 75% of their peers – apply specialists to drive the sales of a selected supplier or technology group. Funded Specialists will impact the dynamics of distribution.

Friday, December 11, 2009

Recession Driven Changes

Changes in the Distributor Environment

Earlier this week I was asked about some of the unrecognized effects of the recession on wholesale distribution. Then the question came up a second and third time in a matter of hours. Apparently, this is the time for reflection. Besides creating stress for business people – recessions drive the acceleration of change. I thought it might be interesting to use this forum as a vehicle for exploring some of the generally uncovered changes in our industry and their ramifications.

Change Number One (not necessarily in any order)

The super “skinnying” of Vendor / Supply partner sales teams
Think about your vendors. In some industries it’s getting darn difficult to keep track of the players. Downsizing, right sizing, whatever you call it – distributors are reporting major changes in the sales teams who support their efforts. If the manufacturer had 5 guys in an office serving the market, today there are three people working out of their houses. Suddenly distributors discovered their old guy was gone (or had twice the territory).

This affected the combined sales efforts. Loss of continuity within the territory meant everything had to be explained… again. Customer connections were lost. History of applications - all gone.

Here are a few of the effects:
----->Product quality issues were handled by the distributor – if at all.
----->Expediting connections were lost.
----->Special pricing agreements were offered to the wrong distributor.
----->Field planning sessions were more difficult to facilitate.
----->Vendor led training went away.
----->In some instances, vendor sales people fouled distributor/customer relationships by promoting direct sales opportunities at customers. This happens mostly because they were worried about their own job security or commission levels.

For the most part, distributors were asked to pick up more of the slack. As the recession ends, distributors who know exactly how to explain their value to supply partners will prosper. To do this right, distributors need to understand exactly how to communicate this in a non-threatening and scientific way.

Let us know what you think.....

Tuesday, April 28, 2009

What Drives Distributor Performance

What drives competitive advantage? Affiliated Distributor members regularly outperform the general market. Something like "8% greater growth than the market year over year" has been reported.

AD uses incentives to encourage their members to build a proactive sales process. Things like vendor planning sessions, targeting competitive accounts and use of modern techniques in the daily operation of the business all come to mind. AD distributors were among the first to use electronic and email communications back in the 1990's.

Any reasonable person involved in Distribution understands that we have a problem with data synchronization. As we move into the future, data needs to migrate from manufacturer to distributor to customer and back again - seamlessly, efficiently and without costly human interface.

I believe that any distributor who develops this skill ahead of the market will have a competitive advantage. And, this advantage will turn into market share on the other side of the recession. Unfortunately, many distributors are paralyzed by the economy. Any efforts to build long term competitive advantage are sacrificed in the name of the recession.

IDEA and Affiliated Distributors just announced a Pilot Program that will once more incent AD distributors to put a process in place ahead of the pack. Modern Distributor Management reports,
"IDEA had been working with four A-D members over a 60-day period to help both organizations define the scope of the program – which is exclusive to A-D for the 2009 calendar year. IDEA will introduce the program industry-wide after an A-D pilot program is completed."

read here

Thursday, February 19, 2009

Ship and Debit Special Pricing Programs

-->It’s happening more and more. Distributors and their Supply partners are negotiating special pricing agreements. In some segments of the Electrical Distributing business over 80% of the product sold goes out the door at a price which is below “normal distributor price”.
The process usually works like this: The distributor buys a product for full price - Puts it in his warehouse – then sells the product below full price. After the sale, the distributor submits a report to the manufacturer and is issued a rebate/credit.

We grew into this pattern little by little. We started off with a few agreements and a couple of catalog numbers. In today’s market, cash is becoming an even scarcer commodity and this practice often involves tens of millions of dollar. A study conducted by The National Association of Electrical Distributors sited that many distributors do without this cash for over 30 days. Often this comes about because the distributor has a poor process. To add insult to injury, I can think of at least a dozen incidents where the distributor’s poor process ended up with lost reports and lost cash. SAP has computer software to sell, but let me implore you to design a real process – with written checks, balances and quality control.
Read the full article here.

Click here  for a brief tutorial on special pricing agreements and ship and debit programs.

Monday, February 9, 2009

Recessions have a beginning and an end, Smart Distributors plan for both

There is absolutely no way to predict the exact time and day, but trust me all things must come to an end. Recessions begin (ours began for most of us sometime in October) and they end. The problem for most of us lies in long range planning. Without planning, we are caught off guard. We may find ourselves reacting rather than following a plan. We tend to act like the recession will last forever. I pose a question, what have you done to build a plan for the recovery. It’s all about positioning. What will you do at the first signs of recovery? What can you do to position yourself now?

Recovery May Be Quicker Than Expected Once Turnaround Begins.

The Wall Street Journal(2/9, Lahart) reports, "Last year's credit crisis hit the economy with a surprising jolt, and most economists expect the recession to drag on until at least the end of 2009, with only a meager recovery after that." But "history says they could be surprised by the speed and strength of the recovery -- once the economy shows signs of turning around." Of the "10 largest quarterly drops in final sales over the past 50 years, nine were followed by rebounds the following quarter, with an average gain of 5.4%. The chance of any rebound in the current quarter seems far-fetched after last week's dismal reports on January manufacturing activity, chain-store sales and jobs. Still, if the government's coming stimulus package and bank plan are able to restore a modicum of confidence in the economy, recovery could come surprisingly quickly."

Thursday, January 29, 2009

How’s business? Pretty good, not bad, it stinks…..

When distributors get together, the most popular question in existence is, “How’s business?” Once unleashed, the conversation gods spin tales of glory, stories of woe and everything in between. It’s interesting talk, a fun icebreaker but it rarely provides any valuable information.

I would like to commend Heating, Air Conditioning, Refrigeration Distributors International (HARDI – for finally putting their information where their idle chat used to be. HARDI publishes a quarterly report on exactly how their members are finding business conditions. While things are not hunky-dory in the housing dependent HVACR world, their members have solid information to steer them through these tough times.

Check out the HARDI Trends here.

Tuesday, January 27, 2009

Services that Drive Growth

Fastenal, a leading industrial distributor, continued to post strong growth in their business. Like most companies they have seen a slowdown in the last three months of the year (same store growth), but it would be our guess that while this year will be hard on Fastenal, perhaps it will be even harder on the folks who must compete in this line of trade. Here’s the reason why. Fastenal has mastered the art of bin restocking. They have essentially put together a reliable and efficient system for their customers to outsource a bit of the inventory handling and maintenance. Other distributors should make note and build their own system if they want to compete.

Reported from MDM Staff


Fastenal Company, Winona, MN, reported sales for the year end Dec. 31, 2008, were $2.34 billion, an increase of 13.5% from the prior year. Profit was up to $279.7 million, an increase of 20.2%. In 2008, Fastenal opened 161 new stores, an increase of 7.5%. Although the distributor had overall growth, its same-store sales saw a slowdown in the last three months of the year. In the fourth quarter, Fastenal reported sales of $544.9 million, up 5% over the prior-year period. Profit increased 11.3% to $62.5 million.

More details on Fastenal’s year-end results in the Fastenal report here.

Saturday, January 24, 2009

Use the Recession to Drive Change

In a recent article by Jack Keough, Industrial Distribution Magazine reported the results of a reader survey which indicates most industrial distributors are battening down the hatches for a long recession. They are cutting travel, clearing inventory and instituting hiring freezes. In a recession, preserving cash is important, but distributors can also put the recession to good use. Now is the time to drive change in your organization.

When it comes to implementing new processes, such as Account Targeting, Planning or CRM reporting, Distributor Sales Managers always find their “old-hand journeyman sellers” to be the most resistant. The new guys are compliant, but the very people who could have the largest impact drag their feet and think of a million reasons to not follow procedures. Often, because of their relationships and skill sets they still manage to perform, but this does not take away from the significance of their inflexibility. These kinds of headlines cause even the most hard-nosed skeptics to think about new things.

Read the rest here