Saturday, August 21, 2010

Price based Buying, Vampires and The Undead

Vampires, according to the HBO TV sensation True Blood, are darned hard to kill. Seems like no matter how much sunlight, garlic juice or holy water you throw at them, the evil beasts keep coming at you. The same holds true for the price based buying myth.

I want a show of hands, how many times have you heard that pricing ranks somewhere at near the bottom of most buyers (not purchasing departments) top 10 purchasing criteria? A recent study of 1,200 companies making purchases in the technology segment conducted by McKinsey and Company revealed many of them claim price is a driving factor in their buying decision. But, their actions are not consistant with their behavior. Could it be that even customers believe the myth?

When McKinsey examined what actually determined how customers rated a vendor’s overall performance, the most important factors were product or service features and the overall sales experience.

Here are a couple of additional points to consider. Customers were turned off most by the following behaviors:
35% say --> Too many contacts by the sales person
20% say --> Lack of Product Knowledge by the sales person
9% say --> Lack of Application Knowledge by the sales person

Did you see anything about price in those comments? But unlike those nasty vampires these customers of ours are actually a pretty nice bunch of folks. Most would rather not hurt your feelings. I believe it's much easier to say, "Frank, your price is too high" than to come out with the truth. And at least 64% of the time, the message would be:

"Frank, you waste our time. You come around way to many times with poorly planned or unplanned sales calls. Sometimes you even show up without an appointment. And once you arrive you don't know enough about your product. You certainly don't have the slightest clue about how we work our business."

You know it is easier to say, "Your price is too high."

Now, put hand on the computer screen and vow to remember this day - forever. When your customer spews those kind words remember. There is a 64% chance they really meant to say... You got outsold!

Read the McKinsey and Company Study here

Sunday, August 8, 2010

Frank Hurtte featured on Fully Threaded Radio..

Way back in 1994, I had the opportunity to briefly meet with George Gilder, a best selling writer, techno-Utopian intellectual, and Presidential Advisor. Mr. Gilder had just written a book called Life after Television which predicts a future where everyone has the technical capacity to produce and distribute their own TV and radio programs.

A couple of weeks ago I met somebody who is bringing this vision to life. Eric Dudas (of Fasteners Clearing House) has created Fully Threaded Radio. Fully Threaded Radio is a bi-weekly radio program devoted to the fastener industry. This hour and a half show is designed to be downloaded to your I-pod or listened to via your computer.

If you are part of the fastener industry - I recommend you make this a regular download. And if you are part of another industry, let it be known, it's about time we move the wholesale distribution channel into the 21st Century.

And by the way - listen to me on Fully Threaded Radio Episode 9.

I cover two topics:
How to Maximize the Value of Distributor Association Meetings
The Targeting Process

Thursday, August 5, 2010

The Gross Margin Equation - For the Record

It happened again. Actually, it’s happening more often all the time. Last week I sat in on a manufacturer – distributor discussion. During part of the conversation gross margin levels came into the conversation. Guess what? The manufacturer’s sales guy didn’t know the difference between “gross margin” and “mark-up”. After the conversation, I politely (and privately) pointed out the error in his calculation. He thanked me, but then said, “My product offers good profit potential, why get hung up on semantics?”

Earlier today, I read an article by an industry expert. Somehow his confusion in the gross margin calculation slipped past his editor. It was a small point - just a few cents difference. So, why the fuss? In my mind, it’s all about vocabulary.

We develop vocabulary to describe in a couple of words things that otherwise would take many words to describe. We build benchmarking metrics, business formulas and other important descriptors around these terms. One small mistake in a calculation could lead to big issues down the line.

If you are a manufacturer’s sales person, an industry consultant or a neophyte wholesaler, remember this formula.

Gross Margin = (Sell Price-Cost of goods sold)/Sell Price
Mark-up = (Sell Price – Cost of goods sold)/ cost of goods sold

An example:
Sell Price = $167
Cost of Goods Sold = $100

Gross Margin = (167 – 100)/ 167 = 40% Gross Margin
Mark-up = (167 -100)/ 100 = 67% Mark-up

Can you see how this kind of confusion could lead to trouble?

By the Way....
Some people mistakenly substitue gross margin for gross profit. I don't like that habit either. It implies that distributors actually get to keep a significant piece of those gross margin dollars, but that is a different story.

Thursday, July 29, 2010

More Free Benchmarking Information

A few days ago we posted on Benchmarking your sales growth... and getting the information for free. Below is a recent (and more detailed) listing posted today by Modern Distributor Management:

Here's a quick synopsis of sales trends for public distributors and manufacturers. Second quarter 2010 is compared with second quarter 2009. (Find specific news about the largest distributors and manufacturers on MDM's Company News page: Find sector-specific news here:

All of these distributors are MDM Market Leaders. Find the list of top distributors in eight sectors, including 2009 sales trends, at

•DXP Enterprises: Up 6.6%
•Airgas: Up 7% (6% organic growth)
•Fastenal: Up 20 %
•MSC Industrial: Up 28.5%
•Grainger: Up 16% (9% increase in the U.S., excluding acquisitions)
•Bossard: Up 18% in first half
•Builders FirstSource: Up 20.5%
•Wesco: Up 8.6%
•L&W Supply: Down 12%
And some manufacturers:

•3M: Up 18%
•Textron: Up 2.7%
•Illinois Tool Works: Up 20%
•Alfa Laval: Down 2%
•Zep: Up 24.4%

News from another source ----
This just came in from Rockwell Automation....
Sales for the quarter increased 25% and Rockwell's operating margin nearly doubled

Tuesday, July 27, 2010

Industrial Vending in the Age of thte Red Box

I can’t really remember when I saw my first “Red Box”; it probably wasn’t all that long ago. But over the past few months, these things have become a part of my environment. I see them everywhere – at the local Walgreen’s, in the front entry of my neighborhood grocery store and at busy convenience stores. And, last week, I noticed one along side an interstate McDonald’s.

For those of you who spent the past 5 years holed up in a hermit’s cave or incarcerated in solitary confinement, the Red Box is a refrigerator sized vending machine that dispenses rental DVD’s. What makes the machine cool is:
You can locate and reserve DVD’s over the internet
There are 5-6 of these machines within a few miles of my house. I can see which movies are available at the machine standing at the Walgreen’s a half mile from my house.

You can rent from one location and return to another
You can rent movies while traveling; basically watching movies as one hops from machine to machine across country.

Your credit card works as your id
No new cards to carry, no application for membership – immediate gratification is the watchword of the day.

What does this have to do with Industrial Vending?
First, technology like the DVD renting Red Boxes is driving technology forward – and doing so fast. Secondly, our customers are being exposed to more and more advanced vending – this isn’t “old school” candy machines. Instead we refer to internet connected, intelligent machines with the capability to track purchases and buyers.

Except in the largest of facilities it probably doesn’t pay to have crib supply attendants on duty 24 hours a day, 7 days a week. And, the success rates of “cribs” with a single shift attendant have been less than successful (especially when maintenance and other employees work other shifts).

In an age when CFO plans call for tighter controls and closely monitored spending, understanding who consumes which supplies is important and reducing theft/shrinkage is an added benefit.

Allow me to share a story to illustrate the shrinkage factor. Many years ago I held the supply contract for flashlight batteries into a fortune 100 manufacturing facility. We had just renegotiated the supply contract and changed the supplier of batteries from one industry leader to another. In mid-February, I received a call from a purchasing analyst – the new batteries were wearing out much faster than the old batteries. She had both statistical and anecdotal proof for her claims. The use of the new batteries had surged in the month of December – about 30 days following the switch. When she checked with facilities people, their only answer was the new supplier batteries weren’t as good. But here’s the kicker. When we looked into usage for the facility, we discovered battery usage peaked every December. Hmmm, could it be that when batteries didn’t come with the goodies Santa delivered, usage at the facility jumped?

Vending machines allow for consumable usage to be precisely measured. It allows for management to understand precisely which department used the product. And, based on preliminary research – these machines are affordable and easy to implement.

We are working on a study of the practice and will soon have some results for you.

Sunday, July 25, 2010

“Money for Nothing, and Benchmarking for Free”

Dire Straights’ 1987 song “Money for Nothing” just blasted out of my office stereo – concert volume drives creativity. It put the gears into motion. Wholesalers today live in a charmed time. Oh, we hear plenty of negative stuff – the Recession, off-shoring, closing of US manufacturing and the like. But we have tools unlike any and all of our forefathers in the industry. They say information is money – and “now days”, we get it for nothing. Here’s my take on “Benchmarking for Free”.

So many of the folks I talk to deal in the industrial market – the great US manufacturing sector. The recovery is under way and their business is improving. The problem is they really lack any solid understanding of how much things have improved. Their business can be up 10% but they don’t really know if this is good, bad or otherwise.

To combat this I suggest you benchmark yourself against some of the public companies who serve the same market (in this case I selected Industrial but it could be any market). Create a Google Alert for each of the companies. When their current business trends are published you have benchmarking for free.

Here is my benchmark list for the Industrial Market (Second Quarter 2010 data):
WESCO - Electrical Wholesaler
Sales to Utility Market Down 10%
Sales to Industrial Sector Up 25%

Fastenal – Fasteners and Industrial
Sales to Manufacturers Up 30%
Margins are higher

DXP – Industrial and PT
Sales Up 15.9%

WW Grainger – Industrial
Sales Up 14%

Does this information provide a 100% accurate picture of the Industrial Market? No, there are things like growth through acquisition and the occasional Wall Street trick thrown into the mix. But it does give you a starting point for your own benchmarking.

My parting comment – If you are not enjoying mid-double digit growth from last year, you probably need to start investigating. If you are growing less than 10%, do it now. Somebody is silently taking away your business.

Thursday, July 22, 2010

Dangerous Deals in Automation

This has nothing to do with distribution and everything to do with distribution. I decided to publish it here so you might pass it along to those folks you know who fancy themselves as "bargain shoppers".

My prioritization of safety concerns looks something like this:
1. Theoretical danger
2. Potential danger
3. Real and Present danger

Theoretical danger is an event that could theoretically happen. For instance a meteor could theoretically streak from the sky and whack me in the head. They say a meteor killed off the dinosaurs – the same could happen to the last of the Hurtte dynasty. Theoretically, that is.

Potential danger is more likely to occur. If you live on the San Andres fault, there is a potential for earthquake damage. To not consider this as a possibility and develop future contingency plans would be foolhardy.

Real and Present danger equates to immediate danger. Danger which requires a change in habits or actions falls here. Anyone who ignores this kind of danger stands in harms way. And, in my book – if they choose to ignore the danger, I have a hard time sympathizing with them. Here some examples of real and present danger: ignoring a hurricane warning, inserting metal objects in electrical receptacles and not installing anti-virus software on your computer.

The Gray MarketBy now you are probably wondering why I have taken the time to outline my little manifesto of danger. For years experts have harped on the dangers inherent with purchasing automation and control products on the gray market.

For those of you unfamiliar with the term, the grey market consists of sellers who are not part of the normal channel to market. I am not saying these people are crooks, villains or scoundrels – they just aren’t part of the authorized (and regulated) channel to market.

Here’s an example from my personal life. I have wanted a high end USB-based sound card and microphone to create training materials for my clients. I did some research and discovered these sell for about $150 dollars. Then one day, I noticed a company providing them for less than half that amount. They advertised authentic, new in the box equipment and the price was almost unbelievably low. I made the purchase and received the product - the box was new, the product was new, but the documentation and user’s manual were not in English and the power supply was missing. Somewhere along the way, this merchant had acquired products whose journey through the supply chain was a bit shaky.

To this day, I don’t really know if what I have is real, counterfeit or somehow lacking in quality of recording or manufacturer. My bargain – may or may not actually be a deal. The point becomes: with the grey market one never knows if it’s a deal or a steal. I would escalate grey market purchases to potential danger.

The Real Danger of Malware in Automation
Experts have been predicting that someday hackers might push their way into the world of automation and related products. For most folks this was a theoretical danger. It could happen, it might happen someday but not something we changed our behavior over.

I believe this danger just jumped two notches on my own danger meter. Here is why. Recently, global automation giant Siemens announced the detection of malware designed to detect Siemens Simatic WinCC and PCS7 programs and their data. The malware which resembles a “Trojan” virus is capable of sending process and production data via an internet connection it tries to establish (according to Michael Krample a Siemens media relations director). This is not the first time something like this has happened, but it is the most transparent in its news release.

This thing has the potential to create havoc in manufacturing environments. The little bug could steal sensitive data, purposely destroy expensive production equipment and cause massive human suffering – chemicals, fires, hazardous spills and loss of life.

Who creates these heinous inventions? Your guess is as good as mine. In this particular case, a common use for the equipment involves “SCADA” applications commonly found in water treatment. National security experts have identified the safety of our drinking water supply as a point of concern. Organized and well funded terrorist groups are probably brainstorming on this topic as we sit here today.

The Combined Danger of Grey Market and Malware
The malware threat in software is just one side of the danger. Most of today’s automation technology hardware has resident firmware. These are complex little programs that tell the chips how to perform. And, it is pretty easy to alter the program onboard resident firmware. When automation hardware falls outside the normal channel to market, you can never really know, from where it comes and if it has been altered. That really nice guy on the other end of an Ebay transaction might be honest as the day is long. Or, he might be a whacked out sicko with a desire to be the biggest thing since Dr. "Ted" Kaczynski of Unabomber fame. You don’t really know. But load your system up with a sabotaged component and all hell could break loose.

What amazes me is the resiliency of the market for this type of stuff. A recent trip to revealed tens of thousands of this type of product posted for sale (Allen-Bradley, Siemens, Telemecanique and Omron, all the major brands were represented). Just last week, I heard of yet another “hot shot” buyer from a municipal solid waste center who saved a bundle on the purchase of equipment for his new upgrade. When I started to outline the dangers, he routinely dismissed the situation with, “Its up and running – no problems so far.”

Now, a Special Message to you Bargain Shoppers
When you’re playing with dynamite, no body cares – just as long as you’re 100s of miles from the nearest other person. Blow yourself up and it’s only a minor deal; blow up others and it’s our job to stop you. And you definitely are playing with dynamite around others.

If you save a nickel and injure someone else – you should go to jail (and for a very long time). If you plant this stuff into somebody else’s factory and they loose production time, you should be forced to pay.

Why not join me in swearing off “grey market stuff”? You’ll feel better because of it. And, if you don’t – I volunteer to serve as an expert witness against you when you get caught. Trust me, you will get caught.

Friday, July 16, 2010

The Changing Face of Distribution

Recessions accelerate changes in way we do business. Yesterday, an old friend made the comment that his (distribution) business is doing well, but it just doesn't feel like 2007. Things were good but different. The recession has put a mark on our world.

A few months ago a survey of the sales management teams of industrially oriented distributors revealed that 72% planned to expand their market by adding to their product offerings - Sell more stuff to the same people. This manifests itself in Electrical Wholesalers adding safety products, Industrial Distributors taking on electrical products and Power Transmission Distributors marketing new lines of Automation and Mechatronic technology.

At the same time, distributors are changing their style of business. Case in point two recent events nationally known distributors Kaman Industrial Technologies and Graybar Electric.

Kaman Industrial Technologies, a distributor of industrial parts just announced a sales/marketing collaboration with Predictive Service, a provider of predictive maintenance and engineering services. Kaman, noted more for logistical rather than technical prowess, is pushing into a cutting edge field and providing themselves with opportunities to build stronger customer connections.

Just a couple of months ago Kaman made a similar move by purchasing Automation Technology Specialist - Minarik. Minarik operated 20 highly focused and very technical locations across the US. The combination of logistics and technology expertise is a game changer.

Across the continent, Graybar Electric of Canada just purchased Ontario-based AVAD Industrial Sales. AVAD is a provider of advanced automation and process controls. Regardless of the occassional hype to the contrary, Graybar is primarily a seller of electrical and data-communication commodities (think metal conduit, circuit breakers, wire, and computer communication cable).

What does all this mean?
Well for one thing, those small independent distributors who used technology as their selling niche will need to kick-up their performance a notch or two. We will see a battle royal between distributors protecting their turf and the hoary invader.

And, the distinctions between distributors are breaking down - change is accelerating.

Sunday, May 2, 2010

High Velocity Radio Interview

High Velocity Radio Interview

Posted using ShareThis

Frank on High Velocity Radio

Radio isn't what it used to be. The following is an excerpt from a half hour interview I recently did for High Velocity Radio.

Listen to it here.

If you would like a full copy of the interview on a disk that you can listen to in your car, email us. It is absolutely free.

Cost up Pricing - The Monster that Devoured Profits

The distribution business has a beast looming in the back of the closet. It lurks in your inside sales group, thrives in your sales department and sucks the life’s blood from your bottom line. What is this savage? It’s the practice of cost-plus pricing. Every industry has one - for the electrical wholesaler it’s cost plus 20, or others it’s cost plus 10, 20, 25 or 30%.

As an industry we have talked about cost-plus pricing for decades, yet it manages to survive. If your organization doesn’t have a clear cut process for pricing, it’s still hiding in the deep recesses of your company. And, it needs to be killed – before it kills you.

Here’s how it works. A customer calls in and asks one of your employees for price and availability on a product. Somehow, someway they believe the ‘system price’ shown on the computer is too high, inaccurate, not supported or non-stock. They quickly look up your cost and then - the monster appears. Instead of measuring the cost of ordering, freight, logistics and all the other value we provide as distributors – they just go cost plus 20.

In our own research, many of these cost plus 20 orders actually turn into cost plus nothing. This is especially true when we think about non-stock items where freight or special handling is required. In our work, we see literally hundreds of occurrences of profit potential being given away. And, worse yet, often negative revenue is produced. We’ll cover this phenomenon some other time, but for now let’s just look at profit potential.

Candid conversations with our manufacturing partners indicate there’s a problem with giving distributors ‘really hot’ into stock pricing. Why? Because some untrained inside sales guy can screw up a whole market by using their favorite cost-up number. The option for really meaningful margin gains flies out the door, because the distributor’s own people allow the monster to dominate their thinking. Still not convinced? What if I told you last week we spoke to a company president who ‘bribes’ her IT person to add 15% to the cost of a line where she had negotiated a really great price level. It’s been nearly 2 years and not a single salesperson has complained – and her business is growing.

I know what many of you are thinking. It doesn’t happen here. Put your own organization to the test. Sort the last week’s customer invoices and look for common gross margin percentages. I would be willing to be a shiny new nickel that you will discover a whole string of orders with margins of 10, 15 or 20 percent. In many instances it will be the same guy in the quotes department or inside sales group who has gotten in the habit of assigning 20% to far too many orders. The question you need to begin asking is; why?

We already said, sometimes this type of pricing is applied because the computer price isn’t accurate. Other times the product is a non-stock and your people are too busy to find the right price. Regardless of why, the real question is how much money are you willing to toss because it happens?

We recommend a process. Measuring the process gives you the opportunity to review and reeducate your people. Ask, why 20% instead of 21.3, 23.25 or 24.75 percent. Customers don’t think about cost-plus for products. The market didn’t somehow form around this cost-plus monster. We created it - the only people with access to our costs work inside our own business.

Build a Process
A process gives the opportunity to go uncover some of the issues lying a below the surface. When employees know management cares, they go a little further to determine the right price. The right price equates to more bottom line profits.

Here are some steps to driving a wooden stake squarely into the monster that devoured profits:
1) Inspect your current situation. Look for instances of even digit cost-plus pricing – sort them by customer, by salesman, by customer service rep, by product line. Nothing beats data for understanding your real situation.
2) Reeducate your staff. Cost-plus pricing is a decades old practice. Talk about the importance of understanding value with your whole team. Coach individuals when you see even digit cost-plus margin percentages.
3) Fix computer issues. Has your computer pricing gone to purgatory? Identify lines with issues and fix them.
4) Tighten up pricing authority. If everyone has the ability to reset price levels, evaluate their skill sets. I believe one person per branch should be the “go-to” for all pricing authority.
5) Establish a procedure for price adjustment. The term czar seems to be in vogue. Why not jump on the bandwagon and name your own ‘pricing czar”. Establish a plan for everyone to bring their pricing issues to a single person.

The tools for building pricing strategies have blossomed in the past few years. For instance, Strategic Pricing Associates of Cleveland, Ohio, has developed tools for pulling data from your system and scientifically evaluating your pricing direction. Their product “bolts” onto your business system and provides real live direction to your process.

Is all of this worth the effort?

David Bauders, who leads the Strategic Pricing organization, has gone on record stating the process developed by his organization can add 2-4 margin points to your business in 90 days and he has a number of distributors who back up his claims. Let’s calculate the payback – if you are a $100 Million dollar organization and you get just a two point improvement – that works out to a cool couple of million bucks.

If you have questions about how any of this works, give us a call. We have seen the monster. We can help.