Wednesday, April 27, 2016

Why Use a distributor?

Yesterday, a new manufacturer asked me a straightforward
question, “Why should I use a distributor?”  He bore no malice to the world of wholesale distribution, but, as he contemplated the company's future path to the market, he righteously wondered about the whole distributor model.  Clearly, the question demanded an answer.  Fortunately, there are a lot of answers. 

The Old Answers
There are a ton of old-school distributor justifications which are still tossed out.  For instance, I could have gone into the finances of the whole distributor thing.  Distributors pay their bills and most pay them on time.   This can be huge; however, in a world moving toward corporate credit cards and other financial instruments, the credit subject is getting a little worn out.

Local inventory used to be a big deal.  Last week I blogged on the changing role of inventory in a world crowded with next day shipping capabilities.  While I still believe inventory is important, for this manufacturer’s product it was viewed as only marginally interesting. 

Customer Intimacy takes on a Different Meaning
Customer intimacy might be something we can still hang our hats on, if we actually possess a few basic components.  Back in our fathers’ day, customer intimacy meant we knew the people, had personal relationships with them, and they liked us.  Typically, this also meant business flowed our way.  In our environment, customer intimacy translates into knowledge about the customer. 

The following is a short list of points we should know about the customer:
  • Specifically, how does the customer make money?  For instance, a few weeks ago we wrote about OEM’s looking to spare parts as a profit center.  If we instead referred to contractors, wouldn’t it be nice to know what kind of projects they found most profitable and understand why?
  • What processes does the customer use in their business?  How do materials flow?  What portions of their business are highly automated?  What are the training requirements for workers?
  • Are there issues where the customer is in search of new technology to advance the way they provide products?
  • Do certain components of the customer’s business create ongoing issues?

Simply stated, we know the inner workings of the customer well enough to provide “targeted opportunities” with a high probability of success.  Distributors should be able to look at a new product and quickly rattle off the best candidates for the manufacturer’s product.  This is something we need to be able to do more efficiently than a telemarketer working a list or script.

Product Expertise provided by the Distributor
Knowledge-based distributors bring product expertise to the customer.  They help select the right product from a confusing catalog.  Solution providing distributors work with their customers to design the customer’s future.  They assist in developing specifications for products which will serve the customer well into the coming five years or more.  These activities multiply the manufacturer’s time.

Think about the value brought to the manufacturer when a distributor does one of the following:
  • Gets a product specified for a new application.  The sale continues for years creating opportunities for more sales, repair part MRO sales and many others which bring value to the manufacture for years following the transaction.
  • Serves as the first line of product support.  New customers need hand holding.  They have issues reading the user’s manual.  They get stuck midway through the installation.  A good distributor takes care of many of these calls and raises the customer perception of the product.
  • Trains customer people on the product.  Stating it once more for the record: For distributors, training is the new marketing.  When distributors train customers on a manufacturer’s product they create a pool of workers ready to apply the product.  With a highly mobile workforce, trained customers move to new organizations and bring along their application knowledge.
  • Amalgamate products to provide a solution.  Many new manufacturers cover a narrow band of the customer’s need.  In the case of the guy who asked my original question "why should I use a distributor?", I wonder how many customers would even give him an appointment.  His product was cool and neat, but alone it just didn’t solve that big of an issue for most customers.  When a distributor adds his product to a total solution, he wins. 

How do you stack up?
To answer the question about distributors in the channel, we need to think about where we fit into the equation.  If you’re a distributor and all you really do is shuffle paper (as well as phone calls, emails, quotations and requests for support) back to the manufacturer, I can’t really think of many good reasons for you to survive in the future.  If you provide the skills outlined above, I am fairly confident you will be around for the long haul. 

I know I missed out on a good many things you may do to create value for your suppliers.  Share them and I will send you a postcard from Iowa.

Monday, April 25, 2016

Inventory on the Shelf vs. Inventory When You Need It

Over the years I have heard some pretty amazing things said about distributor inventories.  Let me share a few of these:
  • A peddler can’t sell from an empty wagon and a distributor can’t sell without a full warehouse.
  • It’s the distributor’s job to provide local inventory.
  • If the distributor doesn’t stock your product and lots of it, you’ll never get its full commitment.
  • We want distributors to prove their commitment to our company by placing a large stock order up front.
  • The distributor’s stock provides a margin of error for logistics problems at its suppliers.

While all of these probably made sense back in the day, those days are finito, over, dead and gone.  Or at least they are for the knowledge-based distributor.  Astonishingly, I still hear most of these words of wisdom bantered about; mostly by the sales teams of distributor supply partners.  What’s really bizarre is most of these folks never took the time to think seriously about their comments.

Let’s shoot a few holes in these antiquated theories.  First, a peddler selling from an empty wagon story predated Sears and Roebuck setting the retail world on fire by selling from a catalog.  It definitely came years ahead of Amazon Supply where many of the items are shipped directly from somewhere other than an Amazon warehouse. 

The local inventory argument…
The distributor role in local inventory is critical, but things have changed.  Allow me to share a story.  Back in the early days of my Iowa career (1978), I worked for a manufacturer with a plant 217 miles away.  We had a warehouse in Iowa to serve emergency needs.  Why?  Because (and I know this fact will be hard for Millennials to fathom) back in the days before Fed Ex and UPS arrived in Iowa, shipment time from Milwaukee to Davenport, Iowa was 4-5 days. 

The ideal local stock today would be items required for immediate use by the customer.  Pulling an example from the Automation Industry, I can’t even imagine a customer decided during lunch that he needs to start and complete an automation project during the afternoon.  The human time required to engineer and design the system requires days, sometimes weeks to accomplish.  This lag typically provides plenty of time to acquire and receive any parts and pieces needed to finish the job. 

What might be an immediate need for the customer and thus justify inventory?  Common spare parts for emergency breakdowns qualify.  Consumables may be justified.  Anything a customer requires on the spur of the moment are important.  OEM customers often place blanket orders with monthly estimated usage quantities, typically these are easy to drop ship, but things happen.  Distributors need to be prepared to immediately replenish failed items and handle those instances where larger quantities are required with short notice.

Distributor commitment tied to inventory?
Somewhere, somehow, manufacturers came to the conclusion distributors were more committed to suppliers with a ton of inventory sitting in the back warehouse.  Perhaps it appears this way on the outside looking in.  Here’s an example.  Friendly Frank’s Distributing has a great relationship with Acme Manufacturing.  Over the years, Friendly Frank (FF) and his team have developed a number of mutual customers.  Acme helps by providing leads, support and a quality product.  Customers make many purchases and, as described above, FF finds it necessary to carry more stock to service those sales.  To the supplier on the outside, it might appear as though the inventory drives the selling activities.  In reality, it is the other way around.

A few manufacturers, who are just launching their products, depend on distributors to assist in funding their launch.  Often, they covet the “initial stock order” as a tool for driving their profitability.  While a nice stock order does provide them with instant cash, one can only wonder what happens if the distributor stocks the wrong mix of product or, worse yet, the market doesn’t embrace their new products.  The whole thing turns into a force fit situation.  Distributors clamor for expensive stock rotations.  Product ages on the shelf creating issues with revision levels and old dusty boxes.

I have suggested this idea a couple of times without much acceptance, but wouldn’t it be easier for the distributor to pay something resembling a “franchise fee” which provides funding to the manufacturer without the hassles of inventory issues?  Perhaps this fee would enable the distributor to get better margins in the future.  Or maybe, the manufacturer could provide some other benefit to the distributor. 

If not inventory, how does the distributor show commitment?
For knowledge-based distributors commitment comes by way of investment in (in order of importance) product knowledge, application skills, careful selection of target customers and customer education.  By definition, knowledge-based distributors don’t just ship boxes.  They wrap every transaction in their unique blend of customer application and product knowledge. 

Covering breakdowns in Manufacturing Systems and Logistics…
Covering breakdowns in manufacturing systems does justify inventory.  However, we should set some parameters.  First, we’re not referring to breakdowns with regularly moving “A” products.  In today’s manufacturing environment, these come quite rarely.  Instead, the issue often falls with items which fall further down the line.  Items which are sometimes referred to as “pre-engineered;” the design work is finished, but the build is still done on an as needed basis.  The factory doesn’t necessarily stock all of the parts and pieces of the product so lead times can be lengthy. 

For most distributors, keeping a spare of this type of item is dependent on customer mix and customer usage.  To provide an example, a distributor in Gary, Indiana may have enough steel plants on its account list to justify a part specifically developed for a steel mill, but the guy in South Texas, with only a single small steel facility, may not.  Referring to the recent massive rainfalls in Texas, what happens when that single plant is flooded by 15 inches of rain in a two hour period?  Factory delivery times hamper restarting the plant. 

Most times, this type of emergency requires plenty of scrambling: Calls to the manufacturer, expediting of component parts and occasionally mad scrambles by distributor and factory people alike to find a replacement somewhere.  But there is an option…

A new solution is pushing to the forefront…
Distributors have looked for easy ways to share inventory for eons.  Some of the more progressive manufacturers have created plans for distributors to report inventory back to a central point for better sharing.  In spite of great enthusiasm along the way, the plans have mostly fizzled out with time.  For the most part the reason is simple, the work required didn’t justify the results.   At the same time, I have observed several informal distributor networks develop plans for sharing inventory.  Typically, these are established from the top down at the distributor, owner to owner or president to president.  These guys decide to attack the issue by promising to help one another.  They work, but often the cost of interaction is high because nearly every call involves some kind of touch by high level folks who are often hard to reach on a moment’s notice.  Good idea, but way too much human interface.

Last summer I became aware of a fresh approach to the issue, WarehouseTWOWarehouseTWO provides internet technology to an age old issue and takes things a few steps further.  Here’s a short list of the things I like:

  • Distributors can get started for Free.  It’s the “freemium” model applied to distribution.  It cost nothing for a distributor to purchase from other distributors.  And, the costs to sell products is nearly free.  For instance, a distributor can list up to 1,000 items online for less than $70 per month (10,000 for $99 per month.)  Plus, there are no transaction fees; the cost is the cost.  A low monthly subscription fee is the only cost to use this service.
  • The selling distributor sets the price.  Got overstocks, you can sell them for distributor cost less 10%, 20% or any other price that makes sense.  Other distributors can quickly shop for bargains and help you balance your inventory.  If you normally stock a “D” item and want to improve your turns, you can sell the product for cost plus 10%, 20% or “whatever.” You set the margin.
  • This is a Distributor only program.  There are no concerns with your local end-customers “trolling” for bargains or checking out their local distributor’s price on products just purchased. 
  • The site automatically limits interaction to only other authorized distributors.  Many distributor contracts prohibit the sale of products to non-authorized distributors.   This is not a source for bootleg materials.  Instead, authorized distributors share inventory within the authorized channel only.

One more point that appeals to our industry is this: Manufacturers can sponsor distributor interaction.  This allows the manufacturer to see what’s in stock throughout its distribution channel without massive IT outlays and without the constant maintenance tied to creating such a site.

Importantly, this outlet provides the subscribing distributor the option of automating the system.  You can easily send broadcast messages out to other distributors, simultaneously search for multiple items or establish a “bargain hunting” list.  And, if you really want to resort to selling on the web, WarehouseTWO allows for uploading a “browser searchable” list that anyone can locate using Google (or Yahoo or something else). 

Finally, I have had conversations with a half dozen distributors already using this service.  They report great results and are quick to report the value is getting better every month.  Why?  More distributors joining the program.  One was quick to point out that nearly every new distributor that joins the network adds a few more new items to the inventory.  One distributor was so enthusiastic he asked me to get the word out to everyone.  Consider it done.  Check out WarehouseTWO at


Friday, April 15, 2016

Analytics Have Become a “Must Have” Tool

It’s Thursday afternoon, I’m on the beach in Florida with my friends, and I’m energized.  
Let me share…

I just finished spending the afternoon with attendees of the Association of High Technology Distribution spring meeting where the topic of the day was driving more value from your ERP system.  But let me digress for a moment…

During the course of the last couple of downturns, analytics have gone from the growth tool of a few progressive distributors with a technology bent, to a “must have” instrument for longer range survival.

To be clear on this survival thing; I’m not saying lack of analytics will put you out of business today, next year or even over the next five, but I do believe companies with analytics are getting more sales during this year’s downturn.  They are also capturing customer “wallet share” today, which will grow when economic winds blow in a more favorable direction.  They are more productive in gross margin.  They are likely finding it easier to develop new salespeople as well.

The key to analytics for distributors comes via business data served up by the company’s ERP System.  Since literally everyone uses an ERP Business System, we should be able to assume data is readily available.  But, it’s not as available as you would think.

Based on my observations, only a few distributors have the ability to instantly access data from their ERP system and review it in meaningful ways.  Those who have invested in “smart front ends” for their ERP using systems like MITs, Sales Management-plus or other organizations seem to have more and better reports and make more analytical data.  But the data is there, lurking just below the surface.

Real Networking and Benchmarking
The Association for High Technology Distribution, hosted a round-table event to facilitate an exchange of ideas tied to the use of ERP systems.  This was pure networking the way it should be done.  Two groups of non-competing members of the distributor community talking about what worked, didn’t work and some of the tricks they had learned along the way.

While the groups didn’t follow this list of questions precisely, they talked about the following points:

  • What is your current computer system and how long has it been in place?
  • If you had just one thing you could change about your computer system, what would it be?
  • Have you ever attended the user’s group meeting of your software vendor?  
  • Did you see value in attending?
  • Based on your experience with your system, how long does it take for a new inside sales/outside sales person to master the system?
  • Thinking about your routine (daily, weekly, etc.) activities, what reports could you NOT do without?
  • What reports do you wish you could pull from your computer system?
  • How long does it take for you to get the right information by way of a report?
  • Does your system make any “upselling” recommendations to your inside sales people?
  • Does your system have CRM functionality?

Real information flowed from member to member.  I could see lights going off and people scribbling down notes as the meeting progressed.  The good stuff was flowing around the room.  Nearly everyone left the meeting with solid takeaways.

Sometimes the manufacturer’s data is better
Many of the attendees were fresh from a similar meeting conducted with manufacturers and distributors discussing best practices with “Reverse POS”.  For those of you who aren’t familiar with the concept, here’s a good description:

"Reverse POS is an analytical tool provided by manufacturers to distributors who provide them with POS data.  Often the data is benchmarked against nationwide statistics and offers objective tools for identifying customer opportunities for the distributor.
What's in your sales toolbox?
One such tool is product segmentation.  Based on a show of hands, most distributors have a difficult time segmenting manufacturer’s products into component parts (with examples being Electromechanical Contactors and Starters, Proximity Sensors, Photo Sensors and Power Supplies.)  This bit of analytical data (commonly called GAP analysis) is a huge tool for distributors; particularly during down economic swings.

Based on the comments of one distributor, a significant amount of their business growth can be traced to using the data provided by a select group of manufacturers via reverse POS.  One couldn’t help but notice the buzz recreated during the network session following the comment.

Analytics are must have tools
Previously, I mentioned that I was energized.  Here’s why.  Distributors and their supply partners are getting together to break down the analytics barrier.  Even distributors who were once cavalier in their attitudes around the topic are taking steps to improve their game. 

Quoting Allen Ray, who I view as one of the thought leaders in distribution and regular contributor to Electrical Trends:
If your company bought an ERP software system 5-10-15-25+ years ago and set it up like most did, you may have built in limitations because the national average for ERP productivity usage is about 40%. This means that you may only use 40% of its capability.

In my mind, the 40 percent Mr. Ray refers to comes centers mostly on the operational side of distribution, things like entering orders, handling inventory, billing and accounting.  The missing 60 percent is the ability to pull data and make data driven decisions. 

Thankfully, distributors are upping their ante on the process.

Before we go, what are today’s must have analytics
Here is a quick list of analytic related reports every distributor needs today:

  • Product segment purchases made by customer – this allows the distributor to identify what’s missing from customer purchases.  It enables you to sell more to existing customers (which experts report is five times easier than finding new customers.
  • Product segment sales by salesperson – A quick report to determine if seller "Frank" is not comfortable or effective in selling all the products you have for sale.
  • Comparative sales and gross margin numbers for every customer showing the last several months and the same numbers for the time period last year.  Why?  Because it’s embarrassing when a customer flips their business to a competitor and you don’t notice it for six months.
  • Purchases of new products by customer – we are constantly launching new products but often lack an easy feedback mechanism to determine if our efforts were fruitful.
  • Purchases by new customers – discover when you break the ice with a customer.  This allows you to track sales progress and explore what products are the door openers to your business.  

Got questions?  Analytics are on our mind.