Friday, June 24, 2016

The Future of Distribution: Q&A with Frank Hurtte

Looking ahead in Distribution

Perhaps it’s the economy, maybe it’s the weather, could be a coincidence, but a lot of folks are wondering what the future might hold for distributors. Just to give you a flavor, during the past couple of weeks I have heard the term “disintermediation” used as a looming threat from some credible sources.

The following are a number of questions forwarded to me for commentary by a writer for Electrical Wholesaling. These will be combined with the expert opinion of others in the distribution industry and published sometime in the coming months. I will share a link to the complete article when it is available, but in the meantime, here are some of my comments.

Looking ahead 5 years in the electrical distribution world, some estimate fewer than 200 distributors will exist. What are your thoughts?

First, I believe the distributor model will change. The “safe” size for a “garden variety” electrical distributor has grown much since my first introduction back in the late 70s and it continues to accelerate. Looking back, in the 70s a sub-$10M electrical distributor was quite viable, by the mid-90s the number had grown to about $20M, today the number is probably $50M but in five years anything less than $100M will feel the pressure.

Let me make a point, I don’t see small distributors dropping like flies. Instead, I see an increasing number of “baby-boomer vintage” owners running out of steam and realizing the business probably can’t be passed along without severely inhibiting the operating capitol.

Further, I see a lot of distributors with business models that have morphed into something outside the normal value-add product model. They have added engineering, fee based-services and have also imbedded themselves into their customer’s process in a way which builds their importance to both customers and manufacturers. Their model crosses over the line into what used to be viewed as the duties of manufacturer’s reps and systems integrators.

Back to the question, I believe consolidation will continue. But, I believe the 200 number is pretty low. Over the next five years, I see the number shrinking but something like 25-30%.

How will the independent distributor survive as it competes against its larger national rivals, many of whom have national contracts? Do you predict a sharp increase in M&A Activity?

First, there will be a sharp increase in M&A activity. For instance, in the past six or eight months there has been a lot of activity in the Rockwell Automation channel. I see more of this into the future, along with the issues I have already outlined.

Along the M&A activity line, I see many distributors in Automation side of the electrical business who are approaching retirement age without strong succession plans. Revisiting the old adage, “you can’t take it with you.” In the next few years, a lot of these owners will face the need to do something. The bigger and aggressively mid-sized distributors in the acquisition mode offer up an exit strategy which may be easier than a succession strategy.

Competing against much larger distributors will require a shift in business model. If a small distributor goes head-to-head with a larger competitor on product availability, price or e-commerce capability they will lose – period. However in the past, larger companies struggle to provide a customized set of services to closely match customer needs. This is particularly true in highly technical areas. I don’t see technology getting easier anytime soon, instead I see technology growing more pervasive.

Finally, some of the smaller distributors will be propped up by manufacturers because the larger guys do a sloppy job of introducing new products. Regardless of all the hoopla, the story from distributor supply partners has remained constant. The larger guys prefer to service the demand for products rather than assist in creating market demand by finding applications for new products or discovering innovative applications for existing products.

Some “traditional” industrial distributors are trending towards buying companies to complement their current business. Wesco, for example, has been widely known as an electrical distributor, recently bought a safety distributor. They are now an MRO supplier/supply chain strategist. Do you see this as temporary or a growing trend?

In the future there will be very few “pure electrical” distributors. We have already see this as distributors launched into the data-com world a little more than a decade ago. Today we see electrical distributors in the safety, motion control, automation, fluid power, power transmission and the industrial market. Over the course of time, this will accelerate.

Why is this happening? First, for solutions-based distributors, customers are demanding it. They want to buy a full solution not just the electrical components. For MRO/Logistically focused distributors, the emphasis is similar; providing a larger market basket of goods to their customer base.

In the past, distributors have launched out into adjoining lines of trade only to discover that breaking into the field was more difficult than they imagined. For most the move took five years or longer. And, during this time, they struggled to justify inventory. And the product/application expertise required to be credible in the market ate into their bottom line.

Acquiring a distributor already in the space makes more since because it creates a cash flow during the ramp up years. Further, acquiring brings existing relationships with first tier supply partners which are difficult to build from scratch. Lastly, buying someone also brings along the needed expertise to support the sales efforts and drive credibility in the market.

How important will Big Data be for distributors?

Distributors will need analytics to produce maximum results into the future. In general, the group gets failing results today. Pricing systems are poorly maintained and rarely use state of the art process (like David Bauders’ Strategic Pricing Associates) to find the proper balance between pricing sensitivity and gross margin. Sales efforts are mostly poorly analyzed as most distributors still rely on time consuming manual manipulation of data.

Further, operational issues can now be pushed to “big-data” process. For instance, many distributors still manually enter customer purchase order information into their systems wasting countless hours of highly skilled workers who could be assigned to tasks with better return.

Considering Amazon Business has focused on logistics and quick delivery, do you feel distributors may overhaul their delivery systems?

First, lots of distributors in the electrical space make customized deliveries without thinking about the type of customer. For instance, they provide free delivery to customers who aren’t really profitable. Lots of times, they roll out their delivery truck for boxes that could be sent UPS for three bucks because the sales team thinks delivery on the truck costs nothing.

Secondly, very few distributors understand what their delivery system costs. Add vehicle cost, fuel cost, driver salaries to all the other variables and you can rack up dollars faster than you expect.

Finally, the local distributor’s biggest differentiator comes with delivering products which are both heavy and lower cost. Amazon might out do us on the 10 ounce sensor that costs 100 bucks, but they can’t handle the bundle of conduit that weighs 500 pounds and sells for 200 dollars. Distributors need to be smart on this. If they find themselves delivering only the heavy (and bulky stuff) without considerable quantities of the lightweight goodies, they are probably losing money.

I see progressive distributors placing a value on deliveries and sometimes charging for big stuff. I see distributors getting better at using all the options available including some of the same advanced logistics as Amazon.

How will all these changes affect the supply chain and the distributor/customer/manufacturer relationship?

We have to understand the Electrical Wholesaling industry is not a way of life, it’s a business model. As soon as manufacturers determine they can go to market more effectively and efficiently through some other model, they will shift their focus. Regardless of their commitment to distribution, loyalty and all the rest, if reaching customers works better some other way, they’ll be all over it. They have to in order to survive.

We have already seen this process in the lighting industry. With LED technology, the lighting market is changing. The lamp companies don’t necessarily need a distributor to sell something that lasts for twenty years. The replacement lamp business will come to a close in the next ten years if not the next five.

Manufacturers will be forced to demand POS data in order to better understand the flow of their products to market and who buys the stuff after it lands on the distributor’s dock. It’s a premise of modern manufacturing.

Manufactures will insist on better analytics from their distributors. In some instances, supply partners will require additional staffing in the form of product specialists, application engineers and professional marketers to drive new product/technology introductions to the market.

How does the buyer fit into all these changes? Will expectations change? The focus used to be product, price and availability. How will buyers change their patterns and what this will mean for “relationship selling?” Will relationships still matter?

Relationships – people buy from the folks they trust. Trust doesn’t necessarily belong entirely to people. For instance, I trust While I am a once in a blue moon customer to the hotel, to, I am a constant repeat customer and am rewarded as such. I believe people trust Amazon because they rarely screw up orders and when they do they fix the issue with zero hassle. Distributors must get the service right and eliminate issues that erode trust.

Pure relationship selling still works for small contractors and other small to mid-sized privately owned companies. In this environment, a relationship with the owner/operator/manager still counts.

Trusting relationships at Fortune 1000 sized companies is fraught with danger. When the chips are down and the buyer must pick between you and keeping their job, you’re out; in a heartbeat.

For larger customers, selling will be about providing an ongoing economic advantage to the customer. This basically boils down to a few items, can the distributor:

  • eliminate people from the process? 
  • help improve productivity?
  • assist in eliminating waste?
  • drive down utility or other costs?
  • assist in meeting governmental regulations?

This is an economic sell and requires selling to different people.

In the future, upper-quartile distributors will excel at building relationships with upper management people who understand the economics of the sale. Today, very few distributors nurture this level relationship.

An electrical distributor who relies solely on the sales of electrical products may not survive. What should electrical distributors be doing to try and position themselves for growth-and survival?

Selling electrical products “only” will not kill a distributor, if they are large, they can leverage their suppliers and provide pricing which is near best in class. For small distributors, tying to electrical products “alone” is a recipe for quick financial disaster – most likely during the next major recession. For mid-size distributors, the strategy will equate to longer term stagnation. If the ownership is 50 plus, they will most likely survive till retirement; just don’t encourage the kids to get into the business.

With the blending of automation, electronics, etc. in the electrical industry, what effect do you foresee this having on the marketplace, specifically do you see new competitors or new forms of competitors on the horizon?

Will there be new competitors? You bet. For those playing in the automation space, expect lots of competitors. The automation space, especially around motion control, lies at the crossroads of fluid power, power transmission and electrical technology. We have already seen lots of conflicts in this market. More to come.

The Internet of Things (IoT) and its industrial cousin, the Industrial Internet of Things (IIoT) promises to be a boom market in the not so distant future. This attracts not only the normal cast of competitors but some biggies like Cisco and others from the IT field. I am optimistic that a few electrical distributors will be big players, but they will be fighting it out with a whole new set of competitors.

Further, the line between some distributor and systems integrator (and even contractors) is blurring. New technology players in technical spaces are turning to SI’s because they got terrible reception from the distributors they approached. In this play, the SI ties product sales to services and replaces many tasks once conducted by distributors.

Finally, there are a host of off-shore companies with plans to break into the US market. They have made the rounds of distributors and have a difficult time getting traction with established wholesalers. They get little respect because they currently don’t have the market share required to produce instant results. But, many of these organizations are big enough and powerful enough to create other alternatives. I believe some will circumvent traditional distribution and thus create new competitors in our market.

What will the future hold?
Changes lots of changes. This doesn’t cover all of the changes but it does touch on quite a few major ones. We are interested to hear from you on your prognostications for the future. What will your world look like in 2025?

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Monday, June 20, 2016

We need more sales calls, but it’s not happening!

Business levels are flat (at best) and sales managers are clamoring for more sales calls.  All across distributor-land, sales managers are pushing their teams for more productivity.  They reason more sales calls equates to more discovery, more opportunities to quote and greater visibility with customers who for some reason or another share their business with several suppliers.

The pressure is on.  Ranging from kind requests to outright threats, sales managers are pushing for more calls.  In cases where the distributor uses some form of call reporting (CRM or otherwise), the reports are getting greater scrutiny and results aren’t pretty. 

Under pressure to create a better looking report, salespeople are counting drop by visits with no actual customer contact as a “sales call.”  Under the heading of a good example of terrible selling behavior, one reported sales call consisted of driving up to the guard shack of the customer and asking for the head of maintenance.  Since the seller had no appointment and lacked the name of the individual, they were summarily turned away.  Another slightly more credible example of a sales call involved the sales person making a delivery to the customer’s facility where the only contact came with the receiving clerk.  Clearly, this type of behavior does little to impact the bottom line.

Why aren’t we seeing more people?
I believe there are a number of reasons that our salespeople are not seeing more people.  But before I rattle off the reasons, allow me to say I don’t believe sloth has anything to do with the situation.  Lack of skill, sometimes.  Bad habits, probably.  Deliberate laziness, no way. 

Finally, here is my list for why salespeople can’t improve their number of calls:
  • They fail to plan their time.  As sad as it seems, on any given Friday afternoon many can’t tell you what they are doing next Wednesday afternoon, unless that day happens to be vacation or the next sales meeting.  Planning is both a skill and a habit, both of which can be improved.
  • They fail to optimize travel times.  Only a few of the sellers we know have territories compact enough to ignore travel times.  The guys in secondary markets drive 50 miles to make a sales call without considering stops along the way.  Folks in big cities cover less distance, but the effect is the same.  Only a rare few plot their day in a way that offers maximum time with customers.
  • They fail to make appointments.  Could be a habit, could be a skill or it could be their customers just plain don’t want to see them.  Getting appointments are hard (not impossible) to make these days.  A lot of folks have just plain given up on making them.
  • They get sucked into mundane tasks.  Some return to the office to follow-up on trivial orders, others drop what they are doing to immediately respond to a quotation and others get hung up on “baby sitting” customer orders.  A few simply don’t trust their support team enough to carry out even small tasks.  A good many are control freaks who feel good about controlling more than they should.  While all of these might be important, they need to maximize team involvement.
  • They spend too much time to responding to customer emergencies. 
    Technically oriented sellers often fall into a purely
    reactive mode of operation.  They get personal satisfaction from solving customer emergencies and customers love them for the work they do.  Sounds great, except that when times are slow, they spend more time instead of less time with each emergency.  Further, some salespeople don’t measure their value.  They spend inordinate amounts of time with low volume, small potential customers.
  • The situation is complex and requires individual coaching…Reviewing the list, it’s pretty clear there is no one magic bullet fix.  Out of a half dozen sellers there may be four or five different situations.  This is where the sales manager earns their keep as a manager and coach.

Over the years we have devised a plan for assisting sales managers understand and respond to individual weaknesses effectively.   As with any type of long-term improvement, it takes time and a bit of effort.  

Here is the simplified version of the plan:
  • For the next 6-8 weeks set aside a time on either Friday afternoon or Monday morning to review each seller’s activities planned for the next week.  Experience shows this takes about 20 minutes per salesperson.  Let them know this is not a permanent procedure but a 6-8 week coaching assignment for the manager.
  • Specifically log the data as to where they plan to go, who they want to meet, what they plan to discuss, whether an appointment will be set and the proposed date of the call.
  • During the same meeting, review the results/details of the last week of calls.  When possible match the planned week to the actual results (a week later).
  • Look for the following:
    • Issues with scheduling.  Are they really planning ahead?
    • Issues with setting appointments.  Do they need some coaching here?
    • Emergencies which took them out of the field.  Are they justified or just control issues?
    • The products, services, issues discussed.  Customers don’t want their time wasted.  Are the products properly selected?  Are they bringing the right sales materials?
  • Identify individual issues which need skills training, coaching or management.

Coaching works better when individualized…
They say it takes 30 days to break a habit and longer to develop a new skill.  Don’t expect instant perfection.  In fact, you should expect improvement sandwiched between in a bunch of returns to the old habit.  But, don’t let your team wear you down.  Improvement will come.  It takes a while but our work indicates a couple of months spent today can change things for a long time.

Finally, we would love to chat about your unique situation…

Drop us a line or give a call.  We would love to hear about your situation.  We have plenty of resources available and a good many of them are… free.

Tuesday, June 14, 2016

Someone Has a Case of the Mondays

"Sounds like someone has a case of the Mondays"

This is a funny line from a movie that often goes through the heads of anyone who works in a traditional or corporate type office.  Sometimes you’re just not looking forward to getting back to the grind.  Other times, you need a vacation from your vacation.  But basically, the premise of waiting 5 more days until the weekend can be a bit daunting.  

I just returned last night from a trip to Mexico City where relaxation was apparently not on the agenda.  Returning to the loads of email, stacks of mail, and a full voicemail, I can say I have a case of the Mondays…on Tuesday.

But I have to wonder, since my fine readers are from all over the world and work in so many different fields, maybe your Mondays signify something different: 

Maybe you’re the fresh new sales guy looking forward to your first sales call.

Maybe you’re in Purchasing and you’ve debated all weekend about implementing a pricing plan and today’s the day you are letting the boss see the margin increase.

Maybe you’re an HVAC distributor and you see all the emergency orders from the weekend as job security.

Maybe you’re in the warehouse and Monday is one of your main delivery days and keeping busy makes Monday seem like the shortest day.

What does a typical Monday look like for you?  Are you planning out your week while responding to messages?  Are you out in the field first thing, so you can catch others in the office while they are doing the catching up?  Or is your world completely different?

Tell us about your Mondays, noting your field and location.  You are welcome to leave your name and/or company anonymous in case your Mondays are filled with social media games.  

We would love to feature some of the comments in a future article, but will not print names.  We value your feedback and your privacy.

Has anyone seen my Swingline stapler?

Tuesday, June 7, 2016

Why do customers buy? Questions and Comments

I just had the opportunity to review Industrial Distribution Magazine’s annual survey.  This year they focused on distributor value and quite frankly, I am not shocked by the results.  I am, however, deeply disappointed. 

The survey question asked “Which are the primary reasons your customers do business with you?”  The respondents reported the following reasons:
  • 85.17% Relationship
  • 74.16% Product Availability
  • 68.42% Technical Support
  • 62.20% Delivery Time
  • 50.72% Price
  • 31.10% Engineering Capabilities
  • 30.62% Vendor Managed Inventory
  • 28.23% 24x7 Support
  • 3.35%    Other

This was the 69th edition of this survey; meaning the very first edition fell well before my father started in the distribution business back in the 50s.  Silly me, but somehow I imagined our industry had progressed. With a couple exceptions, the results look like something straight out of 1965.   I am disenchanted, but again, not all that surprised.

Looking further at the survey methodology, we see the survey was sent to a broad range of distributor professionals – everyone from executives and upper management to sales and customer service.  Thinking about the demographics of most distributors, this would point to a large percentage of sales types participating in the survey.  This is a point to ponder. 

The importance of relationships and trust…
Customer relationships are just as important today as they were back when our dads were making sales calls.  I have to wonder, however, if this comment wasn’t overstated.  I can recall a couple dozen hiring instances gone amiss when salespeople were hired mostly for their customer relationships.  It went something like this:  Sales manager hires sales guy with a long list of customer contacts “ready to follow” him to the new company, only it didn’t happen.  The sales dollars didn’t follow.  In fact, in most of the cases I witnessed, only something like 25-30 percent went with the seller. 

With this in mind, relationships with distributors are important.  But when the distributor uses a team selling approach, and most good ones do, building customer connections with product specialists, engineers, inside salespeople and management types, the individual salesperson relationship is not as important.

In today’s environment, I believe it could best be said, “Customers buy from companies and individuals they trust.”  Developing a strong track record of integrity matters.  If all the technology, product availability and everything else is fairly similar, most customers buy from the company they trust.   By the way, I trust Amazon and don’t know a soul working for the company.  Is this a customer relationship?

Product availability…
Does this mean you are the authorized distributor for a highly valued product line?  Many manufacturers go to market via limited and sometimes exclusive distribution. With the right interpretation, it could mean having what one distributor calls “the A-line manufacturers.” This same guy feels this attracts what he referred to as “A-line customers.” 

The other interpretation is concerning.  If product availability refers to local inventory, I see dark clouds just ahead.  Logistics are shrinking our world.  Back in my younger days, overnight shipping was either impossible or very expensive.  Now it’s cheap and mega-distributors have mastered the placement of distribution centers to get anything to anywhere the next day.  I am told plans are underway to begin shortening the delivery lag to half days in some areas.   Amazon is testing a new service called Amazon Now and they are offering two hour delivery.  If Amazon can do it, others will follow suit.

My parents’ business thrived because they had the best inventory within a 30 mile radius.  Thinking back, even small towns had distributor locations.  The adage, "the only game in town" was real.  Travel and logistics were almost laughingly different 50 years ago.  This business model is gone.  Looking forward, I see this phenomenon only continuing.  I struggle to imagine 74+ percent of distributors imagining availability as a key buying point.

Price, really are you kidding me?
According to over half of the survey respondents, customers are buying from them because of price.  In other words, they see their value as the low cost discount leader.  I wonder, if this is a response flavored by the responses of those involved in sales, does their management see things this way?  Over the course of several hundred (probably over a thousand) detailed conversations with distributor owners and top-level managers, I have never heard any of them say, “We are striving to be the low cost leader in our market.”  Instead they talk about solutions, technology and great customer service.

Reviewing the list above, one would wonder if some of the same distributors touting price as a customer attractant aren’t also investing in technical services, engineering skills, support and improved logistics.
I believe the price focus and the services focus are inherently incompatible. 

Why price is even mentioned at all?
Purchasers constantly push for price.  Distributor salespeople are told, “Your price is too high in dozens of ways.”  Friendly customers give the seller a “last look” where they are allowed to beat the price of some real or imagined competitor; the message is price got you the order.  Not-so-friendly folks mask preference for other suppliers with “your price was out of the ball park, this time.”  The message often plays over the top of technical services and sounds like this, “Your service is great, but all of our suppliers provide the same kinds of things.” 

We have already stated buyers constantly test our price.  This creates a repeated message: price is important.  Scientists tell us when messages are repeated the message becomes believable; the thought develops an aura of truth.  When the message is repeated by many people, the directive appears as an absolute truism.  Psychologists call this the “validity effect” and distributor salespeople respond like laboratory guinea pigs.

We’re drinking our own Kool-Aid…
Through the validity effect, these sales types believe two points: 
  • Point One - We only get the sale when our price is lower than or at least equal to the lowest price from a reasonable competitor. 
  • Point Two – Because I am interacting with price-driven customers, and perhaps selling a lot of “stuff,” I know what the price should be for everything in our catalog. 

Hook these guys up to a polygraph and place their right hand on a stack of Bibles and the two points listed above show valid, but we need to think about the statements.

What is a reasonable competitor?  Pressed for information and objective data, most sellers lack the ability to carefully outline what makes their organization better than the competitor.  When I facilitate distributor sales meetings and ask for a list, I hear some pretty flimsy differentiators.  One of the most popular is “we have professional inside salespeople to assist in handling orders.”  When I ask if the competitor recruits their inside sales team down at the mission, everyone laughs.  The truth is we need to do better than “good service, great company culture and professional sales team.”  It’s management’s job to constantly reinforce specifics on why your company provide greater value.

Point Two requires the greatest scrutiny.  Most distributors sell tens of thousands of products to hundreds of customers.  This creates over a million price permutations, meaning, every customer purchasing every product carries a slightly different set of characteristics.  Let’s take a deeper look at how this impacts price.

We know large volume OEMs view products they purchase differently than the end user buying just one of these parts every few years as a repair part.  Research indicates many OEMs sell “repair parts” to their customers at levels equating to 250-400 percent gross margin.  Clearly, for some small users of the part, the price is justified because they lack the technical ability to determine precisely what part to purchase.  The OEM eliminates the risk and hassle factor associated with the part.  So we extend discounts to the OEM.  But, is every part purchased by the OEM the same?

Let’s assume the OEM is forced by customer specification to create a special one of a kind modification to their product.  Since this is their first use of the product, they require lots of technical and other support.  However, unlike their typical purchase, this will not come with large follow along orders.  Should the price be the same? 

Keeping with our OEM example, suppose the OEM needs to modify the lighting of their production floor.  In this particular instance, the OEM is acting as an end user of the product.  Should the margin be the same?  In many instances, distributor salespeople treat all of these situations the same.

Distributors trust their sales team to understand market conditions, but the sheer number of the pricing variations makes it humanly impossible.  In the face of such overwhelming obstacles to proper pricing, most distributor sellers resort to cost up pricing.  It works something like this:  OEMs get cost plus 20 percent, end users get cost plus 25 percent.  All regardless of product, type of purchase or support required.  If the competition has the business, the percentages drop.

How to address pricing…
Margin management falls squarely on the shoulders of management.  Our industry now has the tools to manage and control the pricing process.  This is not just the addition of some derivation of the 30 year old concept of matrix pricing (which has largely been a failure in our industry.)   Instead, it involves a process tying customer size, type and purchasing habits with product and vendor/supplier.  Further, salespeople are no longer allowed to make changes in pricing at will.  Instead, a management directed pricing leader is used to oversee exceptions to system pricing.

Cleveland-based Strategic Pricing Associates is the industry leader in this field.  With their systems in practice at nearly 500 distributors, they have fine-tuned the process over two decades.  Based on detailed studies of over 50 of their clients, we have observed gross margin improvement which typically turns out to be a sustainable two points.  The impact for a “smaller” distributor with $10 Million in sales runs around $200,000 in additional gross margin.  Further, a large percentage of the added gross margin falls to the bottom line.

Looking ahead for distribution…
When pricing isn’t an issue, it allows sellers more time to work on the things which really matter to the customer.  Things like improving the customer’s productivity, eliminating waste and driving more profits to the customer’s bottom line. 

Is improvement in distribution important?  Undoubtedly, finding ways to improve the overall productivity of the distributor is important, too.  Improvements in our industry’s overall operation will be important.  As an industry we are finding ways to do more with less.  We’re finding ways to handle order flow, logistics and billing more efficiently.  The gains made are critical to the long term health of distribution.  However, without taking care of the customer facing side of the business, we are destined to merely “give away” the gains.