The Future of Knowledge-based Distribution

Earlier this month I was asked to lead a discussion on the future of distribution.  In this case, we focused in on the future of members of the Fluid Power Distributors Association (FPDA).  Since many of our readers are not FPDA members, allow me to provide a bit of background.  The members of FPDA tend to be deeply involved in providing customer solutions.  In many ways they epitomize the knowledge-based distributor.  Their products are complex, sellers understand product technology and application nuances, customers lean on the distributors to provide technical support and most offer up additional fee based services.

Referring to the infographic below and the evolution of the distributor model, FPDA distributors are the poster perfect picture of the Knowledge-based distributor.  Deep product expertise, product specialists, customer centric engineering and solution selling is their mode of operation. 

  

While the argument for Amazon-like eCommerce may make great sense for the distributors falling into the “Logistics” side of the distribution industry, similar investment on the Knowledge-based side of the evolutionary line is likely to be poorly spent.

A quick survey of those attending the meeting revealed the following statistics:
• 38 percent of attendees’ companies did zero eCommerce
• 50 percent did less than 5% of their business via eCommerce
• Only 12 percent of attendees indicated eCommerce represented between 11-20% of their sales

Thinking about available resources like time, effort and money, knowledge-based distributors investing in eCommerce do so at the expense/neglect of other potentially more rewarding investment opportunities.  The pressing question is where should a knowledge-based distributor invest?

This question can be broken into four segments:
• What customers are best matched for the offering of products, service and knowledge provided by the distributor?
• How can the distributor better their ability to drive solutions to this group of customers?
• How might the distributor scale up their ability to provide the solutions?
And the most important question of all….
• How can the distributor ensure they will be paid for the value they provide?

With all of this in mind, let’s dwell on the critical topic of getting paid for the value provided. 

For this breed of distributor it’s not about value-added sales, instead the crux of the equation is value-metric selling.  Simply put, knowledge-based distributors provide value far above the logistically based guy whose “value-add claim to fame” comes by way of timely deliveries, consolidated invoicing and the occasional cross reference to a more conveniently purchased part.  Instead, knowledge-based distributors provide the stuff needed to help the customer develop better manufacturing processes, reduce costly downtime, reduce rejects and drive profitability.  

Strangely, only a few of the sellers in this high value world really understand the true worth of their actions.  Research indicates, their sellers go the other way, undervaluing what they do.  Instead of measuring the financial impact of their ideas in terms of impact to the customer’s business, they shrug off the economic benefit as part of their “service”; often struggling to justify a percent or two greater margin than the person who provides just products without much needed technical support.  This puts the group in a dangerous position.

As knowledge-based distributors move into the future, their reliance on technical advice, engineering support and turnkey engineered solutions as a competitive advantage deepens.  Demographic shifts point to escalation of human side and other associated costs for the distributor.   Without an understanding of the customer value they create, the distributors will see profitability sag.

Knowledge-based distributors need a different kind of training.  The selling advantage goes to the distributor salesperson who can explain the value of their proposed solution in real customer-centric terms.  It’s no longer acceptable to pepper the conversation in technical jargon and call it good.  Improved cycle times, communication speed, scan rates and other data may be factors for selecting components.  But when a solution is being discussed, the conversation must focus on advantage to the customer.  Going further, customer advantages are best described in financial terms.  For instance, the product feature of improved cycle times, translates into 10 percent more parts generated and that newly created production generates $500,000 additional revenue to the customer.  

While training focused on understanding customer economic value is critical, it must also be understood that rarely are solutions outlined in black and white.  To better understand the situation, let’s explore a hypothetical interaction with the customer.

Acme Manufacturing has an issue with a new machine design.  They would like to employ a robotic arm to properly

locate parts.  The distributor proposes a solution capable of reaching into the machine grabbing the part and properly aligning the part thus eliminating a great deal of human interaction and reducing scrap.  It’s a nice marriage of technology and customer need.  The economics justify the work and the purchase is given the green light.  However, midway through the design stage, the customer asks for a new feature.  Instead of only one positioning action, the robot will require an extra move in order to add a date stamp to the part.  

On the surface, the hardware required to complete the job remains about the same.  But additional engineering is required to make a software adjustment.  And the distributor seller is faced with a dilemma; eat the software cost, avoid conflict and keep the customer happy or negotiate a new price with the customer.

A study of distributors conducted earlier this year, points to a deficit in distributor negotiation skills.  Looking more closely, we have sales teams who constantly negotiate solution and system pricing yet have very little formal expertise in the practice.   

Anticipating questions, allow me to address a couple of points.
• Our customers see us a partners and don’t negotiate when dealing with us.  This misconception is rampant in the distributor landscape.  Customers certainly do negotiate as many have had formal negotiation skills training.  Have you ever formalized the technical side of a solution only to be handed off to a purchasing person to finalize the details?  This in itself is a negotiation tactic.
• Our sellers have been doing this for years and know how to negotiate.  Selling is typically about knocking down roadblocks to getting the order.  Giving away a little margin, or throwing in some added engineering time is an easy way to close the deal.  Further demonstrating the phenomenon, distributors who run engineering organizations report reoccurring conflicts between those required to generate profits in the technical operation and the salespeople.  Truth is, the sellers are better at negotiating with their co-workers than with customers.
• Since our sales team is paid on the gross margin they generate, it’s in their best interest to capture as much gross margin as possible.  From a purely cerebral standpoint, this makes good sense.   However, many salespeople reason that a commission on a small gross margin is better than “haggling over a few bucks” and possibly jeopardizing the order or customer relationship.  Pushing further, antiquated commission policies sometimes encourage sales types to capture less than optimal margins because giving away technical support or engineered services does not reflect on the gross margin number.  In this case, the salesperson gets a commission on bad business. 

What do I recommend for Negotiation Training? 
Over the years I have had the opportunity to sample a number of negotiation skills training packages.  Unfortunately, I have not been impressed.  The big names push tactics over substance.  Most fail to understand that our kind of selling is different.  Distributor-customer relationships are living breathing and ongoing bond.  Every interaction adds to (or subtracts from) the tie between companies.  Tragically, most sellers attending were turned off by the whole seller wins at buyer’s expense mentality.

Thankfully, someone recognized this issue and did something to change the landscape.  SPASigma sprang from

the work done by David Bauders and his Strategic Pricing Associates (SPA) team.  With nearly a quarter century of experience helping distributors apply scientific analytics to their pricing process, SPA has assisted nearly 500 distributors in their quest for developing fair and equitable system pricing.  SPA understands the how distributor business works.  SPASigma has taken a new approach to negotiation training.  Along the way, they have developed a whole system of in-person seminars backed up with online retention tools to assist in changing the outlook of sellers in this field.   You can access SPASigma here. 

Before we go,
We started off by saying, money spent on eCommerce could be better spent in other ways.  Following this path of skill development centered on understanding your value to the customer, understanding the cost of the services you bundle and negotiation for the best deal will position your company for immediate payback.   Payback capable of funding the future.