Ah, the joys of being the “middleman.” For decades, distributors have been responsible for efficiently passing products from manufacturer-based suppliers to customers. During the 1990s, we actually got pretty good at taking costs out of our system. Into the 2000s, our customers tasked us with assisting them in removing extra expenses from their interactions as well. Without really being aware of the situation, we have improved the “supply chain,” whatever that is.
To be honest, I often overhear industry buzz words and phrases; things like best practices, channel management, value stream and targeting come immediately to mind. After hearing the word used often enough, human nature pushes us to add it to our own lexicon. I have even found myself using phrases whose meanings are not 100 percent clear.
In a quest to discover a workable meaning for supply chain, I spoke to a young friend who had just earned a master’s degree in supply chain management. I asked her what supply chain management meant and her answers centered on order entry, shipping times, price points and several statements which sounded like they were spewing straight from the mouth of a big corporation purchasing agent. After telling her I was writing an article on supply chain improvement for distributors, she replied:
“Distributors can improve the supply chain by reducing the amount they charge for products flowing through their organizations. And, even though I know you aren’t going to like hearing this, Frank, many of our class discussions question whether wholesalers should even be part of the equation.”
This comment sent me reeling. I wanted to take the time to sharpen my understanding of the phrase.
To understand better precisely what we mean by supply chain, let’s put a quick definition to the phrase.
Wikipedia has a multipage explanation of supply chain; the first sentence does a credible job defining the term: “A supply chain is a system of organizations, people, activities, information, and resources involved in moving a product or service from supplier to customer.” Obviously, a good supply chain minimizes mistakes, eliminates waste and works to reduce costs. Jumping back to our first paragraph, distributors get a passing grade on everything happening downstream from their operations. But what about upstream on the manufacturer side?
During recent years, distributors have measured their suppliers on gross margins generated without much regard for operational efficiency, shipping accuracy or hassle factor. Trucks rolled into the dock, we received the products, put them into stock and added a margin, then shipped them out to customers. All suppliers were equal until the sale.
Somewhere along the way, and accelerating in the days following the Great Recession, wholesalers realized the costs associated with each vender were not equal. At the same time, our suppliers struggled to maintain their own profitability. Turbulent times produced changes in expectations and shifts in the distributor-manufacturer responsibilities. Distributors found themselves charged with performing tasks that once fell on the supplier’s field sales team; mostly without offsetting gross margin increases.
At the same time, demographic shifts, commodity price shifts and new competitors have forced suppliers to look for ways to maintain profitability while driving down their overall product cost. At a time when timely understanding of micro-trends in the market are important, distributor behavior around inventory reporting, sales segmentation and point-of-sale reports hurt the suppliers’ efforts.
Clearly, distributors and their partners find themselves working at cross purposes with two separate sets of needs. The time has come for a new look at the way manufacturers view their suppliers.
Introducing the Supply Chain Scorecard
As stated previously, distributors measured suppliers on just two points: the objective data of the gross margin produced. And the subjective, gut-based topic of how easy was the product to sell. The subjective opinions of management were dated. In an industry where years may have passed since management actually served on the front lines of dealings with the suppliers, some subjective data is outdated.
What would happen if suppliers were measured against objective performance metrics? What if each supplier was contrasted against their peers via a matrix of important characteristics tied to “distributing” their products? Even better yet, what would happen if a whole industry adopted a similar approach?
What would we measure?
Thinking about the big picture, I believe reviewing the company culture of suppliers is critical. Are they committed to distribution, or just as likely to strike deals with online retailers, or skirt around their wholesalers with deals to large customers?
As baby boomers march off into the sunset, grooming good people and keeping them in place have become a benchmark of long-term organizational survival. Measuring the supplier’s willingness to invest in future people says much about their position in coming years.
Continuing with our discussion of people, how effective are their local sales teams? Do they have the right product knowledge to assist you in solving customer issues? Can they solve logistical issues and make things happen back at the factory when the need arises? Equally important to our discussion of people and culture, measures of the supplier’s willingness to empower their people to make decisions at the lowest possible level equate to better business.
Understanding the manufacturer’s product quality is important. Distributors handle warranty claims, and each one translates into an event that impacts both customer satisfaction and the distributor’s pocketbook.
When the supplier and distributor overlay their marketing plans, good things happen. Conversely, with a supplier who uses a one-size-fits-all approach for downtown Miami and rural Minnesota, either nothing happens or the distributor has to carry the load for market growth.
Hopefully, you are starting to get the flavor for the objectivity and detail of metrics provided by a working supply chain scorecard. Without getting into specifics, a good scorecard measures order entry, shipping, scheduling, invoice procedures, terms and conditions, inventory policies, warranty and distributor training.
How do we start the process?
I have good news and even better news. First, HARDI has developed a comprehensive Vendor Survey form which breaks each of the major distributor-supplier interactions into bite-size nuggets. Based on experience with other lines of trade, the document saves HARDI members six months of development time. What could be better than that? Because the survey concept was adopted in other industries several years ago, we can learn from other’s mistakes.
Observing other industries demonstrates that these work best in building the scorecard:
1. Someone with leadership clout must champion the cause. This is not a job for a purchasing clerk. The champion must be able to maneuver in the sales, purchasing, warehouse, marketing and accounting departments.
2. Involve all departments within the company. It’s not uncommon for the sales folks to be sheltered from the impact of unfavorable payment terms, sloppy invoicing and unresponsive attention to credits and rebates.
3. Communicate. Let everyone know it is important to only comment on the sections where you have direct experience. If you’ve heard horror stories secondhand, don’t flavor your input with hearsay.
4. Ask reviewers to provide facts and data wherever possible. Follow up poor scores tied to delivery scheduling with information on the product, circumstances and approximate dates. Data rocks.
5. Review incoming survey data to determine if further research is necessary. Expect to discover previously unexplored topics. In some instances, research may be required to gather additional facts from departments not directly involved with the issues.
6. Compile the information for a management overview. The process of doing a vendor survey allows new insights into not only the operation of the supplier but a view of internal processes.
7. Build a benchmark. Every distributor has a few suppliers whose quality of work far outpaces others. This allows the distributor to develop a standard against which others can be measured.
8. Establish a prioritized weighting system. The measured criteria gained is not of equal value to the needs of every distributor. For example, a wholesaler in an aggressive growth mode may find more value in customized marketing programs and partnerships with the local sales team. Conversely, a larger distributor working on maximizing the power of their central distribution center could discover great value in logistics expertise.
Making the information work for you
The obvious use of the information compiled in your supply chain scorecard is the ability to rank suppliers against their ability to provide strategic direction to your company. This is particularly true with “commodity” products. If brand preference is not part of the customer-buying decision, you can judge vendors against not only gross margin potential but the overall efficiency of doing business.
The realities of our industry point to a number of product lines which are more than a commodity. Many actually touch up against or strive for partnership types of relationships. And this is where the Supply Chain Scorecard really proves to be useful. Allow me to share a conversation.
We had the opportunity to speak with Allie Lehmann, vice president operations, of Dallas-based Standard Supply, an independently owned HVACR distributor. Allie has a unique background, with experience not only in the HVACR market but also in the Electrical Wholesaling industry. Ms. Lehmann is helping to create Standard Supply’s supply chain scorecard and using the experience to develop her master’s thesis in the Texas A&M Industrial Distribution graduate program.
Ms. Lehmann said, “I see the biggest value of building a supply chain scorecard in the conversations we will have with our suppliers’ top management people. There are a number of small ways we can work together to drive down our combined cost of doing business. Changes in packaging will impact damaged shipments. Inventory requirements may be fine-tuned based on accuracies of orders. The list goes on and on.”
Lehmann went on to say, “Usually the best ideas to implement tactically come from the field, not the corporate office. But I think for vendor scorecarding, national involvement is important, because they should HEAR the voice of the customer (the field) so that they can impact change.”
A final note
Providing objective feedback to key suppliers is an important portion of the progressive distributor’s responsibility in the post-recession world. As the HVACR industry moves forward, distributors who develop the practice will hold the keys to a new set of strategic advantages.
I will be leading a discussion of the supply chain review at the HARDI Operations and Logistics Focus Conference in September. Attending will provide you with some strategic insights to position your company into the future. Start the process now; we can talk turkey at the meeting.