Here’s the scoop in distribution: Nothing happens instantaneously. Looking back over my career, I can’t help but notice it took nearly a decade for HVACR distributors to adopt enterprise resource planning (ERP) systems and something like five years for the group to fully adopt email. I could cite another dozen examples and build a pretty lengthy article on this topic alone. I’m not. Instead, I want to make a point. Nothing delivers a knockout blow to distribution. Instead, we suffer death by a thousand cuts.
Let’s start with just six questions; simple questions — We often only glance over questions and certainly don’t give them the thought they deserve. Not answering these questions won’t put us out of business tomorrow or even next year, but ignoring them will definitely hurt your company’s future.
Question No. 1: Do you believe your customers’ and suppliers’ worlds are changing?
As the middleman, our business serves two masters: the customer and the supplier. Our fabulous work ethic, incredible intellect, massive charm and impressively good looks don’t count for much. We exist because our package of value exceeds those of other channels to market. Diminish our value in relation to other alternatives and we fall right after the dinosaur in the extinction list. We need to change to adapt to our environment.
First, let’s focus on customers. Their world is awash with changes. Most are operating in an uncertain economic environment. Business levels are subject to massive swings which fall outside their control. Agility in business is a necessity. Some have selected to scale back on the number of people within their organizations. The people we call on face massive workloads. The more progressive contractors have made conscious decisions to outsource tasks not core to their business, like inventory control.
In the industrial world, there is a shortage of technically focused people. Engineers, technicians and even experienced maintenance mechanics are in short supply. The shortage on the supply side has driven up the cost of labor. For example, engineers fresh out of school are demanding starting salaries around $60,000, and they have very little clue as to the realities of our world. Technicians straight out of vocational school struggle with the realities of real-world troubleshooting. With this in mind, I believe distributors should be thinking seriously about upping the ante on their abilities to provide training mechanisms to push the industry forward.
One new trend impacting a number of contractors selling replacement units is the plethora of low-cost estimates and negotiating tips posted online. One can’t help but imagine many homeowners and smaller commercial accounts aren’t seeing pushback on their street price, leading to a margin squeeze at our customers.
As an industry, we need to ask ourselves, what can we do to lower our customers’ costs? This does not equate to lowering price. Instead, it involves driving down the overall cost of doing business. Things like lowering labor and logistics costs are of growing concern to our contractors and dealers.
Suppliers face a similar set of challenges. Not a day goes by that some new competitor doesn’t pop up. Many are leading with price. Our key suppliers are evaluating how they do business. An online search for hard goods in our industry reveals more than a few companies that have decided to go around the traditional channel. And, a midsummer’s walk through your local big-box store indicates a push by this group to change the competitive lay of the land. We need to think of ways to drive cost out of their system without giving up our own margins.
How can we assist in improving costs for our suppliers? One comes by way of improving their manufacturing operation. Today, efficient manufacturing requires better visibility into the selling process. Point of sale (POS) data have been a hot topic for a long time, but as we edge into the future, it will become even more important in balancing factory loads at our suppliers. Distributor-based sales forecasting is growing more critical to these suppliers’ success.
We also need to understand the costs associated with duplication of efforts. Experience dictates there are many tasks that need to be justified to drive cost out of the system. For instance, does it really make sense for your best suppliers to be training our sales team? Most do a poor job, but they still feel the necessity to make the effort because if they don’t, nobody will.
Question No. 2: Do you believe you need to change to match the world around you?
Now for some soul searching: Do you believe you actually need to change to meet the shifts in the world around you? Most do, but we have a hard time justifying the time to actually work on the changes. Just like our customers, distributors are running lean. Breaking our people away from daily activities to focus on implementing changes is tough. Further, without some kind of plan, you could find yourself in limbo.
Question No. 3: Do you believe it makes sense for your whole company to change in the same direction and in unison?
It’s not uncommon for a distributor to have a great sales team coupled with a stodgy logistics group or old-fashioned purchasing groups tied to high-paced accounting departments. Each department moves toward their own vision of excellence, yet the goals may not be in alignment.
Many leaders take a hands-off approach with the departments within their business, assigning operation and strategy tasks to department heads. If things are running smoothly, there is little oversight. This is especially true with departments not directly interacting with the customer: accounting, IT, purchasing and logistics/warehouse operations.
Many expansion efforts are overly focused on sales and customer-facing functions. Experience dictates back-office departments are not always included in the planning stage until the direction is set. With analytics growing in importance and logistical pressure from mega-distributors using a different model, failure to think about pulling the whole team into the plan will prove hazardous.
Question Four: Do you believe it’s harder to implement change when you can’t articulate why you are changing?
Alison Davis, writing for Inc.com, makes a point that should resonate with distributors. She likens change to preparing for the big game: Everybody needs to understand the strategy and the direction of others on their team. I believe distributors can learn from this. Distributor managers have a reputation for launching poorly thought-out “Plans Du Jour.” Many times, the idea was sound, but poor communication craters the results.
In developing a plan, we fail to review and refine the thoughts by putting the plan on paper. Bringing in the entire leadership team draws feedback and uncovers potential pitfalls. Articulating the plan to others in leadership provides a platform for “practicing” the presentation to your entire organization. Further, documenting your direction of change facilitates the addition of metrics. Understanding incremental gains via metrics accelerates the process and allows for better management and coaching along the way.
Question No. 5: What is your sales process?
Your accounting department uses a process. There is a process for valuing inventory, a process for developing the cost of goods sold, a process for establishing profitability and a process for accounts receivable and payable. Why is this the case? First, the industry lays down guidelines in the form of standard accounting procedures. Secondly, failure to abide by a process opens the doors for fraud and, in worst-case scenarios, visits from a friendly government agent. We’ve adopted these processes, and we’ve modified them over the years based on our environment.
Now, turning to the sales group: Instead of a process, we see the Wild West, where salespeople basically go forth and do their own thing. Chances are the customer experience differs daily depending on the salesperson, the salesperson’s mood and a host of other situations.
At the same time, research indicates sales teams with a process are much more likely to outperform their counterparts in the same situation. Processes around quotation follow-up, opportunity tracking, regular review of nonproduct value delivered and use of support resources are largely nonexistent at most distributors. Customer contact information is poorly maintained, which hampers marketing efforts. Worse yet, customer segmentation around size and industries served limits the ability of management to make critical decisions on expansion into growing segments.
Proof of the need for process exists in the much-studied work of Strategic Pricing Associates’ David Bauder. Applying a scientific program around pricing typically increases a distributor’s gross margin by something like two full points, thus impacting the distributor’s bottom line. You would expect salespeople, who are typically paid on gross margin, to be jubilant. But they’re not.
When you attempt process improvement in the sales group, you get pushback, excuses and fear mongering. Changes as simple as the use of customer relationship management (CRM) systems, that tie activities to results, are met with massive complaints. Enforcement of customer contact maintenance brings out the proverbial, “Do you want me selling or maintaining my Outlook files?” Forecasting, which I believe is critical in today’s uncertain times, is given very little, if any, attention from the sales crew. Pricing structure changes conjure up dozens of stories about customer alienation, but the evidence runs counter to seller projection. Interviews with dozens of companies instituting a pricing processes reveal very few customer complaints in a sea of seller complaints.
The argument of all this boils down to two points. First, distributors who rely solely on their sales force for customer information get poor information. Second, the very people most would consider the best champions for change are often the biggest hurdle to meaningful improvement.
Question No. 6: What are you going to do about the situation?
Thinking back to the eye-opening research contained in “Myths and Misperceptions: How Markets are Really Made in HVACR,” written by Michael Marks and Steve Deistpoint to massive misconceptions in the way our market really works. I can’t help but wonder how many distributors have taken the time to re-engineer their sales groups and review their overall operations.
Research indicates very few distributors have a strategic plan. With this thought, allow me two more questions: When was the last time you reviewed your own plan for the future? Will you be here in 2025?
This article started off with 50 questions I believe every distributor needs to answer. Space limited it to six. Email firstname.lastname@example.org and I will provide you with the other questions.