The Ingredient That Most Distributors Are Missing
HARDI distributors have mastered the art of change. They have shifted their business model from relationship and local inventory to value-creation and problem solving. They have streamlined and focused their business to match the new economy. Most have become reasonably skilled at planning, and a growing number are developing longer-term strategic visions. In a few instances, these folks have begun to build a process around their selling activities. We’ve come a long way in just a couple of decades. But one critical piece is missing: analytics.
Join me as we explore a few basic analytic skills our industry must develop over the coming years to remain relevant to our markets. The list is long, but we will look at three topics focused on creating greater equity for our companies.
We Need to Get Good at Forecasting
As we entered the housing bubble and Great Recession, most distributors failed to see the extent of the downturn. In fact, during our conversations with dozens of distributors, they indicated they were struggling to determine if the downturn was just a fluke several months into the recession. Worse yet, as business began to turn around nine months later, most lost opportunities for growth because again they had no outlook on the future. Let’s look at what might have happened if analytical forecasting was employed.
As the recession approached, distributor management would have noticed uncertainty months ahead. Inventory levels could have been trimmed, hiring put on hold, and customer credit terms tightened. Taking things further, poorly performing employees could have been released ahead of the economic storm, thus strengthening the company’s cash flow and allowing for a buildup of reserves.
Forecasting is an analytic largely ignored by most distributors in our industry. Outside of a few large projects, most wholesalers struggle to predict the next quarter’s results. Meaningful numbers require training, management, and discipline in the sales force. And, in a world where sales teams see the exercise as a distraction, the process gets lip service at best. Yet building the skill stands to provide a massive boost to distributor bottom lines.
Rather than just ask for a random forecast, the distributor manager must institute a plan for nurturing the abilities of the team. Because skills improve with practice, expect the forecasting process to get progressively better. Here are recommendations for launching.
- Measure and track opportunities. As salespeople discover new potential business, they log the details; product type, potential dollars, decision makers, and competitors are identified. You should note that even opportunities that could fall to a competitor should be tracked.
- Assign a degree of probability to the business. The salesperson establishes a percentage of probability that the order will go to their organization. For instance, 10 percent probability equates to a very slight chance of success, and, conversely, 90 percent means there is a very good chance of getting the business.
- Set a close-by date. The close date is the salesperson’s best estimate of when the order will come to fruition, even if captured by a competitor.
- Update the list monthly. Plans are canceled, situations change, customers reduce or expand their projections, and new competitors creep into the mix. Understanding and keeping the information up-to-date keeps the process alive.
- Measure accuracy of close date by the salesperson. Salespeople often fail to fully explore the close date provided by the customer. While some dates are available for the asking, others require probing questions in areas not currently explored by the seller. For instance, many salespeople do not call on material logistics planners, labor schedulers, and production managers.
- Manage the results. Management oversight and coaching is required to reinforce the need for accuracy and to coach the seller on ideas for improving their process.
- Stress the forecasting value. There is something in opportunity tracking and the resulting forecasts for everybody. Not only does management get a better handle on the future, but studies demonstrate that salespeople who understands opportunities grows their territory faster than their counterparts.
Distributors Must Understand the “Why Buy” Question
Why do customers buy from your company? Ask any distributor the question, and the response is the same. Great service, good products, fabulous inside sales personnel, and knowledgeable salespeople are the standard fare. Guess what? Your competitors spew the same story. As simple as it seems at first glance, the customer motivation needs some exploration. And, understanding the “why buy” question requires research and — you guessed it — analytics.
Because selling is a high-touch and emotional activity, sellers rarely understand the true customer motivation. They get wrapped up in customer relationships, activities, and delivering whatever value-adds you may promise while failing to see the bigger picture.
Further, most salespeople hear things through a selective filter. Most will rattle on for hours about the orders they captured, going into great detail surrounding their understanding of the customer’s needs and the way they out-serviced the other guy. Rarely can they describe with any detail the orders that fell to the competition. Experience dictates that sales folks typically categorize lost orders to competitors bombing the price, competitors with strong allies willing to push them forward or some unscrupulous conduct. Rarely do they describe a service breakdown or better nonprice package of values from their competition.
So if not through the sales team, how can a distributor better understand the “why buy” question? Here are a few thoughts to consider.
- When was the last time someone in management asked the “why buy” question? I believe we do this with a couple of degrees of separation from the sales force. Distributor management to dealer/customer management meetings work well in drilling into the subject.
- Customer focus groups uncover important competitive differentiators. What do your best customers have in common in their views of your organization? Why does each company see you as the best supplier?
- Customer surveys are an easy way to spot shifts in customer thinking. One advantage of polling your dealers/customers on service, delivery, product knowledge, and a few value points comes by way of measuring changes over some years. In other words, are you making your company more or less important in the market?
Building analytics on perceived customer value allows for better customer selection. The analytics provide real data for defining potential weaknesses. And the activity refines the selection of target prospects with the needs closely aligned to your package of products and service. One critical profit-generating point comes through time and again. Salespeople overestimate the power of pricing in driving decisions for lost orders.
Analytics Improve Gross Margin
Very few healthy distributors attract customers using the bargain- basement low-price-leader angle. In spite of two decades of research and associated management preaching, most sellers place price level higher on the customer’s value chart than it deserves to be. Research indicates customers count price to be something like five on their decision tree; our sellers believe it to be higher. This happens because customers often send false messages to their suppliers.
A customer finds it less stressful to say, “You were way high compared to the competition,” than to tell your salesman his response was poor on the last order. Even your loyal customers may offer you a “last look,” thus giving your company the opportunity to match a lowball price tossed out by a low-service wholesaler across town. Even companies that require immediate delivery and technical assistance will pull prices from the internet in attempts to establish price level doubt. Applying analytics to pricing makes sense for the distributor’s bottom line.
In our experience, pricing analysis is too complex for the average wholesaler. The algorithms required to analyze data properly are too expensive to purchase; the job is just too complex to be worked out on a spreadsheet. Because each customer and every product require separate analysis, the permutations of price typically equal something like 2 million to 5 million calculations.
David Bauders and his team at Strategic Pricing Associates (SPA) is one of the thought leaders in the pricing process industry. SPA has a proven track record with more than 500 distributors, with the typical distributor seeing a gross margin improvement of two full points. For most distributors, this kind of result equates to a 50 percent impact on the bottom line. This is a solid metric on the power of analytics.
Wrapping This Up
While navigating through the new reality of distribution, even the good times carry the constant turbulence of uncertainty. Mergers and acquisitions complicate the supply-partner scene. Some suppliers are secretly, and in some instances, not secretly, evaluating new channels to market. The cloud of generation change and internet-based buying looms on the horizon.
Distributors today face three major challenges: improving their people, building customer value, and quickly refining their process. Analytics play a major role in each of these issues and provide a solid competitive edge. We have a list of 25 analytics we believe every distributor needs and will share it with readers for the asking. Just shoot me an email.