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Presidents, CEOs and managers of distribution companies are accustomed to doing business based on gut instincts. Unfortunately, this risky approach can often be an unreliable way of running operations.
However, with new technology, distributors can start making decisions with their head.
With this new technology they can target specific areas of business that need to be fixed and allow them to dissect that information. So, instead of threatening their best customers’ business, distributors no longer are flying by the seat of their pants. Instead, they are able to drill down data to determine what exactly is causing the inefficiencies and can locate areas in their businesses where profits can be made. It’s called analytics.
The word analytics often conjures up the image of a statistician sitting in front of a computer screen crunching numbers all day long. To distributors, this word also invokes the fear of a high price tag. However, many analytical approaches do not require substantial monetary investments. As a matter of fact, analytics can deliver benefits to distributors of any size and any industry, including the jan/san industry.
Increasing demands from customers is driving the need for more in-depth analysis. Unless distributors have a deep understanding of the specific drivers of cost within their organizations and how different customer and supplier behaviors are affecting both cost and profitability, they will be unable to make smart segmentation and portfolio decisions, says Guy Blissett, wholesale distribution lead for IBM and author of “Facing the Forces of Change: Decisive Actions for an Uncertain Economy.”
“Successful distributors continuously refine and enhance their ability to negotiate the best deals with vendors, identify and address areas of operational inefficiency, determine a fair price for products, manage inventory levels, and motivate and reward those individuals who help distinguish the business with customers and suppliers,” Blissett writes in “Facing the Forces of Change.” “From a business perspective, the effective application of analytics enables distributors to deepen their customer insights, improve and accelerate decision making, identify and respond to market dynamics, and operate more efficiently.”
According to Tony Pericle, author of “Transforming Data into Action: Using Analytics for Better Distributor Sales Decisions,” the benefits for distributors implementing an analytical approach to business are monumental.
“We’re talking about increasing net profitability by 50 to 100 percent,” Pericle says. “Analytics helps distributors understand where their most profitable customers are and helps to build barriers around those customers so it’s difficult for another distributor to unseat them.”
Analytics can be applied to any and all facets of a distributor’s operations, including inventory, customers and pricing. The most popular method among distributors currently is to tap into analytics via enterprise resource planning (ERP) software.
“As distributors are able to start pulling more data from their ERP systems on transactions and all of the variables that go into a transaction, they’re now able to do a much more granular profitability analysis on a customer by customer, invoice by invoice, line item by line item basis and really uncover who their truly profitable customers are vs. the ones who they thought were always the most profitable,” says Blissett.
Distributors have always looked at their inventory and tried to get a better grasp on how much stock they have, how much they need, if there is a particular promotion worth taking advantage of, and how rebates and incentives are impacting their profitability. Now, analytics can easily answer those questions.
“[Analytics] is the ability to contemplate the different outcomes and the impact of some different future variables,” says Blissett. “So if we assume that oil prices are going to go up or down or that the overall economy is going to grow ‘X’ percent, or my top five customers are going to need 5 percent or 10 percent more product from me, I can now play around with those scenarios much more quickly than I was ever able to do before.”
In 2011, Canton, Mass.-based H.T. Berry Co., Inc., invested in a new ERP software system that has allowed the company to dive deeper into analytics. As a result, the company has been able to reduce inventory redundancies based on volume and product profitability, says Chris Nolan, president.
For example, H.T. Berry’s software allows the company to analyze duplications of product offerings in their warehouse. This involves comparing the different variations of a particular product and weeding out those with low profitability or those that appear to have lost interest with customers. As a result, the company can make the decision to no longer carry a non-popular or low-margin item.
“You can always look at your potential to consolidate which is going to make you more effective, is going to make your turns better with your suppliers, but it’s also going to make you more profitable and a better value to your customers if you’re able to streamline a better product,” says Nolan. “It doesn’t mean that we always make the change, but we do that consistently with all product lines. Whether it’s paper, can liners, cleaning chemicals, we do that in all facets quarterly.”
Jan/san distributors say the increasing pressure from competitors forces them to broaden the menu of products that they offer. As a result, the more products they offer, the harder it is to keep track of their inventory.
“You absolutely have to tap into analytics or else you can really kill your cash flow by over-ordering something or cost yourself so much money in backorders because you didn’t order enough of an item,” says Charles Moody, president of Solutex Inc., Sterling, Va.
Analytical data also allows distributors to categorize their customers into different groups based on sector or by customer profitability. For example, one of the groups may be a low margin, low volume account, while the other may be a high volume, low margin account. By running a report, distributors are able to identify who the accounts are and work with the sales reps responsible for the accounts and try to move the customers into a bit more profitability or increase the margin.
“Before, no one used to run these reports and categorize their customers,” says Dan Josephs, general manager of Spruce Industries Inc., Rahway, N.J. “It used to be done by feel or if an account is not making money type of a deal.”
By diving into each individual customer account through analytical data, distributors are able to identify areas where they may actually find it more beneficial to cut ties with a customer, rather than continuing to lose money servicing them.
“If a customer is costing you money or if you’re delivering three different times because they keep ordering the wrong thing, they keep taking stuff back, that gives you comfort in saying we don’t necessarily need this customer anymore, he’s costing us money,” says Josephs.
But if firing a customer is out of the question, distributors can dive deeper into their data to figure out where the inefficiencies are and can work with their sales reps to better boost the profitability of a particular customer.
“With a customer if we feel like we don’t have all of the business that we can get in the jan/san category, we want to take a look at that and see if there is a way we can improve that,” says Nolan. “There’s no better way than through your analytical devices to do that. You really don’t know until you dive in and run reports.”
Besides account penetration, distributors are also using analytics for targeting segmented customers. In the case of H.T. Berry, the company has the ability to analyze how successful their marketing campaigns have been.
“We can run analytical reports and see if we were successful in this month’s campaign of targeting a certain segment,” says Nolan. “We can truly see the numbers. And if we weren’t successful, say we didn’t get the percentage of closes, we can take a look at that and see what we did wrong and what we can tweak in the future.”
Consultants say that getting deeper into customer accounts is easier with detailed data from running analytical reports. But it’s often a wasted opportunity if sales reps aren’t on the same page as management. With analytical data, distributors are able to easily motivate and set profitability goals for their sales reps.
“If you don’t have analytics you’re going to take a very simple approach by compensating your sales reps on gross margin or on sales dollars,” says Pericle. “If you have analytics then you can be more creative and say we’re not going to pay you on orders less than $100 or we’re going to have a multiplier in here that says if your customers go beyond 60 days in their accounts receivable, we’re going to start charging you 1 percent of your commissions of the outstanding amount. Analytics allows you to be creative in your compensation so you can align compensation with the goal of the company and that is profit.”
In order to get proven results from sales reps, Pericle says that distributors have to start by taking baby steps when providing customer data.
“The number one thing that companies do is they burden their sales reps with garbage and once you do that you cast a shadow over any potential opportunity there is,” says Pericle. “The key is to when you’re presenting information to sales, you need to hone it down. In other words, you start very conservatively, and say we’re going to dial this down in such a way that we’re only going to give you the huge opportunities.”
Another critical business driver that distributors can leverage in today’s challenging economic environment via analytics is pricing. In fact, Blissett says there are some distributors who have uncovered huge sources of revenue leakage by analyzing pricing data. Unfortunately, the number of distributors who are not using analytics for pricing far outweigh those who do.
Distributors, too often, will leave the pricing structure up to their sales reps based on individual accounts. This way of conducting business oftentimes leaves too much money on the table.
Consultants advise distributors to take advantage of the analytical pricing structures made available in their ERP systems. Most ERP providers have been actively engaged in the pricing arena for some time, but most distributors are still not taking advantage of this function. Some distributors cite the lack of resources in their operations they can devote to the function and not having enough knowledge on how to mine the proper data from their ERP systems as major reason why.
“They’re able to do so many of these analyses, but the ability to actually take the results and do something with it, it’s a critical step that is often the most difficult step,” says Blissett.
Pricing analysis is a multi-dimensional challenge that is best viewed from three perspectives: strategy and optimization, management and execution, and monitoring and enforcement, according to Blissett.
Strategy and optimization takes into account issues such as how much distributors should charge for a particular product or service, and recommends how prices can be adjusted according to customer segments and demand.
“A sound pricing strategy considers the best time to promote an item or service, how much of a discount should applied, and how goods and services might be bundled,” Blissett writes in “Facing the Forces of Change.”
Management and execution oversees more tactical tasks, such as ensuring that sales reps are following through with the proposed prices and are charging customers at a price that is most beneficial to the distributor.
The last piece of the pricing puzzle, monitoring and enforcement, gives distributors the ability to track ongoing issues such as whether or not customers are paying the right price, if they are adhering to appropriate terms, and receiving the right discounts. It also ensures that distributor sales reps or customer service reps are aware of and are actually applying set pricing guidelines and are working to avoid revenue-draining experiences.
So, if reps are not following the proposed pricing guidelines, distributors are quickly notified by the system and can take appropriate measures to fix the problem. With factual data, the reps don’t have a leg to stand on.
Although analytics is driven by software and technology, distributors must keep in mind that drastic improvements will not be made just by implementing the software. There needs to be buy-in from everyone in the organization to achieve success. In the end, distributors who continue to make critical business decisions while disregarding the use of analytics are putting their businesses at considerable risk.
“It’s not just the largest distributors who are creating meaningful differentiation vs. their peers, it’s the ones who understand their own business, who understand their role in the supply chain, who understand their cost structures, who understand where value is created and who can apply different analytical lenses to their business to sift out the nugget and capitalize on those,” says Blissett.