Book Excerpt: The Distribution Value Map
Driving Growth and Shareholder Value: The Distribution Value Map™, a book and poster system developed by NAW/DREF and Deloitte Consulting, aims to help distributors improve the performance of their businesses by using a “Distribution Value Map” (DVM) to identify aspects of a business that could be improved and provides steps they can take to reach these goals.
The DVM is essentially comprised of three main components: “drivers” (factors considered by shareholders, analysts and investors to assess a company’s performance); “levers” (define ways to affect the drivers); and “actions” (more than 750 potential improvement steps.)
The accompanying posters include the components of the DVM that will help distributors take the lessons learned from the book and literally map out a plan. The first poster lists all of the drivers, levers and actions and the second serves as a worksheet (actions not included.)
The following is an excerpt from Chapter 1, “The DVM in Action.”
In business for more than 50 years, ABC Distribution (ABC) has made a name for itself in wholesale distribution across North America by providing high levels of service. ABC’s sales staff is organized geographically into branches and districts. Sales from warehouses represent 65 percent of volume; direct shipments are a 25 percent; counter sales are 5 percent; and Internet sales are 5 percent today, but [are]expected to be 25 percent by the year 2010.
ABC is a leader in its segment, yet during the recession of 2002, the company’s revenue declined by 25 percent. Since then, ABC has been scrambling to regain its past revenue numbers. One strategy for doing that was a comprehensive upgrade in the company’s information applications and infrastructure intended to improve a broad range of enterprise business processes. In fact, ABC is still in the early stages of realizing the full benefits of the upgraded technology.
Early in the upgrade project, management realized that considerable value could be generated from a performance improvement initiative. The DVM became the company’s framework of choice to enable the identification of opportunities.
Note that in this story, ABC applied the DVM to plan and execute improvements to its business processes in a four-step approach. When you use the DVM, you might choose to follow a similar approach. Here is how the DVM worked for ABC.
Look At Performance
To what extent was ABC achieving its business plans? Where were the gaps between planned and actual performance? Benchmarking provided ABC’s leadership with a view of its competitive position with its peers. What became clear? The company could do a lot better in more than one area.
ABC compared its performance across eight metrics as illustrated in figure 1-1. The diamond on each metric scale represents ABC’s performance. The vertical red hash marks represent ABC’s selected competitive peer group. (Note that a similar analysis could be developed using competitors, and other admired peer companies that are not necessarily direct competitors.)
ABC performed lower than its selected peers/competitors on most metrics (figure 1-1), and the company graded its actual performance with letter grades A through D. A similar self-assessment approach and grade were used to indicate performance in figure 1-2.
Follow The Map
The findings from the benchmarking analysis motivated the executives and managers to brainstorm improvement ideas and use the DVM framework as a guide. On the DVM, they compared notes and identified hot spots: What were the company’s strategic imperatives? Those strategic imperatives that ABC identified are circled in dark blue (see figure 1-2)
ABC executives and manager then debated their company’s strengths and key business issues and identified the most vexing business issues that could impact value creation as indicated in red dotted boxes in figure 1-2 … Where did the company consider projects or initiatives (called actions on the DVM) that would push the levers that drive value? The sublevers where ABC launched current/ongoing improvement projects are circled in green.
Prioritize And Plan
Revenue Growth as the Driver
ABC decided that Revenue Growth was its No. 1 priority. The DVM … illustrates two alternative subdrivers (i.e., paths): Volume and Price Realization. Both subdrivers needed a lot of attention and benefited from a fresh perspective and rationalization. Was one subdriver more likely to yield immediate results and, therefore, immediate return on investment? The levers Acquire New Customers and Suppliers, and Retain and Grow Current Customers and Suppliers under the Volume subdriver were two areas where ABC executives believed they needed to excel. However, the company had no current projects in those two areas. As a result, they became good targets for future investment. At the same time, under the Price Realization subdriver, the red dotted box around the Price Optimization sublever and around several of the actions below it indicated an urgent need to act. As a result, and based on hot-spot opportunities ABC identified under the Price Realization sublever, the top area of focus became Price Optimization. ABC conducted a detailed analysis of pricing in its organization. The company analyzed transaction data from two of its eight districts for six months to determine the potential for margin improvement.
Price Realization as the Subdriver
ABC used a pricing tool from a software vendor to analyze its price setting and price execution data. Through the pricing analysis and a number of intensive working sessions, ABC management identified $5 million of margin improvement that could be obtained in less than six months. ABC’s implementation approach was as follows:
•Microsegmentation: By analyzing customers within very specific groups and within and across districts, ABC found that customers were not differentiated by volume sales. For example, low-volume customers who bought one or two times a year received the same pricing as customers in other districts who had much higher volume and earned the higher discounts. There were a couple of reasons for this happening.
•The pricing managers in the districts with the low-volume, high-discount customers had little or no experience in selling the items being discounted. As a result, they did not know the customers’ willingness to pay. This lack of experience and visibility to pricing in other districts resulted in lower margins and lost profits.
•The pricing managers realized that higher-volume customers in other markets were willing to pay higher prices for these items. While taking into consideration the differences in customer base and demand in geographies, ABC found that it could raise prices across all districts for certain volumes. Even if the company lost 50 percent of those low-margin customers, it would have overall higher margins, which would result in increased revenues.
•Price analysis and consistency: ABC found that it could use technology to bridge the gap between centralized and decentralized pricing policies. With appropriate legal review of its new pricing policies and the ability to better understand and analyze its prices in the marketplace, the company was able to negotiate like opportunities more consistently. Again, this all revolved around the customers’ willingness to pay for specific products or services. In addition, ABC found that with this price information, the corporate and district pricing managers had new confidence and knowledge to defend prices. This was a significant factor to help increase margins.
ABC identified and focused on these three major opportunity areas to help increase margins:
•Offered a fair and reasonable price at segmented levels.
•Implemented processes and procedures for price setting and maintenance to help determine the correct segmented price.
•Validated and defended system prices at the time of the pricing decision. This was impacted directly by ABC’s confidence in its pricing system.
•Provided pricing information to districts and branches, so they could more easily determine whether market prices suggested by customers and the salesforce were accurate and consistent with what other like customers were willing to pay.
•Provided pricing information to all levels of the organization (i.e., corporate, district, branch and sales rep). So that each could help manage price performance and increase margins.
•Provided the tools to all levels of the organization (i.e., corporate, district, branch and sales rep) to help price opportunities, which took into consideration factors, including the product, customer and channel.
Result at Six Months and Later
After six months, ABC was well on its way to achieving the following capabilities:
•Microsegmentation: Using a pricing approach based on customer and market attributes enabled ABC to group like market opportunities together as determined by its customers’ willingness to pay.
•Optimization of price guidelines: ABC used price models and rules to help achieve targeted objectives, including revenue, margin, and market share.
•Price setting and execution: ABC began to create, assess, edit and publish price guidelines for the organization.
•Analyzing data: ABC used hierarchical and segmentation techniques to manage its data.
ABC started realizing benefits. At the start of the project, ABC set its strategic growth targets for the following 12 months:
•Revenue growth of 5-7 percent.
•Gross margin rate of 24.5 percent (current rate was 22.8 percent).
•$2 million in revenue growth through improved margins.
Eleven months after the implementation of the new processes and pricing technology, ABC achieved the following cumulative benefits:
•An increase in gross margin from almost 23 percent to more than 24 percent.
•An increase in gross margin dollars of more than $1.5 million.
•Maintained or increased win rates in all districts.
As a result, ABC viewed gross margin and margin improvement much like inventory. The company managed them on a daily basis, and they were measured and reported weekly, monthly, quarterly and annually. The results were and continue to be positive, and ABC is now in the top quartile for profitability within its industry sector.
How the DVM Helped ABC Distribution
By using the DVM as a framework for prioritizing its projects, ABC decided to further evaluate whether to continue to launch the following top six potential initiatives:
1. Conduct rapid diagnostic for acquiring new customers and retaining current customers (new).
2. Optimize pricing, including addressing possible leakage of rebates and incentives (new).
3. Increase emphasis on differentiated products and services (current).
4. Improve methods for managing demand and supply performance (current).
5. Enhance communication and coordination across the supply chain (current).
6. Improve supply chain and supply network planning processes (current).
While the DVM was not the source for all of ABC’s business improvement initiatives, it was a source of creativity and a framework for jump-starting and structuring ABC’s planning decisions. The DVM framework also helped the management team evaluate expected outcomes of potential projects as the team considered project interdependencies and strategic business priorities.
ABC then assigned priorities to its potential initiatives by considering the following factors:
•Potential value to be realized (i.e., how the project would impact drivers on the DVM)
• Project costs
•Implementation efforts and also resource availability
•Risk and complexity to implement
ABC prioritized its projects. This helped to create a comprehensive plan and initial business case for its performance improvement initiatives. By focusing on the driver of top priority — Revenue Growth — ABC debated prioritization factors for each initiative and reached the conclusions for its top six potential initiatives.
Get It Done
ABC got the quick wins it was looking for by increasing discipline around pricing and controlling leakage of rebates and incentives. The company improved its gross margin by nearly 1.5 percent. Today, ABC is using the returns from those investments to fund more long-term projects.
Going forward, the company plans to evaluate all initiatives — old and new — against the new baseline performance metrics and manage them within a project management organization. The DVM framework is now an integral part of ABC’s planning and budgeting process.
To order the book, visit the National Association of Wholesaler Distributors’ Web site at www.nawpubs.org.
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