Leveraging Human Capital

Human capital represents  a significant financial investment for every wholesaler-distributor.

The term "human capital" may seem overly formal and perhaps even a little clinical, especially for an industry still characterized by relationship-driven sales and strong ties to its employees.   As much as distribution is about products, services, customers, and vendors, it is also about human capital, which is at the heart of a distributor's capabilities.

In spite of the growing acceptance of online communication tools, people represent an essential part of a distributors capital base.  Indeed, the growing acceptance of online tools actually increases the importance of the human dimension by freeing employees form repetitive, routine non-value-added activities and allowing them to focus on tasks that can add value and differentiate the business.  Human capital represents  a significant financial investment for every wholesaler-distributor.

ACTION POINT: Human capital is an asset that must be thoughtfully and actively managed to ensure the benefits of productivity, effectiveness, value and profitability are met. 

Questions to Consider Regarding Analytics

Do we understand our sources of competitive advantage and disadvantage

When considering analytics-related investments and strategies, distributors should ask themselves:

• Do we know which market segments and niches are growing most rapidly, which are most volatile, and the underlying factors driving the dynamics in each of those segments?
• Can we target with precision our sales and marketing activities and monitor and measure the results?
• Do we know which customers, products, services, and suppliers are (a) most profitable at an aggregate level, (b) most volatile over time in terms of profitability, (c) most strategic to the business (that is the customer is regularly purchasing a high volume of core inventory items), and (d) costly to serve?
• Can we rapidly model the impact to revenues and profits of incremental changes in pricing, at an individual customer, SKU, or supplier level?
• Do we understand our sources of competitive advantage and disadvantage? Can we mode the effect of changes in those dimensions of our our business?
• Are we able to assess whether or not we are making smart decisions across the business?
• Do we have a strategic plan for expanding our analytical capabilities? Are our IT and business strategic plans aligned with our analytical requirements? Does the plan include a human capital dimension?

ACTION POINT: Identify and use the analytic tools that will help you answer the questions above.

The Future of Analytics in Wholesale Distribution

In other words, decisions are made based on not only what has happened in the past, but also taking into account "what we aspire to"  and "what we believe is likely to occur." 

Analytics is rapidly advancing into the predictive realm--with potentially trans formative effects.   Predictive  analysis allows companies to model different outcomes and consider alternative trends and behaviors--all in the proper context.  In other words, decisions are made based on not only what has happened in the past, but also taking into account "what we aspire to"  and "what we believe is likely to occur."  This can greatly reduce risk and surface new opportunities by answering questions such as:

• Are we correctly targeting profitable an unprofitable customers?
• If customers are unprofitable, what options do we have?
• Do we have pricing, service, and profitability models for every customer segment?
• Are we able to accurately monitor and identify inefficient practices across our logistics network?

ACTION POINT:  Considering the questions above offers more certainty that distributors are making the right decisions, and it can help identify and mitigate risks before they occur.

Recruiting and Training

companies must be prepared to offer the necessary training and curriculum's to support basic finance, accounting, and statistical capabilities.

From a recruiting perspective, this can mean revising job descriptions and/or exploring new sources of analytic talent and skills.  From a development  and retention perspective, companies must be prepared to offer the necessary training and curriculum's to support basic finance, accounting, and statistical capabilities.

Figuring out how to reward analytic capabilities (incorporating new metrics into the review process, for example) is another consideration.  From a management succession and advancement standpoint, individuals with advanced analytical skills should be given the opportunity to advance their careers and rotate through all the functions of the business.

ACTION POINT: Analytics will be important for the next generation of distributors, embed them into your business today.

Finding and Supporting New Talent

Managers must also be prepared to explain the rationale behind these decisions.

The industries growing use of analytics is creating a need for new talent.  People who perform analytic-related tasks must feel comfortable working with data, reports, and analytic tools, and be able to interpret the results quickly and accurately.  

In addition to having the resources to perform analyses, companies must have the ability to act on the results--not necessarily in the traditional way.  Managers must also be prepared to explain the rationale behind these decisions.

ACTION POINT: Identify the talent required to see and act on what the data is telling you.

Pricing: A Multidimensional Challenge

A sound pricing strategy also considers...

Pricing is best viewed from three perspectives: strategy and optimization, management and execution, and monitoring and enforcement.

• Strategy and optimization takes into account issues such as how much an organization should charge for a product or service, and how prices might be adjusted according to customer segments, channels, and demand.  A sound pricing strategy also considers the best time to promote an item or service, how much (and what type) of a discount should be applied, and how goods and services might be bundled.
• Management and execution oversees more tactical tasks, such as ensuring that ll of a company's stores are charging the same price for the same item (and if not, why?) confirming the most profitable products and services, verifying that promotional strategies are in line with price discounts and targeting the business's most profitable customers.
• Monitoring and enforcement tracks ongoing issues such as whether or not customers are paying the right price, adhering to appropriate terms, and receiving the right discounts; ensuring employees are aware of and applying pricing guidelines; examining areas that are draining revenue; and tracking sales force incentives/behaviors against corporate goals.

ACTION POINT: Build your pricing strategy around the three key areas above.

Ensuring the Price is Right

Expanding margins, offering a consistent pricing strategy and avoiding negative margin creep are the tactics that will ensure profitability.

Distributors see price optimization as very important to their business.  With the current rising prices in rare earth phosphors and the scheduled announced increases to the lamp pricing at three month intervals for the foreseeable future, pricing has never been more critical.

Expanding margins, offering a consistent pricing strategy and avoiding negative margin creep are the tactics that will ensure profitability.  Some distributors are creating dedicated pricing departments staffed with individuals who understand the pricing science and have a keen eye for strategic pricing.  They review customer purchasing history to assess product mix and cost to serve factors.   A key factor is striking the right balance between relationships and analytics.  One way to achieve this goal is to surround sales teams with a supporting finance team to help optimize pricing performance.

ACTION POINT: Optimize customer pricing based on customer purchasing history(OERL) to set strategic price levels.

Customer and Supplier Segmentation: From segments to niches

Customer segmentation...has more dimensions today than ever before.

Customer segmentation--knowing which customers are in each market and/or location, what products they want and when, and how much they are willing to pay--has more dimensions today than ever before.  Determining what services customers value, how and when they like to receive deliveries, and what mode of communication they prefer are just a few examples of these new dimensions.

To further refine customer relationships and heighten customer profitability, many distributors have stopped selling to  (or are selling differently to) unprofitable customers--deciding which ones should go and which ones are worth keeping, margin-wise.  The same applies to supplier relationships; fee for service payments from suppliers will continue to grow between now and 2015.

ACTION POINT: Identify the customers and suppliers that are essential to your profitability.

Need for Analytics

Unless distributors have a deep understanding of the specific drivers of cost...they will be unable to make smart..decisions

Distributors' increasing demands of customers and suppliers is also driving the need for more in-depth analytics.  Unless distributors have a deep understanding of the specific drivers of cost within their organization--and how different customer and supplier behaviors are affecting both those costs and profitability--they will be unable to make smart segmentation and portfolio decisions ( such as identifying specific customers and suppliers to target for profit improvement actions).

Customers place upstream pressure on distributors to:

• Hold less/no inventory themselves while at the same time minimizing out-of-stocks of key items
• Manage the inventory they do hold, with no guarantee that they will pay for this service
• Provide just-in-time, overnight delivery on orders
• Continuously improve overall service levels

Conversely, vendors expect their downstream distributors to:

• Stock as much of their inventory as possible (number of SKUs, number of items of each SKU, and so on)
• Exert greater influence on market dynamics--identifying new opportunities and stimulating demand
• Work collaboratively to generate sales, product, and forecasts--sharing data and insights
• Identify unmet needs in the market and prioritize new opportunities.

ACTION POINT:  Think about the expectations of customers and vendors and how they affect your cost of operation.

The Scope of Analytics

analytics can be applied to any and all facets of a distributor's operations,
Today, analytics are being applied to an ever-broader array of issues, challenges, and opportunities.  From calculating the optimal loading, routing, and scheduling to transportation resources, to improving disease and drought resistance, to predicting traffic patterns and congestion, to identifying fraudulent tax returns, to understanding shopping behaviors, analytics are everywhere.  The same holds true for distributors.  Increasingly, analytics can be applied to any and all facets of a distributor's operations, including:

• Inventory management -determining appropriate inventory levels across all SKU's and locations, confirming optimal order quantities and frequencies and knowing where inventory is best held.
• Customer segmentation - Measuring those customers that are most and least profitable, determining the cost to serve them and assessing the ease of doing business with them and their willingness to collaborate.
• Supplier segmentation - Measuring which suppliers are most and least profitable, determining the cost to carry and calculating the ease of doing business with them and their willingness to collaborate.
• Product portfolio analysis - determining which products deliver the most profit, volume and differentiation to the company.
• Price optimization - Calculating the price that will maximize selected variable(s): sales volume, gross profit and net profit.  Determining price elasticity across customers, regions, and categories and identifying price interactions.
• Workforce optimization - Understand how the attrition of aging/retiring employees will affect future business performance, identifying the ideal number of employees by skill set, geography, and customer group and allocating those employees to accommodate selected variables.
• Network optimization - Identifying the ideal location of warehouses, distribution centers, and sales branches and confirming the ideal number of trucks, delivery vans, location, routing and loads.

ACTION POINT:  Analyze and address the seven areas above to increase your competitive edge.

Analytics ≠Applications

Ultimately however, the analysis is very much discrete from the technology, making it accessible to distributors of all size and sophistication.

Mention the word "analytics" to some executives, and the images of mathematicians and statisticians programming advanced algorithms into room sized computers to crunch vast amounts of data come to mind.  While this may apply to some industries (such as hedge fund trading), the reality is that may analytic approaches do not require large technology investments, and they can deliver benefits to distributors of any size.

There are five major steps which connect people, processes, technology, and metrics:

• Identify process gaps by assessing each process group.
• Link identified process gaps to financial drivers to understand the impact of shareholder value.
• Analyze profitability of the proposed best practice implementation to close the gap.
• Understand the best practice methodology, implementation details, and challenges.
• Enable appropriate resources to  implement best practices.

A rich set of validated and operational data underlies the analysis, and technology can play a critical role accelerating the capture and provisioning of these data.  Increasingly distributors are looking to IT-enabled solutions to help them make informed decisions.  Ultimately however, the analysis is very much discrete from the technology, making it accessible to distributors of all size and sophistication.

ACTION POINT: Use the analytic steps above to connect people, processes, technology and metrics to ensure your business is competitive.

 

Differentiating with Analytics

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.

Each of these activities leverage analytics.  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.

Always important, analytics are now a required core competency that must be embedded within the distributor organization and elevated to a strategic level.  

ACTION POINT:  Identify and use analytic tools to improve your customer relationships and human capital skills.

Questions to Consider Regarding Services II

Are we building the necessary human capital skills...to improve delivery and sales of our service offerings?

Here are some additional questions to consider regarding the role of services in your business:

• Are there new services that we should offer to our customers/suppliers via a partnership/joint venture with another distributor or other company?
• Do customers expect these services from their distributor? 
• Are we building the necessary human capital skills--through a combination of both recruitment and training--to improve delivery and sales of our service offerings?

ACTION POINT:  Make sure your customer facing employees are knowledgeable and comfortable speaking the language of services. 

Questions to Consider Regarding Services

Do our service offerings reinforce our customer and supplier relationships?

Here are some questions designed to stimulate your thinking about your services and how they should fit in to your business model.

• What services do our customers value, which are differentiating, and which ones are they willing to pay for?
• How can we change value perceptions  where gaps exist?
• How do services affect the acquisition and retention of our target customers?
• What services do suppliers truly value--and which ones are they willing to pay for?
• Do our service offerings reinforce our customer and supplier relationships?
• Do the contemplated/offered services reinforce our brand?
• What services are our direct and extended competitors offering and at what price?

ACTION POINT: Use the questions above and begin a brainstorming session with your team.

Defining and Evaluating Services II

On a strategic level, services can, in some instance, position a distributor as a direct competitor to its suppliers.

In the continued focus on defining and evaluating the value of their services distributors should also consider:

• Outside Sources - Services-based capabilities do not always have to come from inside the company.  Leading distributors have learned the benefits of partnership and collaboration and how those capabilities can pay off over both the short and long terms. (In the case of large distributors, the ability to quickly leverage scale and scope enables them to more quickly develop and market cost-efficient, high-value services.)
• Channel conflicts - On a strategic level, services can, in some instance, position a distributor as a direct competitor to its suppliers.  Although this is not necessarily a negative situation, the implications of new services offerings that may affect key partners should be carefully considered, and perhaps even discussed with them.

ACTION POINT: Consider the value of outside resources and channel partners when developing service offerings.

Defining and Evaluating Services

Adding services may require incremental investments

Distributors must constantly define and evaluate the value their services deliver and effectively communicate that to suppliers and customers.  Some things to keep in mind are:

• Customer preferences - Customers my have certain expectations and preferences regarding how and where they receive services (for example, from the manufacturer, from the distributor, or via a third party).  Understanding the source and nature of these preferences can help distributors overcome resistance.
• Additional resources required - Adding services may require incremental investments in information technology (IT) and/or the addition of new personnel able to sell or deliver the services.  Integrating these individuals into existing compensation and management structures requires planning and communication to ensure expectations are aligned across the organization.

ACTION POINT: Evaluate the services offered in the light of customer preferences and the resources required to deliver them.

Making Services a Reality

Ensure that new services meet or exceed customer's and supplier's expectations.

When incorporating new services or expanding existing offerings, distributors must:

• Forge closer relationships with suppliers and customers.  Tighter collaboration upstream with suppliers can result in new services aligned with your existing product offering, while deeper collaboration with customers will reveal new and  more meaningful service opportunities.
• Align their services-related investments with market realities and trends as well as customer's value perceptions.  A deep understanding of the competitive landscape often requires a broad perspective on just who the competitors are.  Increasingly, consulting firms and technology providers represent additional sources of competition over and above wholesaler-distributor peers.  The ability to quantify and demonstrate the value services delivers is as important as delivering the service itself.
• Ensure that new services meet or exceed customer's and supplier's expectations.  This requires both carefully documenting initial expectations about the service and measuring ongoing performance against those expectations.

ACTION POINT:  Build strong supplier and customer relationships and understand your market realities.

Getting Close to Customers

These individuals must be comfortable selling value and a relationship, not just price and a transaction.  

The value added services model requires a new mindset among distributors that demands more from both the recruiting and training sides of their business.  The objective: building a cadre of individuals who can conduct the deep analysis that identifies high-value services opportunities and who can also convey to customers or suppliers the value of those services.

These individuals must be comfortable selling value and a relationship, not just price and a transaction.  Distributors must also develop new pricing models to capture the most value from services--whether they are bundled with a product sale or provided as a discrete offering.

ACTION POINT: Analyze and identify the opportunities within your customer base for delivering high value services.

The Expanding Role of Services

Capability gaps remain in a number of important areas

Few distributors have yet to truly "crack the code" on services.  Capability gaps remain in a number of important areas, including accurately defining the scope of the service, ensuring the service addresses a specific customer or supplier need, managing the portfolio of services as an integral part of the business rather than a side offering, creating a consistent approach for delivering the services efficiently and convincing customers of the value of being delivered.

In far too many instances there also remain disconnects among:

• The costs associated with delivery of the service
• The customer or supplier's perception of the value the service delivers
• The revenues and margins realized by the distributor from the service.

ACTION POINT: Understand the true costs of providing individual services and their ultimate profitability.

Near, Medium and Long Term Action Ideas

Evaluate growth opportunities and cost-reduction strategies.

Confronting the new economic environment requires planning and action across the near, medium and long term future.  Some ideas to consider include:

• Near Term(1-12 Months)  - Reinforce key customer and supplier relationships.  Review, revise and confirm your business strategy with each partner and discuss growth opportunities.
• Medium Term - (12 - 36 Months) - Take stock of your overall business strategy.  Revisit core elements and assess and prioritize required capabilities.  Reflect on what has and has not worked, and understand the reasons why.
• Longer Term (Beyond the next 36 months) - Evaluate growth opportunities and cost-reduction strategies.

ACTION POINT: The goal should be a continuous reinvention of the business with a focus on retaining and developing the differentiating and value-adding activities at the core.

Questions to Consider

How can we deepen collaboration with our suppliers and customers to identify, define, and deliver new products and services, and prioritize and access new markets?

The following questions are designed to stimulate your thinking about new business strategies, innovative models, and creative leadership techniques.

• Where can we leverage partnerships and joint ventures, across a broad array of potential partners, to access differentiating skills and capabilities?
• How can we deepen collaboration with our suppliers and customers to identify, define, and deliver new products and services, and prioritize and access new markets?
• How can we build a more flexible, scalable organization and cost structure?
• Can we find ways to leverage advanced analytics and optimization techniques/tools to identify new efficiency and growth opportunities--both internally and with business partners?

ACTION POINT: Wholesaler-distributors able to act on these focus areas will be well positioned for the new economic environment.

Developing Targeted Approaches for Growth

companies can no longer look to market growth to drive revenue;

Wholesaler-distributors should create targeted approaches to grow revenue.   Going forward, companies can no longer look to market growth to drive revenue; they must understand and take advantage of changing customer priorities and buying patterns, as well as opportunities for geographic expansion--whether in Mexico, Canada, or elsewhere overseas--and deploy innovative, targeted approaches to generate lasting profitable growth.  Distributors should:

• Define, quantify, and promote the value of their company's products and services.
• Improve sales and marketing productivity by monitoring employees' performance and supporting them with necessary tools and technologies.
• Engage and collaborate with customers in new ways to reveal unmet needs and generate new demand--perhaps borrowing some insights from consumer products industry, where collaboration with retail customers has been driven by new levels of information--sharing and transparency.
• Explore opportunities to partner with and sell to government entities and agencies.

ACTION POINT: Seek and develop meaningful partnerships with your customer base.