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B2B Distributors Acting Like B2C

One of the challenges we hear over and over again from our distributor clients is the impact that they are feeling from the growth of the web presence of their large competitors. The gains that major distributors are experiencing in their online business is significant. If you compete against the big guys, such as Grainger, Staples, CDW, or Amazon; then you cannot help but notice the continued improvement in their web sites and online ordering systems. The lines between retail consumer and business consumer are blurring because the business consumer is expecting experiences that are more personal. Those retail buyers are also wholesale buyers during the day. The major B2B distributors are creating compelling Internet content and experiences that more closely resemble the web sites of their B2C counterparts so that their consumer has a better experience.
 

So, before you put your hands up and surrender to the fact that you will never be able to compete...read on.

What can you do to make your Internet presence meet the needs of the new consumer? First, you have to recognize and understand the needs of your current and future customers. We are fast approaching the point in which most consumers of business related products will have been born with a smart phone in their crib. This makes a huge difference in the communication and interaction preferences of these new consumers, whether they are retail or wholesale-focused. While we don't believe that face-to-face communication will go away in our lifetime, we do believe and see evidence that a significant level of purchasing communication will be done through the web and smart devices. Let's quickly list and not dwell on the bad news for distributors:

  1. Investment in different communication avenues can be expensive.
  2. Developing personalized content takes time and effort.
  3. Outside sales forces will become less relevant on a daily basis.
  4. Customers will expect "almost" instant access to customer support services.

Now for the good news:

  1. Building a mobile application may boost sales revenue and customer satisfaction.
  2. Conducting business through the web is less expensive than traditional avenues.
  3. Allowing customers access to critical business information via their smart phones will differentiate your business today.
  4. A web catalog is exponentially cheaper to produce and edit than a print catalog.
  5. There are product configurators that will allow customers to build their own quotes and orders.
  6. Multi-language sites are easier than ever to build and automatically maintain.
  7. Differentiating between current customers and visitors can be translated into the ability to give each consumer a particular eCommerce look and feel.
  8. A strong web store can expand a distributor's geographic reach.

Here are ideas on how to execute some of these important endeavors.

Mobile applications are all the rage, but not because they are cool, although they are! A Recent study by Flurry (December 2012), a San Francisco-based mobile analytics company stated that consumers are spending 127 minutes per day in mobile apps, up 35% over last year. At the same time, desktop web usage declined 2.3% to 70 minutes. We don't think that this is a temporary situation; we believe that the usage trends will continue and have an impact on the B2B market as well.

Marketers, not just mobile marketers, are saying that getting an app onto the real estate of a smart phone has huge value. The CEO of Chicago-based, Appolicious, Karl Stillner said, "Simply having a prominent icon on a home screen provides value". To get started on the mobile application path, check out these developers: Vokal Interactive, Blue Whale, or Mobintegro.

Web-based business is much more profitable than traditional business. So why aren't you doing it? We hear all the time, "our customers do buy through the web" "Our products need detailed explanations before a purchase can be made." Are you sure? The main reason we hear these responses is because in the B2B market, consumers are not being given as many options as their B2C counterparts. It stands to reason that IF given the choice, consumers would select the easiest way to buy, not the most challenging. Take a long look at your web site and determine if it is delivering the experience that you would want as a consumer. Additionally, you can easily expand your geographic reach with a well-designed and optimized web site. You should check out Grainger, AmazonSupply, or any other recognizable major competitor to get ideas about what an effective eCommerce site looks and feels like. There are some excellent technologies like Store Placer, that can take the data that is sitting in your business system and present it in a user friendly format designed for any device, whether desktop PC, tablet or smart phone.

Giving your customers access to important information in a mobile format will keep them more loyal to your business. According to a study by comScore in September, 2012, 4 out of 5 consumers used their smartphones to shop. Before you say, ”Well, those are not business consumers”, ask yourself how far behind this retail consumer trend do you think commercial consumers are? Aren't these retail consumers also commercial consumers when they are at work? It is imperative that you develop a mobile web format for your prospects and customers to visit. Have you ever navigated to a web site on your smart phone only to find out that it was impossible to navigate because it presented you with the regular desktop website format? If you are like me, you react by clicking off of the web site and move on to the next resource. Even worse, research from Compuware found that 57% of consumers will NOT recommend a business with a poorly designed mobile web site.

There are web development firms like LiquidPrint that can not only build a mobile site for your company, but they can help you drive traffic there. They and others like Woodmark Technologies can also build interfaces between your business system and your mobile web site to give your customers access to order status and other information that is important to  them.

Develop a robust web-based catalog to help your customers buy from you when they want to buy. Even if you have a web-based catalog, how many times have you heard from customers, "I was looking for a particular item, but didn't see it on your web site, so I bought it from your competitor." Ouch!! What about all the times that your customer didn't say a word...

We are seeing more distributors seeking to put entire manufacturer's catalogs on their eCommerce web site so that there are no gaps in the products that they can supply. It is important to code the non-stock products so that they are only available in standard packaging and drop ship directly to the customer. There is typically no value that you can add by having the product come into your facility and then shipped out to your customer. There are also great tools (some of which are built into existing business systems) that will help your customers select additional products that make sense to buy with whatever they have selected. Have you ever shopped on Amazon? They recommend additional purchases based on what others with similar interests have bought.. This not much different from the successful suggestive selling tactic of McDonald's, "Would you like fries with..."

The bottom line is that there ARE strategies and tactics that you can deploy to compete with the major players in your market. You will find that they are successful against your smaller competitors as well. So make a plan to take some action this year to improve your Internet presence. If you need additional guidance or just want to talk about your options, please feel free to contact David Panitch, your distribution-focused technology resource.

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Burn Your Org Chart

New technology has opened many business opportunities for industrial distributors. Customers, and your own sales people, are using smart phones, tablets, and many other devices to improve the ways that business is being conducted. Given this, how will new technology and practices alter your organizational chart?  

Sales and Marketing  

Every distributor will need an "Eyeball Manager", the person responsible for tracking visitors to your web site, LinkedIn, Blog, and Facebook page as well as responding to tweets. Many large companies already have whole departments doing this for their brands and customers. How many sets of eyes are viewing your company's messages, advertisements, product offerings, etc. today? You need to know who is watching you and find ways to be sure your sales folks have the opportunity to turn them into customers.

Virtual Sales Person - Once you know which eyes are looking at your company, you need at least a sales person, maybe a sales manager, who is skilled in communicating with prospects and customers electronically. Billions of dollars of business is now conducted over the Internet. Companies are opening markets on a global basis and it may be impractical for you to conduct business in the traditional person-to-person way. 

Virtual Marketing Manager - Your catalog used to be a virtual sales person on its own. Now it has likely become an on-line catalog. The text, pictures, price sheet, etc. are no longer printed, they have moved on-line. But is that the end game from a marketing perspective? How interactive is your on-line catalog? Can I conduct business through my iphone or android device? How quickly can you respond to texted or tweeted questions? Does your marketing material look the same on a tablet as it did in a glossy printed catalogue? What new virtual media will be available 5 years out?

Electronic Trade Show Manager - It keeps getting harder to justify the cost and time invested in some trade shows. We have not seen many where that fact has not affected attendance. At some point, a virtual trade show is going to replace the old model. Booth duty will finally be a good assignment! Your trade show manager will need a different set of items to draw in prospects and to differentiate your "virtual booth" from your competitors.

Operations  

Virtual Warehouse Manager - We may not have virtual inventory anytime soon, but where your inventory is located is changing already. Many distributors buy or sell on a consignment basis. Many distributors hold stock outside of their own warehouses for key customers. Shared warehouse space, 3PL's, and other options exist today and are used by many distributors on a regular basis. Can your current manager also insure the proper handling and control of inventory spread across the country? Or across the globe? We think he/she might need a virtual counterpart, a person to manage inventory in locations other than your own warehouse.  

Supplier Relationship Manager - Manufacturing companies have been working on developing collaborative relationships with their suppliers because they see it as a way to take cost out of the end-to-end process. Distributors buy products from their suppliers and those relationships need to be more collaborative, as well. Our view is that at least some of your suppliers will be open to looking for cost saving and efficiency options that will strengthen both of you to compete in the future.  

Finance

Margin Manager - Every distributor understands the importance of margins, but not many have given a person the responsibility of looking for improvement opportunities. The margin manager will challenge sales on discounts and other margin reducing tactics. However, he/she will also be looking internally to find ways to improve margins, as well. Issues like managing margins through commodity cycles; tracking product line margins and specific item margins across the company and working with purchasing on competitive analysis will be tasks that your margin manager will accomplish.

Update the Hiring Process  

You may need to hire people to fill at least some of these new positions. Here are some tips for you to consider when filling any new positions:

  • Hire people with the skill set that the job requires, don't hire based on industry experience. Many small to mid-size companies operate under the assumption that a new employee must have worked in their industry segment - i.e. MRO distributor. Large companies benefit greatly from new employees with different backgrounds and experiences. A person with the right skills can learn about your products and customers. And, they may be able to add valuable insight based on what they previously learned in other companies or industries. We helped an industrial distributor hire a warehouse manager from the consumer products industry. That individual brought a wealth of different ideas that led to many improvements in warehouse operations.  
  • Hire a person who will "fit" in your company and culture. Said another way, if you are the owner, don't hire somebody that you don't like as a person, it will not work.  
  • Involve other key managers/employees in the interview process. That will give you some additional perspectives on the potential new employee and, importantly, people will buy in to the new person if they participated in the hiring process.

Change is a given these days in every aspect of a business. It is important to keep your organization current in terms of roles and responsibilities. Talk to every level of your organization and ask these questions: "How do we need to change our organization to remain competitive?" "Who do we need to hire next?" What positions are obsolete and which ones need to be added." What is going on in our markets that will affect our people in every position in the company?" When you have answers to these and other organizational questions put a plan in place and take action!  

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Is Your Plan In Place For Next Year?

For many the answer is no.

Distributors, and for that matter, many companies have found it difficult to successfully put a short and/or long term plan in place.

          "It's too much work."

          "It takes too much time."

          "No one looks at the plan anyway."

          "We know we should, but this customer needs help now. We'll get to it later."

What happens is companies put a plan in place and they then feel the job is done. The plan is not an end in itself; it is a means to an end. The key is the execution and implementation. As you develop your plan, make sure that you have included key milestones and are able to measure your accomplishments.

Is it too late to put a plan in place for next year?

It is never too late to bring your management team together and make decisions on what goals you have for next year and how you will go about accomplishing them. Challenge the team:

          "What have we done well that we should continue and what should we stop doing      that is hurting our business?"

          "What is changing in our marketplace and how should we respond?"

          "Do we have the resources we need to be competitive?"

          "Is our organization up to the task of profitably growing our business?"

If you have not already done so, get started. Spend the time to prepare for what you need to do starting January 1st. Remember, the more complex your plan the less likely that it will be accomplished, so keep it simple; communicate what needs to be done throughout the organization; and FOLLOW-UP.

If you engage your people in the planning process they will take a new level of ownership in the outcome of the plan. Give assignments to as many people in your organization as possible. Your pickers and packers will accomplish more and feel good about their everyday tasks if they feel as though they are responsible for the achievements of your company.

Plan now for success and by the end of next year a lot will have been accomplished.

The Distributor Board helps its clients keep it simple and get it done.

Plan on having a great New Year!

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Sustainable Distribution

Many large corporations have adopted Sustainability programs - Wal Mart, Proctor & Gamble, Exelon, Duke Power to name a few. They do this not just to appeal to the environmentally aware portion of the population, but because they have found that becoming more sustainable saves money. 

As a business to business distributor, you have a similar opportunity. Let's start by defining sustainability, then we will look at some of the actionable opportunities that exist for industrial distributors. Sustainability is conducting a business in a way that respects the current and future environment - i.e. offering products that use less packaging, delivering products with less transportation, and looking at internal processes with the aim of reducing waste and pollution.

Here are some key areas that most distributors can look at in an effort to be more sustainable and reduce cost: 

  • Energy reduction - this has proven to be the largest area of cost savings potential for many companies. In the long run, energy costs are going to continue to rise. For a distributor, making sure that your warehouse is properly insulated, doors and windows are tightly sealed, office and warehouse areas are illuminated only when people are present, are excellent opportunities to reduce heat and electricity waste and save money. Many firms have found it cost effective to have a professionally conducted energy audit to identify opportunities.
  • Renewable energy sources - companies as large as FedEx and as small as Devon Bank have installed solar panels on the roofs of warehouses or windmills next to their building to produce some or all of their energy. The excess energy produced is being sold back to their local utility. There are tax savings and other financial incentives associated with many of these projects.
  • Transportation - Trucks are the primary transportation method for moving products for distributors. Freight consolidation, better route planning, and maintaining your own vehicles,. can yield cost savings, while helping your business become more sustainable. What are the opportunities to reduce travel for your sales team, have you considered encouraging sales people to drive hybrid or electric vehicles? How often do you effectively substitute a face-to-face meeting with a video conference? This can have a dramatic impact on your carbon footprint.
  • Primary and secondary package design - there are opportunities here to work with your suppliers and customers in reducing excessive packaging, increase the recycling of packaging, and the re-use some packaging materials. What is your company doing to collect discarded packaging, corrugated, pallets, and other shipping products for recycling instead of adding them to a landfill? 

Getting started on a new program is never easy. One suggestion that we have is to collect the following information both in units and dollars. This will give you an idea of just what the cost savings opportunity might be.

  • Electricity consumed
  • Natural Gas Consumed
  • Fuel Oil Consumed
  • Miles/Kilometers driven
  • Miles/Kilometers flown
  • Water used
  • Waste Water discharged
  • Materials recycled
  • Solid Waste disposal 

The May/June 2011 issue of Industrial Supply Magazine featured a story about Acme Construction Supply. Acme built a new sustainable facility that has received LEED Silver certification. LEED certification requires the building owner to select features such as energy reduction, water conservation, and the use of environmentally friendly materials. If enough points are generated using a U. S. Green Building Council checklist, the building is certified.  

Lift trucks are an important asset for most distributors. Modern Material Handling's August 2011 issue featured news about hybrid lift trucks and lift trucks powered by lithium ion batteries. Hybrid lift trucks use a combination of batteries and diesel power. Lithium ion batteries have been used in a walkie-type truck for the European market. Their small size provides design and service advantages. 

These are just a few examples of actions being taken to make distributors more sustainable in the future and to reduce costs at the same time.

Need our help or just want to talk? Click here for a fast connection to one of our experts.

Top 5 Ways to Increase Revenue Without Raising Prices

Most distributors we talk to are facing ever increasing downward pricing pressure. So the prospect of the market supporting increased prices is dismally low. When is it going to stop? The short answer is NEVER, as long as distributors have to use price as the way to increase revenue.  Having a fear of losing business or feeling that business must be bought with low prices will not lead to profitable growth.

So how does a distributor increase revenues and more importantly, profits in the current environment? We believe that you need to focus on just a few core concepts. Here are five suggestions that we have used successfully across many different markets:

Referrals, referrals, referrals

Search for issues and solve them

Get involved with your customer's product development

Cross sell

Collaboration throughout the supply chain 

REFERRALS

Distributors traditionally have not done a good job with obtaining referrals. Other industries have built the gathering, nurturing, and converting of referrals into a core element of their sales process. If you've ever met with a financial planner, you know exactly what we are talking about. The good ones ALWAYS ask for referrals. And they ask all along the sales process - beginning, middle, end, and post. So why don't distributor sales people consistently ask for referrals? There are a couple of key reasons.

1. They just don't believe that their customers know others that can utilize the same products and value-add services that they provide.  

2. They are worried that their customers will be uncomfortable by being asked "Do you know anyone else that might benefit from the products and services that we provide?

In both cases, the sales person couldn't be more wrong! Your customers DO know others that would benefit from knowing your company. You know this is true when once in a long while you get a call from a company and they say, "I got your name from so and so, my neighbor, and he thought that you could help my company." The problem is that being this passive is not going to grow your business. Encourage your sales team to ask for referrals, teach the right way and the best time to ask for referrals. Reward them for their efforts even before they reap any real sales benefits. The benefits will come, but in the meantime you need to reinforce this tactic until it becomes a part of each member of your sales team process.

NO PAIN NO GAIN 

If your sales team knows nothing about "solution selling", then either get rid of them or get them trained right away! Solution selling is not a new concept, but it is amazing how absent it is in the sales tool box for many distributor sales people. News flash - the days of route sales people bringing doughnuts to their best accounts is long gone. Everyone, including your customers is pressed for time. There is no time for shooting the !*/%. There is only time for solving problems.

If your team is not sure how to start, a good first step is to get copies of Escaping the Price-Driven Sale by Neil Rackham written in 2008. Click here to link to the authors' web site. It is critical that you are uncovering issues (pains) and ultimately providing solutions. This is the way to take price out of the equation or at least minimize the reliance on price to win the business. We know a distributor of maintenance, repair, and operational supplies that embraced this selling process and has seen double digit growth even during economic downturns. It works!

PRODUCT DEVELOPMENT

Do you want to change the perception that your customers have of your organization from vendor to valued partner? If so, one of the ways to do it is through helping them with their product development efforts. You know the answer to the next question, Do people buy more from others that they believe are 'partners' versus ones that are just vendors? Of course, the partners!!

Here are some quick ideas that can help your distributorship move into the product development consulting realm.

Ask for introductions to the engineering people at some of your key accounts

Research your customers' industry for ideas that can be brought to your customer

Explore relationships with product design consulting firms  

Engage with your supplier partners on your customers' application requirements  

If you are listening carefully to the conversations with your customer, you will undoubtedly uncover opportunities in which you can help them from a product development perspective. Over time, you will become a trusted advisor and not just a vendor found in their database.

CROSS SELL  

If you've ever been to a McDonalds you know that they teach their front line people to cross sell. 'Would you like fries with your order?' Distributors can do that and more if you are willing to dive into your customer data. Most modern systems today allow you to store a wealth of data about your customers. The next step is getting into your data and slicing and dicing it to make logical sense out of it. You should take a look at historical information on the specific customer placing a current order. This will provide you with information about their purchasing pattern and the ability to "remind" them about other items that have commonly been purchased at the same time. Another key piece of information can be derived from your data if you can categorize your customers by type of industry, size, and other key attributes. This will provide you with the ability to suggest something that your current customer has not purchased, but another similar customer has. 

This is exactly what Amazon, another famous distributor, does with its customer data. Its ability to suggest book titles to you while you are shopping is derived squarely from their database of all customers with similar interests as your own.
 
SUPPLY CHAIN COLLABORATION

It is coming, if you are not doing it already. The notion that a distributor can keep 'secret' the information related to inventory is quickly disappearing. We recently spoke to a group of distributors about the increased transparency that is occurring in the supply chain. They all agreed that information must be shared between suppliers, distributors, customers, and most likely, end-users. Collaboration leads to taking cost out of the process.  The challenge that was expressed by many was how do they get to that point? Distributors may need to reevaluate their current technology to determine whether it will lead them towards this collaborative state. Many legacy systems will not be capable of doing this without a significant investment in technology that bridges disparate systems. This could be a logical time to explore new technology that can take the distributor to the next level in collaboration and overall business processes.

We have seen distributors that make the right decisions regarding their technology achieve a rapid ROI. Additionally, the business process improvement that can come with the implementation of new technology can help the distributor reach new levels of customer satisfaction and improved efficiency. Areas that have typically seen excellent improvements are:

Inventory Management

Customer Relationship Management

Customer Satisfaction

Sales Growth

Cash Flow

We encourage you to try some or all of these concepts. We believe that you will see great results if they are implemented properly. If you need some additional guidance related to these concepts or any others that ultimately help to grow the value of your distributorship, please contact us. We would be happy to have an initial consultation regarding your pressing issues. 

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If people are your greatest asset...

Then how do you hire, retain, and reward the right people? 

Most of us have probably heard the term hire slow and fire fast, but it often seems much easier than it looks. How often have we held onto an employee that for a variety of reasons we just couldn't let go? In talking with distributor owners and managers, we found that the topic of employment issues was near the top of their list of concerns. Given the current employment climate, we asked a group of human resource experts about their thoughts on the current employment landscape related to distributors. What we heard is great advice for anyone that is considering hiring, promoting, retaining, or firing employees. 

 

A special thank you to the following people for contributing to this article.

 Josette Goldberg of Goldberg Executive Coaching

Will Clarke of Kensington International

Lori Kleiman of HR Advantage

There appear to be certain traits that distributors with high achieving employees and low turnover have in common. They are:  

  • Showing respect to employees
  • Providing ongoing management training
  • Giving regular feedback on performance
  • Supporting employee education
  • Allowing for flexible schedules and work environments
  • Offering innovative non-cash rewards for performance 

When asked, "Is this a good or bad time to hire people?" the answer was a qualified yes. The obvious is that there are many people that are in the market today.  However, it is still not easy to find the person that is the right fit from a personality standpoint, not skills. The reason for this is that the skills side of the equation is simply the price of entry these days. Skillful people are plentiful, but fitting into an established work environment can be tricky business.

 

There has been an up tick in the hiring with mid-market distributors, but the small and lower mid-market companies have been slow to hire. This is often the case due to the fact that the mid-market and larger have greater capital resources to utilize for expansion. For more cash strapped distributors they want to see greater signs of a recovery before they will add to their head count.

 

Promoting from within is still a very successful way of getting the right people in place. The primary driver of this activity is the lower cost in time, dollars, and organizational knowledge that is achieved by moving someone up the ladder rather than hiring from the outside. Many distributors have implemented employee referral programs and have evidence that it reduces their hiring costs while at the same time on boarding employees that more readily fit the culture. The flip side is promoting someone above their competency. You would think that this wouldn't happen today, since we've been hearing about this and seeing first-hand the failure of this promotion strategy. It was said by one of our experts that "...developing your talent helped to position the right people for promotions and led to the successful retainment of high performing employees."

 
On the retention front, it was also noted that while there is a significant trend towards greater employee turnover, especially in the Gen Y group, it was also found that that same generation was more easily retained if they had a great manager, experienced strong learning opportunities, and had a clear understanding of their goals and objectives. Will Clarke stated,

"The latest polls suggest that what is important to employees is their relationship with their direct manager. This time and again comes up as a leading factor in people staying at a particular company. So companies that help managers to manage better are helping their retention scores, as well."

Our experts also agreed that there are often non-monetized incentives that can be provided to a distributor's key employees that help to motivate and instill loyalty in them. One such incentive is flexible work time. In many situations, the ability to have flexible work schedules far outweighs an increase in salary. Another method suggested to retain the right people was to provide them with clear, unambiguous feedback. When was the last time a manager provided their staff members with a review? What did it look and feel like? Did it include clear goals that the staff member understood and agreed were achievable?


The counter to the "retention is good" mind set was clarified by a question posed by one of our experts Josette Goldberg,

"Would you want to have an employee stay with your company who is no longer motivated and not giving you the level of performance your business needs to thrive?"  

Great question! So there are at least two sides to the employee retention discussion. Distributors today need to ask themselves if they have the right people on the bus, to use the term that Jim Collins, author of Good To Great coined. We advise our clients to not "blindly" retain employees, but to think of employees strategically. As your business strategy evolves you may find yourself with either some people in the wrong positions within your company or simply the wrong people. Sometimes moving them into a more appropriate place within your organization is exactly what needs to be done to raise their contribution to the business. Other times, it is best to allow the employee to explore opportunities outside your business, as one of our associates so eloquently puts it. Remember, hire slow and fire fast.


Josette Goldberg sighted a Gallup employee engagement poll as a way to determine the level of engagement a distributor's employees has. "This research by Gallup and others shows that engaged employees are more productive. They are more profitable, more customer-focused, safer, and more likely to withstand temptations to leave. The best-performing companies know that an employee engagement improvement strategy linked to the achievement of corporate goals will help them win in the marketplace." Quoted on www.gallop.com.

  • In average distributors, the ratio of engaged to actively disengaged employees is 1.5:1.
  • In world-class distributors, the ratio of engaged to actively disengaged employees is near 8:1.

 What is your employee engagement ratio?
 
In conclusion, it appears that now is a great time to hire motivated employees. Retention should not be a goal in and of itself. Holding the right employees in the right positions is the key strategy related to employee retention. There are some excellent non-monetized ways of attracting and keeping the best employees. Employee development and fit should be aligned with and written into your strategic plan. Offering training for management, as well as their staff helps to encourage a productive workplace and employee loyalty.  And finally, understanding at a macro level to what degree you have a highly engaged workforce is a key indicator of world-class success in the years to come.

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STAFDA 2010 Conference Recap

November 2010

The Distributor Board moderated a panel of bankers at STAFDA's Annual Conference in Phoenix, Arizona on November 7, 2010.  The focus of the panel was on what distributors should expect credit availability to be in 2011.  

Herb Shields, one of The Distributor Board's Principals, opened the session by introducing Dr. David Altig, Senior Vice President of the Federal Reserve Bank of Atlanta, who then gave the audience his view of the current situation in the credit markets.Dr. David Altig

Dr. Altig pointed out that the 2009/10 recession was one of the deepest we have seen in the last 100 years.  He indicated that the recovery will continue to be slower than normal largely because of the depressed state of both commercial and residential real estate markets.  Banks are operating under increased regulation and will consequently examine each lending situation very carefully.
      

 

M. Jay Heilbrunn, one of The Distributor Board's Principals, reviewed the results of the pre-conference survey that was sent to some STAFDA members.  Here are some key findings:  

  • A majority (64%) of the respondents consider bank financing to be a very important part of the over-all business.
  • Banking relationships were maintained by 69% of the respondents through 2009 and 2010.
  • Most STAFDA members do not want a higher credit line at this time, and in the past 12 months, credit lines have not changed for the majority of the respondents.
  • Three main classes of assets - receivables, inventory, and equipment are typically used as collateral for bank loans.
  • Access to credit has not been an issue for the majority of the respondents.

Each of the three bankers on our panel then addressed some specific questions that had been raised during a pre-conference survey of STAFDA members.  Dean Rennell, Regional President of Wells Fargo Bank in Arizona, discussed several reasons why banks are lending.  Dean explained that business lending is profitable and that major banks have plenty of capital on hand.  He noted that the same may not be true for smaller, community-based banks which may contribute to the "banks are not lending" assumptions in the media.  Dean mentioned that borrowers are paying off old loans, and that banks want to replace these in their portfolios.

John Weber, Senior Vice President of Middle Market Banking for Associated Bank in Chicago reviewed the necessary information that banks need to see when a company is looking for credit.  This includes:  

  • Financial information
  • Collateral information
  • Projections/budgets
  • General information on the business

Chuck Gitles, Vice President in the Commercial Lending Department of American Chartered Bank in Chicago

discussed the reasons why banks are more selective with new clients and pointed out that the number of bank failures in 2010 will equal or exceed the 2009 number of 140.  Chuck explained that banks have tightened loan covenants and terms.  Owner's credit and personal finances are key factors in loan decision making.  With fewer competitors, Chuck said that banks are seeking to improve their margins which will be reflected in higher rates for customers.  

After taking audience questions, M. Jay Heilbrunn summarized expectations for 2011 as follows: 

The economy will be better, maybe not the robust environment of 2005 - 2007, but better. 

Bank regulations will be more stringent.  Be prepared when you go to your bank.  The easy money days are in the past.

Interest rates will be about the same or higher.  The Fed will be under pressure to raise rates and banks will be under pressure to improve profits. 

Finally, Credit will be available.  Banks report a lot of money to lend; however, borrowing qualifications will be more rigid and take longer than in the past.

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Demand Planning

Our previous eNewsletter discussed the topic of Sales & Operations Planning (S&OP) for distributors.  In this article, we will address an important related subject, Demand Planning. Many CEO surveys indicate that they are satisfied with their warehouse and transportation activities and are most frustrated by the "lack of visibility" and "demand volatility" of their inventory.

APICS, the professional organization, www.APICS.org, that is the recognized expert on all things related to inventory defines Demand Management as:

The function of recognizing all demands for goods and services to support the marketplace.  It involves prioritizing demand when supply is lacking.  Proper demand management facilitates the planning and use of resources for profitable business results.

Some of you may be thinking that this sounds like forecasting, a topic that many distributor sales people consider an annoyance at best.  There is an element  of demand planning that is forecasting, but as we will explain the forecast is just one part of the demand plan.

Demand management has changed over the last few decades due to improved technology, more depth of data, and the globalization of suppliers and customers.  As a distributor, you need to recognize this trend and consider how to take advantage of the tools that are available to better manage demand.

Here are the factors that influence demand:

  • Competition - pricing, promotion, and other decisions made by your competitors can quickly affect the demand for your products. 
  • Market trends - as the economy continues to improve in 2014, how does that affect over-all demand in your industry and for your product categories? 
  • Your company's business plan for new products, promotions, etc. 
  • Your company's capabilities to have the right products in the right quantities at the right time for customers. 
  • The effectiveness of your sales organization, advertising, and web site. 

Demand management involves getting the best possible information about all of these factors and developing a projection of future demand that becomes the basis for purchasing products from your suppliers.

Now let's consider the sources of demand that you may have in your business:

  • Customers - most importantly customer orders for the basic products that your company sells. 
  • Customer orders for replacement or spare parts (for some distributors this may be the primary business.)
  • Promotions and other marketing-related activities that are initiated by your suppliers or by your own company. 
  • Intra-company tranfers     
  • Kitting or special packs that you create for a given customer. 
  • Point of Sale data provided by your customers.

One of the challenges we often see is that many distributors we have worked with assign the demand planning responsibility to the people doing their purchasing or inventory planning without providing input from sales and marketing. Couple this with the fact that many companies fail to provide appropriate support and training to perform the demand planning job effectively, the demand plan / forecast often becomes hyper-reactive to changes in historical demand and fails. Without understanding the subtleties of forecasting, the people or the forecasting software is blamed and the process is abandoned. This leaves the company no better off and in some cases in worse shape then when they started. Considering this, here are some actions for you to consider:

  • Assign sales the responsibility for creating the forecast and promotion calendar. Ideally, the forecast should start at the customer or product category level of detail depending on your business.  Measure forecast accuracy and develop plans to continuously improve accuracy. Ongoing communication and analysis of forecast performance are keys to improving demand plans and in turn supply performance. 
  • Evaluate how your people currently address the demand planning activity.          
  • Determine if specific demand management training and education is required to raise the level of competency of your people.
  • Do you have the right technology in place to take advantage of the inputs that were mentioned earlier?
  • Consider implementing an S&OP process so that the efforts to improve on the demand side are effectively integrated into your overall business process.

Recognizing all of the influencing factors as well as the sources of demand for your business and then developing a plan is the essence of demand management.  The Distributor Board has helped many distributors improve in this critical area of the business and, as mentioned by APICS, these changes will improve profitability.

To learn more about how we can help you with Demand Planning, contact Herb Shields, your Operations Advisor. Herb@TheDistributorBoard.com.

 

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Why Distributors Need Sales and Operations Planning

Sales and Operations Planning (S&OP) is a supply chain process that has been in use since the mid 1980's in many manufacturing and consumer products companies.  Prior to its development, companies were still struggling with having to manage a process - supply chain - within organizations that were siloed when it came to decision-making, communication, etc.  Sales and Operations Planning, as its name implies, is a process that brings all the departments from sales at one end to suppliers at the other together in a way that allows for significant improvement in company results.  The Distributor Board has helped several of our client's implement S&OP and we have heard comments like:

"S&OP has really helped us work together as a company"

"This is the first time sales and operations folks are interacting on a regular basis."

What is S&OP?

A process that integrates all the functional plans for the business - sales, marketing, logistics, product development, purchasing, inventory planning, and financial into one over-all plan.

The key words here are "integrates" and "one plan."  In most organizations everyone from the salesperson in the field to the fork lift driver in the warehouse is trying their best to do the right thing.  S&OP helps improve everyone's results through this simple concept of one integrated plan.  Some of you are probably thinking - this is just "Management By Objectives" repackaged.  Let's get more specific about the S&OP process.  Here are the key concepts:

  • Balancing supply and demand - having the right amount of inventory to fill customer orders but with improved inventory turnover.  
  • One set of numbers - dollars and units - in many companies the sales forecasts and goals are in dollars, but operations plans and buys in units from suppliers.  S&OP insures that the dollars and units are in sync so that when we issue purchase orders to our suppliers, the numbers are correct.  
  • Operating plan linked to the financial plan - Finance is part of the S&OP process to insure that all of the numbers - from the sales plan to the Income Statement - are based on the same assumptions and actions.   
  • Medium to long term horizon - S&OP usually has a rolling 6 - 12 month horizon with demand and on-hand inventory in monthly buckets.  
  • Defined monthly process - there is at least one regular monthly meeting with all functions represented where everything from the forecast to purchase order commitments are reviewed and agreed on.  In larger organizations, over $100 million in sales, there may be several meetings where some of the reports are developed prior to the S&OP meeting.  For most of our clients, this is done by the individuals based on their job function.   
  • Integrates strategy and tactics - issues such as the introduction of new products or new product lines are addressed in the S&OP meetings.  This helps to make sure that the launch of a new product coincides with the availability of that product in your warehouse.  Promotions and other sales tactics are also discussed in the S&OP meeting.  Operational issues such as supplier delivery or quality performance, transportation, and lead times are also discussed.   
  • Consensus driven forecast - who owns the forecast in your company?  Is it being developed based on sales history and are you able to adjust for spikes in demand, seasonality, etc.?  Improving the accuracy of the forecast and creating a consensus leads to less finger pointing and better results.

Here are the results that one of our clients achieved after implementing an S&OP process:

  • Improved inventory turns by 15% in year 1.  
  • Joint effort to eliminate $250K of excess inventory.  
  • Improved on time delivery performance with new customers.

As you develop your plans for next year, consider including S&OP.  If you have any questions about how to get started, contact our Operations Advisor, Herb Shields. 

Herb Shields
Partner

Herb@TheDistributorBoard.com

Main: 847.607.1575
Direct: 847.287.5812 

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Is Your Business Ready For Re-Shoring?

While no one has declared the end of Outsourcing as a business strategy, the latest trends have taken a turn towards North American sourcing.  Here's an excerpt from an article in the January 19, 2013 edition of The Economist magazine:

 
"When five years later (the company) investigated the difference between the total cost of production in China and America, including the cost of shipping, customs duties and other fees, he was amazed to find that California was only about 10% more expensive than China. And that was just on the immediate numbers, without allowing for the intangible benefits of making the devices almost next door."
 

Re-shoring is the term used to describe the process of production brought back to the United States from China, Taiwan, and other points in Asia. Near-shoring refers to the transfer of production from Asian sources to Mexico. If your distribution company is one of the many that sourced products in Asia in order to reduce costs over the last 10-20 years, there are many reasons why you should consider re-shoring or near-shoring as possible sourcing strategies today.

Why is this a good time to review your sourcing strategy? Here are some of the basic reasons why re-shoring has become a trend: 

  • The gap is closing between labor rates in Asia and North America. Make no mistake, we said closing, not meeting. But rates in China have increased by over 25% in some areas and the availability of workers who are willing to work for the lowest rates is diminishing. Labor rates in the United States have not been increasing, and in some cases, have decreased in recent years due to the 2008/9 recession and the continuing high unemployment rate. Labor in Mexico is still much less expensive than here in the U.S.
  • Oil price uncertainty and its impact on transportation expense is another important factor. When oil peaked at $140 a barrel just prior to the recession, supply chain managers and transportation managers saw the impact immediately that fuel surcharges could have on the bottom line. Yes, ocean transportation is less expensive per pound than trucks, but when you have to truck product from the West or East coast to your Midwest warehouse, there is a real impact.
  • The cost of quality was not in the savings calculation that many companies made during the rush to outsource. Hiring Asian based consultant or inspectors is a real expense. Traveling to Asia to manage relationships, find sources, and address issues adds time as well as money. How many shipments have been held due to quality issues or worse yet, how many have arrived at your dock and not been shippable to your customers?
  • Risk management is becoming an important factor in managing global supply chains. Tsunamis, super-storms, droughts, and other natural disasters have impacted production, shipment, and product availability around the globe in recent years. Moving production closer does not necessarily mitigate these risks, but it does make some of the recovery easier to manage.
  • The cost of carrying an additional 4 - 6 weeks of inventory that results with global outsourcing has not caused much pain recently due to the extremely low cost of money here in the U.S. But you cannot expect the rates to stay at these levels forever. And, even with low rates, the extra warehouse space, additional outside storage, and operating expenses associated with inventory have gone up. 

What's next?

All product categories and industries are not the same. Many companies jumped on the source-in-China bandwagon and did not do sufficient homework before making their sourcing decisions. We have recommended and implemented a strategic sourcing process with many of our clients. The process starts by categorizing your products or items into 4 types, each of which requires different actions and approaches. The key word is Strategy, you want to take an approach that will produce positive results over a long period of time. Here are some basic steps you should consider:

  • Calculate the total cost for your current suppliers and products. Include transportation costs, quality cost, and inventory costs. Ask yourself the question - what will happen to those costs if oil reaches $200 a barrel?
  • Research suppliers in North America. Are your original suppliers still in business? Is Mexico a viable option for your product categories?
  • What issues, if any, developed as a result of sourcing in Asia? If you re-shore, how do you avoid a repeat of some of these?

Many distributors buy and sell proprietary products, and in that case, may have limited flexibility in making basic changes in sourcing strategies. If that is the case, you need to discuss this subject with your principal suppliers. It would not surprise us for you to find that they are already thinking about these issues themselves. 

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The Virtual Warehouse

When will the Virtual Warehouse Emerge?

What's the first thing you see when you come in the back door of your warehouse? 

  • Inventory
  • Racks full floor to ceiling
  • Trucks at the dock unloading more inventory
  • Slots with "dead" inventory
  • People, pallet trucks, staging areas, expense, expense, expense 

And, you know your friends in other states are looking at the same thing, day after day after day. 

Does it need to be this way? The Distributor Board thinks that, in the future, "Virtual Warehouses" will emerge as "the" process for successful distributors. What do we mean by Virtual Warehouses? 

Let's take a look at the question, is inventory a benefit or a burden? 

Inventory is a benefit when...

  • your supplier or customer owns it
  • it turns quickly
  • it requires limited warehouse space
  • it is sold to multiple customers
  • it arrives when needed
  • it allows for drop ship/cross docking
  • there is exclusivity and demand 

Inventory is a burden when... 

  • it turns too slowly
  • it requires expensive warehouse space
  • it is obsolete
  • you purchased too much
  • it arrives too early or too late
  • it requires too much handling
  • you have too many "D" items 

Why do you need to own inventory? Consider the question, what sense does it make for a distributor in one city to own the same brand, color and size of a product as non-competitive distributors in adjacent markets? Could all of them pick from the same inventory? Could ownership, occupancy and management costs be significantly reduced? 

Communications and shipping systems today allow for the picking, packing, shipping product and getting it to the customer in the same time frame from almost anywhere in the country. Why have four warehouses doing the same things as one? 

Distributors today and more so in the future, may become marketing and sales agents. Having the inventory out back is not and will not be a point of competitive advantage, since there are very few exclusives anymore in the world today. Having the technology resources to easily and quickly communicate with and get the customer what they need is a competitive advantage. Having an organization that spends time on serving and growing the customer base is a competitive advantage. Having the financial resources to manage in a rapidly changing market is another competitive advantage. Owning and managing inventory is a requirement in today's distribution world, not a competitive advantage, as it may have been in the past. 

How does inventory impact the "value" of your business? As distributors are realizing, cash flow will drive value in the future, both in terms of enterprise value and the availability of credit. Assets on the other hand, will be of less importance. Two distributors in the same business will be valued much differently as a function of their cash flow vs. their asset base. In a recent article we wrote, one banker said "assets are worthless, if a business defaults, how am I going to sell the assets?" 

The future "Virtual Warehouse" offers a new way to think about a distribution business. We're not talking about public warehousing; we're talking about co-operative warehousing. Virtual warehousing involves several distributors co-owning a facility, jointly owning inventory, sharing the costs of systems, employees, and operations. 

How does the Virtual Warehouse happen? First, distributors who serve similar customers in different markets need to agree to collaborate. They must put a plan together to evolve out of their current facilities and join together in a state of the art centrally-located facility that is capable of expansion. Yes, there is a lot of work in putting this together, however, when the economics are analyzed and the expanded product and service capabilities are realized, the competitive advantages for everyone will emerge. 

When will the Virtual Warehouse emerge? When distributors understand and stop believing that "it is not real unless I can see it in the back room;" as costs continue to erode the "value" of the business; as customer pricing pressures increase; and as manufacturers continue to seek fewer, larger distribution points. How soon will the virtual warehouse happen in your industry? Will you be first to make it work? When will the Virtual Warehouse happen? Soon! 

If you think the Virtual Warehouse makes sense, The Distributor Board can help you make it happen. Give us a call.

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Use Sourcing to Improve Margins

There are two basic ways to improve margins, raise your prices or lower your costs. We will focus on lowering costs in this newsletter. For most distributors, purchased material accounts for the majority of the cost of goods sold. Here are some suggested actions that you can take to lower your costs in 2013: 

  1. Review your sourcing strategy - Your industry and your suppliers' industry have gone through a very difficult period of time. As you look ahead to 2013, for each commodity or product group that you purchase, what changes in the number and mix of suppliers need to be planned to ensure lowest total cost and adequate supplier capacity?  
  2. Lock in low prices - You may be buying a product line which has many potential suppliers. If pricing has dropped during 2012, now may be a great time to lock in that price for 1, 2, or more years. When you negotiate new agreements, review the contract language carefully. This may be a good time to adjust the terms to be more favorable to your company.  
  3. Review your blanket order and contract terms - Many distributors don't time their negotiations based on the market, instead they focus on the calendar. For example, if some of your products are seasonal, buying those during the peak will likely cost you more money. If some product line costs are tied to a published market price, do you have the right type of escalation/de-escalation wording in your purchase orders?  
  4. Re-build key supplier relationships - Many distributors have just a few key suppliers. It has been a tough couple of years. Acknowledge the efforts of the suppliers who helped you survive the worst of the downturn. Set up meetings with the management of your key suppliers to discuss plans for growth, reducing total cost, lead times, etc.  
  5. Risk Management - Some suppliers may still be at risk due to the recession. Purchasing and Finance should be working together to monitor suppliers where there have been disruptions in production or delivery. The cause may be cash constraints, or worse. Be proactive in managing your supplier base.  
  6. Outsourcing/Insourcing - The total cost equation has probably changed for many products that have been outsourced during the years leading up to the recession. Now is the time to evaluate suppliers here in the U.S. or possibly Latin America that may be competitive with and offer shorter lead times than suppliers in Asia.  
  7. Examine your energy costs - Focus on your warehouse and transportation energy related costs. Energy costs will continue to fluctuate. Oil is a global commodity. While you cannot control your fuel or heating costs that may be impacted by oil prices, you can question the rationale for announced price increases. Transportation rates are negotiable and you should be resisting any surcharges. Do your costs reflect the fact that natural gas rates are very low compared to recent years?

We have worked with many distributors on these sourcing concepts resulting in improved margins. Can we help you reduce your costs in 2013? Contact Herb Shields, your Sourcing Advisor.  

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At Least 10 Reasons Why Distributors Have Too Much Inventory

Distributors that manage their inventory well have a competitive advantage. They have more cash available to support sales, marketing, and other programs that will build the business for the future. Here are the reasons why distributors have too much inventory:

1. Padded lead times

 Everyone in your supply chain and customer fulfillment process from suppliers to customers adds a safety factor to their lead time. Step one in eliminating the "pad" is to challenge people to provide realistic lead time estimates. Does the customer really need the product next week, is the quantity forecasted correct or has it been padded by your own sales department? Are your buyers adding 2 weeks to lead time to make sure that they do not run out of product? Step two is to explore ways to execute tasks in parallel, rather than sequentially. For example, can we ask our principle suppliers how we can work together with them to reduce lead times? The really good news is that progress made here leads to permanent reductions in the level of inventory without affecting fill rates.

2. Slow moving, excess, and obsolete inventory is ignored

One of our clients said "we do not have much obsolete inventory." After we developed a report to capture those items it turned out to be 20% of their total inventory! Putting someone in charge of working on disposition and prevention of excess inventory is a good first step. Without an "owner" it is too easy for everyone, management included, to avoid the issue.

3. Management does not get involved in inventory planning decisions

Someone in your company is making decisions daily on how much product to order from suppliers who may be half a world away. On a regular basis, decisions are made on order quantities and required deliver dates for purchased materials. The sales and marketing departments ask for inventory to be purchased to support customer projections of demand. The result is cash being committed to inventory. We recommend that you establish a monthly Sales and Operations Process including a management review to look at current and projected inventory levels. It's a lot easier to not purchase inventory than it is to work it off after the fact.

4. Purchasing decisions are driven by quantity breaks

More experienced purchasing people know that there are many approaches to obtaining the lowest price without buying a six month supply. For example, combining several items for one buy may get you the same pricing as ordering more of just one item. Make sure that your buyers understand the impact on inventory of their decisions. Include Purchasing in the Sales and Operations review mentioned above. Focus the discussion on optimizing the balance between purchase price and the carrying costs of the extra inventory.

5. Supplier stocking and vendor managed inventory programs have not been implemented

Distributors have not typically used these programs, but they may be available. These programs shift some of the inventory back on your suppliers. If you have a supplier looking for an opportunity to do business with you, they will probably be more receptive to a new program like this than will your incumbents. Vendor managed inventory may save more money in terms of warehousing and carrying costs than a price reduction.

6. Sales adds new items to your product line without sufficient review

Everyone wants to respond to a new customer or a request from an existing account, and they should. Your company needs a process to review the decision on how much of the new item to stock. There should be follow up to see if the original forecast is achieved. Here's a radical idea, challenge your sales and marketing people to eliminate two "old dogs" from the product line for each new one that they add.

7. Product changes are made too often and without a plan to work off existing inventory

Are you really sure that the new color, size, feature, or package will increase sales? What has the track record been on previous product changes that were supposed to increase customer demand? Manage the change process to sell existing inventory.

8. Errors in inventory records always result in too much of the wrong item and a shortage of the right one

We have worked with several clients where the lack of accuracy led to lost sales and lost customers. Establish a measurement of inventory record accuracy. Identify the cause of each error and take corrective action to prevent it from recurring. If you rely on a periodic physical inventory and you do not have a cycle counting program, we expect that you will have more issues.

9. No one de-expedites when schedules change 

Expediting is the business function of trying to improve a promised delivery date from a supplier. De-expediting is equally important. Customer order changes, especially in the case of special or custom orders, need to be communicated immediately. Otherwise your suppliers will be producing or shipping inventory that you and they don't need or want.

10. Inventory performance is measured at a "macro" level only

Most distributors know the turnover rate for their business in total. However, inventory decisions should be made at the item or product line level of detail. Measuring turns by category or for your "A" items can give you great insight into where the investment in inventory is not paying dividends.

What should we add to this list? What are your concerns about inventory levels? We would love to hear from you.

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The Value of Excess and Obsolete Inventory

One of the issues that can affect the valuation of a distribution business is the amount of inventory on hand that is classified as excess and obsolete. This could also affect the viability of an acquisition that you may be considering to take your business to the next level. Banks look at inventory carefully when considering working capital lending both to on-going businesses and for leveraged acquisitions.

Excess and obsolete inventory is costing the typical distributor 25% a year. If you start the year with $100,000 of obsolete product, that inventory will have cost your business $25,000 due to storage, damage, shrinkage, and the cost of money by year-end. What could you have done with that $25,000 to grow your business? Since the excess inventory is usually stored in the back of the warehouse, in the highest rack locations, or worst case, in an outside rented warehouse, most companies do not address the problem on a regular basis.

Here is a 5 step process to Dispose of the excess and obsolete material that you currently have on hand. We have also included, after these steps, three suggestions related to Prevention.

Disposition of Inventory

  1. Use as is: Sometimes the inventory has been produced for one customer and that customer no longer wants it. If you still have a business relationship with that customer, the sales department needs to work with that customer to explore all options. If the original customer(s) are out of the picture, then you should look at other customers and determine if they have any requirement for a product similar to what is on hand.
  2. Re-work/modify: You may need to ask for help from your principle supplier to suggest how to modify or re-configure the merchandise to be saleable. Even if there is a cost to modification or rework, if it is less than 25%, this might be a good deal. If the obsolete inventory is an old design, can it be brought up to the latest version of the product?
  3. Sell at a discount: Some finished products and/or un-opened components can be sold through after-markets or brokers. Getting 25% of the original value in cash is certainly better than annually dusting and counting obsolete items.
  4. Use components: If your excess inventory is an assembled product or sub-assembly, can it be taken apart and at least some of the components re-used in other products or sold as spare parts?
  5. Donate for tax credit: Once you have investigated options 1 - 4 and are convinced that you have no way to use even some components, you should consider donating the inventory for a tax credit. Our colleague, Claudia Freed is the Director of Education Assistance Ltd., EAL, a not-for profit organization that has helped many companies in this process. A past client with an industrial product worked with EAL and was able to dispose of their inventory, avoid costs associated with scrapping the material, and received a tax credit. Go to www.inventorydonations.org for more information. We really liked their home page heading, "Creating College Scholarships from Excess Inventory."

Prevention of More Excess and Obsolete

Here are 3 common situations that lead to the creation of excess and obsolete inventory. There are others, but understanding and controlling these will usually help:

  1. Customers do not buy as much as they forecast or order. Sales knows which customers represent real risk, build that information into your ordering decision process.
  2. Sales introduces new items that do not sell to forecast. Most distributors know which sales people are overly optimistic.
  3. Your purchasing or planning people buy in large lots to take advantage of quantity price breaks.

Note that all of these are based on good intentions, and may be critical to your business. Measurement of these situations is what is usually lacking, i.e. what does history tell you about the first two, and what is the trade-off in inventory represented in the third?

Most ERP systems allow you to run an ABC listing of inventory items. Force yourself to look at the C's and D's on the bottom of the list at least once a quarter and take action.

Finally, if inventory write-offs and outside warehousing are continuous problems, you may want to consider assigning the disposition and prevention responsibility to a specific person. We have done this with several clients and the pay-off is always good. It is rarely a job anyone wants long term, so they have the incentive to work on the issue aggressively.

The Distributor Board has helped many companies with inventory issues. If you have any questions about anything mentioned in this newsletter, give us a call.

 

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Customer Service Moments of Truth

A lot has been written about customer service over the years and most of it is true.  We have all read and, most importantly, learned the significance of customer service excellence from our own experiences.  It really does make a difference in the performance of distribution businesses.

Important Truths

We have used this over and over again: "You never get a 2nd chance to make a good 1st impression."  In any distribution business, that first impression starts with the first phone call, the first visit to your web site, the booth at the trade show, your Linked-In company profile, your magazine ads, drive into your parking lot, or any other place where you, as a company, are visible and active.  For everything you need to ask the question, how is this informing or helping my customer or potential customer?  How am I providing a service in whatever I am presenting or doing? What value is my organization providing during that first impression?

It was once said that, "Every time a service organization performs for a particular customer, the customer makes an assessment of the quality of the service, even if unconsciously.  The sum total of the repeated assessments by the customer and the collective assessments by all customers establish in their minds the organization's image in terms of the service quality."

The worst thing that can happen to a distributor is not a failure, but rather how the distributor reacts to a failure.  It is clear that a customer service problem that is resolved quickly and to the complete satisfaction of the customer will solidify the relationship with the customer. But this is not an area where repetition is good. Reducing the number of customer service problems should be the goal.  According to Karl Albrecht and Ron Zemke in Service America, written many years ago, but still valid today:

"Of the customers who register a complaint, between 54% and 70% will do business again with the organization if their complaint is resolved. That figure goes up to a staggering 95% if the customer feels that the complaint was resolved quickly"

If the customer is not satisfied, research finds that, "The average customer who has had a problem with an organization tells 9 to 10 people about it.  13% of people who have a problem with an organization recount the incident to more than 20 people."  These numbers can be exponentially higher with today's multiplicity of interactive communication options.

Changed Environment

According to a Business Week article, "It's never been easier for customers to find the opinions of others to validate their product and service choices."  Today's buyers have the entire Internet, filled with evaluations, assessments, and commentary that provides others with the ability to find out about you and your products.  Distributors today cannot hide.  If your service to customers is not 100% all the time, someone, someplace will be talking and/or writing about it for the entire world to know.  That's scary!

In a recent Citrix white paper entitled, Improving Customer Retention and Satisfaction by Delivering Exceptional Customer Support, they stated:

"In today's connected world, a bad opinion about service can be amplified quickly. In fact, customers are likely to share a bad experience with many others via word of mouth and virally, through social networks and service evaluation sites. Research conducted by Northwestern University's Kellogg School of Management on the influence of social media found there is a measurable connection between what is being said about a product in online posts and real time customer behavior and sales."

Many may discount this as "consumer environment," however, don't.  The emerging, continually connected consumer today is the same person that works for your customer.  The knowledge tools, Facebook, Google, LinkedIn, etc., they use personally are often the same they will use to evaluate your products and service.

How to Fail

In the book, The Service Advantage, Albrecht and Bradford talk about:

 "A moment of truth ... that precise instant when the customer comes into contact with any aspect of your business and, on the basis of that contact, forms an opinion about the quality of your service and potentially, the quality of your product."

You make promises every day with your customers and potential customers.  Fulfilling those promises are the "moments of truth" for your customers. It's OK to be out of stock, but don't sell something and then call later and tell the customer you are out-of-stock or, worse yet, don't decide to not call at all and fail to deliver.  This is where failure happens.  Your key to success is making certain this never happens by focusing your entire organization on making sure every promise is kept all the time.

Empowering People

We heard the other day these ten, two-letter words that I believe says it all, "If it is to be, it is up to me." If your organization has this service attitude, magic can happen.  To have this attitude they must be empowered to act and be trained to act to the benefit of the customer and in turn your organization.  Training is critical.  It is a process, not an event and therefore needs to be on-going.

Karl Albrecht and Ron Zemke, Service America said,

"If a company that is supposed to be operating in a service industry has a department called 'The Customer Service Department,' what are all the other departments supposed to be doing?  Might it be that having a customer service department signals to the other people in the company that the customer is being properly looked after, and that they need not concern themselves with the matter?  Shouldn't the entire organization be one large customer service department, at least figuratively speaking?"

How to make it Happen

In this ever changing environment, the Owner, President, or CEO is the key to customer service success.  Troops take direction from the leader.  If customer service is a top down imperative, if keeping the promises you make at all levels of the organization is mandatory, outstanding customer service will occur. The CEO must focus on infusing this culture across the organization.

Beyond the strategy, there are 3 key tactics for success: people, processes and technology.  Perhaps Glenn Dobson of Citrix said it best,

"Companies with the most effective, loyalty-inducing customer service equip their representatives with the tools and skills to resolve problems."

The skills come from training and experience.  The tools are the vast array of technology that can be deployed.  The goal is to have a "consistent" experience across the many points of entry to your company.  Some of the customer service tools that need to be consistent and that all distributors should either be using or considering include:

  • Live Chat
  • Push to Talk
  • Video Product Demonstrations
  • Live On-line Demonstrations
  • Phone Conferencing
  • Video Phone Calls and Conferencing
  • Email Communications
  • Customer Relationship Management Solutions (CRM)
  • Knowledge Sharing Systems
  • Web Site and eCommerce

 

The keys to customer satisfaction success are: to utilize technology that will help you know your customer; technology that lets the customer know you; interactive communication systems; and adaptability to change rapidly as new systems and processes evolve, because they will!

In a recent Customer Relationship Management magazine article titled, The Next 15 Years of CRM, they stated that,

"Advances in people, process and technology over the past 15 years have helped make customer relationships deeper and more meaningful.  But the next 15 years will deliver innovation at a much faster pace and organizations will only survive by embracing meaningful two-way dialogue with increasingly mobile customers."

Conclusion

In one of the Customer Service classics, by Carl Sewell & Paul B. Brown, Customers for Life, they say,

"If you're good to your customers, they'll keep coming back because they like you.  If they like you, they'll spend more money.  If they spend more money, you want to treat them better.  And, if you treat them better, they keep coming back and the circle starts again." 

Yesterday, today and tomorrow's successful distributor exists because of their focus on the service they perform for their customers. The difference then, now and tomorrow are the tools and the application of those tools to the company's processes.  You should be assessing your technology to determine how well it helps your people in developing deeper and more meaningful relationships with your customers. Rest assured, your best competitors are looking at ways to improve their relationships with customers. Some of those customers might be yours!

One final quote comes from an ad that Bill Marriott ran many years ago and is ever more meaningful today.  This lends itself to most any business and certainly to any distributor.

More than flashy architecture

More than razzle-dazzle décor

More than culinary fireworks

More than triple sheeted beds

A business traveler needs one simple thing

Service, the ultimate luxury

It begins the moment you call

1-800-xxx-xxxx

 

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Managing Inventory in a Reset Economy 

The year has started on a positive note for most distributors.  In fact many of you reported that 2010 was a good year, as well. Most economic indicators show that the economy is heading in the right direction.  Manufacturing activity as tracked by the Institute of Supply Management continues to recover.  In this newsletter, The Distributor Board offers some suggestions on how to manage inventory, one of the largest asset classes for most distributors, in the new "reset" economy.

Key Performance Indicators  

How do your key performance indicators (KPI) stack up to those of your peers? Here are a couple of KPIs and some industry specific values that may be helpful in your own review of inventory.

Sales and Marketing Plans 

You have developed a sales and marketing plan for this year.  Sales and Inventory management people should meet to review the sales volume forecast for the next 12-24 months. Are there new products, customers, or programs built into the plan that would be at risk if your primary supplier's capacity were to get tight?  Is there an upside factor that should be built in to the volume forecast based on the market that your company serves?

ABC Analysis

If you have an ABC analysis of your items, you should update it with the latest data available in your system.  Then a review of target stock levels for at least the A and B items should be completed. 

Excess and Obsolete Items

If any of the above leads to the need to increase inventory levels, or even if it doesn't, have someone review your excess and obsolete items. There may be an opportunity to remove some inventory that is costing you money and taking up valuable space.

Meet with Purchasing and Inventory People

From an over-all supply perspective, you should meet with your purchasing and inventory people.  Ask them to review and update current system parameters (i.e. lead time, planning values), critical commodities, inventory targets, and anything else in your business where good planning against the upside will reduce your risk.

Resist the Temptation to Increase Inventory

Even though your sales volume has increased, resist the temptation to increase inventory.  If you feel comfortable with current levels and have been maintaining good customer service, there is nothing wrong with maintaining the status quo.  If you do decide to increase inventories because of an increase in business, do it selectively, don't decide to add 5% in total, add what is needed item by item.

Expect Inventory to Fill the Space Available

We have walked through hundreds of warehouses.  Rarely do we find one that is not almost full, or with open space in the racks.  Before you add warehouse space, especially "temporary" outside storage, challenge yourself and your people to find a way to not take that step. 

Reduce Cumulative Lead Times

Your business processes each take a specific amount of time.  If you can reduce the amount of time or do more processes in parallel rather than sequentially, you can reduce the total system's lead time.  You will have less inventory in your system as a result.  For example, if the purchasing people can reduce the time it takes to issue orders to suppliers by 2 days using e Procurement techniques, 2 days worth of inventory should be permanently eliminated from your process.  If new ERP software allows you to ship customer orders in 2 working days, rather than 4, take 2 more days of inventory out of the business.

Measure Accuracy, Velocity and Customer Service

Good inventory management starts with measurements, not software.  Record accuracy is a measure of how well your "book" inventory matches the actual count by item and location.  If your record accuracy is not at least 95-98%, your ERP system is giving your people bad information.  If you rely on physicals to maintain inventory accuracy, consider initiating a cycle count program.  You will get much better results.

The most common measure of velocity is turnover.  Inventory turns are calculated with this equation

Turnover = Annual cost of goods sold / Average inventory in dollars

If you have $5.0 million of inventory and have $20.0 million annual cost of goods sold, you are turning your inventory 4 times a year (20,000,000/5,000,000).  Turn rates vary by industry and type of business.

In a recent article published by Microsoft, John Schreibfeder suggests that once you have calculated your turns, you can multiply turns by gross margin percentage to create a Turn Earn index.

Turn Earn Index = Turnover x Gross Margin

For example:  If a distributor has a turnover rate of 4 and a gross margin of 50%the Turn Earn index is 4 x 50 = 200. A distributor with 6 turns and 40% margin would have an index of 240. The index can be used at the product line or item level of detail which will provide you a good way to analyze various parts of your total business.

Customer service measurements can include orders shipped on time, unit or line fill percentages, returns, etc.

Finally

What are the big "upside" risks in your business?  If the economy continues to improve and your business takes off, have you asked your suppliers about their capacity?  Is there an opportunity to reduce your dependence on your biggest customers?  Contact us if you need help determining the proper strategy and tactics to deal with the Reset Economy.

Need our help or just want to talk? Click here for a fast connection to one of our experts.

Essential Tactics for Optimizing Organizational Talent

An Article for The Distributor Board
By Tom Schaul, President, Insight People Solutions 


Why is it so important for a company to optimize employee talent?  
 
In a recent survey of business owners, 89% stated that their top priority was to increase their company's profitability and 76% said their second priority was to increase the value of their company. These two goals can best be achieved through the optimization and management of human capital throughout the entire organization.
 
By taking the proper steps in optimizing your talent, you will significantly improve your people's performance, your company's financial situation, and the value of your company.
 
How does this best apply to the distribution industry?
 
Done properly, effective talent selection and management will improve your company's gross margins.  Improving your human capital, whether by new hires, re-deployment of current employees, or by more effective training and education efforts, will produce better overall results. You should see improvements in productivity and a reduction in errors which will reduce your pick, pack and ship costs.  This will also have a positive effect on customer satisfaction since more orders will ship correctly the first time.
 
Employee performance in average distribution companies falls into the following categories:
 
      16% are under performers
      68% are average performers
      16% are top performers
 
In high performing distributors, the employee performance breakdown has less under performers and more top performers. It just makes sense that this would be the case.
 
By identifying and developing more top performers, you also reduce costly turnover. Having said that, turnover can work both ways. Some companies have too much turnover and others don't have enough. People can become complacent without accountability measures in place, causing both productivity and profitability to suffer.
 
A company's overall success is contingent on the talents of their employees. When a company properly optimizes each employee's talent, they can reduce turnover by 15-20%, increase productivity, and at the same time improve employee engagement.

Why is this fact so important?  Keep in mind, as the job market opens up, one of the top challenges on the horizon for all companies will be to retain their top performers. No one wants to lose their top talent to their competitors and at the same time, all companies are striving to acquire top talent to strengthen their organization. Creating creative compensation programs for this group of people will be one of the keys to the retention. Another critical component of your retention efforts should be leadership training. Statistics show that 85% of employees leave due to a conflict with their direct supervisor.
 
What are the essential tactics or best practices in optimizing talent?  
 
To create a more productive company, one needs to incorporate a strategic workforce plan as a new way of managing their talent. According to research most companies focus their talent management efforts solely on senior executives.  To fully optimize your human capital, employees in all positions should be assessed and considered under the same process.
 
To conduct this assessment properly, you should deploy clear metrics that can be supported by facts rather than subjective opinions. You should use unbiased scientific assessment processes which incorporate key performance measurements. This vital data will give you the building blocks for the development of a comprehensive workforce plan that will help to create top-tier talent. A new strategic human capital plan should include:

A strategic plan with specific goals and objectives.  

An inventory of current employees' talent and experience within the company.  

Assessment of your employees - Do you currently have what you need, to get you where you want to go?

Identification of your current top performers - How to best use them and create more top performers. 

Identification of  the talent gaps that exist.  

Placing the right people in the right positions to fill those gaps based on performance models.

Processes centered on  training, communicating, and developing processes focused on the appropriate retention goals. 

Initiatives focused on training, communication, and development processes to meet the appropriate retention goals.

Investment in current employees through the use of individual management development plans.

In closing, are there any other considerations in optimizing employee talent?
 
Successful companies identify their target customers; the time has come to use science, technology, and data to identify your target employees. Research has shown that success on the job has little to do with experience, age, race, gender, or education, but has everything to do with proper job fit.  In support of that, here are some interesting facts: 
 
46% of employees prove to be the wrong hire within the   first 18 months. 

43% have not been properly educated or trained in the position they currently hold 

67% of those currently employed are unhappy in their current position  

50% of an employee's rating of their satisfaction at work is directly related to their relationship with one's supervisor 

Disengaged employees are 53% less productive than their engaged counterparts 
 
By strategically optimizing one's workforce, you can improve the retention rate of your top-tier talent while raising the level of accountability through the creation of clear expectations with measurable results. Combine this approach with a system of best practices for targeting new hires and you have a formula for success!
 
The bottom line: The better your people are, the higher your profitability, resulting in an increase of the value of your company!

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What is Cube Space Profitability Analysis?

Every cubic foot in every warehouse has an associated cost.  This can vary dramatically based on the type of facility, location, management and many other factors.  Each cubic foot also offers the opportunity for an associated profit, related to the goods being stored.
 
Every SKU stored in a warehouse has a related gross margin and requires an amount of storage space defined in cubic feet (or meters.)  Simply, small volume products with high gross margins, at a very basic level, are always preferred over high bulk, low margin products.

  

Product Cube Gross Margin Analysis 
(Upper Right Quadrant is Preferred Position)

 

Source: The Distributor Board

Other factors come into play, such as SKU turn rate; overall volume and associated total dollar margin contribution to the enterprise; purchase quantity requirements; specific customer demands; and other factors.
 
Every business is different; however, looking at the utilization and profitability of every warehouse cube across the company can be handled and analyzed in a similar manner.  Ranking and evaluating SKUs by their profitability per cube can potentially help management make informed decisions about which products to retain and which to phase out, which to expand space and which to reduce, which to look for faster turn less space, which can justify slower turn and more space; how to move goods between multiple warehouses, which have different cost structures; which products to carry in the first place and which to reject.
 
A specific output of
Cube Space Profitability Analysis (CSPA) is a warehouse map using CSPA as a criteria. This mapping can even be 3-dimensional and color schemed to quickly identity hot, red, spots where serious profit problems exist.

Warehouse Mapping Using CSPA

 

Source: The Distributor Board

Further, interactive graphical modeling can be developed, whereby expansion or contraction of space for any given SKU or group of SKUs can yield different overall profitability results for the warehouse. 

CSPA can be enhanced by the use of RFID tagging in a facility.  The utilization of this real time any time data can improve the speed of analysis, decision making and thereby rapid modification of mix.
 
Cube Space Profitability Analysis can be applied in any industry and any size facility.  CSPA is a real time model that can show at any given time the cost profitability mix across the warehouse.  Similarly, when applied across all company warehouses can determine the cost profitability mix across the enterprise.
  

Is CSPA for you?

The Distributor Board can help you get started putting this valuable tool to work in your organization.

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How to Turn Inventory Management into a Business Asset 

When prospective buyers conduct a due diligence review of your business, and ask about your inventory control systems, how will your answer affect their offer?  

When you are seeking additional credit from your banker, how will they value your inventory?

In the eyes of the buyer or the banker, your inventory may not have the same value that it did in the past.

This newsletter will provide you with four actionable suggestions on how to insure that your inventory has the most value to you and, when necessary, to prospective creditors or buyers.
  

Velocity

The key metric for managing and valuing inventory is turnover or "velocity."  We like the term velocity because it reminds us that inventory at rest is costing your company money.  Inventory that is moving through your process - that is being picked, packed, etc. is potentially earning money.  Turnover is defined as follows: 
 
Inventory turnover = Average cost of goods sold / Average inventory
 
There are two ways to improve turns:
1. Sell more with same amount of inventory
2. When sales are declining reduce inventory at a faster rate than the sales decline

Inventory Accuracy 

Inventory accuracy is critical to keeping your customers satisfied, for insuring your buying decisions are made correctly, and for demonstrating to your bank that your numbers are reliable. Annual physical inventories only guarantee accuracy for a brief time. Soon after you finish, your inventory counts can change. So, if your annual inventories only remain accurate for thirty days, you're operating with inaccurate data 92% of the time.     
 
In addition to knowing how much inventory you have in stock, you also need to know where it is.  If location accuracy is not 99+% in your warehouse, inventory decisions will cause disruptions in scheduling and customer service.  The best way to develop and maintain location accuracy is a cycle count program. 
 
Cycle counting is done on a regular basis, either weekly or daily depending on the size of the warehouse and the number of items.  A cycle count team - one warehouse person and someone from either inventory control or finance - should count a selected group of items.  Then they should reconcile the physical count with the computer record, book the adjustment, and do a root cause analysis.  The benefit of cycle counting is that when you do it regularly, and address the root causes of errors, accuracy will improve.With cycle counting, inventory accuracy is improved, and prospective buyers gain confidence in the accuracy of your financial data because they see effective management systems and procedures in place.
 
Chunking 

A third element of effective inventory management is "chunking."  Most companies measure 'turns' for the entire business and think they can mange inventory at the "macro" level.  Don't stop there.  Inventory decisions are made at the item and product family level of detail.  You need to find the manageable "chunks" of inventory for your business - i.e. product lines, locations, customer specific, etc.  When you can measure the turns for each chunk, you can make fact-based decisions about how much inventory to buy and hold.
 
Forecast Accuracy

A fourth important inventory management measurement is forecast accuracy.  Forecast accuracy directly impacts the amount of inventory in your system and how many turns you can achieve. 
 
While sales people may resist the idea of forecasting sales, they are certainly the best source of information regarding what their customers are likely to buy over the next 6-12 months.  There is also some history regarding sales data except for your newest products and customers.  Start measuring forecast accuracy, it may never be 90+%, but even small improvements can result in inventory reductions.
 
Cumulative Lead Time

Finally, identify your company's cumulative lead time - any permanent reduction in lead time should result in smaller inventories.  Consider the lead time to purchase material from suppliers and your internal lead time to process orders, pick and pack, and the transit time to your customer.  Can you find activities in your supply chain process that can be done in parallel, rather than sequentially, that will diminish lead time and inventories? 

Velocity...Accuracy... "Chunking"... Forecasts... and Lead Time. 

Sounds like a lot to do when you already have a full plate, but the fact is it's easy to implement and maintain these processes.

THE PAYOFF

Better performance today, and a higher price tag for your business in the future.

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The Board's Role in the M & A Process

An Important question that growing distributors should be asking, but often don't, is how can we incorporate a Board of Directors or Advisors into our strategic planning efforts?  It has been indicated that only about 10% of private companies have a formal Board that meets on a regular and meaningful basis.  Too many business owners miss out on the benefits a Board provides.

There are typically two types of Boards: a Fiduciary Board, which is formal, and an Advisor Board, which, as its name implies, provides advice only.  For a privately owned distribution company either will work if they provide guidance, support and objective assessments of the company's direction.  Often the difference between a public board and a private company board is the control over management.  However, today we find this is changing and even in private boards the directors can have a major influence on the management of the company, usually to the benefit of the owners.

With this as background, this article focuses on the role the Board plays in the Merger and Acquisition Process.  As a distributor, if you are planning a growth through acquisition strategy, it is highly advised that you formulate a Board if you do not have one.  The Board can play 3 primary roles:

  1. Pre-acquisition
  2. Acquisition Process
  3. Post acquisition integration

Pre-Acquisition

In the pre-acquisition stage the Board should focus on the strategic plan for the company and how any acquired business will fit the plan.  In an article by Stout, Risius and Ross, The Role of the Board in Mergers & Acquisitions, they point out:

"It's helpful to think of M & A as one of the ways that a company can execute its business plan and deliver value to its shareholders. Directors play many roles within the organization, but among their principal functions are: Setting strategy; monitoring corporate performance and management; overseeing risk management; counseling the CEO on the most difficult challenges facing the business; championing good governance; offering constructive criticism." Link to Article

Some of this may sound "too corporate" for a small or mid-size distribution company, however, owners should strongly consider the "best practices" from others to better run their businesses, reduce risk and increase value.  A Board focused on the acquisition process, along with management, will provide a better basis for decision making because of board member past experiences.  At the most recent Foley & Lardner National Directors Institute Executive Exchange panel session, it was pointed out that "great companies have an outside view in and not an inside view out."

Acquisition Process

As the M & A search process unfolds there will be a number of companies that emerge for consideration.  The Board and management should consider a number of critical issues jointly.  From a Harvard Law School Forum article, Role of the Board in M&A, the following key points are made:

  • "... 'Why are we considering this deal? If there are synergies, what hard evidence indicates that they will materialize?'
  • Tactical considerations: What processes are now in place to ... close deals, and execute the post-M & A integration?
  • Risk: What is the company's current risk profile, and how does it correspond to the company's risk appetite?
  • Capital and cost implications: Does our company have the cash on hand, projected cash flow, and/or available credit to commit to this transaction?
  • Operations: What changes will need to be made to the current operating structure ... following the merger?
  • Talent: As we blend the human resources from the two companies, will we have the right talent to make this merger a success?
  • Technology: Is the company's technology infrastructure capable of supporting the planned merger? How will the acquired company's technology be treated post-merger?
  • Culture: Will the merger involve a blending of two different cultures? Do we foresee conflicts? If so, what are our plans for resolving them? Will there be a new post-merger culture? How can we ensure that all retained employees thrive in the new environment?
  • Monitoring Progress: What are the dashboard components for this deal? What elements will management monitor and how frequently? What dashboard metrics will the board use to measure the transaction's overall success?" Link to Article

As the deal(s) evolves the Board can be of great benefit in addressing these issues, but also evaluating Letters of Intent and how the associated components will impact the company if the deal is completed.  Board members may be very helpful in assessing the potential of the acquired management team and objectively evaluating how they fit with the company.

Post Acquisition Integration

It has been said by many that 70% of acquisitions fail.  Why is this?  The primary answer is failure to integrate properly. This applies to large, mid-size and small companies.  Most often what happens is the deal is done and then everyone goes back to business as usual.  However, this is when the work starts.  Business as usual will backfire. An integration team needs to be put in place.  Often where deals get off the rails is when the integration team, which also has other management responsibilities, gets distracted and does not follow the plan.

Perhaps the most important service a Board can provide is right at this juncture.  Holding management's feet to the fire to make sure the plan for integration is carefully followed; providing advice and coaching along the way based on Board member's experience; providing recommendations for resources to facilitate various necessary processes where management skills are lacking; and to make sure that the metrics for success are in place and continuously monitored.

If you are selling your distribution business there are other considerations where a Board can be of great benefit in the process.  These will be covered in future Distributor Board articles.

If you need assistance with your acquisition process or advice on board formation please contact M. Jay Heilbrunn a Partner of The distributor Board at MJay@TheDistributorBoard.com or by Phone 847.579.9185.

You Just Sold Your Company, What's Next?

You just sold your company, congratulations! Now is not the time to ask - What's Next?

The sale of your company is an adventure, one of which a business owner typically only goes through once in his/her life. The complexities of confidentiality agreements, facility tours, discussions, offers, legal reviews, accounting reviews, due diligence requests, are all overwhelming and time consuming; and yes you still have to run the day-to-day business. As the decisions are being made to sell the company, you are most typically concerned with the financial aspects and what's left to retire on or reinvest after closing.
 
In reality the end point of the transaction is usually the beginning of your next phase in the business, if you are not planning to retire. What will be your role post close? For how long? How will you handle loss of control? Will you like your new boss? How will your former employees react to your new role? How will customers and suppliers react?
 
As you go through the selling process, you need to look very broadly at both the buyer's perspective along with your own. From the buyer's perspective there are "... three factors that have the greatest impact on the success or failure of a business acquisition ...: (1) having a thorough understanding of the acquisition target prior to closing the transaction, so there are no surprises after the ink is dry on the deal; (2) developing a post-closing plan that offers maximum potential to effectively integrate, operate and grow the acquired company in a post-transaction environment, and (3) executing that post-closing plan, which can be difficult and is highly dependent on how employees of the acquired company not only accept but proactively participate in the plan. What one key ingredient determines the level of success of all three factors...? Communication!" - Business Acquisition, Integration & Operation ... and Communication 101: A Primer by Larry Fox and Rob Hilliard (CLICK HERE for a link to the entire article).
 
Recognizing these three factors, pointed out by Fox and Hilliard, how do you position your post sale role to positively impact the success of the transaction? The success of this may have an economic impact on you as well if the deal structure provides for an earn-out or some form of seller financing, which is dependent on the success of the business after the sale.
 
As an owner you developed a way of running the company that was comfortable for you and your family, if they were involved. We find from Fox and Hilliard that "... small company transactions can be challenging as well. For example, there may exist within the acquired business a deeply rooted, 'family-oriented' culture that has been nurtured over the course of two or more generations of ownership. Having been acquired by a larger and more formal company, the smaller informal business may now be required to adhere to more structured policies, procedures and demands. Additional reporting requirements to new ownership introduces another layer of 'work' for which employees of the acquired company may not see value. The transition can be time-consuming and, at times, frustrating." What will be your role in smoothing this transition? How do you prepare yourself for the process?
 
As you go through the complexities of selling your company remember to spend a lot of time thinking about two things:
1. What do you WANT to do after the sale? 2. What does the buyer need and what will they allow you to do? These questions require a lot of "personal due diligence" on your part. As part of the transaction make sure that the parameters of your role are clearly defined in ways that are acceptable to you and ways that will positively impact the success of the sale. This is very often a hard process to go through so ask for help. Put a team of advisors around you that can ask the hard questions and challenge your thinking. In the end your satisfaction with your post close role can materially impact the satisfaction of all of those involved with your company.
 
The Distributor Board M&A practice works with distributors to achieve growth through acquisition goals. Contact M. Jay Heilbrunn, a Partner of The Distributor Board to discuss an appropriate process for your company. 

 

Need our help or just want to talk? Click here for a fast connection to one of our experts. 

Financing Distributor Acquisitions

Probably the greatest problem in growing a distribution business through acquisition is finding an appropriate company and successfully negotiating a deal. Once over this hurdle, the next challenge is to put in place the correct financing package.

Financing an acquisition is different for most every company. It all depends on the acquiring company size, amount of existing debt, assets that can be leveraged/collateralized and of course, the company's financial history. These factors will have an important effect in determining the amount of financing available and the ultimate cost of the acquisition.

In planning an acquisition there are many financing options which need to be considered:

  • How much cash or cash equivalent can and will be put into a deal? Many buyers want to put little or no cash into a transaction and leverage 100%. In the past this was possible, however, since the financial industry collapse this has become unrealistic, if not impossible to accomplish. In the current environment, it is not unusual for the cash component to be at least 30% of the purchase price of a transaction. Therefore, when considering an acquisition make sure that there is a reasonable cash component available for the deal.
  • Most distributors have an existing line of credit with their bank. This is most often a working capital line secured against receivables and inventory assets. In some cases this line may be well below its maximum availability. It is possible that the acquirer's funds might be available for acquisition financing. Lines of credit are available only after very thorough bank review. Therefore, it is most likely the bank has comfort with your financial condition/situation. Talk to your bank and find out if there are covenants that prevent the use of line of credit funds for acquisition. In your discussions with your bank, you may also determine that some of this line can be converted to another type of term loan. In some circumstances the target company is purchased by a new subsidiary that the buyer incorporates or organizes. This can shield the buyer's current business from the purchased business if your banker does not require cross-defaults. In this case, the line of credit is secured by the receivables and inventory purchased in the transaction and any future accounts receivable and inventory of the subsidiary after the purchase.
  • Acquisitions are commonly financed in part with bank term loans. Consideration is given to the acquirer's assets and the assets to be purchased from the seller. The seller's bank loans need to be paid off and existing liens on the seller's assets need to be removed. There are no "always" in terms of debt financing, however, one can typically expect that 50-80% of a deal can be funded by bank term debt. Typically, term loans run five to seven years. The loan payments are most often amortized over the course of the loan, although in some cases smaller payments are permitted over the term with a balloon payment of the balance at the end of the term. The cost of secured term debt will vary as a function of the bank's borrowing costs plus some number of points above this. Depending on how the loan is negotiated and structured the rate can be either fixed or variable.
  • In more complicated deals, where the buyer's financial position is less than "standard”, mezzanine capital is often utilized. This may also be used to fill a gap between the amount of equity provided by the acquirer in the deal and what the bank will lend. Mezzanine capital is always costlier than conventional bank loans because of the real and perceived risk associated with this type of lending. The spread tends to be consistent, however, the actual rate is a function of bank borrowing rates plus the premium required for the mezzanine debt. In general, mezzanine capital is not available from banks, but rather from specialized lenders who are privately financed. Mezzanine debt often comes with warrants to buy equity in the buyer at a nominal sum which warrants can be exercised in whole or in part over a period of time.
  • In most, if not all, private transactions today there is a component of what is called "seller financing”. This most typically will take the form of seller provided term debt or some type of "earn out" structure. Seller financing is usually subordinated to other financing resources and often contains standstill provisions which prevent the seller from exercising any remedies in the event of any default under the seller financing without the permission of the senior lenders. If a buyer does not contribute sufficient equity to the deal, the senior lenders will treat the seller financing as equity. The hierarchy of  lenders will most usually be the bank, followed by mezzanine type lenders followed by the seller. Therefore, seller financing holds the highest risk.
  • Another frequently used financing structure is the SBA (Small Business Administration). In general, the SBA will underwrite the loan provided by a bank. If the borrower defaults; the bank will be compensated by the government, thereby leaving the SBA lender with limited risk in the deal.

One of the lending programs provided by the SBA is called the "504 Loan Program”. The following link takes you to the SBA web site that discusses the program in more detail.  Link to SBA Web site.

In summary, from the web site: 504 Loans are typically structured with SBA providing 40% of the total project costs, a participating lender covering up to 50% of the total project costs, and the borrower contributing 10% of the project costs. Under certain circumstances, a borrower may be required to contribute up to 20% of the total project costs.

504 Loan example: Total 504 projects costs (Editor's note: applies in a similar way to an acquisition) for a $1,000,000 project may include the following (eligibility requirements apply to the 504 portion of the project as well as the participating lending portion):  Building Purchase; Land; Renovation; Furniture and Equipment; Soft Costs.

Loan Structure: $500,000, 1st lien with bank (loan obtained from a private sector lender covering up to 50% of the total project cost); $400,000, 2nd lien with 504 loan, 20 year, fixed rate (loan obtained through a CDC*, funded through an SBA-guaranteed debenture, covering up to 40% of the total project cost; $100,000, borrower contribution (contribution from the borrower of at least 10% of the total project cost.)

* A Certified Development Company (CDC) is a nonprofit corporation that promotes economic development within its community through 504 Loans. CDCs are certified and regulated by the SBA, and work with SBA and participating lenders (typically banks) to provide financing to small businesses, which in turn, accomplishes the goal of community economic development.

VERY IMPORTANT: Although SBA lending is an option it is very important to obtain detailed information from a qualified SBA lender. In many banks there is an SBA department with very knowledgeable bankers.

One of the most important documents to have available before the borrowing process begins is a well-developed "plan”. If the acquired business is to be integrated with the current business, the plan must address the combination of the two. How do the integrated financials for the two businesses look? What changes are planned post acquisition which will work towards making the integration of the two entities successful? A good lender will give a lot of weight to a well thought out plan for the business.

It will be important to have accurate current and historic financial statements prepared by qualified accountants.

A distributor may need to be prepared to make "personal guarantees" for a loan. Most people cringe at the thought, however, this is a realistic part of the lending process today. Having a long-term banking relationship may offset this requirement, but one should be prepared nonetheless.

Don't start looking for a bank when you are about to make an acquisition. You should be developing a relationship with your current bank or with a new bank well in advance of a planned acquisition. Begin discussing your growth strategies and how an acquisition could help you achieve your goals with your bank. Bankers are conservative by nature and are much more receptive when they are not surprised by their customers. It can take as long to get a lender comfortable with a deal as it can to get a seller to agree to a deal.

Growing your distribution business through acquisition can be a time-consuming and difficult process. However, an appropriate fit will accelerate the growth of your company, improve your competitive position and potentially reduce certain risks, such as customer concentration. Very often a strategic acquisition will not only add new customers, but it can add management talent, new products and an expanded supplier base.

Thanks to Ken Yager, Senior Managing Director at GlassRatner (KYager@GlassRatner.com) and Terry Kennedy of the Kennedy Law Group (TPKennedy@TPKLawGroup.com) for their inputs and insights in putting this article together. Both have strong M&A backgrounds and provide a valuable resource for any deal team.

The Distributor Board M&A practice works with distributors to achieve growth through acquisition goals. Contact M. Jay Heilbrunn, a Partner of The Distributor Board to discuss an appropriate process for your company.

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To Do or Not To Due Diligence

Whenever a distribution company contemplates expansion through acquisition, a target is identified and a Letter of Intent is presented. If accepted, the next order of business is to conduct due diligence.

What exactly is due diligence?

Due diligence is a review of all financial records plus anything else deemed material to the purchase of a business. Sellers could also perform a due diligence analysis on the buyer. Items that a seller may consider are the buyer's ability to purchase, as well as other items that would affect the purchased entity or the seller after the sale has been completed. Due diligence is a way of preventing unnecessary harm to either party involved in a transaction.

Is due diligence always necessary?

Well known investor Warren Buffet doesn't always think so. In several articles, including the Wall Street Journal and BeingWarrenBuffet.com, we find:

"... Company mergers can be complex and drawn out affairs involving an army of lawyers, accountants and the like. It can sometimes take up to a year to finalize details. In 2003 Berkshire Hathaway bought McLane Distribution Company from Wal-Mart and following a 2-hour meeting managed to finalize the acquisition in just under a month. We're not talking about trifling sums here either; this was a $23 billion transaction. Warren Buffett did no due diligence. Both companies were public and therefore their records could be scrutinized by the public. Warren Buffett said, "I trusted Wal-Mart, I trusted the people I worked with. I knew everything would be in exactly the order that they said it would be, and it was." He said, "We did no due diligence."

This may be extreme, but worth considering.

How do you go about conducting a typical due diligence process?

Over time, I have reviewed several due diligence "check lists." These usually run 8-10 pages of single spaced items. Typically, they include reviewing information on the following topics:

  • Background on the Company
  • Historical information
  • Financial data
  • Human resources, management, staff and policies
  • Facilities and real estate
  • Equipment
  • Product lines
  • Inventory
  • Sales, marketing and advertising
  • Purchasing
  • Inventory
  • Technology
  • Legal issues

In most cases, a great deal of time is spent pouring over financial data to make sure that what is presented is accurate. Inventory is always a "hot button" in acquisitions. This is because most distributors are painfully aware of their own inventory deficiencies and want to minimize the impact of acquiring more "dead inventory" through this business purchase. Receivables are also a big concern; are they "good" and will payments actually be received? To confirm the actual existence of assets, time is spent checking serial numbers on specific equipment and determining the "fair market value."

Where should more time be spent?

Very often the "organization" is assumed. It is expected that people will stay with the company and continue to perform. Many consider "employees their greatest asset," and yet very little time is spent evaluating management, office staff, warehouse people and drivers. What are their individual strengths and limitations? How will they integrate with your existing personnel? What training will they need? Will the cultures fit or clash? Who will stay? Who will leave? Who do you, as the buyer, want to keep or replace? Will you gain valuable management talent, or will the acquired management be a liability? "Organizational due diligence" is often given short shrift.

Very often the "customer" is assumed. The seller has been doing business with his customers for many years. "They're all good!" Maybe not so fast. There is always a reluctance to reveal customer lists. However, time needs to be spent looking at customer turnover and acquisition. Are both companies serving the same customer(s)? Has the customer base been growing? How well is the market defined and what is the customer share of market? Can you rate the "risk" of retention that each customer presents? Are there opportunities in dormant customers?

The same can be said about a distributor's suppliers. Don't assume they are "all good."

Ever buy a used car? You take it for a test ride and it runs great! A week after you bought it, all of the things that need fixing start to appear. The same holds true for newly acquired companies. Very often "good working order" is assumed. It should not. Not enough time is spent in the nooks and crannies of a company to document what needs fixing. This exists across all disciplines. What are known as "reps and warranties" are part of the "purchase" agreement and, yes they do provide some protection for the buyer. However, legal intervention takes time and you still have to run and integrate the new business. "Fixing" is a distraction from accomplishing the goals one has for the newly acquired company. Knowing what has to be fixed in advance is a real benefit both in terms of purchase price and in budgeting the integration costs.

What's the answer? Develop a comprehensive due diligence plan

When starting the due diligence process, set very tight time limits on each aspect of the due diligence plan. Make sure to prioritize the issues that will have the greatest impact on the business post acquisition before you finalize the purchase. Remember to keep in mind that a higher proportion of time should be spent on the most important parts of the business, the employees and the customers!

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The Value of Successful Acquisition Integration* Click the image to read about technology mistakes *

As the economy continues to improve, distributors are becoming more aggressive acquirers. At the same time, many distributors, who believed their businesses were devalued during the recession, are realizing that now may be the time to create a change of ownership, before this up cycle runs out of steam. As a result, The Distributor Board is currently seeing more transaction activity compared to the past several years.

As we see these transactions taking place, why are we concerned?


One of our observations, along with many others, is the high failure rate of acquisitions. Some have said that 50% to 70% of all acquisitions fail, at all company size levels. An article in the March 17, 2012 US News and World Report issue stated:
 

"According to most estimates, about 70 percent of mergers and acquisitions fail to live up to expectations. Layoffs are common, culture clashes are the norm, and workers often abandon ship. One study found that in the first five years after a merger, companies typically lose about 10 percent of their value."

Why do acquisitions often take place to begin with?

  • Companies want to increase sales faster than they can do so organically
  • Often a company is seeking to grow its market share
  • One of the goals may be to access new customers or expand into new geographic markets
  • Adding on complementary products and/or services
  • Acquiring unique technology or other improvements
  • For public companies, one of the goals may be to improve shareholder value; however, this may be the objective of private ownership as well
  • Acquiring new management talent or employees with unique skills
  • Margin improvement with higher margin products or through lower costs
  • Better utilization of facilities or obtaining expanded space

The list goes on, however, the key goal is to be farther ahead after the process than before.
 
Why then is there such a high failure rate with acquisitions?

There are a lot of reasons, a few of which include:

  • Often buyers overpay for the company
  • The seller may mentally "check out" after the transaction
  • The expected synergies of the acquisition may be over estimated
  • The cultural differences are not accurately identified or successfully addressed
  • Leadership styles may clash and never be resolved
  • Compensation and incentive programs may be misaligned between buyer and seller
  • Lack of a clear plan for the business
  • Systems and technology conflicts
  • Abrupt cost-cutting can cause severe disruption

All of these and more can be overcome by successfully planning the integration process. Done well, this can build great value into a business and create the 1+1=3 goal that most have when they set out on an acquisition path.

What does a successful acquisition integration template look like?

There are many ways to go about the process, however, at The Distributor Board we recommend the following:

  • Step One: Appoint an integration facilitator. This may be someone within the company, or if none is available or capable, an outside consultant can fulfill this role.
  • Step Two: Develop a deep understanding of the cultural differences between the organizations and set in place a process to resolve these differences.
  • Step Three: Evaluate all of the organizational disciplines to determine the strengths and limitations of each area within both companies. For distributors, some of these include:
     
    • Sales and marketing
    • Purchasing/sourcing
    • Vendor relationships
    • Warehouse operations
    • Transportation
    • IT systems and technology
    • HR Policies including compensation and incentive programs
    • Finance and accounting
  • Step Four: Develop a plan which describes how each discipline is going to be addressed. For each include:
     
    • Strategies
    • Goals
    • Responsibilities and individual roles
    • Action steps and timing
  • Step Five: Communicate the plan to the entire organization, including an organizational chart, which will help everyone understands their position and role in the new company.
  • Step Six: Develop and implement a communications plan for customers, suppliers, and other stakeholders

These six steps are critically important if you want to improve the likelihood of successfully integrating an acquisition into your company. Most companies do not follow a well-defined plan. Some start off with the best of intentions, but then they get derailed due to competing projects. Goals are often not stated. Frequently, the staff of the organization struggles to understand where they stand, if they will have a job next week, what are their new roles, what the new company leadership wants, and how they should best assimilates into the new organization.
 

At The Distributor Board we understand the value of the integration process. Most importantly we understand how it adds value to a distributor's business! We look forward to helping you acquire and successfully integrate your next company.

 

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Successful Acquisitions Through Effective Deal Teams

The upcoming change of ownership among mid-size wholesale distribution companies is significant.  Today, the majority of business owners have no succession plans.  These are individuals who started and / or purchased businesses in the 60's and 70's and are now ready to retire.  At the same time they are coming out of a deep recession and are fearful of another slide back, which would further delay their ability to sell their companies.

At the same time that this change of ownership is occurring, many companies are looking for ways to grow their businesses.  The process of internal, organic growth is difficult and often slow.   Consideration should be given to strategic acquisitions that bring sales volume, products, systems, organizational talent and other benefits to companies interested in expansion.

In a recently published survey by Industrial Distribution Magazine 38% of respondents reported that they are "expecting more consolidation among distributors."  26% reported that "they would be agreeable to a buyout."  30% indicated that they are "actively looking to purchase another distributor."

In our recent buy-side work with distributors we have found a significant number of owners interested in selling their companies.  Why?

"The time to retire is past."

"I'm looking for a successor who can continue my work."

"Competition is more difficult and we have little leverage."

"The Family is not interested in the business."

"Not spending enough time in Florida."

"We've had years of losses and can't find a way to stop the bleeding."

"The internet is killing us."

"Don't want to invest in today's systems."

What are some of the questions distributors, interested in taking advantage of this increasing change of ownership opportunity, should be asking:

1.    Where should the company be in 5-years and how will it arrive there?

2.    What revenue size business would be a comfortable, digestible fit?

3.    What geography is best, should it be within the current market area or adjacent?

4.    Should the product line add volume to the current offering or should it be supplemental?

5.    Should the strategy be to add new market segments or expand within existing segments served?

6.    Do you need additional managerial or line talent?  Or, would most of the acquired organization not be needed?

7.    What is affordable, both in terms of cash and leverage?

How does one go about finding viable candidates?  An effective M&A buy-side program using capable and knowledgeable professionals will bring forward qualified candidates.  Some of these companies may be on the market, however most are not.  Critical to success is an understanding of the industry and markets served; knowledge about potential candidates; and effective screening to sort out companies that offer the best fit.  A good process is one that looks at the quality of candidates rather than quantity.

As the process evolves, a variety of professional needs exist including: strategic planning, accounting, banking, insurance, legal, and IT.  All of these disciplines are involved in the search, selection, bidding, negotiating and due diligence process.  The key to an effective transaction is a "deal team" that works together.  Deal teams include a knowledgeable intermediary / M&A professional, accountant, transaction attorney, banker, insurance representative, IT and other consultants.

Critical, as well, is the post transaction integration work that makes the acquisition a success.  Unfortunately, the majority of deals are problematic or they fail altogether.  This is caused by the lack of diligence post closing.  A key part of the process is assuring that the steps are in place to create success and the right "deal team" and "post deal team" can make this happen.

The Distributor Board is unique in its approach to M&A buy-side transactions.  Our first focus is on the Distributor and understanding their goals.  We have owned and managed distribution businesses and understand the impact of an acquisition across all disciplines of the company.  Our work does not stop at the closing, but continues through the transition process. An important part of this is our close work with the "deal team," the professional advisors, all of whom together can create the best opportunities for our clients.

If you are a distributor or you have distributor clients that are considering growth through acquisition, give The Distributor Board a call and let's discuss how together we can create an effective deal team!

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Should Distributors Sell, Buy, Merge or Hold their Businesses in 2010?

Now may be a good time for distributors to sell their companies or buy others.  However, there are very important conditions to be considered in moving ahead with an acquisition or divestiture strategy in 2010.
 
In preparing this newsletter we had the opportunity to speak with three very knowledgeable professionals in distribution generally and mergers/acquisitions specifically. 

Chuck Andrews of The McLean Group
(Investment Bankers)  

Terry Kennedy of Meltzer, Purtill & Stelle LLC
(M&A Transaction Attorneys) 

Jack Keough of Keough Business Communications
(Former Editor and Publisher of Industrial Distribution Magazine)
 
We, at The Distributor Board, want to thank them for their time and insights.
 
Is now the time for a transaction? As always "it depends." It depends on:

  • The performance of your company
  • Conditions in the general market
  • Conditions in your vertical market
  • Availability of buyers
  • Availability of sellers
  • Realistic valuation expectations
  • Your motivations with regards to exit or expansion
  • Buyer financing capability

To begin addressing these questions one must put the distribution market environment into perspective.  Without a doubt, conditions are turning from very bad to better.

  • Employment is improving, because job loses are lessening, however, the rate of unemployment remains high.  There has been a 7% decline in overall distribution employment with the following verticals experiencing the steepest declines - Building materials, Furniture, Computer equipment and Plumbing.(according to a report titled "2010 Economic Outlook for Wholesale Distributors," by Pembroke Consulting Inc. and IBM) Link to Article 
  • Wholesale inventories are down significantly since the start of 2007 and only beginning to build back as manufacturing starts to improve.  In raw numbers inventories are down almost 15% as compared to 2007 figures. 
  • According to the ISM New Orders index, business appears to be improving.  From a decline of -35% they are seeing an improvement of +5% in the number of new orders. 
  • We have seen steep declines in GDP during 2009, however, most forecasts are indicating improved comparisons in 2010. Unfortunately, this is due mainly to the overall poor performance in 2009.  GDP is expected to improve by approximately 2% in 2010 according to the Bureau of Economic Analysis, Wells Fargo Bank and the McLean Group report. 

Within this somewhat improving environment, the value of distribution companies will increase. In a recent Modern Distribution Management Report, the value of "public" distribution companies has come back.   In looking at the most recent historical data, the high value mark was in 2006 at 13.3x the Median Enterprise Value/EBITDA and the low level was 5.9x in the first quarter of 2009.  Recently, this has returned to a 10.0x in this quarter. 
 
These do not reflect what small and middle market distributors can expect for valuation, which has typically run in the range of 3-5x EBITA. However, if private market valuation trends follow, it can be expected that at or near the bottom EBITDA multiples may have been as low as < 1x to 1x. Currently one would expect an improvement, but probably not back to historic trends.
 
In a recent report by Hinge Marketing, in their "Top Dollar" report Link to Article , they talk about the Factors Driving Premium Values for professional service firms. We believe that these same factors are accurate for the wholesale distribution sector:
 
Rank   AR*      Factor 

1     8.39     Strength of Existing Client Relationships
2     8.00     Technology
3     7.86     Quality of Management Team
4     7.51     Marketing Strategy
5     7.21     Financials
6     6.89     Employees 
7     6.28     Profile / Image

*Average Rating.  0-10 scale where 10 is most important to obtaining a premium value
 
An important take away is the focus on your customers.  Have they stayed solid throughout the downturn?  Are they growing?  Is your relationship with them growing?
 
Although "Employees" are lower on the list, among those we interviewed, not enough could be said about the importance of employees in the valuation of a company. In particular, sales people, who hold the important customer relationships, are viewed as "intrinsically important" to the business.
 
Among those we interviewed, there seems to be consensus on the fact that business buyers do exist, however, the "strategic" buyers will have a greater chance of being successful in the short term. Why is this true? The main reason is that financial buyers, private equity firms and individual investors, will have to provide much higher levels of equity than ever before. In the past financial buyers relied on a heavy leverage component for a transaction. The banks today will not support this type of leverage, at least in the near term. Strategic buyers, in many cases, are sitting on high levels of cash and can create improved financial performance from a combination of entities. Now seems to be an opportune time for a strategic buyer to grab share at lower acquisition prices.  According to Thomas Gale of Modern Distribution Management, 

"...sellers are not likely to have the number of potential buyers courting them - at least for a while - as financial buyers (private equity funds and other outside investors) don't have the same flexibility because of current credit rates and conditions." 

However, opportunities may exist among strategic companies in your vertical market where there are synergistic combinations that provide improved performance and competitive advantage. But, there are fewer of these today due to past consolidations and the economic demise of marginal distributors.
 
Historically, banks have looked at assets as an important security in both lending and business combination transactions. At a recent meeting one banker stood up and said "assets are less important ... cash flow is what we look at today." What he further went on to say is that if a deal goes bad, the bank has many less avenues in which to sell the assets. This is very much different than in the past. In the past, many loans were leveraged against assets. The reality today is that these same assets' values are under water. This is particularly true in the current market with regard to real estate, equipment and inventories. On the other hand, if a company performs well, cash flow will follow. If they do not, the assets will most likely not support the underlying lending. This is a radically different lending philosophy as from the past and may be a vision for the future of the credit markets.
 
Transactions are not always rational decisions.  Owners may be "burned out" on the business.  There may be marital or other family issues.  Estate conditions may drive decisions.  The owner's physical condition may demand a change of ownership.  Interestingly our panel does not feel that taxes drive the decision process.  However, this may change as future estate tax laws are determined in Congress.
 
Conclusion
 
What we conclude from current conditions are the following:

  • If there are not any compelling conditions for selling your business, it may be better to wait for a more improved economy and better valuations.  However, if your performance has been great during this recession and you are "best in class" you may find very willing suitors with a lot of cash and a lot of interest. 
  • If you see an opportunity to buy a competitor, or expand into another product line through acquisition, now may be a better time than ever to make a move.  The costs of making this move will most likely only go up as we pull out of this recession.

An important final consideration is integration.  It has been stated that over 70% of all acquisitions fail.  This is very often due to badly managed integration of the entities.  As you consider a critical event of this nature, invest adequate time planning what will happen after the deal.

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Distributors Don’t Need New Technology, Unless They Want to Survive!

Making the decision to replace your current business system (Enterprise Resource Planning - ERP system) is one that we see delayed as long as possible by most distributors.  It’s not that there isn’t a perceived or real need to improve the business through technology. It’s not that distributors don’t have the money or think that it would be a poor use of those funds. We often find that they have memories of the last major technology implementation and they are NOT good memories. Yes, implementing new ERP technology is hard, but with proper planning and managed expectations it can be made much less overwhelming. So if you are asking yourself, “Is it time to replace our ERP system?” these helpful tips should provide some guidance.

1)      Create a technology plan that aligns with your business goals.

2)      Educate yourself on what current ERP technology can do for your business (some to consider).

a.      Dashboards with Key Performance Indicators
b.      Auto sending of customer facing documents via fax or e-mail
c.      Searches from anywhere within a field
d.      Paperless warehousing
e.      eCommerce for customers and new prospects
f.       Business alerts

3)      Assemble a cross functional leadership team to evaluate your current technology.

4)      Develop clear process and functional requirements for all aspects of your business.

5)      Determine if your current technology can satisfy all of your requirements.

6)      Develop your ERP enhancement implementation plan.

7)      Execute your plan.

If your ERP system cannot meet all of your requirements, move on to step 8.

8)      Determine viable software solution providers to consider.

9)      See exactly what the software can do for you specific distributorship.

10)   Develop a budget for software, ongoing maintenance, implementation services, training services, and hardware.

11)   Analyze your choices and make a decision based on both quantitative and qualitative measures. 

12)   Negotiate fair and comprehensive agreements.

13)   Assemble a cross functional implementation team (not necessarily the same as the selection team).

14)   Assign or hire a strong project manager.

15)   Develop a project plan (detailed timeline) that also takes into consideration your human resource constraints.

16)   Carefully manage all aspects of your project plan.

17)   Work with a sense of urgency, but not a frenetic pace.

18)   Celebrate small successes with the entire organization.

We cannot cover all of these ideas in one article, but today we will discuss the development of a technology plan. In future articles we will talk about how to evaluate your current ERP technology and how to select and implement a new ERP system.

So let’s start with the foundation; a technology plan. The most important aspect of your plan is to make sure it follows and does not lead your corporate strategies and goals. That being said, there may be some valued expertise with a particular operating system (Windows, Linux, iOS, etc.). If that is the case, your technology plan may need to include that constraint to enable faster implementation and support of new technology. The key elements of your plan should include:

  • Corporate strategy and goals
  • Technology strategy
  • Purpose of the technology plan
  • Business-focused technology initiatives
  • Specific technology goals – short and long-term

Your technology strategy must support your corporate strategy

In your technology strategy you should be focused on where the business is headed and how technology can play a supporting role in the journey. The strategy should aim to solve business problems through technology. The one mistake we see distributors make is to allow the technology plan to take over the overall business plan. This can happen when one technology leads into another and another.

We saw this firsthand when a distributor was executing a portion of their plan focused on hardware. What began as a desktop obsolescence roadmap led to outside employee’s laptops and then to the recommendation that there be a rapid transition to tablet computers. Before they knew what was happening, there were proposals flying from hardware providers, peripheral device providers and mobile application development firms. Everyone was very excited about this 21st century path, but little thought was being given to the actual business benefit and ROI that could be expected from all of these initiatives. There are times that a strong ROI cannot be achieved. That fact in and of itself may not be a reason to delay the selection and implementation of advanced technology. The new technology could be necessary to just keep pace with your competition or support other processes within your distributorship.

Have a purpose

If your plan has a written purpose, it will go a long way in explaining what you are doing and why you are doing it. This will help everyone in your organization better understand the technology improvement process. It will provide the framework for evaluating and prioritizing technology projects. Without a purpose, the organization will have a tendency to start projects simultaneously that could actually overload resources and result in failed projects throughout the business.

Clearly defined and planned out initiatives will be the visible elements of your plan

Your organization might forget your strategy and purpose, but they will surely see your initiatives. While it may be the job of the IT department to execute the initiatives, they will almost always have an effect on another department within the organization. Your initiatives should always support key business requirements. We had one client that created an initiative to improve the remote connectivity of their disparate sales force. The current method was inefficient and buggy. So they embarked on an initiative to replace their current remote access technology with one that could support over 20 instances at any time, day or night. There was almost immediate payback in improved efficiency and access to their core business system by people throughout the organization.

Goals are also an important part of your plan

Developing “SMART” goals will help you develop the appropriate initiatives through the life of your plan. The acronym SMART represents, Specific, Measurable, Actionable, Realistic, and Time-based. When you include goals in your plan you will add one more ingredient that will help you successfully execute your plan. An example of a possible goal might be to migrate all users to a new operating system by the end of the year. The reason for this goal might be that the current operating system is no longer supported or another software technology that is soon to be implemented will not run on the current operating system. Whatever the reason, the goals should help you move forward with your specific initiatives.

So as you embark on creating a technology plan, remember that there are certain key elements that need to be included. Stay focused on supporting the corporate strategy. Also, it is important that you concentrate on key business needs rather than get caught up in the latest and greatest new technology.

In a future edition we will cover the ERP selection process. If you are considering embarking on the selection of a new system, we are always interested in helping guide distributors through the decision process.

If you have any specific questions, please feel free to contact David Panitch, your technology advisor at The Distributor Board. David@TheDistributorBoard.com or call him directly at (847) 868-2004. 

Click here to request a free 30-minute professional consultation on the distribution-related topic of your choice.

Software Selection - Doing it Right 

This is the 2nd in our three part series on Technology for the Distributor. Our first article can be found here.

If your organization has gotten to the point that your software is inhibiting your growth due to its inability to help you perform important tasks, then you have a very important decision to make. 

Do you continue to struggle with manual (outside the core system) work arounds or modifications to your existing technology? OR 

 

Do you decide to upgrade your current system to the latest version? OR 

 

Do you explore the software landscape to find a new system that can help support your growth plans?

 

If you are considering upgrading your current system or replacing it with something better, we would like to give you some ideas that can make the process less arduous. Although, we have seen a number of software consolidations over the past decade there are still a plethora of choices when it comes to Enterprise Resource Planning (ERP) software systems. So the first undertaking is to learn about the available choices. This is probably easier said than done for a couple of reasons:

 

1) Software developers have various ways that they sell and implement their systems today, some offer the ability to buy directly from the developer, others have a network of resellers that you need to select from, and others offer a hybrid in which you may license the software from one organization and get it implemented by another.
2) The information that you will find on websites and in printed brochures are purposefully generic so that they can attract a wider potential audience.

 

So to make your life a bit easier, we are going to give you some guidelines to follow when doing your initial research.
 
• Check with your trade association – what are others in your industry using. This doesn’t mean that you should follow the trend, but you should be aware of what others in your industry are using as a starting point.
• Create a brief list of the critical processes that a new system must be able to perform – we suggest you ask your departmental managers for 2-3 top functionalities that they cannot live without.
• Decide in advance if there is an operating system that you must use in the future – Microsoft, Linux, Apple, Unix, etc. If there is a constraint, you will be able to narrow your search.
• Decide if “size does matter” – Will you only be comfortable with a software developer that is a billion dollar organization or does it not matter to you?
• Don’t fill out forms on a software developer’s website in much detail. Once you give them info about your organization (location, size, # of employees, industry) you will be dropped into their CRM system and assigned to either an internal sales lead or an external value-added reseller. This will make it very difficult for you to work with any other resource during the sales process.

 

If you don’t have the time or expertise to travel down this road; all is not lost. We have the expertise to perform this work on behalf of your organization. 

 

The following are key steps that you should follow in selecting a new ERP system for your organization.

 

1. Determine viable software solution providers to consider.

 

This should be done through a clear process that involves documenting what you need a system to do for you and your other key requirements in addition to functionality. A series of interviews with your people, documenting processes, including ones that are outside of your current system and getting answers from the potential software solution providers will move you in in the right direction.

 

2. See exactly what the software can do for your specific organization.

 

The only way to do this is to tell the software solution providers exactly what you need the software to do for your company. You will need to actively participate in detailed demonstrations with multiple solutions to make the best decision for your organization. Don’t get too focused on the exact way in which the software is shown to work. In most cases, there are multiple ways to process a sales order, for instance. You want to make sure that the system has a logic that you can agree with and then during the implementation process you will get a chance to tailor the system exactly how you want it to react to your business needs.

 

3. Develop a budget for software, ongoing maintenance, implementation services, training services, and hardware.

 

In putting a budget together, you can rely on information shared with you by the software solution providers. But, you need to make sure that they are providing you with ALL of the numbers. One area that we almost always see companies scrimp on is training and education. Don’t short change your organization! 

 

4. Analyze your choices and make a decision based on both quantitative and qualitative measures. 

 

You should develop a quantitative matrix that you can use to “score” the software solution providers. There is something to be said about “gut feel”, too. Analyze your decision utilizing both methods.

 

5. Negotiate fair and comprehensive agreements. 

 

Almost every agreement that we have seen favors the software developer and software solution provider. While you may not be able to turn the tables completely, there is room to make the agreements fair for both parties concerned. You also should consider including details about the most important functionality that you want the system to perform. This is your last point of leverage. Once you have signed agreements, the leverage is in the hands of the software solution provider.

 

As you navigate through the process of selecting your next ERP system, follow these steps and you will have a greater chance of success. If we can help you with this important decision, please feel free to reach out to our Senior Technology Partner, David Panitch. We are always happy to answer questions and provide guidance with your selection efforts. While this may be a selection process that you undertake once or twice in your career, we help multiple organizations every year make thoughtful decisions related to technology.

 

In an upcoming article we will cover:

• What to avoid while drinking the software “Koolaid”?
• How to best manage internal expectations?
• What are the key elements of a successful implementation?

 

 

Click here to request a free 30-minute professional consultation on the distribution-related topic of your choice.

Successful Implementations Take More than Just Software

So you’ve made a decision to license a new ERP system. Contracts have been signed and the installation of the software is scheduled. If you haven’t already awakened in a cold sweat…you soon will. Now the real work begins. Here are some keys to ensure that your ERP implementation is heralded as a success.

Remember the goals
If you didn’t create goals and objectives before you set out on selecting a new system, do it now! You don’t need dozens of goals, just a few focused, measurable goals to keep everyone’s eyes on the ball. The question “Why are we working so hard to get this system implemented” will be quickly answered by the established goals. It is important to note that some goals will not be achieved the minute you flip the switch on the new system. Some will not be fully realized until you have been live on your new system for many months. Every distributor is different, so your goals will be, too. 

The team does matter
A highly functional team will move your implementation forward with the precision of a well-trained championship athletic team. On the contrary, if your team has a high level of dysfunction then prepare yourself for over-runs of both time and money. The team members should heed the advice in Patrick Lencioni’s book, The Five Dysfunctions of a Team. You want people that can have honest conversations with each other in a professional manner, understanding that there are times that you will disagree. Those disagreements must stay within the team and not leach out to the rest of the company. 

Change management
A new ERP system is one of the best opportunities for positive change within your distribution company, but it can also be a time that you see heels digging in for the status quo. Having a well thought out change management process will be important to not only move the implementation forward, but to help get a high-level of user adoption of improved processes. Mapping out your current processes and re-engineering them to leverage the new technology capabilities is a valuable exercise. As the project moves forward make sure that there are small wins that can be celebrated with the entire team and others within the organization. Holding frequent sessions with some of the user community to show them the progress that the implementation team has made will be a benefit to the entire organization. This will help reinforce the value that the new system will be bringing to the company once it is live. Allowing the implementation team and key users the ability to be “evangelists” about the new system will help the entire organization embrace the important changes that the new system will bring.

Management support
There isn’t a software firm out there that doesn’t answer “management support” when asked why implementations succeed or fail. This simply means that management needs to be supportive and offer to remove roadblocks that may come in the way of the project. Management doesn’t need to be in every meeting or involved with every decision, but they do need to be engaged. The best implementations have supportive, but not overly bearing management. This allows the implementation team to make decisions and know that they have the full support of their managers. Management should highly consider creating a technology steering committee that meets regularly to discuss the progress of this project and other technology projects that may need to be considered as the implementation progresses. This is an excellent way for management to stay connected to the project.

Don’t be distracted by shiny objects
We cannot tell you how many stories we hear and some that we have witnessed where the implementation project plan has been blown out of the water by the attraction of the next shiny object. Sometimes this occurs as the implementation team learns more about the ERP solution and discovers a new “want” that they just have to have…now! Other times it is caused by the most vocal team member. They start by asking for something that is out of scope and when it gets moved to phase 2 or later, they become louder and more demanding about the new functionality until finally the team gives in. Resist the temptation unless the majority of the team can see the great value that this new functionality will bring to the business. Build a project plan and do your best to stick to the plan. This will help to insure that your project will come in on-time and under-budget.

Conclusion
  As you assemble your implementation team and create your detailed project plan, be realistic about the implementation timeframe based on your team’s time and their ability to either backfill their regular work commitments or add additional hours to their work week. This is an important project and one that often is laden with potholes and detours that have to be carefully navigated. Allow your team the time to do it right and not do it faster that is reasonably possible. 

Since this is a “once in a decade” type of project, it is highly likely that you don’t have project managers waiting in the wings to guide this project. If that is the case, feel free to reach out to us. We have outstanding project managers that can help you from day one to make your implementation a success.

If you follow the guidelines in this article you will have a strong chance for success. If you have any questions specific to your particular situation, please feel free to reach out to us at The Distributor Board. We are always happy to help move you in the right direction.

Read Part 1 - software selection
Read Part 2 - software selection 

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What’s Next? Big Data can make a Big Difference

Unless you are still handwriting orders and invoices, your company probably has a ton of data on your customers just waiting for someone to analyze. Since the cost of storage (hard drives, NAS devices, etc.) has plummeted to all-time lows, we all seem to be storing more and more stuff. You probably have years of customer sales, product category, market segment, and profitability data that can be merged with outside data.  If you have a blog, Twitter account, LinkedIn company page or a Facebook page you should be collecting data from people that interact with you through those social media venues.

If you are NOT deciphering all of this data and making some sense of it, you are missing out on some of the most robust information available about your customers. If you were to get a behind the scenes look at what Grainger and soon, AmazonSupply are doing with all of the data they are collecting, it would make your head spin. Most of you are probably thinking, “Those guys are huge and have unlimited budget for this kind of analysis, we can’t do what they are doing”. You would be right on all counts, except the most important one…YOU CAN do something meaningful with the data that you collect. It will take some effort, but the rewards will be well worth it.

Some of you may have heard of a relatively new term called, “Big Data”. It refers to the massive amounts of data collected and the data collected on the data. Sounds crazy, but true. To give you an idea of what we are talking about, Walmart captures over 1 million transactions an hour,  in the USA there are an average of 294 billion e-mails are sent every day, and Facebook users create an average of 90 new pieces of content every month. There are over 1 billion Facebook users. It is not just the volume of new data that is created, but also the incredible speed at which it is created. Rest assured, the amount and speed of collecting data will not slow in the foreseeable future, but only grow exponentially. But what can a business your size do? You don’t have a department of data analysts. You don’t have sophisticated software algorithms to help you figure out this ever-increasing mountain of data. Harvard Business Review states that “…the most important question regarding Big Data at almost any company is: How much are your customers really worth?” Don’t disregard this advice, because if your competitors are figuring this out, it won’t be long before they are calling your customers their customers. Here is what Kristin Norris, VP of Finance for W.W. Grainger had to say about just one of their technologies, Teradata’s solutions have helped us become more efficient in capturing data needed to effectively run our business. We’re able to analyze data on a variety of dimensions at the level of detail and speed our business users need for strategic decision-making necessary to achieve our goals.”

We have some ideas that we think will help you leverage the data that you have and make some great tasting lemonade out of it. There are three things that you should do.

1)      Develop a meaningful  short and long-term goal or goals regarding what you would like to do with your data and how to turn it into useful information

2)      Develop a Customer Lifetime Value (CLV) metric to help measure the customer’s value beyond their own sales and profits to your company and include their buying influence on others.

3)      Develop additional value that you can provide your customers, especially your VIP customers

Goals

Let’s take a look at some potential goals that you may want to consider. First, your goals should be focused on the customer and the value that they bring to you and the value you provide to them. With that said, one goal to consider would be to improve your anticipating (forecasting) their needs. While we all know that customers can surprise us with new requirements, using the 80/20 rule, most of the time we should be prepared for what they need before they need it. Another goal to think about is how you can get connected with other people that they may know that can also use your products. This used to be called asking for a referral, but in today’s connected world, you should be able to suggest who they should introduce you to based on key criteria. Some of the big guys out there are creating goals around expanding the depth and breadth of products that a single customer can buy from them. Big Data can help you better understand your customer’s buying habits. This is not just what they buy from you, but what they buy from you and all of your competitors combined.

CLV

Another metric…really? Yes and a very important one at that. As the Harvard Business Review author, Bill Lee said, “The most forward thinking companies are adopting some form of Customer Lifetime Value (CLV) to assess the value of customers to their bottom lines.” But there is more that you need to know about your customers. Are they blogging about you? Are they tweeting about you? Are they influencing others to buy from you? By properly analyzing Big Data and talking with your top customers, you should be able to uncover this hidden gem of information. Imagine what you could do with the knowledge of which customers are promoting your company to others the most. The data is out there and there are business intelligence (BI) tools that can help you find it. Check out www.qlikview.com as one technology that can bring you knowledge from outside your four walls.

Value

Additional value: How are you connecting your customers to people that can help their businesses? You can also treat them special at events that you host. Know what direction they are headed and help them get there. Here is an example that comes from the software industry. Salesforce.com knows who their best customers are by name. These are the people that are evangelizing their company. They measure what these “MVP customers” are doing and reward them with front row reserved seats at their annual conference, “Dreamforce.” In addition, they keep them updated with valuable industry information that their MVPs can use as they see fit.

What special value can you provide your MVPs? How can you excite them about becoming evangelists for your business?

Summary

Distributors of all shapes and sizes need to turn data into valuable information to remain relevant in this information rich world.  Set clear goals, determine each of your customer’s total CLV, and gain knowledge of and add value to your key customers. You are not too small to take your data and turn it into actionable information that will grow your customer’s loyalty and increase your profits.  What’s next?  Call The Distributor Board and let’s discuss how you can use Big Data to make a Big Difference. 

Need our help or just want to talk? Click here for a fast connection to one of our experts.

Click here to view a PDF version of this article as published in the November 2012 issue of

What Every ERP Vendor Doesn't Want You To Know

For those of you who still have memories of your last ERP selection and implementation endeavor, some of what we will discuss in this article may not surprise you. For those who have not gone through an ERP conversion process, read carefully. When you decide to invest in a new ERP system strongly consider getting independent expertise to help.

Discounts and terms abound

While the negotiations don't begin in earnest day one, you should be positioning yourself for a strong, but fair negotiation. Discounts vary by vendor, but there are always discounts available. There are various factors that impact your ability to maximize these:

  • One is the time of year. This doesn't mean that the summer is better than winter, but what it does mean is that almost all software firms are public and have quarterly reporting requirements. Getting to the apex of the negotiation as their quarter or year-ends is the best time for you to be negotiating.
  • Another factor is the state of the vendor's economy. Have their sales been flat? If so, they are hungrier than if they just closed a large number of deals in the past thirty days.
  • Hold your ground on payment terms. Often they will insist that you pay for all or the majority of the software when it arrives at your dock. Don't do it. They have flexibility in their payment terms, leverage them.

The demo is always better...

It just is. The people that "perform" the demo, because it is a performance, are well practiced in their craft. Their job is to make their software dance and sing. Most software solution providers know that if the demo doesn't go well, then you are likely NOT going to buy from them.

The demo should be focused on what YOU want the software to do for your business and not what the software vendor wants you to see. Take the time to develop a demonstration script that the software vendor will be expected to follow. This will help you determine if the software can handle the unique requirements of your distribution business.

Implementation will take longer

ERP Vendors have most likely scoped out your project and put together a very thoughtful proposal. What they didn't tell you is that you forgot to tell them about an aspect of your business that will require more work. One of our clients had not mentioned to anyone that they manually created special invoices for eight customers. The new software could handle this requirement, but it required hours of time customizing the invoice forms for each of these customers. You also will find out that something you thought could be done by your people with a little bit of training is too stressful on your organization and will take four times longer if you try to tackle it yourself. The bottom line is that the scope will almost always expand. So how do you minimize this from happening?

  • Ask a lot of questions. Tell them everything about your business, down to the smallest details, and ask them how their software will accommodate those needs.
  • Be skeptical when they tell you that with their award winning training program, your people will be able to work miracles with their software before you go live.
  • You may be best served by having the software vendor develop a well-thought out proof of concept. You may have to pay for them to perform this work, but it will give you a clear view of what their system can and cannot do for your company.

Implementing ERP software is difficult for three main reasons: 

  1. Change: There will be undoubtedly be some, and often many, changes in your business processes due to the implementation of ERP software. Most people prefer not to change, so you will be swimming a bit upstream during the entire implementation project. Make sure you have a good change manager involved at a high level in this project.
  2. Rare activity: Selecting and implementing ERP software is just not done every day. Without expert guidance, you will struggle with this decision and the implementation process. If you have someone in your organization that has selected systems in the recent past, tap into their experience. You will need it. If not get independent outside help.
  3. Extra work: This is more true during the implementation process, but can still affect the selection process. You will need to assemble a team to be involved with the selection of new software. Since ERP covers the entire organization, you should select people from all critical areas to help make the final purchase decision. Then the "real" work begins. The implementation may involve the same people that were on the selection team, but they need to be properly prepared for the extra effort that will be REQUIRED to successfully implement a new ERP system. Your implementation team will need to commit on average about 8-10 hours per week on the implementation of your new system for 6-12 months. That is a minimum of 260-520 hours for each person on the implementation team. Even your most loyal people may balk at this requirement and often need a carrot to help them through this extra work. One of our clients offered every team member an additional week of vacation time to thank their people for their commitment to the company. This was very well received and didn't have a negative impact on cash.

Be prepared to train your employees

During the implementation process, the software solution provider will offer training and education to your implementation team. This should be a combination of face-to-face, online and self-directed work. In most cases, the implementation scope will NOT include the training of your entire company. That burden will fall on your implementation team.  The good news is that this keeps your costs down, but the bad news is that this will increase the stress and responsibilities of your implementation team. They must learn your new software well enough to teach others. Most companies get to the point of training their entire company and when they look around they realize that only some of their people will be effective trainers. This will unexpectedly place new (increased) demands on the best people in your organization.

ERP software vendors are not paid to improve your business processes.

What? "I thought the new ERP software was going to fix some of our broken business processes."

The short answer is that it will. The long answer is that the software vendor did NOT budget consulting time for them to help lead this important business process improvement initiative. Their job (unless you did a great job of scoping out your own project) is to implement their software into your CURRENT business processes.

The unspoken word here is that during the selling process you thought you kept hearing about how the software was going to help improve your business processes. To be fair, you probably did hear this and you probably will get "some" business process improvements, but the improvements will most likely fall woefully short of your expectations.
 

If you are looking for improvement in your business processes, make sure that you either put some specifics into the scope agreement or place it into your implementation project plan.

The Bottom Line

Selecting and implementing ERP software is often one of the most important projects that a distributor undertakes. Distributors need to be knowledgeable about the things that ERP vendors don't want you to know. It is important to have a well thought out ERP software acquisition and implementation plan. Have clear goals defined before you start your selection project.

Keep the thoughts that we have detailed in this article handy as you embark on your project.

  • Negotiate from a position of strength and leverage
  • Disclose everything, document it and ask "dumb" questions
  • Prepare for change and plan on more work
  • Invest in training for your internal trainers
  • Take responsibility for business process improvement

You would also be well served by having an independent organization guide you through the selection and implementation process. The Distributor Board has led some of the best mid-sized companies in the US through these efforts and we have been told that they could never have done it without our help. Contact our Technology Advisor, David Panitch for a conversation about your technology and to determine if we can add value to your next technology project.

Want to talk to us about technology? Click here and we will get right back to you (during normal business hours or when we are not helping another distributor with their critical technology).

The Top FIVE Technology Mistakes

Isn’t it amazing how technology seems to have taken over almost every aspect of our lives? Can you live without your smartphone? What if you couldn’t see who was calling you before you picked up the phone? Do we ask humans for directions anymore when we have GPS-enabled devices? We hate toll road a bit less now that we don’t have to stop and pay the toll due to I-Pass, EZ-Pass and other Transponders. But when it comes to advanced technology in our distribution-based businesses, and actually many other B2B focused businesses in other sectors, we are lagging behind.

MISTAKE ONE: Bar-coding is for retail and too expensive for us

We see bar code technology everywhere we look, so why is it missing in so many small to mid-sized distributors’ warehouses? It takes a mindset that is ready to move forward and is not satisfied with the ways things have always been done. Adding bar-code technology to most ERP applications is pretty simple, but it is the planning for a fully functioning bar-coded warehouse that is often the obstacle. It takes some thought about changes to processes, even though at the very core of bar-coding is the concept of replacing keystrokes with a scan. The beauty of most technology is that you can take baby steps before you begin to sprint. The same is true with bar-coding. Make the decision to move forward and then take that first baby step, you’ll be running in no time.

MISTAKE TWO: Technology will solve all of our problems

Another mistake we see distributors make is thinking that bringing in new and improved technology will solve their problems. It has been said many times before that technology can speed up processes, so bad processes just happen that much faster. When you are considering new technology, it is important to recognize that it is also the best time to change your processes. One of our clients had posters place in strategic locations throughout their building that simply stated “We’ve always done it that way” with a red circle and a diagonal line striking through the words. Technology can be a catalyst for change, but in and of itself cannot make the change. Make sure that you have people within your organization that are “change agents” involved with any evaluation and subsequent implementation of new technology. If you have the right people with the right attitude implementing the right software, you have a winning combination that CAN solve problems.

MISTAKE THREE: My staff is smart, we don’t need much training

We see this time and time again. A great technology solution is selected, but management has decided to skinny down the dollars related to the training and education aspect of the implementation. There is some software out there that is relatively easy to use,, but in the world of ERP, CRM and WMS technology, that is often quite a ways from reality. These systems today can do so much, but also take a great deal of thought and understanding to fully leverage the deep functionality. When evaluating ERP systems, you should make sure that you budget an appropriate amount of your implementation dollars to training and education. It is our recommendation that 50-60% of your implementation budget be for this sole purpose. You should also be very much aware of the time that your people will need to spend on learning a new system. A rule of thumb that we often use is to budget a 4:1 ratio between your people’s time and the outside implementation consultant’s time. So if your implementer has budgeted 700 hours, you should expect your team will need to invest 2,800 hours overall on the project. If you calculate the hours that your people need to commit to a project of this magnitude, you will get something along the lines of the following:

2,800 hours x $35 per man hour = $98,000 Not a number to be sneezed at.

MISTAKE FOUR: When it comes to technology, my IT staff makes the decisions

Before all you IT professionals start to e-mail us, what we are trying to point out is that it is critically important to involve the business leads from all functional areas on the evaluation, selection and implementation of a new business system.  It is not that the IT folks don’t know technology, quite the contrary, they do know technology. But what you really need when you are selecting new technology are the people with the best knowledge of your business processes and more importantly, what you would like your business processes to be. As we said earlier, this is the perfect time to be making process improvements. Who better to suggest, implement and own the process improvement plans than the people using the technology on a daily basis.

We know of a distributor that needed to do a better job of tracking the success and failure of their sales efforts. They had almost 50 salespeople handling the United States and Canada. The VP of Sales asked their Director of IT to research and recommend a solution to this issue. What happened was disastrous. The recommendation was to create their own CRM system rather than trying to fit their processes into a “boxed” solution. Twelve months later, the custom CRM solution was finally deployed. After another six months of begging, pleading and threatening the sales team to use the system, they shelved the CRM tool. It didn’t come close to meeting the needs of the sales team or the VP of Sales. It was then that the VP of Sales took ownership of the project, hired a consulting firm to help them evaluate and select an out-of-the-box solution that was then tailored to fit the sales team and management. Three months after they went live on this new CRM system, they had a 95% user adoption rate. It was because the sales team owned the decision and clearly understood the benefits that they would derive from properly using the system.

MISTAKE FIVE: Next year the technology will finally be perfect

If I just wait until next year; the technology will be better, the price will be lower and we’ll be more ready to implement the changes along with the technology that we need to run our distributorship. Well, it is likely that all of that will be true, but and it is a big but, you will be one year further behind your competition. If you have some technology deficiencies, the sooner you can do something to eliminate the weakness and turn it into a strength the better. You can’t afford  be on the “bleeding edge” of technology, but you can certainly move your company forward with very little risk by moving a little bit closer to the early majority. If you wait for every “bug” to be worked out of whatever technology you are looking at, you will be waiting forever. Understand that it might not be perfect, because it won’t be. Do your due diligence, gather enough facts and then make a decision.

MISTAKE SIX (BONUS): Fear

There are many reasons why distributors make mistakes in technology, but the one that seems to rise up above the rest is fear. Fear of the unknown, fear of change, and fear of losing control of the business.  We have also seen technology adopted because of fear. Some of you will remember when you processed your first customer order through Electronic Data Interchange (EDI)? Wasn’t that done because of fear or just clearly the threat that a major customer would stop doing business with you unless you adopted EDI capabilities? What about that first request by a customer to send you a request for quotation via e-mail. There is technology out there that is just begging to be implemented. Don’t be the last kid on the block with whatever it is. Get past your fear. Shoot past your competition. Make a decision to explore some technology that can positively impact your sales efforts, increase efficiencies, or improve your decision making, you’ll be glad that you did. 

Have you seen MISTAKES SEVEN, EIGHT AND NINE?  We would like to hear about what you have seen.  Email them to us at David@TheDistributorBoard.com

Need our help or just want to talk? Click here for a fast connection to one of our experts.

Cloud Computing: Paradise or Peril

We have talked with many distributors and one of the questions that keeps being asked is "should we be moving our technology to the cloud?" Some of the reasons that this question is being asked is based on the following factors:  

  • We just had a server failure and we lost a ton of data
  • We are trying to reduce our expenses and we heard that the cloud was cheaper that what we are doing today
  • Maintaining our current hardware is expensive and it is not what we want to be focusing our time and dollars on
  • Technology is changing so fast, we just never seem to be able to keep up.    

So let's start with explaining some of the terms that you may have heard tossed around:

Cloud – This merely means servers outside of your four walls where you either have software, access someone else’s software or store electronic data. Typically, this would be a data center like Amazon, Rackspace, GoGrid or Google. This could also be where you access software solutions like; Salesforce.com, Netsuite or GoogleDocs. 

CoLo – This stands for colocation. What that really means is a place (data center) that has many servers and rents out the use of those servers or allows companies to place their servers in this location. It is typically very secure and protected from most natural disasters. You can access the servers via the Internet.

SaaS – This stands for Software as a Service. One of the most popular SaaS products is Google’s Gmail. This is e-mail software that you access through the Internet and do NOT have the software on your servers or local computers. What began with a couple of softwares delivered this way has turned into one of the fastest growing areas of software development. Today, you can literally find any type of software that is delivered as SaaS. Some examples of distributor-focused software are: Netsuite, SAP by Design, DemandCaster, or Infor CloudSuite.

HaaS – This stands for Hardware as a Service. Companies offering HaaS provide remote access to computer or server hardware. This is similar to CoLo, but is yet another acronym that may be used in place of CoLo.

The way that software is deployed in most distributors today is through a server and PC network. This is most likely what you are doing today. You have your business system and e-mail sitting on a server that everyone accesses through their PC or laptop computer. This also requires that a great deal of software must be loaded onto the individual PCs. Software such as Microsoft Office, CRM, and others.

In a cloud environment, the vast majority of software and processing of data is done in the cloud. The distributor’s workstations (PC) need to have some type of cloud interface software, but often this is just a web browser. Now the reality is that moving to the cloud is not a dramatic change in what is currently being done. All this is really doing is shifting the responsibility for the hardware that runs this core software to the cloud.

A mid-sized distributor that we worked with was seeking improvement in the core business system (ERP system) and along the way we discussed how it would be deployed. They had about 50 employees, of which 30 of them had daily interaction with the ERP system. The company did not have a full-time staff member that focused on technology, but contracted for external technical services with a managed services provider.

After a careful evaluation, the decision was made to deploy their new ERP system in the cloud. There were some key points that helped this client make the decision. They were:

Lack of an internal technical resource to support the on-site deployment
Costs of maintaining the servers on-site through managed services
Concern over backup protection in their internal environment
Need for a business continuity plan       

These factors drove the decision process regarding the ERP system and have now influenced some of the other technology that they had traditionally accessed through local servers. They are now moving all of their file storage to the cloud. It will also provide for a continuous redundant backup of these files and of course, easy, but secured access to these files from anywhere in the world. The costs to have their systems in the cloud rather than on-site was revenue neutral, but the safety and security increased substantially.

There are benefits and risks associated with moving to the Cloud. 

The key benefits are:

No Hardware – Not exactly no hardware, but certainly no server or backup drives to purchase and maintain.           
Disaster Recovery – The software will be accessible even if your doors are closed. The Cloud is significantly safer than your current building.
Lower Initial Cost – Getting up and running in the Cloud is significantly less expensive than purchasing user licenses and hardware for an on premise solution.

The key concerns are:

Rent – you are renting software and as you know if you don’t pay your rent, you get evicted. With software, if you stop paying the rent, you stop using the software.
Financial Strength – Will the company whose Cloud you are accessing be around tomorrow. If not, neither will your access to the software.
Customization of software – There is only so much you can do to customize software in the Cloud. If you have very unique needs, you may not be able to get the software to exactly fit your business processes.

This should give you some thoughts about the cloud and whether it is the right move for you company. I remember a friend telling me a few years back that this whole “cloud thing” was a fad that would quickly disappear. We can assure you that this “cloud thing” is NOT a passing fancy. It is changing the way software is developed and we believe that it will continue to grow at a meteoric pace.

Take thoughtful steps as you consider moving your company to the cloud. As always, if you need help in this process, The Distributor Board is ready to assist you in navigating this important sea of change.

Need our help or just want to talk? Click here for a fast connection to one of our experts.


Does Your Technology Need Help?

We all know organizations that were doing just fine before the most recent recession. All right, maybe they weren't growing at the pace of some of their competitors, but they seemed to be doing ok. The recession caused a number of marginal distributors to vanish and some relatively strong ones to weaken. Now that we are seeing evidence of an economic recovery, what is needed for the recovery to continue and business to flourish in the new economy? One of the opportunities most businesses have is to take a refreshed look at the technology they utilize in all aspects of their business. 

It is almost impossible to find a business today that doesn't rely on technology for a majority of its processes. What is equally typical is finding companies that are either utilizing only a minimal amount of the functionality in their business technology or actually have ineffective technology.

Here are some questions that should be asked that will uncover whether help is needed with the technology part of the business: 

  1. Is your technology working for you or are you working for the technology?  
  2. Is there a hardware replacement plan or do you replace things when they break?  
  3. How well integrated is all of your software?  
  4. When did you last uncover new functionality in your technology?

Even if you don't ask any of these questions, there are observations that you can make that will give you a good indication as to whether technology is being leveraged to its fullest.

 Observation 1 - Mounds of reports on the corner of desks

 Observation 2 - Window envelopes for snail mailing of invoices and payables checks

 Observation 3 - There is an employee with the title or nickname of "Report Guru"

 Observation 4 - Outside sales people call in to find out about the status of customer orders

 Observation 5 - When you hear people talking about being "in the cloud" they are talking about their last airplane trip

These are all clear signs that help is needed. The Distributor Board specializes in helping distributors better leverage their existing technology. We also have a proven methodology that will guide distributors through the challenge of evaluating and selecting new business technology.

A quick in house assessment will not take a deep dive into the many potential technology issues that might be faced, but it will get some answers to important question. Here are some technology assessment questions that you or a trusted advisor can review. 

  1. Is the software running on servers at your client's location, a data center, or "in the cloud"? 
  2. What are the install dates for each of the servers? These machines are required to run 24/7/365 and have a life expectancy of between 4-7 years. Is there a replacement plan? 
  3. Staying focused on the core business system (sometimes referred to as ERP or Accounting software), find out if the most current release of the software is being utilized. It is best to stay relatively current with this software. A bit of research may be involved to determine if the software is current or 5 versions behind. A contact to whomever they bought their system from should be made to find out what has improved since the last time it was upgraded. There may be some enhancements that will provide a very strong ROI. 
  4. Is there a support and maintenance agreement with either the software developer (ex. Microsoft) or the people that they bought the system from (VAR-Value Added Reseller). This is often dropped if the software is a bit older, but is one of the wisest investments a company can make. 
  5. When was the last time the Internet service was reviewed (audited), which most likely is the same as their phone service. If it has been more than two years, then it is very probable that an upgrade to faster service for less money than is being spent today is available. 
  6. Get a total count of the software programs that are owned. Often times there is software that is owned, but not being used or there is software being used by one person for one specific task that could actually be done with software that is more widely used. This switch could save money if maintenance is being paid on the single software program. 

Beyond these assessment questions, most others would get a bit more technical and might be difficult to answer. If you have any technology questions, please feel free to contact David Panitch at (847) 868-2004 or David@TheDistributorBoard.com.

Need our help or just want to talk? Click here for a fast connection to one of our experts.

Emerging Technology: Is the iPad in my Future?

First published in January 2011

Introduction of new technology is occurring at a fast and furious pace. For most of us, it is a situation that we are forced to figure out. It's not that there isn't a deep wealth of information about all of the new hardware and software. The challenge is distilling the flood of information and making sense of it all. Today we are going to take a look at small form computing devices.

When we think of small form computing devices there are two that come quickly to mind; the iPad and netbooks. If you can remember 

iPad.jpg

back when the "first" portable computers were introduced, it was in 1981 by the Osborne Computer Company. It was the size of a small suitcase with a keyboard that doubled as the top and a huge 4" monochrome screen. In just 19 years we have come a long way. Today, the need for 24/7 availability to the Internet is a basic requirement for any portable device. The screen must be crystal clear and display millions of colors. And the keyboard must be responsive and provide a great feel. The speed of innovation in this segment of the market has been in hyper mode and looks to continue at this frenetic pace.

The first question that we hear from many distributors is "so what?"

Well, if you are still reading, in a moment we'll share a few key thoughts about these devices that will get you to say, "how quickly can we deploy them?" Today, it is not good enough anymore to look the other way when it comes to emerging technology. The world of business has changed and distributors are feeling the harsh effects of that change.

Let's start with some of the key differences between tablets and netbooks. Tablets typically do not have a traditional keyboard. The keyboard appears on the screen when the device recognizes that you are ready to input data.  The tablets have a mode that allows the screen to go black and the device to "go to sleep", but with a single touch of a button, the device is on and ready to go...instantly. The third difference is the availability of new applications. The number of applications that are available either in the iTunes store or the Android Market are in the tens of thousands and growing every day. Tablets are also "tablets", there are no hinges because they don't open up and they are always open. These devices also have flash memory which is typically considered more durable and faster than traditional hard drives.

Netbook.jpg

Now netbooks have some excellent features, as well. The first is that they have the look and feel of a traditional laptop, but in a smaller size. This can be a key decision point for those of us that prefer a tactile keyboard and something that "opens up" on our lap or desktop. If you travel in coach, it can be a life saver when the traveler in front of you decides to quickly recline their seat. The small format of the netbook won't have its screen caught by that seat back flying towards you! There are also the tried and true applications (Microsoft products and others) that can be loaded (albeit, with an external DVD drive) onto the netbook. Netbooks are now coming with solid state hard drives (SSD) instead of the traditional spinning drives. This change adds much needed durability and speed to the newer netbooks.

We know what you're thinking, all this information is fine, but why do I or my business need these new devices? "Our laptops are working just fine."

Let's take a look at a couple of examples of how distributors are taking advantage of these devices and leapfrogging some of their competition.

Nxtec Sales Group Inc. is an MRO distributor with over 1 million different items. Their president, Mike Jespersen, provided iPads to the sales force so that they can be more knowledgeable when they are in front of a customer. They have instant access to all 1 million items wherever they were in the country. Their ability to show a customer their inventory, place an order, and confirm a shipment created a key differentiation for them. Many of their competitors could gain access to their respective systems, but the process was clumsy (laptop balanced on an arm or on a counter) and very slow. The reality is that most of their competitors lean over the shoulder of their customer while helping them navigate through menus on their website or system at the home office using the customer's computer. Nxtec would probably also admit that there is the "wow" factor when their sales people walk in with the iPad under their arm.

Markley Enterprises is a manufacturer who focused on their supply chain to improve their competitiveness. They recently brought iPads to their warehouse floor and immediately realized improved efficiencies. The President, Tim Markley, found that his people are able to take orders and answer packaging instruction questions quickly without having to get to a traditional computer. By using the built in WIFI capability of the iPad, they are able to access a wide range of business information right from the forklift. He found that by affixing the iPads directly to their forklifts he eliminated one of the concerns of their "all screen" devices, which was breakage from dropping them. He said that you would be amazed at how much time you can save by not having to make that 30 foot walk to a computer terminal in the warehouse. In addition, there was a significant cost savings realized by going with iPads versus a ruggedized laptop. The iPads were 1/5 as expensive.

Distributors need to provide their sales people with access to account information from anywhere in the world. Most have been providing their people with laptops for a while now. The two biggest issues we hear regarding laptops from road warriors are the weight and the wait...the time it takes to start up their devices. The iPad and many net books have virtually eliminated these issues. As a matter of fact, this article has been completely written on an iPad over the course of a few days. The ability to just start writing when I felt the urge made the time incredibly productive.

Here are some of the things you should consider when thinking about these new devices.

What software will you be using with the device?

Will you need Internet access when you are not within range of your network?

What is our method of securing the devices and the data that the devices will have access to?

Do we need to store a great deal of data on the device?

Where will we gain the most competitive advantage?

Who should be the first to "test" the device?

What physical protection do we need for the device?

How will we measure the value that we receive from this technology?

If you would like additional help in determining which technology would be best for your particular company, feel free to contact us. We help distributors make the best decisions with a wide range of technologies that encompass every aspect of distribution. Let us help you make clear business decisions regarding your technology.

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