Redefining How The Game Is Played
In The
Distribution Industry
Part One
Managing The Forces Of Change
Berling Associates
The Last Thirty Years
 The changes of the last thirty years have been continually eroding the margin for error in distribution
companies
 The major themes of change can been described as
 1982 to 1987 as a time of opportunity when the business climate favored distributors, and their
growth in many cases outpaced that of the general economy
 1988 to 1992 as a period of aggressive restructuring, meaning increased rates of consolidation,
new entrants into the channel, and the emergence of new ways of doing business
 1993 to 1995 as a time to focus on the improvement of business practices within the company
and across the links of the supply chain, as acquisitions increase, and technology becomes a more
pervasive enabler
 1996 to today as the period when the time it takes for an industry (and economy) to make a 180degree change compressed dramatically; from dot.com to dot.bomb and from economic expansion
to economic recession
 The last thirty years have demonstrated that to be successful (or maybe even to survive) the
distributor must be continually redefining the way he does business. He needs to be responsive to
changing customer-markets, to evolving customer needs, and to increased competitive pressures. He
also needs to be creating advantage through the identification and implementation of business process
improvements that yield cost reductions and to be developing core competencies valued by his customers
and potential customers
Managing The Forces Of Change
Berling Associates
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The Environment Today
Relative Risk and Complexity of
Managing a Distribution Company Today
Risk
(Tons)
Integrated Supply Chain
Network Management
Coordinating
Strategic Alliances
Moon Landing
 Only perform those activities that are valued
by your customers, vendors, employees, and
other stakeholders
 Develop competencies and capabilities in
your people, processes and systems
Oil Rig Fighter
Edsel
 Effectively manage your resources
Taxes
(High)
Complexity
Managing The Forces Of Change
 Fully understand the customers’ needs and
wants and how those needs and wants change
over time, so as to engage your customers over
time at a profit
 Continually improve the effectiveness and
efficiency of those processes you must perform
Managing Distribution
Company
Death
 Five imperatives are the legacy of the last thirty
years
 The complexity and risk inherent in managing
the distribution function whether it be a single
company or in a network of companies
coordinating an integrated supply chain has
dramatically increased
Berling Associates
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Focusing On A Profitable Relationship With The Customer
 The first imperative:
“Fully understand the customers’ needs and wants and how those needs and wants
change over time, so as to engage your customers over time at a profit.”
 Our focus will be on the customer and how distributors can continually be “in the loop”
as to the customer changing needs and wants. Our focus is not only on the sales
organization understanding the needs and wants of the customer, but on all the organization
units of the distributor working harmoniously to serve the changing needs and wants of the
customer over time at a profit.
Managing The Forces Of Change
Berling Associates
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Serving Customers At A Profit
To fully understand the customers’ needs and wants and how those needs and wants change
over time, so as to engage your customers over time at a profit, you must
 “Own” the customer and all the information about him
 Communicate continuously with the customer regarding his changing needs and wants
and how he values them
 Communicate continuously with all in your organization to ensure all understand the
needs and wants of the customers you are attempting to serve at a profit
 Effectively manage your resources
Managing The Forces Of Change
Berling Associates
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Own The Customer – The Power In The Channel
Distribution of Power in the Channel
 In the beginning
In the beginning
Supplier
Distributor
Customer
 Suppliers fulfilled many distributors who provided product to
a homogeneous block of customers
 Suppliers determined product functions and features
 Distributors sold on price, with little differentiation on
service
(High)
(Medium)
(Low)
 In most cases today
In most cases today
Supplier
 Customers purchased what was available
Distributor
Customer
 Fewer distributors are providing products from fewer
suppliers to individual customers
 Suppliers are seeking customer input on product functions
and features
 Distributors are selling on price, with significant
differentiation on service features
Color Key to Level of Relative Channel Power: High, Medium, Low
 Customers are purchasing what they need and want
The power in the channel belongs to the one who can dictate terms, prices and other aspects of the business transaction.
Today, the information about what the customer needs and wants can be a source of power. To ensure his role and possibly
survival, the distributor must grow the amount of his power vis-à-vis the supplier.
Managing The Forces Of Change
Berling Associates
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Own The Customer – Information Is King
Supplier
Distributor
Changing Needs
and Wants
Evolved Products
Customer
Changing Needs
and Wants
New Service Packages
 To shift power from the supplier to the distributor, the distributor must “own” the customer
 The “how” is simple, but within the “simple” is much complexity
 To own the customer the distributor must utilize his customer facing position
 to learn and to continue to learn about the needs and wants of his customers and potential customers
 from this information the distributor must create new service packages around the basic product to dovetail
into the customers’ business processes delivering value extended beyond the basic utility of the product
 as the distributor becomes more deeply involved in the customers’ business processes, he will be in a
position to see what is causing the needs and wants of the customers to change and begin to anticipate/direct
change. All of this information will be of value to the suppliers as they look to evolve product attributes and
create new products
 These are not periodic snapshots of information, but continuous flows of information; “being in the loop”
Managing The Forces Of Change
Berling Associates
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Communicate Continuously - Externally
 An HVAC distributor carries a number of primary product lines and has a strong market
position. But, the distributor is only marginally profitable. Management is attempting to
determine what to do. They gathered the internal and outside sales teams and asked what their
customers want from them and their product offering.
Sales Force Said
What Do The Customers’ Say
1. Best product quality
2. Broadest product line offering
3. Next day delivery
4. Lowest price
 Missing from the internal inquiries was a look outside to the customer.
Managing The Forces Of Change
Berling Associates
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Communicate Continuously - Externally
With web technology today, a distributor can frequently ask customers what elements of
his product/service package are most important.
Importance Ranking
4.5 

 

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
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Our example asks the customer to rank the importance of fourteen different service elements based on a scale
of 1 to 5. The data is collected via a web survey instrument, at any time or place convenient to the customer.
Managing The Forces Of Change
Berling Associates
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Communicate Continuously - Externally
In another part of the survey instrument the distributor asked the customer to rank how he is performing
on the fourteen service attributes. The response is overlaid onto the importance ranking chart. The
distributor is over- and under-performing in different areas. The action should not be only to focus on
bringing performance up in the most important areas where he is underperforming, but should critically
evaluate those activities, which are not highly valued and can be scaled back.
4.5 
Importance Ranking 
Performance Ranking


 

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

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
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
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Managing The Forces Of Change
Berling Associates
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Communicate Continuously - Externally
Gross Margin Percent
 A large distributor with over 300 branches located across the United States installed an ERP system to replace a number of
legacy systems that had been acquired through a series of acquisitions. As a part of the application’s installation the distributor
attempted to standardize as much as possible. One area of standardization was the consolidation of all the regional pricing
programs into one national pricing schedule. Shortly after the “go live” the company watched its gross margins drop more than
two percentage points.
 While the ERP system was fraught with
its own challenges, it was not the culprit in
the margin decline. The company had lost
28%
contact with its customers. While seeking
the efficiencies of a standard pricing
27%
schedule it treated its customer base as a
homogenous group, which was not in 2001.
26%
25%
24%
23%
22%
21%
Month 1
Month 3
Month 6
Month 9
Months Since Go Live
Month 12
 To address the margin degradation the
distributor commenced a series of meetings
across its network with branch managers
and customers in an attempt to identify
value (a code word for price) points for
various product groups and service
packages. They learned there national
business was very local in terms of price
elasticity. For example the price a customer
was willing to pay for a particular
product/service bundle in Pennsylvania
varied significantly in Altoona, Harrisburg
and Philadelphia; Harrisburg being only
100 miles from Altoona and Philadelphia.
 A new pricing schedule template was developed and implemented. The new schedule was reflective of the customers’ local
values, and the new result was a dramatic increase in the previous gross margin levels.
Managing The Forces Of Change
Berling Associates
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Communicate Continuously - Internally
 In a sports equipment distributor, the marketing group decided to revamp one of the product lines. They
identified a supplier, negotiated a large systems contract, then informed purchasing of the business
arrangements with the supplier. They next turned their attention of developing the marketing materials and
campaign. Purchasing in the mean time set up the supplier and began releasing orders. At the semi-annual
sales meeting the marketing group introduced the new line to the sales force.
The Implication Of Not Communicating Continuously Internally
Customer
The customer was not asked about changing the line, and the the new line was a mediocre performer.
Marketing
From their silo point of view marketing did everything right in accordance with their existing business
practices.
Sales
Sales did all they were asked to do. They took the new line and tried to “push” the product.
Customer
Service
CS learned about the new line when the first customers began to call. CS was not able to respond to questions
about the product usability because it had no information about the products.
Warehouse
The warehouse saw the packaging for the product when they unloaded the first container. The boxes received
were in 24 units to a pack. The sales pack consists of four units per pack. All the boxes needed to be
repacked into packs of four per. This required the renting of a separate facility and leasing of temporary
personnel to do the special repackaging.
IT
When the warehouse set up the special packaging operation at the remote location, IT was called to set up
communications and remote computers to record the special packaging operations.
 The lack of communications about the needs of the customer and the impact on internal operations cost
the margin garnered by the new line.
Managing The Forces Of Change
Berling Associates
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Ensure All Are Aligned
 The example on slide 12 demonstrates how a lack of continuous communications
internally about customers’ needs and wants can result in less than optimum cost
performance.
 While the example focuses on communications internally, underlying the
communications message is the importance of taking action once the communication is
received. In our example, that is aligning activities within the business across the
business functions to be responsive to the needs and wants of the customers.
 This same message is present in the first example, on slide 8, where the distributor
found himself to be over-performing in activities which were not important to the
customer. In this case the distributor needs to refocus his resources away from the
activities which lack importance or value.
 Central to these notions about aligning business activities to the needs and wants of
the customer is the fact that these needs and wants change over time and as they do so
must the distributor’s business activities.
Managing The Forces Of Change
Berling Associates
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Effectively Manage Resources
 Just as the distribution business is a lot about having the right product, in the right place, at the right
time, it also about having the right resources in the right place, in the right quantities, at the right time.
 Traditionally, resource management decisions have been based on information acquired through the
application of financial controls and analysis of both the balance sheet and income statement. This
focus has traditionally been historic and aimed at examining the results of operations and monitoring
working capital.
 Aggressively managing the customer relationship and its many aspects, also requires the effective
management of resources. But, all of the tools that provide the information to manage the resources
applied to customer relationships are typically not found in the financial controls and analysis tool box.
 The consumption of resources is measured financially, but the indicators or metrics used to
monitor/manage the activities and activity levels that consume the financial resources are best measured
with non-financial tools.
 The metrics used in the management of customer relationships are continuing to evolve.
Interestingly, the metrics being utilized are being used as performance monitoring tools, as well as
relationship building tools and competitor entry barriers.
Managing The Forces Of Change
Berling Associates
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Effectively Manage Resources
The Customer Relationship Has Two Points Of View
The Distributor’s Point Of View
The Customer’s Point Of View
Growth
Cash Flow
Profitability
Reliability
Same Location
Days Payables
Outstanding
Special
Packaging,
Labeling, etc.
On-time
Delivery
New Locations
Deductions/Charge
-backs Per Invoice
Shipping
Requirements
(TL vs. LTL)
Fill Rate
Days Purchases in
Inventory
Order Lot Size
Growth
Cash Flow
Profitability
Same Branch
Sales
Days Sales
Outstanding
Special Packaging,
Labeling, etc.
New Branch Sales
Deductions/Chargebacks Per Invoice
Shipping Requirements
(TL vs. LTL)
Margin
Days Sales in
Inventory
Order Lot Size
Margin
Price Points
Special Carrier
Requirements
Price Points
Special Carrier
Requirements
Transaction Size
EDI/Internet Exchange
Share of Wallet
Sales Support Needs
Transaction
Size
Damaged Goods
Per Shipment
Share of
Wallet
Returns Per
Shipment
Sales Program
Terms
Cash Discounts
 Measuring the “quality” of each customer relationship is critical to knowing what level of resource to apply
 Interestingly, the measures work for the distributor and for the customer. Recognizing this synchronization and
using it as the basis for a quarterly customer performance scorecard can be an effective competitive tool
Managing The Forces Of Change
Berling Associates
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May We Be Of Assistance
Berling Associates has been providing an array of proven services to the distribution industry for over
25 years. Our perspective, forged over time, can assist executives to redefine how they play the game.
Business Strategy
Supply Chain Analysis
Market Analysis
Strategic Assessment
Inventory Management
Segment Profitability
Market Segment Analysis
Cargo Management
Customer Profitability
Competitor Evaluations
Sales/Service Analysis
Product Profitability
Acquisition Evaluation
Vendor Management
Perception Analysis
Strategic Alliances
Purchasing Management
Strategic Planning
Customer/Vendor Surveys
Business Process Management
Activity Cost/Value Analysis
Process Analysis
Site Location Analysis
Process Simplification
Activity Based Costing
Warehouse Cost Management
Process Integration
Product Line Profitability
Logistics Network Optimization
Customer Process Integration
Customer Impact Management
3PL Analysis
Vendor Process Integration
Key Business Metrics
Decision Support Systems
Knowledge Management
Measurement Tools
Managing The Forces Of Change
Berling Associates
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Contact Information
Rob Berling
Berling Associates
550 Pharr Road
Suite 212
Atlanta, GA 30305
Tel. 404.365.9836
Fax. 404.365.9837
Email: [email protected]
Website: www.berlingassociates.com
Managing The Forces Of Change
Berling Associates
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