The Effects of Globalization:
Survival Discussion for BSA
BSA Annual Convention
May 2005
Scott Benfield
Benfield Consulting
www.benfieldconsulting.com
1
The Effects of Globalization
• Slowing growth in domestic markets
• Rapid growth in worldwide markets exceeds
North American growth
• Nominal profitability for North American
Distribution
• Cost of material and cost of service are the
playground for North American Distributors
• You won’t sell your way out of this-at least in
North America
2
Slowing Growth in
Domestic Markets*
• North American Market will grow from $7.6 billion in 2002
to $9.55 billion in 2007 to $11.8 billion in 2012
• Average growth rate of slightly more than 5% for North
American Market (2002-2012)
• U.S. Market is expected to grow 4% per year from 2002
to 2007 and near 5% per year through 2012
• Canada and Mexico are expected to grow 8% per year
through 2002 to 2007 and 6% per year through 2012
• Western Europe’s growth rate will approximate that of
the U.S. Total Market 9.6 billion by 2012
*Data Source the Freedonia Group
3
Worldwide Growth is
On the Move*
• China grew from $2.65 billion in bearings purchased in
2002 to $4.44 billion by 2007 and 7.25 billion by 2012
• China’s average growth is 13% per year from 2002 to
2007 and from 2007 to 2012
• Eastern Europe grew from $1.95 billion in bearings
purchased in 2002 to $2.65 billion in 2007 and $3.55
billion by 2012
• Eastern Europe’s average growth is 7% per year from
2002 to 2007 and slightly over 7% from 2007 to 2012
*Data Source The Freedonia Group
4
Worldwide Growth
is on the Move*
• Pacific Rim/Other Asian Markets will grow from $2.75 billion in 2002
to $4.04 billion in 2007 to $5.6 billion in 2012
• Average growth rate is slightly over 9% from 2002 to 2007 and
slightly less than 8% from 2007 to 2012
• Total of China, EEU, Pac Rim grows from $8.65 billion in 2002 to
$16.4 billion by 2012 or a slightly less than 9% average growth over
10 years
• These three markets will be approximately 40% larger than the
North American market by 2012 and average annual growth rate is
almost double
• Russia market growth at a rate of 5.6% per year to 1.5 Billion by
2012 but central government control worrisome
*Data Source the Freedonia Group
5
World Bearing Demand
by Application*
• Industrial machinery will grow 7.7% per year
through 2007 to $20.1B, and 7.3% per year to
2012 to $27.5B
• Motor vehicle will grow 2.8% per year through
2007 to $7.7B and 2.7% per year through 2012
to $8.8B
• Aerospace and misc. will grow 7.3% per year to
$7.6B by 2007 and 6.8% per year through 2012
to $10.12B
*Data Source Freedonia Group
6
Nominal Profitability for
North American Distribution*
• Durable Goods Distribution in the bottom 10% of
productivity in US Economy
• Wholesale Durable Goods sales per employee grew .6%
per year from1997 to 2002 while wages per employee
grew 2.75% during the period
• Industrial Distributors (IDA, PTDA,BSA, NAHAD, etc.)
had sales per employee of 1.23% growth from 1997 to
2002 and 2.36% growth in wages per employee
• Approximately 20% or slightly over 2000 industrial
distribution establishments “disappeared” during this
period (Economic Census 2002)
*Source Benfield Consulting White Paper
7
Financial Trends for
BSA Distribution*
Measure
1994
2004
Return on
Net Worth
14.23%
4.6%
Net Profit
Before Tax
1.74%
.8%
Sales Per
Employee
$248,910
$289,078
*BSA PAR Reports
8
Financial Trends for
BSA and Associated Distributors
• Growth of sales per employee is 1.6% per year
vs. average U.S. inflation growth of 2.6% per
year
• Pre-Tax profit of IDA Distributors in 2004 was
.7% of sales, in 1996 it was 1.6%
• Return on Net Worth for Electrical Distributors
fallen from over 20% in the late 1970’s to less
than 10% today
• The vast majority of Durable Goods distribution
is in a declining financial mode
9
The New Playground in
North American Distribution
• Cost of service will be integral to financial survival
• Expect sales and solicitation costs to fall
• Expect definition of service to increase and “embedded”
services to decrease or have lesser cost alternatives
• Alternative suppliers will come from China and India
• Master distributors will rise as competition for major
manufacturers
• Pricing systems will be developed and sales driven
pricing will decrease
10
Aligning Services To Customers
Two Poles Of Service Provision
Bowling Ball
Services
+
Product
+
Cost Plus Price
One size fits all, over-serve,
Under-serve, don’t serve
specifically
Segment Based Services
Customize by segment
Scale by segment
Account A
Account B
Services
By
Account
Starburst
Account D
Account E
All things to all
people,
Account C can’t scale can’t
keep up
11
Research on the Distributor Sales Effort
• 2001 Research on Sales Valuation 4% Price Decrease
or Outside Sales Call-75% Price Decrease (Progressive
Distributor-Valuing the Sales Effort)
• Nine out of 10 Distributor Sales Managers use total
margin dollars as a sales allocation methodology (Benfield
Consulting Sales Audits)
• Durable Goods distribution is in lowest decile (10%) of
productivity in US Economy (Benfield Consulting White Paper-2004)
• Sporadic use of Hybrid Marketing or matching cost of
sales to solicitation method (Benfield Consulting Sales Audits)
• Expect book in 2005 and new research in 2006
12
Knowing if Your Sellers are Productive
• Can you answer the following questions with
solid mathematical analyses:
• How many sellers do we need calling on
accounts?
• What is a seller’s call capacity?
• What accounts are worth calling on and which
aren’t based on their cost to serve?
• What is the probability of an account group
growing with sales calls?
• If these questions are difficult to answer, you
likely are less productive than you could be
13
Aging Concept Of Sales Productivity
(Thousands)
600
Total Sales Rev. 500
Sales Cost
400
300
200
=
100
Wasted
Productivity
0
.
.5
1. 1.5 2. 2.5 3. 3.5 4. 4.5
(Time in years)
Sales revenue from account
Sales cost optimum
Sales cost actual
14
Aging Concept Of Sales Productivity
• ROTI- return on time invested has dominated sales
call
management lit. since mid 80’s $GM
Cost call
• ROTI example:
5 calls/day x 250 days/yr = 1250 calls year
– Sales cost $65K salary, 17K benefits, 12K expenses =
$94K total
$94K sales cost
– Cost per call = 1250 calls/yr
= $75/call
– Territory $GM =
500K
1250 calls/yr
250K
– Territory $GM = 1250 calls/yr
=
=
$400GM/call
$75GM/call
= 5.3:1
$200GM/call
$75GM/call
= 2.7:1
15
Aging Concept Of Sales Productivity
• ROTI encourages larger territories $250K GM
territory vs $500K GM territory
• “Arithmetically convenient” to “give” sellers large
territories to increase ROTI
– Little regard to account size (Account Hording)
– Little regard to segment need (want of a seller)
– Productivity was driven by territory design, not market
need
• Future measurements should consider the cost
of incremental investment
16
Sales Productivity In The New Millennium
• ROITI = Return on incremental time invested
Year
1
Account sales
25K
Account GM%
25%
Account GM$
6.2K
Incremental GM$
growth
GM$ call
1 call/wk
ROITI
2
3
4
5
50K
20%
10K
200K
18%
36K
250K
17%
43K
275K
16%
44K
3.8K
26K
7K
1K
73
1:1
500
7:1
134
2:1
19
.25:1
17
The New Models Of Sales Allocation
Functional – Allocates sellers by function performed
(technical, trade, missionary, new product,
relationship)
Segment - Allocates sellers to well defined segments
(res. tract plumbers, repair & remodel plumbers,
mechanical contractors)
Consultative – Sellers as consultants (technical
process, service products, supply chain process)
Enterprise – Firm to firm strategic partnering (supply
chain, VMI, I/S, reverse customer buying)
Transactional – Take the cost out of how they buy
Hybrid/Queuing – Inside/outside and call queuing
logic (time, pre-arranged schedule)
18
The New Models Of Sales Allocation
Model
Functional
Segment
Difficulty of
Change
Management
Implications
Medium-High Define and support
functions
Medium
Compensation Mix
Varies- typically low
at risk comp.
Good segmentation Varies- med. To high
and support functions at risk comp.
Consultative
High
Definite testing of
service value
High base- high at risk
Enterprise
High
Solid plan of firm to
firm projects
High base- med. To
high at risk
Transactional
Very High
Hybrid/Queuing
Low
May be a new model Compensation and bonus
of business
parallel other functions
Rearrange call plan Slightly more than inside
sellers
19
Segment To Solicitation Decision Matrix
Segment
Number of
size
accounts
Small Large Many Few
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
Solicitation Key:
1 = Functional
2 = Segment
3 = Consultative
4 = Enterprise
GM%
Number of Number of Tech.
Solicitation
transactions deliveries
need
strategy
Low High Low High
Low High Low High
X
X
X
X
5,7,8,9
X
X
X
X
1,2,5,6
X
X
X
X
8,9
X
X
X
X
1,2,3,4
X
X
X
X
5,8,9,6
X
X
X
X
2,3,4,1
X
X
X
X
6,7,8,9
X
X
X
X
1,2,5,6
5 = Transactional
6 = Hybrid/queuing
7 = Telesales
8 = Catalog
9 = E-commerce
20
Why Services?
• Services may or may not be unbundled and
priced
• Reasons for unbundling include:
- Commoditize service value, road to unique value
- Align service capability and capacity with
segment needs
- Allows for flexible market or “naked solutions”
marketing
- Escapes the death spiral of consulting for your
competitor
- Limits the risk of backing a service warranty
without making the product sale
21
Service Basics
• Unlike products…..
- Services cannot be inventoried
- Services are produced, consumed and
sometimes transacted in the same
moment
- Services are intangible
- Services are more difficult than products to
maintain quality for
- Services are remembered by customers when
they are provided in a low quality mode
22
Service Basics
• Since services are unlike products, this
means:
- You must understand their importance relative
to the customer segment
- You must be able to identify, process correct
and measure customer satisfaction of
service
- Learn how to “tangibilize” service
- Learn which services are expected, augmented
and potential
23
Service Product Ideas
• Storage and delivery services (overnight, emergency,
2ndpart warehouse, secured box on site)
• Design and layout services (CAD/CAM, engineered
drawings, P.E., M.E. or E.E. approved designs)
• Process redesign services
• New product or new application services
• Payment options, differing terms, leasing services
• Software services to speed transactions, provide
information or tighten supply chain controls
• Light manufacturing, product augmentation or “kitting”
services
• Packaging services
• Inspection service (fire extinguishers)
• Training services (product or process)
• Labor services
24
Service Basics The Service Hierarchy
Price
Competitive
Increases Offerings
Decrease
Strategic Goal
Potential:
proprietary
or exclusive
Develop and test
products, engineered
market. Launch as
design and applications
a service product
services, unique software
capabilities
Separate and price
Augmented: managed inventory,
where necessary.
design services, process reorganization
Develop winners into
services, new product application services
service products.
Basic or expected: outside sales, inside sales,
reasonable delivery, inventory, break bulk, extend
credit, warranties and returns
Take the cost out
and align with
segments
25
Aligning Services to Segments
The Service Pricing Matrix
Segment
Category/
Service
Freight 2 hour emergency
Same Day
Overnight
Early A.M. Next Day
Next Day
2nd Day
Sales
Design and Layout Service
Site Visit for design
Product Recommendation
Automotive Aftermarket
Service Type
Price
Basic Augmented Potential Mechanism
(Expected)
X
X
X
X
X
X
X
X
Per delivery
Per delivery
$30 Flat
$15 Flat
N/C
N/C
$60/hour
$75 Flat
X
*****The Service Matrix Makes Pricing Consistent To The Segment*****
26
New Service Development Process
Success Rate
Service Funnel
200 Go In
Idea generation
Typical Internal Costs
Concept development & testing
48 Financially valid
ideas
Business & financial analysis
Communications & strategy
development
24 Pilots
$15,000 to $60,000
$8,000 to $15,000
$40,000 to $80,000
$60,000 to $120,000
Test market
12 launch
Service launch
Post launch support
$36,000 to $70,000
$159,000 to $345,000
6 Succeed
Successful service product
27
Flexible Market Offerings
Wholesaler: E-Z Cutting Tools
Segment: S.I.C. 25 – Furniture Manufacturers
Service/Product
Standard Offering
1 gross 3/8” carbon
standard bits
Case lot
Shipment
Next day 24 hours
Inside sales
As Needed
Outside sales
Route coverage
Ordering
Fax, phone
Terms
Net 30
Warranty
Dependent on mfg.
disposition
Price
21% on product cost
28
Flexible Market Offerings
Service/Product
Flexible Offering
Price
3/8” Carbon standard bits 1 – 72
144 +
Cost + 14%
Cost + 10%
Shipment
24 hour our truck
Same day
2 hour emergency
2% of order value
4% of order value
6% of order value
Ordering
Phone – I/S assistance
Fax
E-commerce
Non-stock – phone I/S assist
5% of order value
3.5% of order value
2% of order value
8% of order value
Terms
Net 60
Net 30
Net 15
1.5% of order value
N/C
1% discount
Warranty
Mfg. Disposition
No questions asked –
immediate credit
N/C
Proof of purchase
+ 5% of order value
29
Activity Costing or
Approximations are a Prerequisite
Activity Decision Tree
Streamline Process
Negative
Activity
Margins
Increase transaction size
Raise price
Charge fee for activity
Change buyer behavior
Eliminate activity
30
Need for System Pricing
•
•
•
•
•
Factors that influence pricing include:
Segments-Type of customer
Type of Transaction-stock, non-stock, direct
Geography or branch location (diminishing)
If a distributor has 5 segments, 3 transaction
types, 7 geographic markets and 15, 000 sku’s
then pricing permutations are (5x3x7x15,000) or
1.57 million
• Can your seller keep this in his/her head?
31
Sourcing Becomes
Global
• “We are contemplating buying foreign products to
•
•
•
•
•
become increasingly competitive.” 57% Agree/Strongly
Agree (China Syndrome)
“We believe the value of the industrial brand will
decline…” 79% Agree/Strongly Agree (China Syndrome)
“Master Distribution will increase as a percent of
purchases.” Benfield Consulting CIPH Survey
Expect distribution to offset profit losses with lower cost
product
Expect some distributors to become Master Distributors
Expect distributors to band together to source foreign
goods
32
Sourcing Becomes
Global
• Distribution will, where financially viable, invest in joint
ventures with foreign manufacturers
• Much of yesteryear’s channel power, driven by strong
brands, will decrease
• Distribution alliances will move beyond co-operatives to
investment groups in new product sources
• Channel power, at the manufacturer level, is increasingly
dependent on supply chain excellence and marketing
excellence
33
Back Door Programs And The DPI
Distributor Profit Index
Gross margin % x Turns – Operating expenses % = Profit Index
Example:
25%GM x 4 turns – 20% operating expenses = 80%DPI
Gross Margin %
Increase revenue
or decrease COGs
Drop ship programs
Quick ship programs
Add on orders
Pick-up privileges
Lower freight rates
Lower storage rates
Lower Storage by
better packaging
Turns
Operating Expenses
Increase
Decrease
Decrease operating
Sales Velocity
Average Inventory
Expenses
Factory tech-support
i Order size
Vendor managed
800 numbers
Quick deliver C&D
programs
items
Factory tech-support
Usable lit.
Regional warehousing Immediate warranty
“Sticky” websites
No hassle warranties
credits
Troubleshooting programs Product line reduction Simple freight claim
Cross reference lists
Consolidation
policy
Distributor-Technician
EDI or internet
Bar code inventory
programs
Completed orders
Complete orders
Accurate labeling
34
Service Planning And Vendor Involvement
DPI Front Door Model
Gross Margin%
Turns
Expenses%
Increase Revenue or
decrease COGS
Increase sales
velocity
Decrease average
inventory
Decrease operating expenses
Joint sales calls
Prospect list services
Account Qualification
services
New, innovative
products
Product training
Advertising
End user literature
Seller training
Sales spiffs
Key account
programs
Direct mail
Honor & recognition programs
Product specials
Loss leader products
New, innovative
products
Free goods
“Bakers dozens”
Purchase programs
Consignmentinventory
Returned goodsallowances
Direct ship programs
Complete orders
Accurate labeling
Dating programs
Co-op advertising
Trade or end
user seminars
Open houses
Application
Support
35