As top distributors become more proficient with data analysis, others are falling behind, creating a critical gap in business intelligence. Four of the speakers at MDM’s upcoming Analytics Summit share their recommendations here for optimizing data analytics across a range of business operations.
Understanding the power and potential of proper data analytics is becoming increasingly important for distributors looking to get a leg up on the competition or simply keep up with those who are already putting analytics to their advantage. But there’s a competitive gap forming between companies building analytics capability and those not addressing this aspect of operational improvement.
While smaller shops may be able to get away with less sophisticated analytics programs, anyone in the $20 million and greater revenue range has “got to be on top of the game with regard to analytics,” says Al Bates, principal at Distribution Performance Project and formerly of the leading financial performance benchmark service for more than 40 distribution associations across three decades.
“I don’t want to predict their demise (for those not invested in analytics), but I think they will begin to slowly be marginalized. Less sales growth. Less gross margin. More expenses than their competition,” Bates says.
The quality of analytics directly affects two components of a company’s operations: profitability and growth, says Charley Hale, chairman of Liquid Technologies and former CFO and CEO of FCX Performance, a company he grew over 18 years from $30 million to more than $300 million with a focus on analytics.
“Clearly, better analytics and understanding pricing is critical,” he adds. “I’m still amazed when I look at a lot of distribution businesses that don’t have any kind of strategic pricing approach or pricing analytics.”
The industry has evolved from basic, transactional data analysis such as understanding what a customer is buying and what the margin on the product is, to applying strategy to that data to make pricing more effective, Hale says. It’s critical for distributors to have the capability to understand what customers are buying across a range of product offerings, know where the “holes” are and how to attack them, he adds.
For example, for a lot of distributors, business is concentrated in a sales territory where the focus is on the needs of the top 10 customers. Sales people are “not doing much work beneath that,” Hale says. Using data to understand where potential or neglected customers are and how to access them is a helpful initial step, says Hale, who will be presenting “A growth-by-analytics success story” at the Analytics Summit.
The Will to Do It
While some companies will do well in spite of themselves, simply by being in the right market at the right time in the right place, “for most companies, if they aren’t keeping on top of their inventory analytics, then they are going to fall behind for sure,” adds Mike Brockway, consulting director at Dimensional Insight.
This means tracking inventory to know what’s selling and what’s not selling, and how the product mix is lining up with customer buying patterns. Too many companies aren’t carefully tracking inventory overhead and how much their warehousing costs are affecting profitability. “If you’re not keeping your eye on it, it can quickly snowball and you’re going to get eaten up by the competition because you’re not in control of your costs,” says Brockway, who is presenting the session “Inventory Management Analytics: Maximize Productivity” at the Analytics Summit.
Distributors already tracking data “get a lot of power” from working with large data sets and historical data, adds Bob Sherlock, CMO of Chief Outsiders, a marketing consulting firm. But companies often miss other ways to segment their business by taking a look at smaller data pools, he says. One example is looking at differences between transaction types – large contract jobs versus small one-offs. “Where they may not have masses of data, is there still enough data to do analysis with, even if it might not be analytics in the sense of massaging data sets looking for patterns?” he says.
One example from Sherlock, who is presenting the session “Hidden Value: Pricing & Margin Improvement Levers” at the Analytics Summit, is the correlation between buying behavior and price sensitivity; these can be very different between a large project and a small, routine one, such as rewiring a strip mall store for a new tenant. “I don’t know how many distributors are tracking their transactions to analyze the buying situation and so on,” he says. “So that might be another type of gap in analytics; they’re just not tracking that type of data.”
It boils down to a combination of factors: the will to implement such data tracking, the availability of technology, and then understanding how to access and interpret the data, says Hale.
Why It’s Been Lacking
The majority of distribution businesses still tend to measure themselves and think about sales from the perspective of what the company is doing this year versus what they did last year. The focus instead, Hale says, should be on this year and to identify the real market for its products. “The focus should be on “understanding what the market is, understanding where those opportunities are and then how to deploy your sales resources to get at that,” he says. “Closing the analytics gap is really attacking both a margin and a revenue growth problem.”
Even for those companies that may already have internal resources capable of tracking such data, there is a lack of understanding on how to access it and interpret it, Hale adds. A salesperson used to calling on the same customers year over year, selling them what they can sell them and moving on, probably isn’t thinking with an analytics mind frame. “They don’t have it, have never been interested in it, have never been exposed to it,” he says.
Bates, who will be presenting “Benchmarking profitability: The analytics that really matter,” at the Analytics Summit, agrees that although upper management may have access to and rely on data analytics on a regular basis, that knowledge doesn’t get filtered down throughout the organization.
“I’ve got sales managers who know that sales is all I’ve got to do and don’t care about anything else,” Bates says. “I think the challenge is, how do I get the business to begin to move to using data more effectively to understand where we’re going?”
Spreading the Knowledge
Pricing is an area of expertise for Hale, who recommends distributors bring in an external specialist to help the company develop a strong internal discipline around tracking it. “It’s one thing to use consultants to do the work, but obviously the key is implementing it,” he says. “So you’ve got to have the will and you’ve got to have the capability internally.”
A lot of transactional data that is going to waste now can be used for sales planning, Hale adds. He recommends stepping back to review all products and not only which existing customers are buying them, but also what companies in the same industry are doing with them. He’s also a fan of developing an end-market profile for what a customer is likely to buy, which should be possible with most distributors’ existing data resources. Use an external data resource to understand the total addressable market, revenue opportunity and market share to know what the company needs to do to fuel growth, Hale adds.
Brockway, whose experience is in inventory management, says finding good ways to display information so that it is easily identifiable and actionable should be a top priority. That way, it takes data analytics from a management-level enterprise and spreads it throughout the company. One area to start: inventory accuracy percentage, as it directly relates to the activity of employees — giving them skin in the game.
“The more accurate your inventory is the better. Your employees directly control that based on where they’re putting the inventory,” Brockway says. “When inventory should get deleted or when it leaves the warehouse, is it being entered and tracked properly? Warehouse employees can certainly affect that number and relate to it.”
How That Knowledge Can Help
In inventory management alone, there are more than 30 metrics distributors can use to gauge company performance, Brockway says. While some measurements are more important than others, inventory turns is an easy one to track. “You’re not really managing your inventory effectively” if you don’t monitor it and use it with your team, he adds. “How often is your product turning and going out of your warehouse? That’s very, very important to have your team aware of these metrics.”
Hale sums up the critical need for deeper understanding and implementation of data analytics across the industry. “Those companies that are crisp with analytics and understand what their marketplace is, understand what their customers buy, they get rewarded,” he says. “The diligence demands today are great and those that understand data and analytics and how to use that get rewarded for it.”