The 2020 Mid-Year Economic Update_long

The Path to Distribution Growth Has Changed

3d illustration of hundreds of cardboard parcels lying on a heap

Some years back, a distributor was as good as their worst salesperson. Customers bought from representatives they trusted and had served them well in the past. If we’re honest, the company itself had little to do with the bulk of the transactions and the key driver was the sales rep, not the company.

Fast forward to today and the landscape has shifted. The role of distributor trade associations, buying groups, geographic branch expansion, the rise of central distribution centers, specialized sales roles and technology have fundamentally changed customer expectations. The sales rep still holds a prominent role, but customers are holding companies to much higher standards.

If distributors want to compete, they need to start asking themselves some hard questions and then change what isn’t working. Do you have higher profits and growth than your competitors, and, if you don’t, what are you going to do about it?

Michael Porter, Harvard professor and well-known strategy guru, called this “competitive advantage.” Successful distributors adapt to the market. This ability to pivot to changing demands allows them to experience fewer sales and profit declines in recessions than their competitors, capture share when the economy recovers, and create more profit and experience higher growth during economic expansions.

Leading distributors are analytically led and strategically driven. They share many characteristics:

  • Sales reps maintain flexibility to maintain customer intimacy, but are clearly management-directed versus self-directed.
  • Sales reps have migrated to specialized roles, rather than generalist, where the economic value of recurring activities is grouped to match appropriate compensation levels.
  • Distributors have created specialized value propositions for specific customer segments and allocated resources based on the segment’s cost to grow and potential to grow.
  • They are deeply involved in the digital transition and investments are balanced between lowering SG&A costs with automated processes and creating a B2C experience for their customers.
  • Their CRM systems are designed for helping sales reps make better decisions on where to spend their time, not just giving managers a set of tools to measure them.
  • They have developed analytical tools to understand market potential and share of spend metrics by customer along with the cost to serve.
  • Sales staff has input, but not control, over pricing to customers.
  • Pricing is data-driven and rules based such that they have hard data on what is the market price at a transaction level to overcome traditional negotiation activity.
  • Individual sales contributors see their performance on a monthly and year-to-date ranking report.
  • They have designed compensation and incentives such that selling costs decline with scale and are no longer linear.
  • Their supplier scorecards are not negotiating tools, but joint measurement processes closely linked to suppliers to improve the effectiveness of their commercial relationships.
  • Every employee knows the strategy and can explain it at a high level.

Distributors Must Find Their True North

There is an old expression that the CEO always gets their minimum-accepted performance level. Many distributors today are working as hard as they can to just stay even and squeeze out a growth rate slightly above GDP with average net margins. Many don’t know what else to do so they work to improve on current strategies. Huddled around the boardroom table, they discuss the latest guru or great idea and then seek to build e-commerce websites, implement CRM systems, do sales training, or get into private label. For most, this is playing around the edges of what is necessary. This tactic doesn’t work for their competition and it certainly doesn’t work for them.

The strategy that will guide distributors toward success isn’t based on emotions or layering new tactics on top of old organizational structures. It’s based on real, hard data that takes months to gather and analyze, not emotions. Most importantly, however, the strategy must be based on their customer, not the sales force because that input is heavily colored by negotiation. Every customer wants to buy from the best distributor at the worst distributor’s price.

So, turn that idea on its head and pave your own path. Start with winning the customer over and then making it blindingly easy for the customer to choose you over anyone else.

Mike Marks, Indian River Consulting GroupMike Marks is co-founder and managing partner of Indian River Consulting Group, a consulting firm to distributors and manufacturers. He specializes in helping distributors and manufacturers accurately diagnose problems and identify risk-bound alternatives. Contact him at mmarks@ircg.com or visit ircg.com.

 

This blog is No. 1 of MDM’s 10 Most-Read Blogs of 2019. View No. 2345678,  9 and 10.

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