identify the total value that National could bring the client besides the price of the product, the COO was surprised by the client’s eagerness to work cooperatively on opportunities such as optimizing billing. The two companies have been able to identify changes that each can make to improve business processes and deliver additional value.
National believes another key to a successful client partnership is to build relationships with a range of personnel from the client’s organization (such as operations manager, financial officer and other key officers). This strategy helps to strengthen and diversify National’s relationship and positions the company to deliver added value across the client’s organization.
To enhance its pricing capabilities and operational processes, National recently spent four months implementing an ERP system.
Through the creation of Profit Optimizer and the subsequent implementation of the ERP system, National has seen its gross margin averages peak at 32%-33%, nearly 10% higher than industry average for distributors within the same market.
2004 NAW/DREF. Reprinted with permission. This case study is from the book Price for Success, A Practical Guide for Improving Margins in Wholesale Distribution, published by the National Association of Wholesaler-Distributors Distribution Research and Education Foundation. Price for Success presents strategies, tactics, and case studies to help executives, sales managers, and pricing managers build a pricing foundation for improved margin management and long-term profitability. The authors take a commonsense approach to pricing by sharing methodologies and best practices that have proved successful in the marketplace. For more information on the book or to order, go to NAW Publications at www.nawpubs.org.
Editor’s note: This case study is one of several case studies from the book, Price for Success, A Practical Guide for Improving Margins in Wholesale Distribution, a resource guide on pricing for distributors interested in driving higher margins. Please see end of the article for more information.
National Sales (name changed) is a family owned, regional wholesaler-distributor specializing in providing a full and diverse inventory of older and hard-to-find items for the mechanical contractor and plumbing, valves and fittings market. National Sales has more than 30,000 SKUs in stock and over 100,000 square feet of warehouse space.
National Sales Company has two core elements to its business: counter and job bid.
Counter Business. On any given day, 60 to 100 contractors (bidders”) visit National’s store fronts to place orders and pick up supplies. Each contractor has a unique set of needs regarding the type, volume and frequency of the products purchased. Like many distributors, National faced the challenge of effectively serving these customer needs by setting market-realistic pricing for all items. National wanted to ensure that it was competitive on price-sensitive products and could hit desired margins on less-sensitive and less-frequently purchased items. Adding to this challenge was the marketplace perception that National was a “high-priced” supplier.
Job Bid Business. In the job-bid side of its business, National competes with larger, nationwide distributors who compete aggressively on price. With its reputation of being high-priced and the reality that its job bids were often higher then those of larger competitors, National concluded that it must find ways to better manage costs to help drive prices lower and, most important, sell clients on the superior value and service it could offer.
Counter Business. National decided to internally build a new system that would best meet its needs. It was dubbed “Profit Optimizer.” The starting point was a manual and highly time-consuming process involving its counter business.
National carefully examined which of its product lines most significantly impacted the bottom line and adjusted profit margins to fit the way retailers addressed price. Price-sensitive items were priced lower and more competitively; less-sensitive items were priced higher than previously. To help measure and gauge whether the new pricing parameters would work in the marketplace, National established comparative sales-history benchmarks.
The daunting Profit Optimizer project took six months and required resources spanning IT, Operations and National’s management team. To help speed up the pricing process on 30,000 SKUs, National initially automated price changes based on velocity. The management reviewed and adjusted pricing from there. National continued the debate on which items were truly price sensitive and periodically made adjustments based on feedback from customers and the field.
Job Bid Business. National then turned its focus to the cost side of the equation for its entire business. It joined a large buying group to increase buying power and drive costs lower. As a follow-up, National is considering consolidating vendors to provide more leverage when negotiating overall package prices.
National is in the midst of exploring new ways to improve performance and profitability in its job bid business. The first step is to teach its sales representatives the negotiation principles covered by William Ury in Getting to Yes. The COO decided to test some of Ury’s innovative approaches. In a recent meeting with the company’s CFO and a senior vice president of a major contractor client to