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From Good to Great as a Distributor

April 10, 2009
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It’s been popular in recent press and, contrary to the hard times, to inject positivism by saying “there’s no better time to be in distribution.” I would, for the most part, agree with the statement but it needs clarification. Far too many distributors take the sound-bite as valid and run their businesses the same way they did when the economy was humming right along.

In this environment, if you do what you’ve always done, you will probably get less than what you traditionally got. If you want to move from good to great in a down economy, then you will need to change or rethink your strategies. There are real opportunities available for regional distributors and strong independents who want to grow the business. There are numerous companies who are in trouble and strapped for cash and preparing for the upturn with new and better strategies is not in their game plan.

Other companies are hunkering down, not spending anything extra, and hoping to ride out the storm. In a real sense, the contrarian who plans for the upturn by making the organization better will be the winner and the rest of this blog entry will describe those strategic events that, based on my consulting and experience, can make a huge difference in performance.

Know What You Are and What You Do Best

When I am asked to help a distributor with their strategic plan, I cringe. Most distributors have vision and mission statements and, if I put them in a pile, they would, mostly, sound the same. I am less interested in the concept of “we want to be the best distributor by serving our customers better…” than in the specific handful of things that the company does well and how they are measured.

In essence, if you have a broader inventory than the competition then what’s your measurement? If you tout a quicker delivery and fill rate, what’s your benchmark? If you are the low cost service provider, what is your measurement and how does it benefit the customer?  If you are the leader in a technical application, how do you substantiate the claim?

Far too many distributors claim to want to be the best in their vision and mission statements and far too many have almost no concrete measurements and plans to substantiate their wishes. If you can’t point to concrete measures, numbers, and benchmarks in your strategy, you don’t have much of a strategy. You can’t set measurable goals by saying “we want to be the best.”

In a real sense, the great firms know what they are about and know what they do best.  Many years ago as a graduate student, when big steel was failing, I had the chance to interview an upstart company called Nucor Steel. Nucor was headquartered in Charlotte, NC, which is a financial center and most certainly not a steel capital. The CEO at the time, Ken Iverson, related that there were two things Nucor did well:
1) Build plants less expensively than everyone else, and
2) Run them more efficiently than everyone else.

He then went on to describe how his key measures of productivity, downtime, output, and human resource policies supported that goal. I came away from the meeting rather dazed having quickly realized that Mr. Iverson knew what Nucor did well and what they were about and the rest of the functions supported the two things they did well. There is no substitute to knowing what you are and what you do best. Many, perhaps the majority of companies don’t know this, and that’s probably why I cringe at mission and vision statements that all sound the same.

“Family, Shmamily” Pay and Keep the Best Performers

Most of distribution is privately held and there are plenty of family-owned enterprises.  One of the biggest problems in family-run businesses is that the business often outgrows the ability of family to run the firm. In my business career, I’ve had plenty of instances to view the payrolls of distributorships and understand the capabilities of family members. It’s no surprise that many family firms have sons, daughters, nieces and nephews at C and V level slots. And, it’s no surprise to me to find that many of these appointments are made because of blood and not because of ability.

The phrase “over paid and over their head” comes to mind. If you want to be a star distributor, you must have star players. And just because you are family doesn’t correlate to an ability to master the top echelons of management. Most family-owned distributors that go from good to great have many of the top spots not occupied by family. I often find where a top performing distributor has a C level spot occupied by family, but many of the supporting V level roles staffed by outsiders. It is also increasingly common to have outsiders occupy the CEO slot and report to a family Chairman. 

Many years ago I had an experience with a wholesale firm that had way too much family in the top slots. The firm was undergoing financial stress and, while they had a aura of being a great firm in their industry, inside the company the performance was anything but top notch. Family members were paid the highest salaries and management didn’t give annual reviews and raises to top performers. The result was that many good, non-family members left the ranks of the firm. 

If you want to be a great firm, then you have to make room for talented outsiders who can outperform and should, rightly, out-earn some family members. If you can’t reconcile this type of thinking, then don’t dream big. Most firms, heavy on family in the top spots, seldom reach the Top 25 in their industry. The reason is that the family gene pool simply isn’t big enough to generate executives to manage a large, complex, and great company. The vast industry of distribution is full of big company wannabes and has-beens that keep too much family at the top for too long.

Do Things Differently

Distribution is an uber-mature industry with a century of history. The idea that one can do things incrementally better and be a superstar is flawed. There’s no way to train branch managers to be a little better and rocket to stardom. Having sellers who know products a bit better than the competition may get a few more sales but it may also train customers on products who buy from your competition at a lower price as they don’t have expensive sellers. Incremental or “a little bit better” thinking won’t make a great wholesaler. You have to do things differently, consistently, and in a big way.

In past blogs, I’ve discussed the rise and stall of Ferguson Enterprises and their parent, Wolseley Plc. At one time, not so long ago, however, Ferguson was a great company who did things differently. Starting from a small footprint in the Mid-Atlantic, they hired college grads from top schools, trained them heavily on the business, and expected long hours.  They created top-notch operational processes, rewarded the best performers, and drove their efficiencies to the marketplace.

Ferguson and Wolseley PLC seemed to forget their formula for success during a Pac-Man acquisitive spree in the last decade. But make no mistake, at the heart of today’s stumbling giant was a well-honed organic growth strategy that did things differently and did it well for two decades prior to the gluttonous buying of the last decade. 

Clues to the Future

My personal belief is that distributors who learn to take cost out of the operating platform, define what they do well, and learn transaction economics are those that stand the best chance of winning in the years to come. Too often distributors are defined by what the seller drags in and this is an inefficient and strategically costly way to go to market. Good marketing definition aided by transaction-based profitability can reduce inefficiencies caused by “selling all over the place.” Distribution firms that pick their niche, define their services, and bring operating efficiencies to bear in the marketplace have a better than even shot of going from good to great.

On the other hand, wholesalers that bleat “we want to be the best” without concrete measurements, put too many family members in top slots, or don’t do things differently will assume the ranks of the average which, at traditional profit margins, is less than the long-term returns of the equity markets. In short, if you want to be an average distributor, with average earnings, you’re better off selling the company and putting the money in the equity markets. However, if you want to go from good to great, the timing is right and the knowledge is available to help get there.

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Doing more for Less $$$

Anonymous
April 16, 2009
Scott, I am a sales manager for a plumbing wholesaler here in Chicago. While we all are trying hard to navigate our way thru this economy(which most if not all of us in management positions have never seen). I am growing increasingly more concerned with the rapid and steep decline in profit margins. I will tell you that from my perspective we are being asked to do more for our customers than ever before for less profit. We are quoting record numbers of commercial fixture quotations than ever before and seing less of them come thru as orders.We have wholesalers quoting product below cost to take orders thinking that rebates will save them. We have residential contractors as well as wholesalers with little to no experience quoting commercial work and taking it for far less profit than they should. We have manufacturers reps acting as competitors rather than partners. I have heard the comment that Wholesalers are thier own worst enemy and I am starting to see alot of truth in that. We all enjoyed the business that we had in prior years but that is gone and it is time for us to take a hard look at what we do and take control of this market! I would like to see Supply House Times do more articals on this subject in the future.. Thank You for the opportunity to vent.

Response to Anonymous Sales Manager-More With Less

Scott Benfield
April 16, 2009
Anonymous Sales Manager: I understand your frustration as these are unusual and trying times. Try to sell consulting in this environment! First, I think you are witnessing the general deflation of a market in that material costs are down substantially from last year. Secondly, there is still a lot of overcapacity in distribution and this has to be worked out to allow for better margins. As it regards doing more with less, my forecast is that this will be a way of the future as growth will be low, commodity inflation much less than in years past, and the appetite for commecial building to be much less. All of this means that job quotes and commercial work will be a tough place to be. One of the problems in getting long term cost down is that there are no meaningful measures to help with this. Traditional education relies on PAR reports and accounting ratios and these things, to me, are mostly unreliable for long term cost reduction. For instance, rewarding sellers on margin dollars means nothing much and a seller can generate loads of margin dollars and still not generate a positive operating profit. The problem is that financial accounting and PAR reports don't adequately classify and allocate costs to sellers, branches, transactions, customers, etc. Because of this, wholesalers are left with 40 year old conventions to manage an increasingly complex business. To understand more about this, there will be a print series starting next month in SHT Magazine called Transaction Management. And, for an idea of the new measures and disciplines, go to my site at www.benfieldconsulting.com and click on the article Transaction Management on the home page. Using Transaction Management Principles for Quotations, try these things: -Drop ship as much material to the site as possible. -Batch orders to the site or put a trailer on site and stuff it full as possible. -Make sure that counter or branch pickups for a job, that aren't quoted get the highest price possible. -If a job contains above average counter sales, non-stock orders, or stock transfers, consider cutting sales commisions on the job. -If you quote non-stock products on the job, quote them higher by 8% or more than the stock items (if you can). -Make sure you are not competing against foreign "off-brands" with domestic brands. Our research finds foreign "off-brands" cost 30% less than domestic brands. -Ship (inbound) non-stock orders on stock order ffa shipments -Field scrap job returns and work out a system with vendors where you can get a credit on the field scap with some reasonable documentation. These things should help, however, I would encourage you to push your Association and its leaders for better benchmarks and knowledge on cost reduction. The current staple of financial accounting, PAR reports and Activity Costing is hackneyed, obsolete, and doesn't help much. Feel free to call me if you need more help. Scott

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