Most distributors are, unfortunately,
realizing what we have been saying since December and that is the current
economic downturn is severe and protracted. Coming out of this environment to
an economy with a consistently high GDP will take years.
To recap our
predictions; prices will be low, almost
everything will be price sensitive, growth will be muted unless you can take it
away from a competitor, and winning will depend on your ability to reduce
process costs and take savings to the customer. In this environment, the cost of
serving the customer will come under scrutiny and nothing -
repeat, nothing - will look
like the up cycle from 2003-2008. So, if you are managing like you did in the
last up turn, don’t read this because it won’t help and you won’t like what you
hear.
Where The Money Is
In the 1930s, dapper bank robber
Willie Sutton was asked why he robbed banks and he said “cause that’s where the
money is.” Similarly, if you buy our logic that the cost to serve will be a
strategic necessity, then you will need to attack sales expenses because that’s
where the largest expense is. How large are sales expenses for the average
distributor?
In our studies over the years, we
estimate that 30% to 40% of operating expenses are in sales and solicitation
efforts. This includes outside sales, inside sales, marketing expense and
e-commerce. That means that a distributor that has 20% of sales in operating
expenses has 6% to 8% of sales in sales or solicitation expenses.
Furthermore,
our work finds that, on average, distributors have a 25% to 30% overcapacity in
these efforts. In essence, there is upwards of 2% to 2.7% of operating margin
that is wasted in most distributor sales efforts. Why does this exist and what
can be done are common questions and I’ll finish this installment shedding
light on these questions.
Measurements, Old Knowledge, and New Stuff
Sales force management in distribution
is a constant topic. Unfortunately, our research finds that most of work and
literature is about sales effectiveness or doing things well and not efficiency
and effectiveness, which means doing things well at the least long run cost. The
biggest problems and opportunities with distribution sales management are as
follows:
Confusion of sales with solicitation: Distributors
too often have a mindset that everything needs a sales call, everyone can
afford a sales call, and everyone wants to be sold. This is of course bunk and
our work finds that many customers would be glad to trade less calls for a
better price. Distributors should think of solicitation which is using the
entire range of ways to contact customers including inside sales, outside
sales, e-commerce, telesales, catalogs, etc.
A sales call is not a sales call: There are
different models of outside sales including geographic territories, new product
sellers, consultative sellers, enterprise sellers, missionary and segment-based
sellers. Most distributors go for a geographic outside seller and hope that
fits the bill. For inside sellers there are several models including
generalists, personal account managers, and technical specialists. Most
distributors have generalists which, again, are effective but not all that
efficient. Unless the distributor understands these models and how to use them,
they typically get a one-size-fits-all sales effort that gets things done but
is very costly.
All margin dollars are the same: Paying sellers
on margin dollars for any significant part of their compensation typically
spells trouble. Unless the margin dollars are balanced by other metrics
including customer profitability, transaction profitability, or something that
allocates operating expenses to customers, then margin-dollar-only compensation
systems typically yield 40% of territories that
don’t contribute to operating profit. The big problem
here is that traditional accounting measures aren’t all that good in driving
profitability in distribution businesses. The problem has to do with where the
expenses are in the measures. In manufacturing cost accounting, the cost of
goods sold has direct labor, direct overhead, and direct material in the
number. In distribution, the cost of goods only has the cost of material. Labor
and overhead are treated as operating expenses and are below the gross margin
line. Hence, using margin dollars in distribution gives a distorted view of
profit and it can be ruinous to the business. So, unless you have a method to
allocate operating expenses to accounts, transactions, branches, sales
territories, etc. Then, in our view, you don’t have sufficient metrics to
measure seller progress, reward them, and drive operating profit.
Sales Managers are product driven: Most sales
management in distribution is product driven. That is they know product
functions and applications and this knowledge is important. However, many
customers know the products as good or better than the sales talent which means
sales managers should know the sales and solicitation
process. Process management
means that sales managers have crisp measures and concise definitions or
answers for things such as:
- How many
sellers do we need?
- What is the capacity
of my current sales force?
- What is territory
balancing?
- How can I use various
solicitation efforts to make my sales force more productive?
- Why does typical compensation
fail and what do I do about it?
Unfortunately, most product
driven sales managers don’t do real well when asked these questions. If your
sales management is trying to B.S. you with answers to the previous questions, then
they really don’t know what’s going on and need to be educated or reassigned. Again,
this is process knowledge and not product knowledge, which is the domain of the
majority of distributor sales management.
Much of today’s distribution
sales managers take knowledge from research and practice that is decades old.
Not all the knowledge is obsolete, but much of it is. And new knowledge can
help greatly in sales force productivity.
I really don’t expect a
distributor to compete well in the next five, and possibly ten years, with
bloated sales efforts that are based on old knowledge and practice. Good sales
management takes an understanding of new topics including capacity planning, new
models of inside and outside sales, hybrid marketing, and balancing
compensation metrics. Without an understanding of the new knowledge, it will be
increasingly difficult to compete in tomorrow’s environment.
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