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Value is a much revered concept that is touted by executives but seldom measured. Academics define value as Free Cash Flow/Weighted Average Cost of Capital, but ask wholesalers if they use the measure to drive the business and you’ll seldom find convincing answers. In a recent conversation with a wholesaler CEO, I approached the value question along the lines that, for me, are most convincing; new products. The start of the conversation was the idea that following some two decades of research on value generation, McKinsey found that new products created significant value streams for shareholders and well above more common efforts of sales to new and existing customers or acquisitions.
Wholesalers are rightly jaded about new and different products hailed by their manufacturers and they have ample dead-stock and slow-moving inventory as a reminder. To manage value, I’ve long advocated a product manager position whose duties, among others, is to develop a process to launch new products before a substantial investment in inventory is made.
Many years ago, when managing the nascent marketing efforts of a PHCP wholesaler, I asked for and was given the appointment of a Corporate Product Manager whose partial duties were to work with key vendors on new products and new technologies. The position took a lot of foresight from the owners of the business as, at the time, few other wholesalers had carved out anything similar. The man and duties were well-matched, however, and brought significant and tangible value to the organization and its shareholders.
Product Management in wholesalers can run the gamut of duties but for a primarily Box In/Box Out (BIBO) platform, most interactions are with vendors and outside the purchasing functions of buying and managing the physical turns of inventory. Good product managers operate off processes that identify supply chain activities, often outside price negotiation, that maximize profit.
For new products, the key steps include:
- Discussion of new product and technology opportunities with key vendors.
- Vetting of new product opportunities with colleagues who are subject matter experts.
- Testing of new product opportunities with key customers.
- Final decision-making of product support, or no support based on internal expert and external customer reviews.
- If supporting the new product is approved, then crafting of a launch plan with the vendor is appropriate including marketing monies and marketing/sales campaign, inventory commitment and terms, and positioning versus existing technologies.
These steps, if carefully crafted and followed, can substantially reduce the risk of new products which, by most counts, have somewhere between a one in five and one in eight chance of success. Too, the product manager should have both experience in wholesaling including working with vendors, the inventory investment cycle, and a general understanding of marketing and finance. In essence, the product manager position should be occupied by a tenured professional with the right experience; sellers looking to come in from the cold should not apply.
Following product management of vendor offerings, wholesalers can create substantial and proprietary value streams with new service development. The new service development process is too detailed to cover in this blog; however, it closely follows that of manufacturer product development with some exceptions.[i]
As the BIBO model becomes more contested by e-commerce based “cost-out” competitors wholesalers are moving further into the value chain with assembly and fee-based services. In our recent Growth Survey[ii], some 45% of distributors responded that they had these operations and they were likely to grow them in the future. These new growth avenues, however, can be greatly aided by a qualified product management function that surveys the market and guides the assembly and service arms of the organization in creating, testing and launching new technologies.
Today, for most wholesalers, the concept of driving value through new products is mostly handled by sales and other functions including executive management. From our work, however, these efforts are untrained, lack cohesiveness and are much less effective than they could be with proper education and management process. The financial research from the public sector is clear; most shareholder value is contained in successful development of new products and services.
As wholesalers enter more into the areas of assembly and post-sales service, they would be well-advised to fund a professional product management function. Our findings in BIBO distribution are that key vendors greatly appreciate a product manager who works with them on new products and new technologies. However, the position is not a sales position but part of the marketing function. Structuring and developing the platform takes time and patience but the rewards are worth it.
[i]Benfield, S., Driving Value, New Service Development, Chapter 3, ppg. 50-63, Bencon Press, 2012.
[ii]Benfield, S., Growth Survey for Wholesalers, Survey on Growth Across Wholesaler Markets in Conjunction with Direct Business Media and Industrial Supply Magazine, Fall 2013.