Most distributors operate in more than one geographic market. They may find different customer segment opportunities, and different product and service opportunities, in each market. They may encounter a different assortment of competitors (other distributors, suppliers selling direct, etc.) in the various markets. The distributor may be authorized for different product lines depending on the market.
ERP and CRM as Strategic Tools for Wholesale Distributors (Part 7)
By using segmentation analysis, you can organize the variability in the way your markets are defined to make good decisions on resource allocation.
The third and final strategic planning step to guide your ERP implementation is to build a “big picture” of your markets. This is really a three dimensional exercise, balancing the three segment analyses – customer segments, geographic markets, products and services – into a panoramic view of the business. For simplicity’s sake, start by looking at each of your geographic markets. For each, break out customer segments and products and services. The priority – grow, maintain and harvest – may be different for each region.
This strategy breakdown is based on the premise that product lines and service offerings should be different in various geographic markets. That is true because customers and customer segments, and possibly product line authorization, vary from market to market. Wholesale distributors must be organized around the needs of their customers. Certain functions can be centralized, such as financial reporting, credit management, human resources and information systems. For most distributors the sales and operations functions that touch customers must be managed close to the customer. The physical presence of the purchasing function is debatable. Inventory replenishment is a local matter whereas marketing (deal making with major vendors and pricing) can be a centralized function.
Regardless of your perspective on the value of centralization versus decentralization, no two companies are exactly alike. Distribution markets are highly fragmented. This final step is important to make sure your strategic planning analysis is tailored to your company’s unique set of attributes and circumstances.
Make strategic planning along the lines covered in this series a continuous process. Companies of all sizes benefit from a strong strategic planning process. As noted earlier, relatively few wholesale distributors actually have a strategic plan in place. Those that do consistently outperform their competitors. They have a clear picture of their customers and markets, and they focus their resources where they know it matters. While there are other components to a strategic planning project, the three steps offered here provide a framework to analyze the best opportunities for profitable revenue growth. These are core analytic steps necessary to break the common short-term focus on cash flow and topline revenue growth without regard to profitability and long-term growth potential.
As an “asset manager” for your company, are you confident that your capital and human resources are invested today to yield the highest rate of return in three to five years? Are you still investing in the same portfolio of customer segments, products and services, and geographic markets that you always have? The three steps to strategic planning excellence outlined here are the best way to answer these questions and to build long-term value and financial returns
The next part of the strategic planning process directly impacts how you set up your CRM system, and will affect pricing, terms and levels of service for customers with different strategic attributes.
ERP and CRM as Strategic Tools for Wholesale Distributors (Part 6)
The customer segments analysis has a great deal to do with sales force deployment. Whether or not sales staff specialize in certain segments, they get comfortable with the customers in the segments where they spend most of their time. Sales reps become more valuable to their customers when the reps are intimate not only with the customer’s operation but also with the industry the customer is in.
The traditional distributor ways to segment customers, such as by Standard Industrial Classification (SIC) codes, are not necessarily useful for strategic planning. For example, consider segmenting customers based on what they want from distributors, how they buy and what it takes to capture their business. Consider the following:
• Auctioneers. These customers buy from the vendor with the lowest price. A junior buyer has no loyalty to your company, and the selling cycle is 30 days or less.
• Wheeler Dealers. The decision-maker is a purchasing agent who wants low price, but also good service. The selling cycle is six months.
• Negotiators. This departmental manager wants a fair price and extra services. This customer will have some loyalty because the relationship is built on more than price.
• Partners. These customers are focused on value. The decision-maker is a C-level executive willing to pay a higher price if there is a return on that investment. The loyalty level is high, but it takes a long time to gain their trust, up to two years.
Segment your customers into these categories to help you better understand how you can better serve them. The importance of looking at customer segments differently is tied to the sales function and rules you’ll embed in the CRM system. The number and type of sales reps, how they are deployed and managed, are fundamental strategy questions for wholesale distributors.
The customer segments matrix, as well as the geographic markets matrix and products and services matrix, drive the questions of: Which sales skill sets, and how many salespeople, do we need in this geographic market to sell these products and services to these customer segments? It makes an enormous difference if you are intending to grow, to maintain or to harvest. Like capital, sales power and technical capabilities are scarce resources. What’s in short supply must be allocated with precision. It is a trap to say “grow” for every market, product, service and segment.
The successful distribution business needs to focus people resources and assets on a small number of high potential (profitable sales) opportunities. The rest is maintained, harvested or dropped altogether.
For many distributors the driving force of their business is the deep knowledge of the customer and the customer’s business. The old rule of thumb that it is four times harder to sell even a familiar product to a new customer than an established customer applies to new customer segments as well. The decision to grow a new customer segment to its full potential for a distributor may require hiring new sales people or sales specialists to focus on that particular segment. It takes significant time and effort to develop expertise, relationships and a good reputation in a new customer segment. Expect a reaction from entrenched competitors to your new sales and marketing efforts!
Concluded in Part 7
What strategic approach can you take to analyzing services business that, simply, doesn’t seem that strategic? The determination to grow a product line that requires services is also a decision to provide those services. Growth designation is a commitment to invest heavily in people and assets to achieve the company’s full potential with a product line. Broadly speaking, it is feasible for distributors to develop services as a product center separate from product lines but this is rare.
ERP and CRM as Strategic Tools for Wholesale Distributors (Part 5)
The decision to maintain the status quo of a product line is a commitment to invest as needed to hold the company’s market position or share of that product line. Doing so requires growing the business fast enough to expand with the market as well as to find pieces of business to replace those that are inevitably lost to competition or for other reasons.
Harvesting a product line is potentially difficult because of the way suppliers may react. The distributor’s intention is to hold onto the customers already buying the products while not seeking other customers for those products. The resulting loss of buying power may be a problem even if the supplier is supportive. The decision to harvest a product line is sometimes a determination to replace the supplier’s line with another line or to drop the unprofitable products altogether.
It is much easier for sales people to build sales with a product line they are familiar with and feel confident with than to be a market pioneer with a line they don’t know much about. Some sources state that it is four times more difficult to introduce new product lines, even to a well-established customer, than to sell what the sales person (and the company) is already proficient with. The decision to move into a totally new line is a difficult one because of the commitment of time and capital over a long period, possibly several years. This is a “zero sum game” when trying to sell a new line through the existing sales force. The new products will take sales time and energy away from established products. The new products must be more profitable, and have more growth potential, than those they will displace.
Many products have become more complex with the stunning growth of technology. Suppliers expect more technical expertise from their distributor sales forces partly due to a reduction of the size of some supplier sales teams. Customers often demand that distributors provide technical support for products and equipment including the ability to solve complex problems. The technical evolution is both an opportunity and a threat for distributors in many lines. Some companies choose to solve the need for field technical support by adding technicians to the staff to assist the sales reps. Others are training their sales reps to provide more expertise. Adding new product lines may require hiring sales specialists for the new line, hiring more technically savvy sales reps or engaging technical support staff. The incremental costs place more demands on the profitability of the new line. The customers’ current suppliers will react to the entrance of a new competitor to the field and a plan needs to be in place to deal with their responses.
Continued in part 6
Often suppliers play a powerful role in defining the expansion plans of their distributors. This is particularly true for distributors of exclusively or selectively distributed branded products, where the supplier awards authorization to distribute product lines within defined areas. The supplier may not be able to prevent shipment from an authorized location to customers outside the designated area; however, they are able to withhold sales and cost support as well as apply pressure in various ways.
ERP and CRM as Strategic Tools for Wholesale Distributors (Part 4)
The first step in the geographic market segment exercise is to decide which markets are included in the matrix versus being left off altogether. The next step is assignment of the Growth, Status Quo or Harvest analysis to each geographic market. The scope varies based on the size of the distributor. For example, a local company may look at new sales territories or small branches near its central location; a regional firm may consider opening (or closing) large branches in nearby geographic areas.
The segment matrix is an exercise for small groups to work on and to report their recommendations to the planning group as a whole. The entire group can engage in a discussion that leads to decisions. I recommend that the teams assign this grow, maintain or harvest evaluation to each segment matrix item rather than checking two boxes or using plusses and minuses where the group has trouble reaching a conclusion.
The geographic market segment exercise may lead to a deadlock in which people want to grow every market. This problem can be resolved by carefully defining the categories. The growth category requires significant commitment of time and dollars to fully develop the company’s market potential. The maintain designation indicates that the company intends to invest in a market where it feels its market share has reached its potential and a strong effort may be needed to protect market position. Even the harvest designation requires continued effort to protect existing customers even though the company does not intend to actively seek other customers in that market.
After the geographic analysis, next tackle the question of arriving at the right mix of products and services. The products and services analysis is a series of investment decisions about deployment of sales resources and capital for inventory. The products and services analysis is complicated by the inclusion of both products and services in the same matrix. Traditionally distributors get into the services business out of necessity, the services being a means to the end of selling more product. The service demand may have come from customers or from suppliers, such as a requirement that authorized distributors perform warranty work or minor repairs on equipment. The decision to get into equipment may well have been an effort to sell more product.
Distributors often find making money on maintenance and repair work very difficult. The problem is made worse by inability to track labor and travel time and the cost of parts. Service technicians are often used to assist in sales presentations and provide other support. So what do you do? More about the right mix of products and services in Part 5.
Continued in Part 5