Results of a Major Study
Texas A&M's School of Industrial Distribution is renowned for its research capabilities on the practical aspects of the business of wholesaling. HARDI was pleased to have the HVACR industry represented in a recent consortium on "Sales and Marketing Optimization (SMO)." Through the generosity of the HARDI Foundation, several HARDI member companies participated in this landmark study, conducted over nine months. Three firms were chosen after a solicitation to all distributor members. The companies are: Johnson Supply, Houston, TX; Meier Supply Co., Johnson City, NY; and GBG Inc., Pittsburgh, PA. Sixteen additional distribution firms from seven lines of trade formed the remaining research subjects. The research was conducted based on the five-step methodology as follows:
- Identify gap through process assessment
As a first step, a one-day personalized research workshop was conducted with each participating member company separately. The objective was to assess sales and marketing processes of participating distributors. This initial step helped develop a detailed framework for sales and marketing processes in the wholesale distribution industry. The framework consisted of 21 business processes. The processes were assigned into seven categories — sales & marketing strategy, business development, marketing communications, pricing optimization, sales force design, development and management. Through research, common, good and best practices were identified for each of these 21 processes. Pricing optimization was treated as a single process, though it is comprised of three activities (analytics, optimization and execution). See Figure A.
These processes were assessed along this spectrum of common to good to best and then rated based on inputs received during research workshops. Out of 19 participating firms, two firms had two best practices, nine firms had one best practice and eight had no best practice. One of the participating HARDI members was part of that "top spot" of having two best practices out of 21 processes that were assessed.
- Map shareholder value
Having identified process gaps, the next logical step was to understand the impact of these gaps on shareholder value, so distributors can prioritize and improve performance. The research group developed the logic to connect business process to shareholder value through process metrics and financial elements. Following this logic, process metrics were identified for each business process and then linked to financial elements and metrics. For example, customer stratification is one of the business processes under the business development category. One of the process metrics to measure customer stratification is cost-to-serve, which can be linked to a financial element — accounts receivable. This can be measured through a financial metric — days sales outstanding (DSO). The shareholder value is represented by four financial drivers — growth, profitability, cash flow and asset efficiency — and DSO is a cash flow driver. See Figure B.
Thus, each business process is linked to shareholder value. This resulted in the 'Sales and Marketing Framework' map — a key deliverable depicting the link between sales and marketing strategy (market segmentation, target market selection and value positioning), business processes, metrics (process and financial) and shareholder value.
- Understand best practices
With the "Sales and Marketing Framework" map as reference, the research team identified best practices for each business process. The best practice for each consisted of key elements, methodology, examples and implementation components. For instance, sales force compensation had five key elements — level of pay, method of pay, performance metrics, variable pay structure, and three-way alignment. The best practice methodology for the second element (method of pay — fixed vs. variable) included two major perspectives — degree of influence wielded by sales person and degree of differentiation demonstrated by firm through value proposition — and the combination method to arrive at a final pay structure. See Figure C.
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Finally, the best practice explained four key aspects — people, process, technology and metrics — that are critical for any best practice implementation and sustained improvement. The same structure was followed to explain the best practices for 20 other business processes as well.
4. Assess profitability — Link best practices to shareholder value
The research extended to the next critical step of linking best practice implementation scenarios to shareholder value. This step used real-world financial numbers from participating consortium members (after masking the identity for confidentiality reasons) to demonstrate the impact on shareholder value when they chose to implement certain best practices. See Figure D.
For example, as a result of implementing customer stratification best practice, one may decide to redeploy sales force effort — resulting in varied amount of time spent by the sales force with different customers. This redeployed effort (as a result of best practice implementation), for instance, moving the effort from service-drain customers to opportunistic category, resulted in increased profitability and cash flow. This analysis quantified those improvements for a given level of redeployment effort. This step helped distributors understand the power of best practices as well as any inherent challenges such as short-term financial losses, if any.
3. Enable & implement (Educational Sessions)
In this final step, the research concluded with the importance of learning and growth components for any successful best practice implementation and sustenance of resulting improvements. For any wholesaler-distributor, sales and marketing strategy is the largest function with highest human capital. Hence, any "change" in this space cannot be mechanical or just technology-driven. People have to be educated on best practices; processes have to be demonstrated; technology has to be customized; and metrics have to be linked to shareholder value. This is the recipe for involved-implementation of any sales and marketing best practices that can be owned by team members for sustained improvements in customer service and shareholder value.
The following points highlight a few valuable insights resulting from this leading edge SMO research consortium.
Business development through "complexity and opportunity management" is a competitive advantage for distributors.
Three-way (customer, sales force and company) alignment is fundamental to sales force performance.
Understanding (and educating the sales force about) the business "we want to do" is as critical as defining your value proposition to customers.
"Art" (experience and judgment) can lead to "growth," but "science-assisted art" will lead to "profitable growth". Note that we still need the art in this largest function of wholesaler-distributor with highest human capital — sales and marketing.
Finally, sales and marketing processes can be linked to shareholder value and customer service.
In conjunction with Texas A&M, HARDI will conduct a 1-1/2 day training seminar focusing on the best practices identified through the study specific to the HVACR industry. This is a special offering available only to HARDI members. It will be held Sept. 27-28, 2010, in Rosemont, IL (near O'Hare Airport). Register online at www.HARDInet.org/events.
The Sales & Marketing Optimization (SMO) Consortium is a collective effort of Council for Research on Distributor Best Practices (CRDBP) — an entity formed by Texas A&M University & National Association of Wholesaler-Distributors, HARDI and 19 distribution firms. The research results and examples shown in this article were submitted by the researchers Senthil Gunasekaran and Pradip Krishnadevarajan in cooperation with Barry Lawrence, Ph.D., director of the Industrial Distribution Program and the Thomas and Joan Read Center for Distribution Research and Education at Texas A&M University. © 2010 All Rights Reserved. Texas A&M University. Supply Chain Systems Lab.
The HARDI Sales and Marketing Consortium was a real eye opener for us. The challenge always seems to be where our time is spent most efficiently, and this program helps to clarify that. It was a privilege to be involved with this Texas A&M sales and marketing consortium. The benefits will have a long-lasting effect on our company's bottom line.
— Michael Meier, VP/COO
Meier Supply Co., Johnson City, NY
We are excited to develop new strategies from the data that was collected. Through this consortium, we have been able to accurately identify the sales and marketing areas that, as an organization, we need to change to promote significant growth. Creating alignment with our dealers' and vendors' business practices is crucial!
Change is what business is all about. Those that do it well, and do it quickly, reap the profits. Those that don't become stagnant and, in some cases, fail. Many times, businesses are reluctant to change because it requires us to step out of our comfort zones and explore and implement unfamiliar concepts and ideas. Although change is not always comfortable, when the results are seen and experienced, we breathe a sigh of relief and feel a sense of accomplishment. In today's economy, we not only have to be willing to make a change but also have the foresight to actively seek it out. If we don't, the market will change without us, leaving us behind the times or worse, on the "curb."
— Wayne Castor, president
GBG Inc., Pittsburgh, PA
Our participation in the A&M consortium was beneficial from a tactical, strategic and synergistic standpoint — all the elements were present in the process. Strategically, it gave us some great insight into how to structure and align our sales force with our customer base. Tactically, it gave us very specific actions to take — particularly in conjunction with our customer stratification. Synergistically, our interaction with the other consortium members — particularly our HARDI members — over dinner, in the hallways and after the class — was in many ways as valuable as anything else we learned. Finally, the evaluation of where our company is performing against best practices gives us great ways to prioritize our actions going forward.
— Richard Cook, President/COO
Johnson Supply, Houston, TX