VOLUME ONE

INTELLIGENT DISTRIBUTION MAKING YOUR BUSINESS MORE COMMERCIALLY EFFECTIVE

QUALIFICATIONS, ASSUMPTIONS, AND LIMITING CONDITIONS

Neither Oliver Wyman nor NAW shall have any liability to any third party in respect of this report or any actions taken or decisions made as a consequence of the results, advice, or recommendations set forth herein.

The opinions expressed herein are valid only for the purpose stated herein and as of the date hereof. Information furnished by others, upon which all or portions of this report are based, is believed to be reliable but has not been verified. No warranty is given as to the accuracy of such information. Public information and industry and statistical data are from sources Oliver Wyman and NAW deem to be reliable; however, no representation as to the accuracy or completeness of such information is made. No responsibility is taken for changes in market conditions or laws or regulations and no obligation is assumed to revise this report to reflect changes, events or conditions, which occur subsequent to the date hereof.

It’s not enough to be good at something; you have to be

good at everything, and excellent at the most important things.

CONTENTS

7AMAZON IN WHOLESALE DISTRIBUTION OVERBLOWN HYPE OR GAME-CHANGER?

19UNLOCKING HIDDEN PROFITS SECRETS TO GENERATING NEW DEMAND

29 BEWARE THE PRICING MYTHS BUSTING MYTHS TO GROW PROFITS

39GETTING “QUICK WINS” TO WORK DRIVING LASTING MARGIN IMPROVEMENT IN 90 DAYS OR LESS

45MAKING SCIENTIFIC PRICING ACTUALLY DELIVER 3 CAPABILITIES, 3 ENABLERS, 3 POINTS OF MARGIN

55THE SALES FORCE EFFECTIVENESS PARADOX WHY SALES FORCES STILL PRODUCE 80% OF THEIR VALUE FROM 20% OF THEIR ACTIVITIES

67PURCHASING COST REDUCTION WHAT DISTRIBUTORS CAN LEARN FROM LEADING RETAILERS AND MANUFACTURERS

Over recent years, my team has had many conversations with senior executives in

wholesale and distribution companies and have worked with them to increase their

company’s commercial effectiveness in ways that result in clear profit improvement

and shareholder value.

So we know that your business is difficult to run: difficult because you have a large

customer base under constant pressure in their own businesses; difficult because

of changing economics and technologies; and difficult because of the multitude of

different products you stock to and from geographically dispersed locations.

This is why I want to share with you the Oliver Wyman vision of intelligent distributor

commercial effectiveness – where taking a future-looking, scientific approach to

wholesale distribution enables you to not only keep up with the competition but break

away from them and truly differentiate your business.

An intelligent distributor is a company where the customer-facing business – sales force,

pricing, segmentation – is linked and integrated to the back-room operations – the

supply chain and supporting systems. An intelligent distributor has best practices as the

bedrock of the business, with the talent and culture to support innovation.

In this compendium I have selected a series of articles that highlight the most important

commercial steps towards becoming an intelligent distributor. Several of these pieces have

been the direct result of our work with the National Association of Wholesaler-Distributors

in the US, where we learned that while some companies are showing innovation and

capabilities in specific areas, few have developed and implemented best practices

across every facet of the business. This is not a criticism – it is a call for action to take the

opportunity for development, differentiation, and future success.

I hope these perspectives can initiate new discussions within your company and arm

you with a suite of practical steps that will have measurable and lasting impact on the

growth and longevity of your business.

INTRODUCTION

Kevin McCarten

KEVIN McCARTEN

Partner

Kevin McCarten leads the firm’s wholesale and distribution practice, where he and his team are focused on addressing the challenges faced by B2B distributors, wholesalers, and companies offering multi-site services and custom manufacturing.

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By the time customers call you today, they have now already done the majority of the research.

They want the easiest way to accomplish the task – that’s where the market is going.

We are trying to get ahead and create the customer experience of the future.

– CEO, $BN DISTRIBUTION COMPANY

Over the past 15 years or so, the emergence of online players like Amazon and Expedia has

transformed many B2C sectors, from books and music, to electronics and travel. With US

e-commerce sales of goods at some $210BN+ in 2012 and Amazon alone accounting for

$35BN sales in the US and over $60BN worldwide, it is hard to argue that Amazon does not

now represent a formidable competitor in those areas where it chooses to focus.

What, then, to make of Amazon’s entry into B2B distribution with AmazonSupply in April

2012, or Google’s beta-test of Google Shopping for Suppliers, which ran from January 2013

to June 2014?

To what extent do these represent early moves of disruptive game-changers, or will they

turn out to be limited incursions in a set of complex sectors where local presence, technical

knowledge, and personal customer relationships will always win?

AMAZON IN WHOLESALE DISTRIBUTION OVERBLOWN HYPE OR GAME-CHANGER?

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WHAT WE HEAR AND SEE

In our discussions with more than 25 CEOs of billion-dollar distribution businesses in recent

months, we have heard a broad range of views. Around a third are skeptical that e-commerce

will have a major impact on their business: often because their product is too difficult for a

new entrant like Amazon to warehouse and ship, and sometimes because of value-added

services that they feel cannot be provided except through a direct local relationship. This

view is reinforced in some cases by work their businesses have done to provide online

ordering platforms that have seen limited uptake.

Other CEOs take a different view. In some cases they are already competing head-to-head

with AmazonSupply in certain categories. Many are keenly aware of how customer behavior is

changing in influencing sales. To quote one: “By the time customers call you today, they have

now already done the majority of the research. They want the easiest way to accomplish the

task – that’s where the market is going. We are trying to get ahead and create the customer

experience of the future.” Within this group, of those CEOs intending to build greater barriers

to online competitors, about half feel they are on the right path, while half are struggling.

Such concerns are underpinned by some interesting facts:

• In B2C, in 2012, US sales that were influenced by online research, at $1,200BN, already

account for around 6x the sales transacted online

• In B2B, 45% of professional buyers have already purchased from AmazonSupply.

Additionally, 85% of buyers state they will always buy a lower-cost option online, despite

loyalty to their current supplier

• 90% of younger procurement buyers (aged 18–35) make B2B purchases online,

compared to only 29% of older procurement buyers (aged 60 and over). See Exhibit 1.

Exhibit 1: Younger procurement buyers – the future of the B2B customer base – are far more likely to use online platforms than their older counterparts Respondents by age making B2B purchases online in the US

29%

AGED 60+ AGED 46-60

45% 68%

AGED 36–45

90%

AGED 18–35

Source: 2013 State of B2B Procurement, Acquity Group

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It is also worth bearing in mind that Amazon in particular has a track record of taking a long view

in establishing a competitive position. In 1997 Jeff Bezos stated, “It’s all about the long term…

We may make decisions and weigh trade-offs differently than some companies.” More recently

he was quoted as saying, “Percentage margins are not one of the things we are seeking to

optimize…” Amazon’s history of always seeking to have the most competitive price in the market

by applying advanced trading algorithms to “real time”competitor price data is well known.

HYPE OR THREAT?

If you cut through the hype, we believe that there is a steady and inevitable online and multi-

channel transformation underway. As with most things in business, it’s pretty simple: it starts

with customers and their needs. Customers increasingly value quick, simple, effective ways

of interacting to get the products and services they need, as well as new value-added services

that were not possible previously. As one CEO put it, “Our customers have already been

trained by Amazon [in B2C] on what good looks like. That’s what we have to compete with.”

We believe this multi-channel shift will eventually affect nearly every type of product in B2B

distribution. Some sectors, though, are likely to feel the competitive impact much more quickly

and acutely than others. Sectors characterized by small, high-value, low-weight, easy-to-

handle-and-ship products that are readily specified and do not require specific physical services

to deliver are much more amenable to an Amazon entry. Unsurprising, then, that AmazonSupply

has launched with an industrial parts offer – a category which meets all of the above

criteria – rather than, say, industrial chemicals, that fails most of the above tests (see Exhibit 2).

Exhibit 2: Example analysis of which categories are more immediately prone to a new online threat

INDUSTRIAL CHEMICALS INDUSTRIAL PARTS

Product driven Intrinsic “shipability” Much lower-value, heavy, bulky product – requiring local supply chain density

Typically high-value, light, smaller product – easy to ship via common carrier

Handling requirements Often requires specialist equipment/ handling/certification

Straightforward

Customer driven Technical guidance Numerous products require technical guidance and support

Many products easily “bought to specification”

Product selection Typical customer buys a small number of predictable products – enabling local SKU counts of 100s or 1,000s only

Customers can buy across many 1,000s of SKUs

Value-added services Diluting, blending, cleaning, etc. are widespread and require physical presence

Real-time availability, tracking, inventory management, etc. can often be executed remotely

Not an obvious category for an online-only business to attack

Online platform and remote DCs well-suited to meet many customer needs

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It would be a mistake, though, to think that the competition from online players is

“binary” in nature. The question is not whether they will be a threat, rather it is which

customers, purchase occasions, and categories will be targeted first. Consider the

lesson from the mass merchant retail clubs. In a number of categories, Amazon

already has a comparable or broader range than the established club stores such as

Costco. In addition, Amazon’s Subscribe and Save service, which delivers frequently

purchased high-value items such as razor blades and diapers automatically every

month or so (unless the customer pro-actively updates or skips the order), is already

“hollowing out” shoppers’ baskets at the clubs and reducing trip frequency.

There is a ready read-across to non-core categories such as personal protective equipment

in industrial gas distribution or non-food items in food service. While the core business may

not be at threat, such adjacent categories can often drive around 20–30% of dollar gross

margin. That’s a lot to have to make up in other core and often lower-margin categories.

Such customer unbundling also acts to undermine “full service” customer relationships.

The key battle is one of consideration rate, i.e., for what percentage of customers

are you the first place they will go (whether physically or online) when the customer

thinks about purchasing a product in a specific category? In B2C of course, Amazon

has already comprehensively won the consideration rate battle in many categories

through its aggressively low prices, huge range, consistent meeting of fulfillment

promises, and “no quibble” returns. So much so that many customers now never

check prices or range anywhere else.

As one looks ahead, compared to most traditional offline distributors, AmazonSupply by

our reckoning starts with an SG&A cost advantage of some 20% or more to its scale and

lack of local operations and field sales, as well as a business model built on operating

margins (currently less than 2%) that are a fraction of those in more established

competitors. It is, then, no surprise that one can already see more competitive pricing

on many items at AmazonSupply.

The question is not whether AmazonSupply will be a threat, rather it is which customers, purchase occasions, and categories will be attacked first.

Similarly, while AmazonSupply is still at an early stage of growth, one can already see the

beginning of a compelling range in those categories where it has started to focus (Exhibit 3).

Finally, one needs to take into account Amazon’s substantial investment in building around

ten distribution centers per year since 2010 close to major cities. Our estimate is that by 2015

Amazon will be able to reach more than 50% of the US population with same-day delivery.

As one looks ahead, our view is that AmazonSupply, for one, will represent a new player in

the competitive ecosystem for the majority of wholesale distribution product verticals, and

that a new competitive equilibrium will therefore evolve.

Exhibit 3: Building a compelling range – AmazonSupply has been growing its product selection, doubling its breadth in just over a year

JUNE 2012 JANUARY 2013 JULY 2013 JULY 2014

2,250,000+500,000+ 600,000+ 750,000+

PRODUCT SELECTION FOR A FEW REPRESENTATIVE CATEGORIES

AMAZON GRAINGER MSC WB MASON

Abrasives

15K+ products 9K+ products 31K + products –

Fasteners

39K+ products 55K+ products 55K + products –

Hand tools

50K+ products 38K+ products 17K + products –

Paper

9K+ products – – 1K+ products

Office furniture

5K+ products ––

3K+ products

Note: Product selection compared on 15 December 2013

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SO HOW MIGHT YOUR COMPETITIVE ECOSYSTEM EVOLVE?

We have of course already roughly characterized two business models: the traditional

distributor with local presence and fulfillment, field sales, expert knowledge, and

established relationships; and the online distributor (e.g., AmazonSupply) with more

centralized operations and fulfillment, and no pretense to technical knowledge or

field sales. A natural third model is the omni-channel distributor: a model defined

by enabling customers to get the information they need and place orders across the

web, phone, mobile devices, and in person in a seamless and integrated way.

This omni-channel model is where a number of CEOs are already working hard

to take their businesses in the next two to three years. Our sense, though, is that

AmazonSupply is not the only new business model many will face.

From January 2013 to June 2014, Google ran Google Shopping for Suppliers (in

addition to Google Shopping) as a test service targeted at B2B companies. It was

essentially an online catalog in three test categories, with detailed structured

technical data comparable across products and suppliers. The revenue model had

suppliers pay $1,000 to be verified and those that were verified would appear higher

on search rankings (although throughout the test the fee was waived).

The customer concept seemed appealing: a truly comprehensive, fully up-to-date

product catalog that is as easy to search as Google. While the testing has now

completed, many of the learnings will be transferred through into the main Google

Shopping and Google AdWords businesses, meaning Google is likely retain a stake in

the wholesale and distribution supply market.

One might also expect, in some categories, the advent of a meta-search business

model offering price comparison searches similar to those in B2C sectors such as

travel (e.g., Kayak) or insurance (e.g., insurance.com). We are also seeing attempts

to establish online marketplaces for specific customer types (e.g., “The Supply Place,

Powered By Ace”).

Lastly one can also anticipate the disruption to traditional supply chains. Some

manufacturers are already using the web to go direct to customers and reduce

reliance on channel partners. In other instances, one sees potentially powerful new

partnerships evolving (e.g., Grainger partnering with Lowes to fulfill MRO supplies for

its B2B customers).

It might be interesting to consider how you would react if your main competitor

tomorrow announced a major fulfillment partnership with AmazonSupply.

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It might be interesting to consider how you would react if your main competitor tomorrow announced a major fulfillment partnership with AmazonSupply.

POSITIONING YOUR BUSINESS TO SURVIVE (AND HOPEFULLY THRIVE)

We have seen a few versions of this movie before. To highlight one: in grocery retail much of the

story of the last 20 years or so has been how the progressive roll-out of Walmart Supercenters

across North America has challenged one regional chain after another. The arrival of a disruptive-

scale competitor with a low-cost base, compelling range advantage, and SKU prices often some

15–20% below those of the existing players has driven a dramatic shake-up in most markets.

The most typical pattern is a polarization of incumbents. Those grocers with relatively

undifferentiated offers, many of whom cut prices or increased promotional activity in order to try

to compete, typically did not make it. (Although long run price elasticity is high, in the short run it

is lower. So those that invested only in price did not see enough volume increase fast enough to

compensate for the short-term margin loss due to lower prices – exacerbating their financial bind.)

Those who instead invested thoughtfully in quality, freshness, and alternative formats and who

critically stayed sufficiently in touch with Walmart on price (within roughly 10% or less) have

generally grown sales. Today in many markets there are only one or two strong conventional

grocers left alongside Walmart, but they have thrived at the expense of the players that have left

these markets (Exhibit 4).

Exhibit 4: The key to surviving Walmart’s entry into a local grocery market has been a strong offer perception combined with “good enough’”or better value perception

The customer perception map: a typical pattern for a retail sector

CUSTOMER FAVORITESVery well placed to win share from all local competitors, including the value leader(s). Typically only 1 in 10 retailers are in this position.

“THE PACK”Around 4 in 10 retailers are typically viewed by customers as ‘average’ – a weak starting point. A few break out to become customer favorites or offer leaders, while others slip into the laggard zone.

VALUE LEADERSPrice leadership is highly effective against established rivals. A customer perception positioning often defined by Walmart. Today around 2 in 10 retailers are in this position.

OFFER LEADERSStrong assortment, great

product quality and/or high levels of service put these

retailers in a strong position to defend against the Walmart

threat. Typically around 2 in 10 retailers fall into this category.

LAGGARDSRetailers in this region

are poorly regarded by customers, and are in

trouble even without a new competitor. Only around

1 in 10 retailers are in this position at any given time –

in part because they don’ttend to survive long.

VALUE

OFFER

Weak Strong

Weak

Strong

Note The above exhibit is an illustrative example of Oliver Wyman’s Customer Perception Map – a powerful tool for understanding customer perception, predicting share growth/decline, and informing customer-facing strategy

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SO WHAT SHOULD YOU DO?

Responding to the changing environment is not only about digital capabilities. It is

about robustly understanding what customers want and need, and then delivering

it better and faster than your competitors. As the grocery story illustrates, the good

news is that you don’t need to outrun the low cost “bear.” But you will need to outrun

your “friends” in the industry.

If new online entrants start to take significant share, the remaining available market

will shrink. Growing your business will require you to take an ever greater share of

what is left, and potentially to expand your perimeter. If this is striking an immediate

chord, and even if it’s not, there are six elements that we suggest need to be part of a

credible plan.

1. PLAY THE MOVIE FORWARD, BOLDLY

What could an online-only player like Amazon do to your sector if they got serious?

Work this through at the level of customers, purchase occasions, and categories.

Which will be the early battlegrounds? Which customers and occasions are

core and must be held at all costs? What will cause your key vendors to partner

with you, vs your competitor, vs Amazon, vs sell direct? What could be the

new competitive equilibrium? (Hint: if your scenarios don’t involve you or a

competitor exiting the market or merging, you are not being bold enough.)

Example: One distributor is “inventing” how their customers will behave going

forward. By mapping customers’ economics and anticipating online innovation,

they are predicting new service and solutions offers, and working hard to stay

ahead of this curve.

2. GET CRYSTAL CLEAR ON WHAT YOU NEED TO DO TO WIN THE CONSIDERATION BATTLE

If your prices are more than 10% above Amazon, it’s time to review your pricing

policy – but carefully, reflecting on the grocery lesson about short vs long-term

price sensitivity above. If you can’t fulfill next-day delivery on 90%+ of your SKUs,

it’s time to review your supply chain. How might you leverage your technical

knowledge and local service to defend the first battleground categories? Own

brand products and exclusive brand supply relationships may have an important

role to play here too.

Example: Several distributors are explicitly focusing on: achieving 90–100%

same or next-day product availability, up-skilling the sales force to provide more

customer advisory support, and consolidating vendors to minimize delivery

disruptions to important customers.

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The good news is that you don’t need to outrun the low cost “bear.” But you will need to outrun your “friends” in the industry.

3. STAY VERY CLOSE TO BOTH YOUR CUSTOMERS AND COMPETITORS

Do you collect monthly customer feedback on your local service performance? Do you

know how customers rate you vs competitors on key dimensions such as value, product

quality, service, and technical support, and can you translate that into a “customer

perception map” vs AmazonSupply? Are you tracking competitor pricing in the field

and online? Do you have tools to help you spot missed orders or customers at risk?

Example: One distributor tracks customer satisfaction every month in every branch, has

a scale mystery shopping program, and tracks fill rates and customer service issues to

create a monthly customer dashboard.

4. GET SERIOUS ABOUT CUSTOMER STICKINESS

What information, services, and apps could you deliver in a better way to core

customers in a multi-channel world in order to save them time or make them more

productive? What service activities can you automate online, cutting costs and

driving up sales? Can you create new pricing constructs that defend against SKU by

SKU cherry-picking?

Example: Several distributors are delivering services to keep the customer on the shop

floor, not in the back office (e.g., back office apps, CRM, and sales/inventory reporting).

One is hosting dozens of customer websites using their infrastructure. Another has

innovated a “whole basket” pricing construct that is delivering 20%+ customer sales

growth in an otherwise flat market.

5. GO ON THE OFFENSIVE

Once you have a robust online catalog and transaction engine, why not “re-skin” it for

B2C? Once you have the fulfillment model, why not start adding more adjacent product

categories? Then why not get serious about customer acquisition through pay-per-click

engineering, affiliates, targeted email promotions, etc.? Should you consider acting as

the fulfillment partner for AmazonSupply or a large B2C player?

Example: Several distributors are driving e-commerce across wholesale and retail, and

managing the challenge of competing with their customers.

We are already seeing the early stages of a wave of innovation as the most forward-thinking wholesale distribution businesses invest significant time and resources into becoming potent omni-channel competitors.

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6. START THINKING “MOBILE FIRST”

We are right now living in the first year when there are more smart mobile

devices connected to the internet than PCs. Mobile commerce is forecasted

to quadruple in the next five years. In distribution businesses most customers

are, by nature, already mobile – whether on a building site, a shop floor, in

a commercial kitchen, etc. Delivering simple, relevant, highly personalized

information, services, and ordering capability to customers while they are going

about their business will be a competitive game-changer.

Examples: Distributors are already enabling access to product technical

information, real-time product availability, ordering, order status tracking, etc.

on mobile devices. Getting just the right information to the field sales force

can also be hugely powerful. One distributor has real-time customer order

history, statistically predicted orders and customers at risk, next product to sell

recommendations, and next prospect to call on insights available to their sales

force on iPads.

AND HOW SHOULD YOU DO IT?

If the above is about “the what,” the final question we have discussed with a number

of CEOs is about “the how.” How to move with sufficient imagination, pace, and

flexibility; and how to recruit and inspire some very different talent?

One recipe comes from the digital disruptors themselves. Both Amazon and Google

have set up wholly separate divisions with the explicit aim of inventing the future,

fast – and allowing bold failures on the path to bold successes. In Amazon’s case, the

genesis was in 2006 when Jeff Bezos picked up the Sony e-reader and saw a huge risk

to Amazon’s core business. He rapidly established Lab 126 and, 18 months later, the

first Kindle was launched. Walmart is right now seeking to apply the same approach

with a wholly separate division based in Silicon Valley (a long way physically and

culturally from Bentonville, AR) focused on rapidly reinventing its online business in

the face of the expansion of AmazonFresh. Closer to home, Grainger established its

online division more than 15 years ago.

Great care is required in managing what follows. As the new organization successfully

challenges the status quo and builds momentum, should it be left alone, should it be

integrated into the old business (or maybe better, vice versa), or should it become an

ongoing source of innovation that “hands over” lines of business when they hit critical

mass? The experience of those sectors that have gone online earliest and fastest

(travel, consumer electronics, etc.) is that customers who shop across channels

have little tolerance for price and offer inconsistencies. Moreover, while customers

are happy to benefit from offline services and advice, superior online pricing and

assortment nearly always wins in securing the final purchase.

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While customers are happy to benefit from offline services and advice, superior online pricing and assortment nearly always wins in securing the final purchase.

CONCLUSION

In our view AmazonSupply, Google Shopping, and quite possibly one or two more new entrants

will have a profound effect on many wholesale distribution sectors over the coming five years.

In many (but maybe not all) sectors, a new competitive equilibrium will be established.

History suggests that those that act to strengthen a differentiated high-quality yet good-

value customer proposition and which adapt fastest to the opportunities created in a

multi-channel world will see their businesses flourish. Those that do not will see their

businesses struggle.

We are already seeing the early stages of a wave of innovation as the most forward-thinking

wholesale distribution businesses invest significant time and resources into becoming

potent omni-channel competitors. If your business does not yet have a credible plan to

survive and thrive in the new ecosystem, there may be less time than you think.

When you discover a problem, you discover a business.

– HENK KWAKMAN, FORMER CEO OF NESPRESSO

This article is drawn from Adrian Slywotzky and Karl Weber’s book Demand – Creating What People Love Before They Know They Want It. Crown Business, 2011

In today’s competitive market, most companies are struggling to drive profitable growth in their core customer base. Generating and harnessing demand for new propositions is critical to driving breakaway performance in this environment.

Driving profitable growth is tough. Once you strip out growth from price increases, mergers and acquisitions, and international expansion to look at a business’s “core growth,” you often find that this growth has been sluggish or even negative over recent years (see Exhibit 1).

This is not simply a result of the Great Recession, although this has clearly hit some sectors

hard. In fact, it has been an issue for many businesses since the end of the 1990s, not just

wholesalers and distributors. We regularly talk to CEOs struggling to hold on to their core

customer base, let alone profitably grow them.

UNLOCKING HIDDEN PROFITS SECRETS TO GENERATING NEW DEMAND

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Yet, despite this weak background, some businesses have managed to generate outstanding

growth of 6–10 times that of their market. They have done this by innovating: new propositions,

new services, and game-changing products that have found pools of untapped customer

demand. This paper looks at the five key lessons to be learned from these “demand creators”

and how they are being applied today by the more innovative distribution companies†.1

1. Customer and supplier hassles are the source of untapped demand

2. New propositions need a team, processes, and the right culture to incubate

3. Don’t stop innovating and iterating until it’s magnetic

4. Identify techniques to get around the inevitable customer inertia

5. Don’t launch before you are ready – then scale, fast.

Exhibit 1: Demonstration of sluggish core growth in many distribution and wholesale sectors

Our analysis found that, after stripping away growth from acquisitions and international expansion, core growth has been meager at best

DISTRIBUTION SECTOR1

2008–2013

INTERNATIONAL GROWTH2 ACQUISITIONS3

PRICE INCREASES4

ESTIMATED CORE GROWTH

Electronics

9.4% – 1.8% – 3.9% + 0.0% = 3.7%

Food

6.0% – 0.4% – 1.2% – 0.4% = 4.0%

Building materials

5.3% – 1.5% – 0.9% – 0.9% = 1.9%

Pharmaceuticals

3.1% – 0.2% – 0.3% – 1.2% = 1.4%

Industrial chemicals

2.0% – 2.5% + 1.0% – 3.0% = -2.3%

Industrial parts

2.0% – 2.2% – 0.4% – 0.2% = -0.8%

Electricals

0.2% – 1.4% – 0.9% – 0.7% = -2.8%

Average = 0.8%Source: Company 10-Ks, annual reports, and US Bureau of Labor Statistics.

1. Each sector is comprised of three leading publicly listed multibillion-dollar distribution companies, primarily based in the US

2. Growth from base international revenues in 2008, along with international acquisitions

3. Net change in revenue caused by domestic acquisitions and disposals4. Estimated from the change in Producer Price Index for the associated industry

† Several of the lessons and examples are drawn from research published by Oliver Wyman in Demand: Creating what people love before they know they want it by Adrian Slywotzky and Karl Weber.

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Lesson 1:CUSTOMER AND SUPPLIER HASSLES ARE THE SOURCE OF UNTAPPED DEMAND

Managerial attention is first and foremost on the products and services you deliver today.

To generate breakthrough demand, companies need to spot unmet client needs before

competitors. This is easier said than done. It requires you to look beyond your current

business into the wider “business system” in which your products are sold and look for

hassles that you could solve for your customers, or suppliers.

Take surgical equipment distribution as an example. In the past, surgical teams sourced

protective equipment, gowns, and surgical instruments from multiple manufacturers,

sterilized them, and brought these different parts together for each operation. Distributors

focused on getting the right range of equipment at the lowest price, delivered on time when

the customer ordered them. Yet, this left the surgical team with some significant hassles:

• Missing protective wear or tools for the operation

• Incorrect instruments

• Incomplete sanitization of instruments before use

• Accounting for individual surgeon brand preferences

• Post-operation disposal and recycling.

Each of these issues could increase operation set-up times, increase risk of infection to the

patient, add to costs in the hospital, or even jeopardize patient safety.

These hassles, however, also presented a major opportunity. Innovative equipment suppliers have

become “value added distributors” by providing custom procedure trays (Exhibit 2). These trays

contain in one pre-sealed pack all the single-use medical devices needed for a specific procedure.

The value proposition to the hospital is clear: shorter set-up times, less unused equipment, less

packaging waste, and reduced costs. For the distributor, the trays offer a significantly higher

margin than selling the constituent products, and a broader product range than before.

This lesson applies equally to your suppliers who may also experience hassles that reduce their

margin or increase their risk. Mapping hassles systematically using a “hassle map” (Exhibit 3),

can often be the first and richest source of ideas to identify next-generation demand.

Exhibit 2: Procedure packs – sterile, sealed packages containing all single-use equipment for a specific operation

Multiple surgical items need to be gathered, sterilized, and disposed of.

From...

A pre-sterilized, single-use procedure pack solves hassles in the operating theatre.

...To

To generate breakthrough demand, companies need to spot unmet client needs before competitors.

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Exhibit 3: A hassle map for chefs planning their menus

FROM...

How should I redesign my

menu this summer?

What are the trending foods

in my area?

What’s my gross profit?

What prices should I set the

dishes at?

What’s the nutritional

content of the dish?

How should I innovate new

dishes?

How should I vary my menu

over the season?

How do I place an order with the

right suppliers?

How do I train my kitchen brigade

to prepare?

How should I scale up/down with portion sizes?

Are the ingredients in stock? Where?

What happens to my gross profitif I change an ingredient?

How long do they take to

prepare?

How do I keep track of the

recipes?

Simple applications from distributors and software providers are simplifying the hassles above

Open an app to select recipes you and your

customers love

Have costs, gross margin,

and nutritional information

to hand

Click button to order

ingredients or print o�

a menu

...TO

22

Lesson 2:NEW PROPOSITIONS NEED A TEAM, PROCESSES, AND THE RIGHT CULTURE TO INCUBATE

Demand innovation is as challenging as new product innovation and requires the right level of resourcing: consider the contrast between efforts we have seen in one business to generate the next $1BN, shown in Exhibit 4. Too often companies default into the ”growth initiative” mode, unwilling to free up their best teams to work on new propositions. New propositions are also often threatening to the core business itself and risk being killed off by managers.

The best demand innovators address these issues head on. Take Amazon’s creation of the Kindle as an example. Amazon realized that, if the Kindle team were based in Seattle sitting next to the teams selling traditional media, the Kindle would be seen as too big a threat to the core business and quietly killed. In addition, Silicon Valley was home to the resources required to move away from logistics and distribution and towards becoming a great device manufacturer. For these reasons, Amazon’s Lab126 was set up near to Apple’s headquarters in California as an entrepreneurial start-up, with Amazon providing the investment dollars.

Or take Nalco, originally a chemicals business focused on water treatment and hygiene, which branched out from chemical sales to technical services. Nalco developed a technical solution that both monitored water quality and added the appropriate amount of Nalco’s chemicals. The benefits to the customer were less downtime of their plants and less chemical use. While this service was clearly valuable to customers, it posed a threat to Nalco’s core chemical revenue streams. So the company decided to incubate this new service in a completely separate team and developed specialist sales forces. The result: a unique service built up over 20 years and counting, with overall sales linked to customers using the solution being 2–3 times more profitable than what had been sold before.

Thinking now to your business, once you have identified the customer hassles behind next-generation demand, consider the structure of your innovation team:

• Is it well resourced with your best talent?

• Do they have a clear stage-gate process for assessing and accelerating/prioritizing/

dropping innovation concepts?

• Are they appropriately incentivized for success?

• Are you really willing to provide sufficient investment for it to launch, improve, and

scale its offers?

Exhibit 4: Contrasting efforts seen by Oliver Wyman by a business keen to generate the next $1BN in sales

GOAL: $1BN+ IN NEW REVENUE INVESTMENT

New product R&D • Dedicated brand or product development team

• $300MM on each new product

• System to track and ensure success

New car platform • 1,000+ specialized employees and best suppliers

• $500MM of investment

• Gated process with senior executive review focused on fine-tuning, not pass/fail

Entrepreneurial start-up • 10–30 people

• 100-hour work weeks

• The best talent

• $MM of venture capital investment

Growth initiative • 10s of staff, often B-players

• Minimal investment

• Presumption of failure, mind-set is to “poke holes”

23

Lesson 3: DON’T STOP INNOVATING AND ITERATING UNTIL IT’S MAGNETIC

The list of functionally useful but fundamentally unsuccessful new propositions is long.

Propositions that appear to be great on paper fall at the first hurdle and don’t get the

expected customer traction. At this stage, managers often conclude that to invest further

would be to pour “good money after bad” and decide to call time.

Truly innovative new propositions require extreme patience, careful risk management,

and a combination of emotional customer appeal as well as functional excellence.

There is no substitute for testing prototype propositions with customers, be it with

panels or through friendly relationships (see Exhibit 5).

Take a client of ours in the electronics manufacturing and sales industry. It is recognized as a

leader in innovation, spending over $300MM a year in R&D with highly qualified PhD-caliber

employees. It created a new product, whose functionality was far superior to anything else on

the market. This product was patented and the manufacturing process was secret. Yet early

versions of the product achieved no traction in the end-market installers and end users.

Further investigation identified that the product’s functional requirements were only a small part of

a broader proposition needed to make the offer magnetic. For example, customers were uncertain

about whether the new product was future proof, how it worked with other products in our client’s

system, and its interoperability with solutions from leading manufacturers such as Cisco.

We found that our client was able to create a package that became the market standard, containing:

• Branded, interoperable products

• Future-proofing guarantees

• Endorsement from other leading vendors.

This system has generated an estimated $500MM in market value for the business since its launch.

Exhibit 5: Proven customer research techniques to make your offer magnetic

Virtual marketplace simulation toquantify likely uptake and optimalo�er combinations.Strategic choice analysis that invites respondents to trade o� between competing o�ers and reveal a preference for one versus another.

O�er 1

O�er 2

In-market testing puts di�erent prototypes out in the market andtests which does best.Though potentially more time-consuming and expensive, this approach o�ers the most real-life data on customer impressions.

CB

A

Customer feedback sessions feature product story boards and solicit inputfrom would-be buyers.Storyboards contain realistic mock-ups of what the o�ers might look like, feel like, and include. Customer feedback is gathered from there.

24

CASE STUDY 1

DEVISING A NEW PROPOSITION IN FOOD SERVICE

Based on trial feedback, the offer resonated with customers, solving ordering hassles and

helping them manage their margins. However, when it came to selling the proposition, many

customers were either skeptical of the benefits and hassle of signing up, or used it as an

opportunity to negotiate prices down to reduce the perceived risk.

The company overcame this inertia by following the four points shown in Lesson 4:

1. Make it easy: the company invested significant time in designing sign-up to be quick

and efficient, completed in one short sales visit.

2. Provide reassurances: the company provided customer testimonials and money back

guarantees vs competitor offers.

3. Use early adopters as advocates: early sign-ups were encouraged to recommend other

local businesses to sign up.

4. Provide incentives: for valuable customers, the company provided time-limited teaser

offers to encourage adoption without long-term discounting.

Lesson 4: IDENTIFY TECHNIQUES TO GET AROUND THE INEVITABLE CUSTOMER INERTIA

Once you have a magnetic proposition, you still need to convince customers to adopt it. B2B

customers are often reluctant to try something new. Many are naturally distrustful of new

offers from suppliers, fearing they may lose out through changes in terms, conditions, or

pricing on their core purchases.

Our experience has found that you need to do four things to overcome the inertia:

1. Make it easy: remove barriers to signing up to the new offer

2. Provide reassurances (sometimes financial) that it will work and that downsides will

be covered

3. Use early adopters as advocates for the proposition

4. Provide incentives to customers to use the new proposition.

In our experience, the sales force may need several rounds of training on a new proposition

to be able to get customers over this inertia. In the case study below, 3–6 months of training,

role play, and practice to deliver the pitch got conversion to as high as 90%.

Lesson 5:DON’T LAUNCH BEFORE YOU ARE READY – THEN SCALE, FAST

Nothing can kill a good proposition faster than an inability to deliver on your promises to

the customer. And nothing will frustrate you more than an inability to scale up your winning

proposition. But how can you avoid these issues?

Launching well requires a high degree of discipline and focus on some key areas:

• Planning: be rigorous in planning and monitoring all aspects of the launch, including

the IT systems you require to support it. Set pilot standards by which you judge readiness

to launch – 75% right just isn’t good enough here!

• Piloting: thoroughly test the launch with dress rehearsals of each element of the

proposition and the supporting infrastructure.

• People: overinvest in people to support planning, training, execution, and assessment.

Assuming the pilot is successful versus your standards, you will want to rapidly scale it up.

This means having systems and sales approaches that can be scaled up, a roll-out plan, and

the resources to do it. All of these things should be considered as part of your pilot so they

can be anticipated.

CONCLUSION

In a competitive environment where most companies are struggling to drive profitable

growth in their core customer base, generating and harnessing demand for new

propositions is critical to breakaway performance.

However, creating the environment to systematically design and launch winning new

propositions is challenging at the same time as running your existing business.

Looking at successful innovators from the wholesale and distribution industry and beyond,

we have identified five lessons to follow to institutionalize innovation in a company.

1. The first lesson is to look for innovative ways to solve customer and supplier hassles

to generate demand for new products or services and build customer loyalty.

2. To turn the idea into reality, your organization needs to create an environment (culture,

people, and process) that helps you systematically develop and refine propositions.

3. This environment needs to be designed to keep refining and testing the idea until it is

“magnetic” – functionally good is not enough. You need something customers love.

4. To sell your winning proposition, you must also make sure you plan how to overcome the

natural B2B customer inertia around changing their behavior. This means making it easy to

buy the new proposition and providing appropriate reassurances and incentives to the buyer.

5. Finally, your organization needs to be skilled at launching well and scaling fast. This

requires rigorous planning, and careful piloting with high standards to measure success.

Generating new demand and unlocking profitable growth can be a reality for any company,

but it requires disciplined application of a different approach to managing and incrementally

improving your core business.

FURTHER READING

DEMAND: CREATING WHAT PEOPLE LOVE BEFORE THEY KNOW THEY WANT IT

by Adrian Slywotzky with Karl Weber

This book explores the critical role of demand creation in today’s

economy and analyzes how some companies’ products are doing

exponentially better than their competitors’ by creating “magnetic”

products and services. In an economy that’s increasingly demand-

driven, understanding what Adrian calls the customers’ “hassle map”

to create a product they love will be the key to success for both B2B

and B2C companies.

27

Pricing is at the heart of our proposition. It needs to be very clear and accurate…

…it is absolutely essential to everything; if we get it right it provides huge dividends.

Pricing is very high stakes; there aren’t many things more fundamental.

– CEO OF A FOOD DISTRIBUTION COMPANY

In distribution and wholesale, pricing decisions make senior managers anxious. They’re

tricky to get right, and the stakes are high: it’s difficult to know which prices will attract

business without hurting the bottom line, particularly when faced with thousands of

customers, hundreds of products, and a wide range of local competitive environments.

Given this complexity, it’s not surprising that so many businesses tell us they struggle with

pricing. One executive summed it up neatly: “Although pricing is one of the most basic

things we do, it’s also one of the scariest.”

So it’s rare for senior managers to examine their pricing practices to see whether they’re doing

all they could for the business. Usually, they aren’t: because although tried-and-trusted

pricing rules might seem safe, these rules weren’t designed to cope with the complexity

and competitive intensity that characterizes business today. In fact, they may not even have

been right to begin with. By sticking to a set of outdated beliefs, or myths, about pricing,

many businesses undermine their performance to the tune of millions of dollars a year.

This paper looks at five of the most common pricing myths we hear and explores how,

by “busting” them, executives have been able to unlock a powerful and profitable

competitive advantage.

BEWARE THE PRICING MYTHS BUSTING MYTHS TO GROW PROFITS

29

Myth 1:PRICING DECISIONS ARE BEST HANDLED BY THE FIELD

Reality:COMPANIES CAN’T AFFORD TO LET THE SALES FORCE FLY SOLO WHEN IT COMES TO PRICING

Why shouldn’t companies leave pricing decisions to the field? After all, the sales

force is closest to the action, meeting customers and battling competitors daily.

Surely, nobody in headquarters can keep up with so many customers, products, and

competitors. And, really, isn’t it the sales force’s job to negotiate prices?

Of course, salespeople are critical to establishing relationships, pitching new products,

and managing service. But when it comes to pricing, companies can’t afford to let them

fly solo. Salespeople simply cannot see the same kind of systemic insights that headquarters can, from customer price sensitivity and “walk away” points,

to how best to price products versus competitors in order to drive profits. Moreover,

customer frustration can result from a localized sales force setting prices that seem

inconsistent and illogical.

Consider the industrial rental company that provided its salespeople with regional

catalogs and the freedom to price as they wished. On the surface, customers received

individual treatment and gross margin seemed reasonable. In reality, salespeople

were either pricing purely on instinct or drowning in incomplete information. They lacked effective guidelines and had limited knowledge of what clients truly valued – or the cost of delivering that value.

As a result, many deals were underpriced or even lost money at the EBIT level.

This is not an anomaly; we have observed many companies in various industries

dealing with similar issues. The best solution, we have found, is to keep salespeople

empowered to negotiate prices, but to support them with insights from the center. It all hinges on a central team turning insights on customers, products, and markets into simple but effective guidelines and tools for the sales force to drive profitable growth.

Keep salespeople empowered to negotiate prices, but support them with insights from the center.

30

Exhibit 1: A distributor found its standard SKUs, whose prices were set centrally, made higher margins than its unique, differentiated SKUs. The unique SKUs were priced locally, missing the premium they deserved

10

PRODUCT CATEGORY

40

30

20

Batteries Switches Category3

Category4

Category5

Category6

Category7

Category8

Category9

0

Standard SKUs: higher marginsSales force provided with specificpricing guidance from the center

Action: refine central guidance to drive margin Action:apply stronger

pricing guidanceto build up margin

Action:introduce

pricingguidelinesfrom the

center

Limited pricingguidance

No pricing guidance

Unique SKUs: lower margins

Exhibit 1 shows an example of central insights being used to guide local actions. An electrical

distributor was giving its sales force inconsistent pricing guidance across its product range.

Prices for the standard range were specified centrally. Pricing the unique and differentiated

products was left to the sales force, with limited or no central guidance. When we profiled

the margins earned on different products, we found that the centrally priced, standard

products earned the highest margins. The unique but locally priced products were not

earning the premiums they deserved. These insights helped the center guide the sales force into raising prices on the unique products, without significantly affecting volume.

This work helped drive EBIT growth worth 1.5% of revenue.

31

Myth 2:“COST PLUS” IS THE SAFEST BASIS FOR SETTING PRICES

Reality:COST-PLUS PRICING IS NOT ALWAYS AS SAFE AS IT SEEMS

A cost-plus approach seems like an effective way to set prices. It normally ensures

companies consistently reap a markup above their costs. It is also straightforward for

management to set up and for salespeople to execute. Moreover, unlike value-based pricing,

it does not rely on a complex analysis of competitors, products, and customers. But in our

experience, cost-plus pricing is not as safe as executives might think, and many companies

have missed profit opportunities or even lost money because of it.

The problem is that many businesses lack a good understanding of their true costs.

Take one of our outsourced service clients. The company took pricing and account

management decisions based on the gross margin of its products and an average allocation

of cost to serve. When the costs to serve were linked back to the accounts responsible

for them (as seen in Exhibit 2), it soon became clear that the average allocation had been

misleading. Actions taken with the old average allocation had often been risky or even

harmful. The new, “true,” allocation fixed this issue and unearthed a set of loss-making

accounts. Tackling loss-making and low-profit accounts alone was worth around

$4MM of additional EBIT on a base of approximately $50MM EBIT.

Hence cost-plus pricing is not always as safe as it might seem. In fact, it can cause a

business to lose money on some of its accounts without realizing it.

Exhibit 2: Moving from an average cost allocation by site to a true allocation helped this company identify mispriced accounts

35%

40%

30%

25%

20%

15%

10%

5%

0%

10k 100k 1,000k 10,000k

35%

40%

30%

25%

20%

15%

10%

5%

0%

10k 100k 1,000k 10,000k

“Standard” cost allocation: logistics Pragmatic “true” cost allocation: logistics

Key changes

1. Vendor funding allocations

2. Logistics costs allocated based on true drivers of in-bound logistics

3. Activity-based overhead allocations

TOTAL SALES (LOG SCALE) TOTAL SALES (LOG SCALE)

LOGISTICS COSTS AS % OF AMOUNT PURCHASED LOGISTICS COSTS AS % OF AMOUNT PURCHASED

32

Myth 3:TRACKING COMPETITOR PRICES IS NOT WORTH THE EFFORT

Reality:PRAGMATIC USE OF READILY AVAILABLE INFORMATION CAN PRODUCE INSIGHTS THAT PAY FOR THEMSELVES SEVERAL TIMES OVER

On the surface, tracking competitor prices seems so complex as to be overwhelming, with so many competitors, products, and types of customers to monitor,

not to mention frequent price changes. However, the process can be made much less

daunting by splitting it into two fundamental tasks: systematic collection of competitor

prices, and a central system for data management and analysis. Implemented properly, the insights gained can pay out within just six months and enable much greater long-term returns, making the process well worth the effort.

Consider a distribution client of ours that was reviewing its product prices. Feedback from

the field indicated prices were uncompetitive, but the executives were wary of overreacting

and giving margin away. They wanted to know how competitors were really priced, but this

seemed impossible given the thousands of products and clients involved. That was when

the executives realized they were sitting on a gold mine of data. Many sales bids involved a

partially open comparison between their prices and those of competitors. Moreover, many

competitors regularly published catalogs revealing the “shape” of their pricing and putting

an upper limit on individual prices.

To harness the information, the firm set up a small central team to collect and compare

competitor prices with in-house products. The data yielded valuable insights that could

then be relayed to the sales force, including where products were really over- or under priced.

Over the course of a few months, the initiative created a real competitive edge. Not only did it

assist formal bids, it also gave a good view of pricing versus the market over time, informing

the pricing strategy. The data also triggered a series of promotions, targeting products for

which the company was competitively priced. All told, the initiative supported EBIT improvements worth half a point of sales, more than offsetting the up-front cost.

33

Myth 4:“QUICK WINS” ARE TOO RISKY TO ATTEMPT

Reality:REAL VALUE CAN BE DRIVEN QUICKLY BY FOCUSING ON PRAGMATIC ACTIONS AND BEING SYSTEMATIC

What company wouldn’t want to improve its margins in a matter of months with some

pricing “quick wins”? But as any experienced executive knows, such price changes

are fraught with pitfalls. On the one hand, rapid, across-the-board price hikes often

upset customers, leading to defections or the cherry-picking of lower-margin

products that remain competitively priced. On the other hand, tailoring price changes

to individual customers and the products they buy takes time, making gains anything

but “quick.”

Indeed, in our experience, many quick win programs end up being a waste of time,

and fail to achieve the targeted impact. But when companies avoid sweeping changes and focus instead on insights and pragmatic actions, we have seen impressive results.

In one example, an industrial distributor was under pressure from competitors

undercutting its prices. To counter that threat and to build a “war chest” of cash, the

firm launched a 90-day quick win plan. During the first month, it examined readily

available internal data for the telltale signs of opportunities, such as:

• Unprofitable accounts once cost to serve had been properly allocated

• Customers not buying the full range of products they needed

• Expensively priced products with high price sensitivity.

Exhibit 3, taken from another distributor, illustrates this type of analysis. It shows

how sensitive different customer segments are to price changes on the products

they buy, highlighting opportunities to boost profits by raising some prices (with limited impact on volume) and lowering others (driving significant volume uplift).

When companies avoid sweeping changes and focus instead on insights and pragmatic actions, we have seen impressive results.

34

In the second month, the industrial distributor developed simple, practical campaigns to

address the opportunities. To sell extra products, for example, price points were set and

sales pitches, processes, and training prepared. The final month was used for building buy-

in, training, implementation, and support.

A key success factor in the final month was the formation of a small central team to track the

program’s progress and adjust course where necessary. This included measuring the impact

of price changes on margin and volume and refining some of the changes. Overall, the program drove an annualized EBIT improvement of ~$25MM on a sales base of approximately $2.5BN – a true set of quick wins.

Exhibit 3: An illustration of how differences in price sensitivity between product categories and customer segments can be used to identify pricing opportunities

Insight:resellers have highsensitivity to priceof piping

Action:price down if competitiveposition allows

Insight:resellers have lowsensitivity to price ofmeasuring instruments

Action:price up if competitiveposition allows

Piping

Category 2

Category 3

Category 4

Category 5

Category 6

Category 7

Category 8

Category 9

Category 10

Category 11

Category 12

Category 13

Category 15

MeasuringInstruments

Res

elle

rs

Ind

ust

rial

use

r

Seg

men

t 3

Seg

men

t 4

Seg

men

t 5

Seg

men

t 6

Seg

men

t 7

Seg

men

t 8

Higher-price sensitivity

Key

Lower-price sensitivity

PRODUCT CATEGORIES

CUSTOMER SEGMENTS

35

Myth 5:PRICE INCREASES ABOVE INDUSTRY INFLATION ARE LIKELY TO FAIL

Reality:ABOVE-INFLATION PRICE RISES REQUIRE CAREFUL ORCHESTRATION OF PRODUCT PRICING, SALES EXECUTION, AND CUSTOMER COMMUNICATION

Many companies are wary of increasing their prices above industry inflation levels, often because of past failures in trying to do so. Customers always resist price rises

and, without the justification of inflation, they often refuse the increase or take their business

elsewhere. Moreover, some contracts stipulate the use of industry inflation metrics to

regulate price changes. But what if a company’s products are underpriced to begin with or

its costs have surged due to the expense of providing value-added services?

The truth is that above-inflation price rises are indeed likely to fail unless they are implemented

deftly. Consider the food service company whose costs of serving customers rose above

inflation. In response, executives implemented several rounds of across-the-board price hikes in quick succession, all of which failed to stick. Then the company tried a different approach.

Firstly, it placed a four-month moratorium on price increases to build back customer trust.

Next, instead of implementing a “blanket” price hike, it tailored increases to individual

products based on their inflation, price sensitivity, and competitive environment. Crucially,

when putting those price increases into effect, salespeople avoided “going in high” and

negotiating down: instead they communicated the target increases with clear justification

for why they were necessary, which strengthened client trust. And lastly, executives closely

managed the performance of the sales force in landing the increases. This allowed them to

implement a price rise that was on average 2% above inflation, all during a recession.

While impressive, such results are not unique. Indeed, we have seen other businesses take this approach in different industries to achieve increases 3% or more above inflation.

36

CONCLUSION

In all these situations, cutting through complexity and myth to improve a company’s pricing

capabilities proved to be more achievable than one might think. Many companies, for

instance, already have the data they need to move away from cost-plus pricing or to start

tracking competitor prices. To be sure, developing the capabilities to use that data is not

trivial, but we have seen companies succeed and reap the rewards. Such businesses often

have several things in common:

• Centralized capabilities that regularly analyze internal and external information to

understand customer, market, and product trends

• Robust processes and easy-to-use decision support tools to turn insights into clear

guidance for the sales force

• Leadership from the top, with senior executives emphasizing the importance of the

program, and frequently communicating successes and new learnings.

For these types of companies, there’s no time to rely on myths; they’re too busy maximizing

their profits and outpacing their competitors.

So, is it time to ask yourself what myths might be holding back your

company’s profitability?

We thought we were doing all we could to close the margin gap but we barely moved the needle.

When we finally got our pricing quick win program right, I was amazed by how much we got and how quickly it came.

– REGIONAL SALES HEAD, $BN US DISTRIBUTOR

You are a senior executive at a major distributor running a P&L. For the past couple of

quarters, results have been worse than expected – and now you need cash, fast. But the

problem is that you’ve already picked the low hanging fruit and your sales force and product

and ops teams are tired of hearing leadership ask for yet another push. So what now?

We have often found that, even after executives have employed many of the classic tactics,

such as tightening expenses, pressing vendors for cost reductions, and even broad price

increases, it is still possible to generate substantial value within weeks through a “quick

win” program that takes a more rigorous, fact-based view of the business.

Two recent examples provide a good illustration. In the first case, an environmental services

business generated $40MM of margin (1.4% of revenue) within six months by carefully

analyzing unprofitable customers, then pricing up those who were unlikely to be price-

sensitive. In the second, a food service distributor improved its bottom line by $25MM

(1.6% of COGS) within eight months by setting up a robust vendor negotiation program,

based on more actionable analytics.

But achieving such impact so quickly is far easier said than done. There is a lot of appropriate

skepticism around many so-called quick win programs. How, then, to successfully capture

the promised quick wins and to avoid slipping back after the initial push?

GETTING “QUICK WINS” TO WORK DRIVING LASTING MARGIN IMPROVEMENT IN 90 DAYS OR LESS

39

PRICING AND CONTRACT TERMS Cut the negative contribution tail of customers and products

Raise prices on customers that are underpriced versus peers

Raise prices on specialty and niche products with a differentiated proposition

Raise prices where cost increases have not been sufficiently passed through

Reduce prices in return for new volume or share growth deals with large customers

Introduce specific service fees

Tighten contract term compliance, and follow up on missed charges

Deploy a series of targeted discounts or promotions.

SALES Share weekly sales force performance vs peers and hard wire incentives

Give the sales force prioritized prospect lists

Identify and proactively follow up on missed customer orders

Reassign accounts across sales reps to focus on areas of opportunity

Support sales reps with information on “next product to sell”

Systematically call customers with good news (e.g., price reductions) to prompt orders.

COST Identify suppliers with limited market power and push to reduce costs

Address “high cost to serve” customers where the costs are not driven by customer needs

Renegotiate supplier costs on non-critical items

Track and promptly capture the benefits of suppliers’ cost reductions

Select partner suppliers and offer them increased spend in exchange for better deals

Conduct cost deep dives on top product categories – understand cost drivers and identify savings

Renegotiate central contracts on GNFR (goods not for resale).

QUICK WIN CHECKLIST

CREATING LASTING MARGIN IMPROVEMENT

Most successful quick win programs do three things well:

1. Drill the data and do the math

2. Make execution really simple

3. Create an effective feedback loop

1. DRILL THE DATA AND DO THE MATH

Companies often see a range of possibilities for quick wins, but thoughtful analysis will

highlight the most impactful ones. This is important to both build conviction in the business

and avoid wasted efforts. Identifying the best opportunities relies on two capabilities. The

first is the technical ability to rapidly access and join up enterprise-wide data, often from

multiple unconnected systems. The second is the experienced analytical expertise to

“do the math” and find the high impact actions. Without either of these, companies could

easily misdiagnose or miss the most lucrative opportunities – or worse still, fail to convince

leadership that an opportunity exists.

In many cases, companies have all the necessary data somewhere in the systems but often

give up too quickly because they are stumped by technical challenges and can’t see a ready

way to the insight they need.

Take our environmental services example. The necessary data was stored across three DOS-

based legacy systems and more than 100 separate databases. The IT function had quoted

three years (and a substantial investment) to bring this information together. A different

approach, with a focused technical SWAT team, yielded actionable analysis within six weeks

and the first bottom line impacts within three months.

With the key data assembled, companies need experienced analytical resource with relevant

expertise that can cut through the mass of data and complexity, and drive out the most

actionable insights.

Consider a chemical distributor, with antiquated legacy systems, where the only insight

into customer orders was gleaned by the small number of committed sales reps prepared

to spend hours examining dot-matrix-style printouts of transactions. By importing the

right statistical expertise from a different distribution sector, the company was able to

systematically identify missed order opportunities across thousands of customers within

four weeks. Within eight weeks it deployed a desktop tool allowing reps to access this

insight easily and automatically, turning a quick win into a sustainable upside.

“We’ve sat on the opportunity for years because we’ve never had the analytics to validate and act on it.”

– PRESIDENT OF CONTRACT SALES $BN US DISTRIBUTOR

41

2. MAKE EXECUTION REALLY SIMPLE

Companies often struggle with keeping quick win programs impactful yet simple

to execute. We have seen numerous quick win programs abandoned because

the execution complexity overwhelmed a busy sales force, operations team, or

purchasing team. Our experience is that managers often think they have kept it

simple to execute, but they haven’t fully engaged those who actually have to

make it happen.

Take the example of a large US distribution company that conducted an extensive

customer peer-pricing analysis to identify opportunities to price up specific

customers. With the opportunities in hand, managers mistakenly assumed that all

they had to do was to put that information into the hands of their empowered sales

force. However, few reps took any action and the initiative stalled.

The problem was that the execution process for the sales reps was far too complex.

In order to push any changes through, reps were required to use multiple IT systems

and make several judgment calls on prices. Additionally, little time had been spent

engaging them in either the rationale or logic behind the analysis, or the process for

turning the analysis into actionable price changes. Not surprisingly, few reps “bought

in” and little changed.

To address this issue, the company quickly redesigned and built an execution process

that was much simpler for reps: all they had to do was hit a button to approve or reject

a suggested price increase and a central pricing team would handle the rest. To build

buy-in, the company also conducted a rapid series of road shows building confidence

around the quality of the opportunities and simplicity of execution. The result: a

$25MM improvement in margin run rate (0.5% of sales) in just four months.

“Our first attempt stalled because what looked like a simple price execution process to us was in reality fairly cumbersome for sales reps.”

– CFO OF A $BN FOOD DISTRIBUTOR

3. CREATE AN EFFECTIVE FEEDBACK LOOP

Few companies make an adequate effort to track the impact of a quick-win initiative

and understand what is working, and what isn’t. Yet a thoughtful and accurate feedback

loop can often add 50–75% more value to the program.

Take the earlier example of the food service distributor that achieved a significant reduction

in COGS. A team of analytical experts used granular insight and analytics to identify savings

opportunities and set detailed cost reduction targets. Based on this, the company launched a

wave of supplier negotiations led by the buying group. Every negotiation had a clear “ask” and

the buyers were armed with analytical reports customized specifically to support each ask.

In parallel, the analytical team developed detailed tracking and reporting on the program.

This drove several benefits. Weekly reports on costs savings vs targets (across different

categories and buyers) allowed the executive team to actively manage the program “in

flight.” They could quickly see which buyers were delivering and which buyers needed help

(or an extra push).

A process to share weekly success stories and cost savings was put in place. Learning on what

was working was rapidly shared across buyers, building momentum and confidence in the

early stages of the program.

The company subsequently compiled a negotiation playbook for all buyers based on the

learning from the program. In parallel, it is automating the most powerful analytical

approaches to be available to buyers on their workbench at the push of a button.

Not only was the company able to actively manage and refine its quick win program by

tracking and monitoring the results, it was also able to use what it learned to build a

sustainable high-capability process.

CONCLUSION

The “data and the math” is often the most fundamental building block, and the toughest.

Many distribution businesses lack the technical ability to cut through messy IT systems, or

lack the experienced analysts who know just what to look for. But for those that manage to

navigate these challenges, the payoff can be real and fast.

The most successful quick win programs do more than just temporarily boost the

bottom line; often they serve to ignite and fund true performance transformations

– catalyzing sustained capability development and organizational momentum over

several years.

An effective feedback loop can often add 50–75% more value.

43

I know there is a better way to do it, and I know that pricing can be the biggest thing we do this year to drive profits, but I’m not sure where to begin.

– PRESIDENT OF A $2BN DISTRIBUTOR

You may be in a similar situation: you may have experimented or trialed different ways of pricing; you may be unsure if you are using the right tools; you may be asking if you have a team with the right capabilities to win.

Adding to the uncertainty:

• Opinions in your business may be running strong about what has worked in the past or apparent lessons from other industries.

• You may be cautious about importing ideas from consumer sectors as pricing in those businesses has few similarities to a complex business-to-business (B2B) distributor.

• As your sales mix shifts to more services and solutions, you realize that your approach to pricing products has limited relevance to your new offerings.

• You may also be considering a software solution that will “solve your problems,” but worry that it’s going to be a “black box” that you have little visibility or control over.

This paper summarizes the best approaches that we have seen distribution companies use to improve pricing, and outlines a basic methodology which we have seen work successfully many times. The key? Firstly, developing a robust understanding of the powerful and practical science behind pricing, specifically: your cost dynamics, price sensitivity and local market competitiveness. Secondly, engaging the business – particularly the sales force – in the solution. Thirdly, building pricing competence at the corporate center, including better processes and decision support tools to sustain the benefits.

The focus of the paper is on the mass of mid-size customers that can make up 50–80%+ of distribution businesses, not the “national accounts” or “strategic partnerships” which, due to their importance, are always carefully negotiated one-offs.

MAKING SCIENTIFIC PRICING ACTUALLY DELIVER 3 CAPABILITIES, 3 ENABLERS, 3 POINTS OF MARGIN

45

Exhibit 1: In this distributor, 80% of lapsed customers cited price as the main reason for their departure

Other9%

Missing items2%

Minimumorder quantity

4.5%

Poor relationship4.5%

Price80%

REASONS FOR SWITCHING FOOD SERVICE WHOLESALER (SURVEY)

Key pricing hassles identified by customers:

• Price variation over time

• Poor perception of value for money

• Poor headline prices

• Rebate errors.

WHY PRICING IS WORTH THE EFFORT: COMPLEXITY = OPPORTUNITY

Distribution businesses are extremely difficult to price well because they combine

high degrees of complexity (thousands of products, many sites, many markets with

different competitors, thousands of customers) with the structural challenge of a

distributed sales force with differing pricing beliefs and capabilities, complex terms

and conditions, and customer-specific propositions.

Yet getting pricing right is critical: Exhibit 1 shows that, in a typical distribution business,

pricing is cited by up to 80% of customers as the reason they switched suppliers.

After working with many distributors in recent years, we have learned something

about cutting through this complexity to craft a practical pricing regime that works.

It is based on simple principles, keeps only the required complexity contained in the

center of the organization, and actually makes the sales force’s life easier.

In addition, it enables a critical role for senior business leadership to be able to steer

pricing in a genuinely strategic way – either to take share without sacrificing margin,

or to take margin without losing overall share and competitiveness.

In a typical distribution business, pricing is cited by up to 80% of customers as the reason they switched suppliers.

46

POWERFUL YET PRACTICAL PRICING SCIENCE

The distribution companies with the best pricing outcomes are those that have a clear plan

for shareholder value growth.

They have selected a specific trade-off of margin growth vs revenue growth, and they are are

thoughtfully driving the business via a targeted mix of the elements below:

• New customer acquisition: attracting and retaining more valuable customers, and

increasing share in the most attractive customer segments

• Growing share of customer spend: proactively cross-selling the right incremental

products and services

• Mix management: improving the mix of products and services sold, and up-selling to

increase margins, particularly for low profitability customers

• Cutting churn: rewarding valuable, loyal customers and retaining their business

• Cutting unnecessary price giveaways: getting product prices right, and reducing margin

leakage by the sales force

• Reducing cost to serve: encouraging “win-wins” using rebates or fees to incentivize customers

into lower cost-to-serve behaviors such as online ordering, alternative delivery slots, etc.

There are three key required capabilities to develop before you can set the right targets and

manage your sales force to achieve them.

1. A SOLID UNDERSTANDING OF COST DYNAMICS AND PROFITABILITY

This doesn’t mean cost-plus pricing. Instead, it means having a detailed knowledge of all

cost-to-serve components and dynamics, across all of the services and products you offer,

and where you are really making money at a customer, product, and vendor level.

This is the true foundation on which all pricing improvements stand. Data for this analysis

usually exists, but is not always well used and understood.

The distribution companies with the best pricing outcomes are those that have a clear plan for shareholder value growth.

47

2. AN EMPIRICAL UNDERSTANDING OF PRICE SENSITIVITY

This is about how customers will respond to changes in price vs competitors in the market

for specific products. Products, for instance, are never uniformly price sensitive. Customer

responses typically vary in predictable ways according to factors such as overall item value,

purchase frequency, degree of “commodity vs specialty,” market share, and local competition

(Exhibit 2). Getting these factors right and pricing with as much specificity as possible in each

customer-product-local market situation is the key. Real-time pricing experiments are the

the best way to quantify price sensitivity, but a great deal can be achieved with good data,

thoughtful models, and experience.

3. ROBUST TRACKING OF COMPETITIVE PRICES

In B2B businesses, because much pricing is negotiated and “private,” competitive information

feels hard to get. Yet we have found that much more data is already readily available than you

might expect. Sources include capture by the sales force (e.g., in “meet or beat” bid processes),

published prices (particularly online catalogs), and competitor cost analysis.

Exhibit 2: Price sensitivity is not uniform... products can vary up to 10x in their sensitivity to price depending on which customers are buying them and in which markets you compete. This figure shows an example from chemical distribution

• Industry 1

• Industry 2

• Los Angeles

• City 2

• City 3

• City 4

• City 5

• Chemical 1

• Caustic Soda

• Chemical 3

CUSTOMER INDUSTRYMARKETPRODUCT

MOST PRICE SENSITIVE

LEAST PRICE SENSITIVE

• Chemical 4

• Chemical 5

• Industry 3

• Consumer

• Products

Distributors with these three foundational capabilities are then in a powerful position to steer

the business to better pricing outcomes. For example, low price sensitivity products, where

margins are low and prices are below competition, are obvious candidates for price increases.

48

ENGAGE THE BUSINESS, PARTICULARLY THE SALES FORCE

Too often we have seen pricing initiatives and tools created at HQ and “thrown over the fence” for

product or sales managers to implement. Unsurprisingly, the typical result is a high degree of

skepticism from the field, low usage of tools, and limited if any impact.

How then to avoid this all too typical outcome? In our experience there are four key elements.

Firstly, position the program as being about “decision support” not “decision control.” The

role of HQ is to enable each sales professional with pricing intelligence from hundreds of

similar customer-product pricing outcomes, distilled into a simple target price range for

that unique situation, alongside a select number of other key insights. It is then the job of the

empowered sales professional to achieve the best pricing outcome they can, as they and only

they are in discussion with that customer in that individual competitive context.

Secondly, share ownership of the journey. Fully engage senior sales leaders early on in program

objectives and approach. Start with how the field are trying to do their jobs today, listen hard

to their requirements and frustrations, and actively design the new processes around how they

need to work. In our experience, the most successful programs adopt a “by the field, for the field”

mind-set in which a truly representative group of sales colleagues are deeply involved in process

and tool design.

Thirdly, adopt an agile development approach. Once the science is cracked, get the first version

of processes and tools designed and working in weeks, not months or years. Try them out with

the field. Iterate and improve on a weekly cycle, and get a full local pilot up and running a few

weeks later. This enables much greater and faster learning, as well as hugely improved time to

value compared to a traditional development process with many months to collect requirements

and then many more months to design, develop, and test remote from the field, before then

releasing something that typically disappoints. The other key benefit of an agile approach is that

the field are actively engaged, feel listened to, and foster a strong sense of ownership.

Finally, get some visible quick wins early. Stories of successful pilots and first waves of re-

pricing should be shared broadly in the organization. Sales colleagues who are achieving

stronger sales, better margins, and greater incentive payments will tell other colleagues

who are not part of the pilot. Word spreads and excitement builds. At this point, the change

process becomes straightforward as the new processes and tools are literally “pulled” by

other sales colleagues who want to adopt the new approach and share in the success.

49

MAKE IT SUSTAINABLE: PRICING ORGANIZATION, PROCESSES, TOOLS, AND INCENTIVES

Getting the foundations built to support a robust pricing approach and engaging the

business is only half the battle because pricing effectiveness is not a one-time fix.

Distributors with the strongest pricing outcomes build sustainable capabilities to

maintain pricing advantage versus competitors.

ORGANIZATION

Because many businesses lack a competency center for pricing, a common question

is, “What should our pricing team look like?” Best-in-class pricing is a difficult,

technical, and quantitative capability that requires real expertise. The job of the

pricing team is to own the science and tools, and to champion the processes and

disciplines behind them. (See Exhibit 3.) A very rough rule of thumb in complex

distribution businesses is that each $250MM of annual revenue requires an additional

full-time equivalent specialist in the pricing team. The pricing leader needs to have

senior status in the organization – comparable with any functional director or the SVP

of sales – because he or she will have critical influence over business performance.

Exhibit 3: Example structure and roles within a pricing team

Specifies, manages, and develops pricing systems and tools

Often a mix of pricing specialists and IT experts

Maintains core pricing and commercial data sets

Provides ongoing reporting of market intelligence, pricing activities, and outcomes

Understands and develops pricing intellectual capital

Informs pricing strategy

Performs ad hoc analysis to crackpricing questions as they arise

Drives pricing best practice through the organization

First line of support for queries

FIELD SUPPORT PRICING ANALYTICSDATA REPORTING

AND INTEGRITYTOOL AND PROCESS

MANAGEMENT

Senior leader and champion of pricing best practice

PRICING LEADER

Distributors with the strongest pricing outcomes build sustainable capabilities to maintain pricing advantage versus competitors.

50

PROCESS AND TOOLS

The market for B2B pricing software remains fragmented with no accepted standard. In our

experience, the tools that deliver the greatest value to the bottom line and fastest time to

impact have been those with “agile” builds that were driven in-house or by selected third

parties in close collaboration with pricing decision makers. (See Exhibit 4 for alternative

approaches to pricing tools.)

There are several reasons why this approach seems to yield the best results. The main

learning is that such agile builds – designed around the unique characteristics of the

business and how the field need to work – can be powerfully energizing for the sales force.

When compared to a lengthy configuration of off-the-shelf pricing software with already

designed-in processes, the difference is stark. As one sales leader recently told us of an agile

build, “It saved me time, helped me win more business at better prices, and made me more

money. What is there not to like about that?”

A final critical learning is that, in distribution businesses especially, pricing logic should

be kept outside the ERP. We have seen too many distributors desperately frustrated either

because the legacy ERP cannot support the new pricing model or, worse, many tens of

millions of dollars were overspent on a new ERP implementation because of unnecessarily

complex pricing logic built into their ERP where it does not belong.

INCENTIVES

Finally, distributors need to appropriately align sales incentive plans (SIPs) with pricing

as well as sales objectives. Schemes with a low variable component and those that enable

incentives to be earned several years after the original sale was made typically do little to

drive focused growth. Similarly, SIPs that rely on sales colleagues having full visibility of

gross margins tend to drive cost-plus pricing behavior at relatively uniform margin rates,

as sales professionals always want to make the sale and typically have in mind a particular

“minimum acceptable” margin percentage that they can drop to.

In contrast, SIPs with a significant variable component linked to differentiated pricing

targets or “deal scores” can be very effective at driving both sales and appropriate pricing

behavior. However, there is never a single right answer to incentives. Typically SIPs evolve

over time as both business objectives and the ability to report frequently on specific sales

and pricing metrics evolve.

Agile builds can be powerfully energizing for the sales force.

51

Exhibit 4: Alternative approaches to pricing tools. Quite different approaches and outcomes that are often not well understood

TRADITIONAL PRICING

SOFTWARECONFIGURE

PRICE QUOTE

BUILD: IN-HOUSE

IT APPROACH

BUILD: AGILE

APPROACH

BUSINESS OBJECTIVE End-to-end price management

Complex offer price control

Control our own destiny

High impact decision

intelligence fast

Pricing intelligence

How smart are the prices? Do they drive margin/volume impact?

Addressed separately

Addressed separately

Process simplification

Is the solution user-friendly? Does it improve the speed of quoting?

Business customization

Is the solution customizable for specific needs of your sales force and customers?

Development time

How long does the solution take to develop?

Cost Medium Low High Medium

Bottom line

Intelligence varies by vendor,

significant configuration of

“pre-wired” process

Fast to implement,

lower cost, but limited value

beyond point of sale “control”

Highly customizable,

long time to uncertain value

Highly customizable,

high value, fast time to value

52

CONCLUSION

Making scientific pricing actually deliver in distribution businesses is a high-value but tough

problem because of the sheer product, customer and local complexity, and the need to

deliver in a simple sustainable way through a field sales force.

There is a tried-and-tested way of getting the value out with three components:

1. Figuring out the right answer using powerful yet practical pricing science: true cost

dynamics, empirical price sensitivity, and local market competitiveness

2. Engaging with the business, particularly the sales force, in designing the solution

3. Putting the right organization, tools, and processes behind the science to sustain

the solution.

Pricing remains one of the most valuable and fastest-to-impact levers for most distribution

businesses. With typically up to three percentage points of profit and five points of sales

growth available, it is definitely a hill where the view is worth the climb.

We have put a huge amount of investment into technology and enablers for the sales force, yet the sales productivity number is the same now as it was ten years ago.

– CEO $BN DISTRIBUTOR

In our recent interviews with 25 CEOs of billion-dollar distributors, we’ve heard a consistent

theme: that sales force effectiveness is one of their highest priority issues, and that they are

frustrated. Many have made substantial investments in a broad range of sales enablers such

as sales force automation platforms, solution selling, challenger training, or in some cases

large-scale ERP replatforming programs.

Yet an inconvenient truth remains: few companies have managed to ignite a profitable

sales growth engine. Indeed many CEOs tell us that their sales productivity metrics have

remained largely unchanged for years. Further, now more than ever, they see the need for

real improvement to offset slow market growth and to out-sell their competitors, including

new online players.

In this paper, we talk about what’s behind this frustration and what to do about it. We’ll

focus in our examples on the mass of mid-size customers that can make up 50–80%+ of

a distributor’s revenue since it is in that part of the business that this challenge is most

acute. However, many of the same principles also apply to larger “national accounts” or

“strategic partnerships.”

THE SALES FORCE EFFECTIVENESS PARADOX WHY SALES FORCES STILL PRODUCE 80% OF THEIR VALUE FROM 20% OF THEIR ACTIVITIES

55

SO WHAT’S GOING ON?

For the most part, our experience suggests that many companies have been trying to solve the

wrong problem. Or, more fairly put, they’ve been solving useful problems but missing three

core underlying issues.

Firstly, individual field sales professionals are still largely in control of where they spend

their time. Despite all manner of attention on detailed tracking of pipeline opportunities,

customer rostering, territory assignments, selling process review, etc., the day-to-day reality

is that it is still often largely up to the individual rep to decide how much time he or she should

spend selling and servicing each customer and which opportunities to pursue.

Of course it often may not feel like such an active choice. In any week, sales professionals are

often “on the run” between a few demanding customers, a set of opportunities that need

urgent attention, and the need to navigate a maze of internal admin as they try to get their

customers the quote, the service, or the product that they need. On a good day, they’ll call on

one or two prospective customers but typically with insufficient preparation or insight because

of everything else they are trying to manage. The result is a picture like Exhibit 1.

The second issue is that sales professionals often may not know where the greatest

opportunities lie. While some may have good intuition, this can often be overshadowed by

“easy sale” behavior. Consider a waste industry example. Most sales professionals understand

that restaurants serving Asian food are low profit customers for waste companies.

Costs are heavily driven by disposal weight, and so customers like Asian restaurants that regularly

fill the container with large quantities of heavy wet waste are structurally low margin. Yet despite

such sales force intuition, a huge amount of sales force time is nonetheless spent on these

restaurants. Why? Because restaurants are easy to find, their owners are easy to access, and

restaurants are almost always ready to sign up to a new deal as long as it saves them money.

When you do the math to understand the true lifetime value of acquiring an average Asian

restaurant vs another group like real estate operators, you see a huge difference: close to 8x

in lifetime value per sale. (See Exhibit 2.) Some 2–3 percentage points of operating margin

improvement are often available from “out-mixing” competitors – focusing the sales force on

the best highest lifetime value customers – if you are one of the first to act on such insight.

This approach is commonplace in many financial services sectors, for instance, yet we find few

distribution companies have yet done the work to understand what makes one customer type

more valuable than another over a multi-year period.

Compounding this is an issue that many sales leaders come across: what’s in the sales automation

system is rarely a good reflection of all the opportunities out there. At best such systems tend to

capture only around 80% of the opportunities, often several weeks out of date, with opportunities

themselves mostly self-reported by the sales team with only partial data. This makes it even harder

to optimize a sales force system inadvertently focused on selling average- to low-value business.

56

The third issue is that the nature of sales is changing, fast. Already nearly 60% of new

B2B purchases are first researched by customers online before they make contact with a

company, and 90% of younger (under the age of 35) procurement buyers now make B2B

purchases online. [See Amazon in Wholesale Distribution.]

Customers want fewer visits than ever before – and very often fewer visits than the

sales force thinks they need. Rather many customers increasingly want to interact with

distributors in an “omni-channel” way: selecting the phone, website, tablet app, web chat,

or in-person interaction that best suits who they are, where they are, and what they are

trying to get done.

When they do show up, sales professionals are expected to understand the customer’s

business, to bring real incremental value and expertise, and to be armed with data and

insight on all of that customer’s interactions with their business.

TIME FOR A CHANGE

So what’s required to break through this paradox? We’ve seen a small number of companies

unlock sales productivity improvements equivalent to ten points of market share and three

points of margin improvement by taking a more disciplined, six-step approach: using

powerful analytical insights to reshape day-to-day activities as well as long-term capabilities.

Exhibit 1: Sales force time allocation example

50%

75%

25%

Tota

l tim

e

Trav

el

Oth

er

Ad

min

istr

atio

n

Cu

stom

er

Pri

cin

g

Pla

nn

ing

Face

-to-

face

tim

e

Selli

ng

tim

efa

ce-t

o-fa

ce

Pro

spec

tin

g

Trai

nin

gcu

stom

ers

Rel

atio

nsh

ipb

uild

ing

In this distributor, less than 13% of total time was spent in face-to-face selling

NON-SELLING SELLING

100%

0%

Already nearly 60% of new B2B purchases are first researched by customers online before they make contact with a company.

57

1. FIGURE OUT WHAT YOUR SALES FORCE ACTUALLY DOES AND FREE UP SELLING TIME

Build the picture of how your sales force spends its time in an average week or month. While the most accurate answers will come from asking sales professionals to keep diaries, downloading Outlook calendars and the like, you can get to a first high-level answer in a week or so through a simple survey of a sample of the sales force or managers.

The chances are that you’ll find a large amount of time dedicated to “admin” and non-sales activities (Exhibit 1). Be ready for this and ask your sales force in advance to categorize the most common causes (e.g., pricing process, chasing approvals, research for customer, etc.). This will give you a better sense of what you need to do to drive up effective selling time. In one example, we saw a huge amount of sales force time consumed by customer service. In another example, we found that some sales reps spent close to a third of their time travelling to and from

customers, because accounts had been allocated without giving full consideration to travel time.

If you have already invested in a sales force automation system like salesforce.com or CRM

Dynamics, then this type of analysis should be easy in theory. However, you may find low or at best

patchy adoption of the tools across sales professionals (40 percent or less in many cases). See step 4.

Exhibit 2: Example drivers of customer lifetime value in commercial waste hauling

ACQUISITION PRICE SENSITIVITY

RETENTION PRICE SENSITIVITY QUIT RATE

SALES/MARGIN (ANNUAL)

LIFETIME VALUE

Agriculture Forestry/Mining

... ... ... ... ...

Construction & Basic Manuf.Heavy ManufacturingTransport Courier and UtilitiesWholesale – Durable GoodsWholesale – OtherWholesale – FoodConsumer RetailRestaurants – Asian

2.4 1.3 6.8% $260/25 $1,650Restaurants – Fast Food and Coffee

Restaurants – Pizza Subs BBQRestaurants – Steakhouse DinnersDrinking Places

3x 1x 2x 2–5x 8xFinancial Institutions and Prof. Svc.Entertainment ServicesHotels and Motels

Automotive – DealersAutomotive – Services

0.8 1.4 3.0% $560/120 $11,700Real Estate – OperatorsHealth Facilities and Health Related

... ... ... ... ...

Social ServicesEducation ServicesResidential and Membership Org.Government Inst. and OtherWood and Pulp ProductsPrinting and PublishingManufacturing – Chemical

58

2. DO THE MATH AND ALIGN SALES FOCUS AGAINST CUSTOMER POTENTIAL

This is in some ways the most important diagnostic step and one that you will want to

repeat on a regular basis. The first analyses you will want to see are those highlighted in

Exhibits 1 and 2. Figuring out lifetime value with properly allocated route and handling

costs, churn and acquisition, etc. is of course not simple. Indeed, we’ve heard some

CIOs argue that such analysis will take three years and a new ERP system to deliver. Our

experience is that most of the data you will need will exist in your business somewhere, and

that if you task the right highly capable individuals with the challenge, a good first cut is

possible in as little as 2–4 weeks.

If you then bring the picture of customer potential together with the view of how the

sales force is deployed, you can create a picture like that in Exhibit 3, which immediately

highlights first order opportunities to better match sales capacity against customer value

and potential.

When you’re ready to go further, it’s time to take a long hard look at your productivity

gradients through two lenses: customer and sales person.

A helpful way to think about the customer angle is to separate out the three core drivers:

customer acquisition rate, customer sales and margin growth, and customer retention and

churn. You will find huge variation in each, particularly if you then slice by market. Together

these graphs will reveal the structural potency of your proposition to each customer

segment and market. In places where you have a strong proposition and sales pitch, you will

be winning customers, growing share, and seeing low churn. In other places, you will see

unexpectedly high churn and low acquisition – reflecting stronger competition and perhaps

that what you are selling is overpriced.

A whole host of “to dos” will flow from this analysis. However, from a selling perspective, the

immediate imperative will be to focus more sales time on those customers and markets with

highest lifetime value, where you have proven you can win and retain business, and where

there is still significant share left to take. Then taking a hard look at individual sales person

productivity – now with the ability to control for customer mix – will tell you who is most

capable of driving sales harder, and who needs help or attention.

59

3. DO THE HOMEWORK ON HOW CUSTOMERS WANT TO BUY AND BE SERVED

Understanding how your customers want to be served is an important piece of information

that is often overlooked. Getting it right can help increase sales by making your customers

happier and at the same time reduce costs by focusing your resources more effectively.

In the short term, there’s a key piece of understanding you will want around how often your

customers want to see a sales person and how much they would prefer to do by phone,

or with your existing online offer. It’s not unusual to discover that your field sales force is

spending double the time physically calling on customers vs what customers want. If so,

that’s not a bad thing. In theory your sales productivity just doubled. Of course, in practice,

such responses may reflect the limited value your sales force is seen as bringing.

In the medium term, the chances are that a fundamental re-imagining and re-engineering

of your whole customer engagement model – including the role of the sales force – will

be required. We’ll address this topic more fully in a forthcoming paper. Start to build the

knowledge you need for that exercise now: at the same time as you ask customers how they

would like to be served (as they think about your business), ask them what their ideal future

vendor partner would do, and test out a few of your leading hypotheses.

Exhibit 3: Allocation of sales capacity against opportunity

0.3

0.2

0.1

0.4

0.5

0.6

0.0

0.7

CUMULATIVE OPPORTUNITY ($MM)

0 10 20 30 40 50 60 70 80

REPS FOR EVERY $MM

Overcovered: reduce resources

Undercovered: increase resources

Some territories are overcovered, some undercovered

60

4. GIVE SALES PROFESSIONALS TOOLS AND PROCESSES THEY LOVE

All too often with sales tools and processes, we see frustration. In the center, sales leaders get

frustrated because they put huge effort into new systems, processes, and reporting, only to

see rejection and low adoption from the field. “It’s all there, if only they would actually use it,”

is a common refrain. Meanwhile, in the field, one hears a different story: one of complexity, of

the sales force not being able to find what they need fast, of new tools and processes taking

so long that they are not worth using, and of low confidence in the validity of any new sets of

numbers and reports.

Why does this happen so often? A lot traces back to two causes. First is a lack of meaningful

engagement of the field when new approaches are developed: “It often feels like another

report or process got thrown over the wall at us.” Second is broad adoption of off-the-

shelf software tools with “vanilla” capabilities that are not built around what the sales

force wants and needs. Thus sales professionals default to doing what they know and

personally find most productive, resulting in as many different ways of working as there are

sales professionals.

There is a better way. It is rooted in a “by the field, for the field” methodology and an

agile approach to tool development. This mind-set can deliver powerful bespoke tools

and processes in a matter of weeks. On the tool side, it focuses on providing just the

right insights and information to the sales person, and no more, tailored to how the field

wants and needs to work. Like Apple products, the aim is for the tools to be so simple that

there is no need for a manual. Importantly the approach is focused on decision support:

empowering the sales professional with real insight, but recognizing that only he or she

knows the customer and can make the final judgment call.

See Exhibit 4 for an example of a tool developed in this way to provide the highest priority

sales leads and issues each week for a sales professional to review.

When you get this right, the “pitch” to the field is thus both simple and powerful: “Here’s a

new way of working, designed by experienced fellow sales professionals, that will save you

time and make you more successful.” That’s pretty hard to argue with.

61

Exhibit 4: Example sales opportunity prioritization tool

Monday morning dashboard provides simple, intuitive, and actionable insight on the most valuable opportunities. The tool uses sophisticated algorithms to supplement sales reps’ judgment and helps them determine which customers to call and visit that week.

62

5. ATTACK ONLY THE MOST IMPACTFUL CAPABILITY CHALLENGES

We often encounter one of two legacy situations. In the first, distributors have signed up to

one or more “cookie cutter” or “fashionable” sales approaches over several years leading to

a disjointed overall sales process, out of step with what really matters and will drive value. In

the second, distributors have conducted some form of sales diagnostic and then come away

with a long “laundry list” of areas to address – effectively taking an “everything is broken and

everything needs to be fixed” approach.

The most successful players, we have found, take a hard look at the data on what is actually

going on in their business (steps 1–3) and then go after the highest-priority areas.

For instance, if you have not previously understood “true” customer lifetime value potential

and sales productivity, you will probably want to act on sales resource allocation and reshape

your field execution model. If you have properly understood market deal flow and concluded

you are not winning your fair share of contracts despite a competitive offer, you may want to act

on demand generation and drive upstream lead incubation.

Similarly, if you find huge gradients of sales professional productivity focused on the same types

of customer and product that aren’t obviously related to experience, it’s probably time to look

to sales force recruitment and incentives to revitalize your selling capability. The most important

point is to pick the few areas that will have the biggest impact for your organization and get

started in a focused way.

6. THINK BOLD, BE DIFFERENT, AND PROTECT IT

Those companies that truly break away don’t do it by putting the sales force through

the same training programs as everyone else or installing the same generic software

platforms. They break through by building a sustained advantage in typically two or more

of four areas: unique data, better insights, better ways of working, and stronger sales

professionals. (And often it is investment in the first three areas that attracts stronger sales

professionals who see tangible evidence of a company that is on a transformational journey

and backing the sales force.)

Better insights are always possible – and don’t require a big new technology investment

or platform. We have, for instance, never yet seen a distributor that is fully leveraging the

power of even its own internal data – whether order history, customer data, cost-to-serve

data, web event logs, etc. There are also increasingly powerful external data sources that

can drive valuable insights on markets and potential customers. The trick is to hone the

insights that you need and to bring them to bear at just the right moment to inform each

key commercial decision.

Similarly, develop your own ways of working “by the field, for the field.” If you don’t have

a center of excellence to support the field with insight and advice, build one. Encourage

experimentation and pilots. Expect a few (controlled and fast) failures on the way to even

greater successes. Above all, set high standards, clear targets, and a high “clock speed” for

execution and innovation.

64

CONCLUSION

Many distributors have put significant efforts into driving sales productivity with, at

best, limited returns. Our experience suggests this is often because individual field sales

professionals are still largely in control of where they spend their time, and lack immediately

actionable insights to enable them to be more productive. Moreover the nature of sales and

customer expectations is changing fast.

Profitably re-igniting the sales engine doesn’t need a large up-front cash investment. Nor

does it require addressing huge data or system complexity to get substantial benefits out in

the first phase. We have seen distributors drive dramatic top and bottom line improvements

by taking a disciplined approach to understanding the core productivity drivers: where

the sales force spends its time, where customer lifetime values are greatest and least, and

how customers want to be engaged. They then build processes and tools that the sales

force loves, attack only the most important organizational capability gaps, and act boldly in

building a unique capability that is not readily copied.

It’s real work for sure. But for a $2BN business, such approaches can drive $400MM+ in

incremental high-value sales over three years. That prize is worth attention.

Our GFR cost reduction program delivered a 23% increase in group profits in its first year by transforming the way we negotiate with our vendors. However, the really big savings have come since then by working with our largest vendors to take cost out. – CPO, $BN FOOD SERVICE BUSINESS

Distributors and wholesalers are in a brutal business. Many operate on thin net margins, typically

between 3% and 5%, with revenues under constant pressure. But some companies have been

figuring out how to thrive by driving down cost of goods sold (COGS) while at the same time

fostering critical vendor partnerships in such a demanding environment. What is their secret?

A large part of the answer comes from their ability to reduce costs by learning from two

industries renowned for their skills in purchasing: retail and manufacturing. By adopting

a pragmatic strategy that combines the best of both approaches, our experience is that

distributors and wholesalers can reap substantial value. Generally speaking, goods for

resale (GFR) can account for up to 80% or more of a distributor’s cost base. By using a more

sophisticated approach, our experience is that a typical distributor can achieve 7–10%

savings from GFR cost-reduction programs, potentially doubling net profits. (For distributors

that buy a significant proportion of commodity items, typical savings percentages are of

course lower, although the impact can still transform the bottom line.)

Top retailers have sophisticated negotiation approaches aimed at squeezing out the

best possible deals from their vendors. In contrast, leading manufacturers work hand

in hand with their vendors on the intricate task of finding new efficiency gains together.

Distributors often find themselves sitting in the middle, without the depth of capability

deployed by either retailers or manufacturers. They are often not organized for success,

with a good deal of purchasing happening locally – making it difficult to create valuable

insights and pool purchasing volumes. As a result, they leave considerable money on the

table. How, then, to combine the best of those two approaches in the unique sector that is

wholesale distribution?

PURCHASING COST REDUCTION WHAT DISTRIBUTORS CAN LEARN FROM LEADING RETAILERS AND MANUFACTURERS

67

A TALE OF TWO APPROACHES

That these two approaches could hardly be more different from each other makes their linkage

a challenge. Essentially, retail buying reflects a “trader” mentality, whereas manufacturer

purchasing requires an “engineering” mind-set.

In retail buying, the primary focus is on maximizing the difference between what consumers will

pay and what vendors will accept as payment for their products. Negotiations are thus typically

characterized by deal making that frequently involves aggressive, confrontational tactics.

Generally, retail buyers are reluctant to commit to multi-year deals with vendors, wanting the

flexibility to switch between brands. Indeed, this threat of de-listing is often used as a powerful

lever to increase bargaining power. While retailers often deploy sophisticated approaches, the

basic goal is to maximize negotiation leverage, and most retail buyers have little interest in what

goes on behind the scenes in the production facilities or supply chains of their vendors.

Manufacturer buying is completely different. When producing complex products, such as cars,

planes, or industrial equipment, it is essential to work closely with vendors, resulting in a mutual

dependency that both parties understand well and from which both parties benefit. Generally,

the relationships are characterized by an extremely high level of trust and detailed information

sharing. Both manufacturer and vendor constantly seek small, even tiny, improvements (for

example, shaving a millimeter off the thickness of a component) that will drive out cost and

achieve performance benefits for the overall system. As such, vendor relationships are true

partnerships, expected to last for many years and underpinned by multi-year contracts.

ACHIEVING THE BEST OF BOTH WORLDS

For distributors, achieving world-class purchasing on a par with leading retailers and

manufacturers can be a long, difficult journey. One challenge is that there isn’t a single unified

solution: distributors need to pragmatically deploy multiple approaches depending on their

product and vendor characteristics. Moreover, many distributors find that they need to rethink

what they are purchasing where, and how, in order to extract the full benefits. That makes getting

the money a substantial effort, unless you organize effectively.

Having observed various distributors attack the GFR challenge in recent years, we have captured

those tools that have proven to be the most effective, and codified them into a “Purchasing

Periodic Table” (Exhibit 1).

Note that the elements of the table are grouped into two major clusters. The first is aligned to the

retailer approach where the focus is “taking margin out of vendors:” picking the right vendors

and maximizing your negotiating position to get the best possible deals. The second cluster is

aligned to the manufacturer approach where the focus is “taking cost out of the system:” attacking

the larger part of the cost base that is the vendors’ costs, rather than just their margins, by

challenging and working on topics such as product specifications and manufacturing efficiency.

68

Exhibit 1: Purchasing Periodic Table. For the typical distributor, the most effective approaches we have seen start on the left and move to the right

Reduce total cost of ownership Rationalize requirements &

specifications

Redesign the system

TAKE MARGIN OUT OF VENDORS

Maximize negotiating effectiveness

TAKE COST OUT OF THE SYSTEM

Optimize supply base

Information superiority

Competitive tendering

Vendor consolidation

Middle-man removal/consolidation

Reverse cost engineering

Use vendorassets to reduce costs

Product design to cost

Change the organization’s boundaries

Vendoreconomic modeling Auctioning

New supplier introduction and development

Global/low-cost country sourcing

Complexity reduction

Vendor-led TCO innovation

Product standardization

Vendors’ business design innovation

Bargaining power analysis Target pricing

Strategic supply alliances, JVs, and partnerships

Grey market sourcing

Commodity cost management

Vendor-managed inventory

Product substitution

Next-generation technology

Procurement outsourcing

Volume commitments/ base loading

Dynamic/automated negotiation

Logistics optimization

Wastage reduction

End-user demand engineering

Vendor disaggregation

Vendor tiering and share management

BenchmarkingVendor metrics and incentives

Backwards integration

Buying for vendors

Minimizing transaction costs

Packaging elimination/reuse Network redesign

Competitor comparisons

Commodity price/FX management

Smart forecasting and planning

Contract compliance and auditing

Research and market intelligence

Risk and profit sharing

Vendor consortia buying

SKU/catalog rationalization

Transport mileage reduction

Client TCO reduction

69

70

For the typical distributor, the most effective approaches we have seen start on the left and

move to the right. In other words, first mastering the best of the negotiation techniques

used by top retailers. In other words, they first master the best of the negotiation techniques

used by top retailers. Then they introduce the “cost out” approaches used by leading

manufacturers, working with the selected partners to achieve cost savings beyond those

achievable just through a negotiation approach. Achieving the full potential of 7–10%

cost savings may take two to three years, but much can be achieved in as little as five to

six months.

A TWO-STAGE METHODOLOGY

1. REALIGN AND RESHAPE THE VENDOR BASE

The first step is to explain your growth strategy and describe how your company will be

reshaping its vendor base to focus on fewer partners. Tell vendors that the transition will

result in “big winners” and “big losers.” But before vendors can even be considered as

partners, you will be thoroughly reviewing the potential candidates.

To prepare for your negotiations with vendors, you will need to do some real analysis to

identify the opportunities for savings. You should look in detail at how vendors have been

performing and examine the competitiveness of their offerings. Consider, for example,

the evolution of their prices compared to changes in their input costs, their delivery

performance, their margins versus the competition, and so on.

You will need to describe to each vendor how it needs to realign its proposition to

your expectations. A vendor might, for instance, have to atone for overcharging and

underperformance in the past. You can emphasize that complying is necessary for moving to

the next stage. Of course, such discussions are difficult, but you can minimize any pushback

by anchoring your arguments on robust, fact-based analyses that vendors cannot dispute.

This analysis package is the critical foundation of a successful program (Exhibits 2 and 3).

Exhibit 2: Analytical insights. Category and product managers already have lots of data – what they need is the right insightful analysis, delivered in a way that is easy for them to use. For example:

Overall summary of vendor’s sales and margin by category

Comparison of vendor’s cost evolution vs their known input cost changes

Comparison of vendor’s sales and margin performance by brand vs. competitor brands

Exhibit 3: Negotiation planning and support . Example of Oliver Wyman tool that: i) enables and underpins a highly structured negotiation process and ii) auto-generates a wide range of compelling analyses to provide negotiating leverage at the touch of a button

2. Develop negotiation plans based on a summary of vendor performance

3. Build negotiation arguments based on detailed analysis of vendor performance

4. Produce disguised reports to use in the room with vendors

1. Develop category strategies based on category and brand performance

Category performance Materials used for the category strategy workshop; detailed performance by category

Negotiation plans A one-page summary of vendor- category performance with key negotiating points highlighted

Brand performance Brand-level data of vendor- category performance for developing negotiation plans

Vendor performance within category Full vendor-category performance detail for developing negotiation plans

Vendor performance across categories Brief overview of vendor performance across categories and across desks

Disguised charts and reports to share with vendors Potentially sharable charts with labels removed

71

CASE STUDY 1

BENEFITS OF ADOPTING A RIGOROUS, ANALYTICAL APPROACH TO VENDOR NEGOTIATIONS

The largest vendor of a $BN+ food service company had put through a series of price rises

and was pushing for more. The vendor argued that it was merely passing along some of its

costs from a rise in commodity prices (see Exhibit 4). However, a detailed analysis – taking

into account the actual cost changes for the ingredients in the correct proportions in the

ordered items – showed that the vendor’s costs had fallen by more than 10%, driven by a

19% fall in the cost of raw materials, offset by higher fuel prices and wages.

If the vendor’s prices had tracked input costs, the company’s costs would have been lower

by some $4MM. The negotiation outcome was a substantial and immediate price reduction

plus an up-front compensatory payment equivalent to 20% of the annual spend with the

vendor. This negotiation was a major contributor to the overall program, which delivered

more than $15MM in savings.

Exhibit 4: Example commodity price analysis used in vendor negotiations

90

80

70

60

140

120

130

110

100

Dec-08Jan-08 Jul-09Apr-08 Nov-09Aug-08 Feb-10Mar-09 Jun-10

INPUT COST INDEXED TO JAN 2008

Vendor input cost (Brand B)

Price charged to the B2B company

5% price rise

7% price rise

10% price rise

Vendor input cost (Brand A)

Vendors that you believe have the potential to be future partners will need to submit their

best possible proposals to be considered for a multi-year contract or “memorandum of

understanding.” You should focus the process by providing clear guidance on what each

vendor needs to do to protect its existing business. For example, if your margins with a

particular vendor are below the category average, the vendor must rectify that to remain

in consideration.

You should suggest what each vendor might propose in exchange for growing its business

with your company. You might, for instance, agree to share the additional profits that a vendor

attains from the future higher volume based on an analysis of that firm’s variable margins. (Note

the right answer is rarely a simple 50/50 split when you consider the leverage that increased

volume typically has on a manufacturer’s gross margin given their larger fixed cost base.) This

process of reshaping the vendor base also presents the opportunity to consider new vendors,

including those from new, and potentially lower cost, countries.

The outcome should be a significant consolidation in your vendor base, allowing some vendors

to achieve significant growth and your business to benefit from multiple “more for more”

agreements. Those benefits will often take time to fully accrue as you clear stock, evaluate

new SKUs from partner vendors, establish new supply chains, and so on.

Success depends on vendors truly believing that their business is at significant risk if

they don’t comply – that is, they will automatically become “big losers.” Many distributors

that have distribution agreements with powerful brands mistakenly think they have little

clout to negotiate. In contrast, we have seen that the approaches described here can be

deployed with equal effectiveness when applied with the right analysis, process, and tools.

The scale of benefits you can achieve from this stage will depend on the characteristics of your

sector and the sophistication of your starting point. In some cases, 6–8% GFR savings are

achievable just from improved vendor negotiations; in other cases 3% or 4% may be the limit.

2. WRING OUT COSTS

Distributors then face a substantial opportunity to reduce costs further, with the benefits

being shared between them and the vendor. Typical areas where waste and inefficiencies

can be eliminated are: the supply chain, from raw materials to manufacturing and logistics;

product specifications, including materials, design, accessories, and packaging; and the

interface between distributor and manufacturer, particularly with regards to order quantities

and the efficiency of processes such as forecasting, ordering, and payment.

“We successfully persuaded our branded footwear vendor to cut prices on key styles by over 10% based on our detailed analysis of costs and margins.”

– CEO, $BN CLOTHING AND FOOTWEAR BUSINESS

73

Most responsibilities for achieving the savings will sit with the vendor, although some will reside

with the distributor or will require joint work between the two parties. The opportunities will be

very different depending on the characteristics of the vendor. For small vendors selling high value-

add products (and for which the distributor accounts for a large percentage of the turnover), the

opportunity for cost reductions will likely be large. For major global brands and true commodity

items (fuel, basic chemicals, commodity food, etc.), the opportunities will typically be much

more limited in percentage terms, although the potential dollar savings may still be very large.

CASE STUDY 2

PARTNERSHIP WORKING TO IMPROVE EFFICIENCY AND DECREASE COSTS

A multi-national home improvement distributor was working closely with a key vendor to identify

cost reduction opportunities. Together, they spotted the potential benefits from optimizing

order quantities. The products were made to order for the distributor in batches. Small orders

meant the manufacturer needed to set up a production line then shut down and clean it just

a few hours later. Unit manufacturing costs would reduce as the order size increased until a

second production line was needed, which would increase unit costs again (see Exhibit 5).

Analysis showed that orders were not being placed in a way that minimized production cost:

only 8% of orders were within 10% of the most efficient level, 22% were above, and 70% below

(Exhibit 6). The companies also factored in storage and delivery costs to minimize total costs.

Because of their partnership, the distributor could recognize which order quantities minimized total

cost, with the subsequent savings shared between the two parties. This was a key component

of an overall program that delivered a total cost reduction of over 7% across all products.

Exhibit 5 Exhibit 6

1.80

1.70

1.50

1.30

1.40

1.60

Single production linemaking batches

1st production linerunning continuously,

2nd productionline making batches

ORDER QUANTITY (THOUSANDS)

UNIT COST ($)

0 20 40 60 80 100

1.20

Lowcostzone

10

20

ORDER QUANTITY (THOUSANDS)

30

Under 10 10–20 20–30 30–40 40–50 50–60 Over 70(2nd prod. line)

PERCENTAGE OF ORDERS RECEIVED

0

60–70

Lowcostzone

THE DELIVERY CHALLENGE

The task of working with partners to wring out costs can be challenging and time consuming.

We have seen several distributors achieve limited success and end up reverting to ever

more aggressive, non-fact-based negotiations. In the long run, that tactic becomes

counterproductive, particularly with partner vendors who have earned the right to be

“big winners.” Vendors that are continually forced to slash margins will inevitably either

start cutting corners on product quality or service, or start investing in your competitors

instead. Successful programs therefore take time and discipline to achieve their full potential,

although sizeable “quick wins” can almost always be achieved with the right approach.

In our experience, we have found that success depends on four critical factors:

1. COMMUNICATION

Effective vendor co-operation is based on great communication, real understanding,

and enlightened self-interest. Vendors need to understand that cost cutting is absolutely

necessary and that non-compliance will inevitably lead to loss of their partner status. To

emphasize that point, you should embed annual targets for minimum cost reductions in

multi-year agreements.

2. TIGHTLY STRUCTURED NEGOTIATION AND PLANNING PROCESSES

An efficient and structured approach is necessary so that vendors can fully understand what

is required from them, and by when – whether as part of the initial structured negotiation

round or as part of an annual joint business plan. You should monitor their progress (as well

as your own) and track results versus the plan at each stage.

3. ROBUST DATA AND EFFECTIVE ANALYSIS TOOLS

Getting all the necessary information and talking points for negotiation into the hands of the

buyer or product manager quickly and efficiently is essential. The most effective programs

use analytical tools that can generate all relevant vendor facts and prioritized insights “at the

touch of a button” (see Exhibit 3).

4. ADDRESSING ORGANIZATION AND CAPABILITY GAPS

The product and purchasing organization will typically need to evolve and embrace new

approaches. Yet great progress can be made initially without large-scale restructuring or

hiring. Creating a small expert set of buyer “champions” to manage the overall process and

support other product managers in negotiations can go a long way.

Sizeable quick wins can almost always be achieved with the right approach.

75

But the ball isn’t only in the vendor’s court. Distributors can often play a large role in

wringing out costs, particularly when a vendor is comparatively small. You might, for

example, be a much larger buyer of raw materials, energy, or other items needed by the

vendor. In such cases, by enabling that vendor to share your purchasing power, you

can help it reduce its costs. The vendor would then improve its margins with all of its

customers, and you should argue for a share of those savings too.

Although the work to wring out costs can yield big savings, there is a danger that vendors

seek to take advantage of their partner status, especially if the competitive tension they

experienced during the first stage has faded. You will need to put in place mechanisms to

avoid this, such as “best price guarantees” in your partner agreements so that you have

the opportunity to find the best prices for products (through benchmarking, competitive

tendering, or reverse auctions) and your partner will need to match those prices in order to

retain its status.

76

CONCLUSION

Driving down GFR costs while at the same time maintaining or improving critical vendor

relationships is a tough challenge for any business. In the complex and often “local” world

of wholesale distribution, it is tougher still. Yet a small number of distributors have looked

beyond traditional industry approaches to learn from the purchasing methods used by

leading retailers and manufacturers. These distributors have typically achieved a 7–10%

reduction in non-commodity GFR costs and unlocked a new wave of productive partnership

and collaboration with their vendors.

The key is to first select the right purchasing tools for the distributor’s unique circumstances

(from a “periodic table” or similar) and then apply them in a thoughtful sequence – starting

by reshaping the vendor base to take margin out of vendors, and then progressively

engineering cost out of the system with the vendor base that remains. Core to achieving

enduring savings are effective communication, a tightly structured negotiation process,

robust data and analysis tools, and a sequential upgrade of organization and capability.

For many distributors, these types of benefits are not only compelling, they can also serve to

step change growth by enabling the business to be more competitive on those products that

matter most to customers.

www.oliverwyman.com

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Oliver Wyman is a global leader in management consulting that combines deep industry knowledge with specialized expertise in strategy, operations, risk management, and organization transformation.

In the Distribution and Wholesale practice, we draw on unrivaled customer and strategic insight and state-of-the-art analytical techniques to deliver better results for our clients. We understand what it takes to win in distribution and wholesale: an obsession with attracting, serving, and growing customers, constant dedication to operational excellence, and a relentless drive to improve capabilities. We have a track record of helping clients win in this environment, creating real competitive advantage and driving significant growth. We believe our hands-on approach to making change happen is truly unique – and over the last 25 years, we’ve built our business by helping distributors and wholesalers build theirs.

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