Automate or stagnate

Distributors are seeking greater operational efficiencies to maintain customers

by Allen Ray and David Gordon

Continued margin tightening and increased competition are forcing distributors to seek greater operational efficiencies to maintain their profitability. More importantly, greater efficiency can help them maintain customers.

Recent research conducted by Allen Ray Associates and Channel Marketing Group revealed that industrial distributors recognize they need to automate their customer invoicing processes or risk being less profitable and potentially stagnated. While not automating invoice processes does not mean a distributor will close its doors in the short term, the inability, or unwillingness, to offer e-services can be a restraint on sales and margin growth.

Much has been accomplished in recent years between distributors and manufacturers to automate their transactions through increased usage of electronic data interchange (EDI). Leading distributors are taking the next step and offering connectivity to their customers in a bid to streamline processes, reduce paper flow and tighten organizational relationships. The benefit is reduced operating overheads, increased customer retention and higher operating margins.

How we got here
Increased sophistication among customers, technology improvements and margin pressure prompted some distributors to recognize a solution to manual invoices clogging their accounting and collection processes. Over the years, distributors evolved from manual processes to enterprise resource planning (ERP) software systems that tied together inventory, purchasing, invoicing, bank documents and other business systems.

However, the promise of a paperless office never materialized. Paper usage for invoices, envelopes, reams of reports and postage stamps significantly increased. Along the way came the fax machine, which generated more paper. Even today, distributors and their manufacturers and customers trade faxes and e-mail attachments that require printing and eventually manual data entry into a system in order to generate a report. Because each piece of paper represents a cost, leading distributors are finding ways to reduce the paper freight train.

Why distributors do what they do
Distributors generate reams of paper in the form of invoices, shipping notices, proofs of delivery, product submittals, technical drawings and more.

The paper trail begins the moment the customer orders a product and continues as the distributor and customer trade spec sheets, tech drawings, order acknowledgements, receipts of delivery, and so on. When the wrong product or quantity gets shipped, it requires even more paperwork. To compound the issue, some distributors send statements twice a month with copies of all invoices.

Most distributors invoice as soon as the product leaves their building, only to send the same invoice with a monthly statement. If you submit technical or product specs, proof of delivery, advance shipment notices or MSDS sheets, our research shows there is a 90 percent likelihood that you send the information on paper.

All of this paper, most distributors admit, is designed with the sole purpose of getting paid sooner. Distributors are especially concerned about their daily sales outstanding (DSO), a measurement of receivables and how quickly they are paid. A lower DSO means more improved cash flow. According to our survey of industrial distributors, 5 percent of their customers pay in 30 days or less, and about one-third pay within 31 to 40 days.

Asked if they believed they were paid sooner than their competitors, 31 percent said yes, 34 percent said no and 35 percent don’t know. Asked why they thought one distributor is paid sooner than another, more than half (52 percent) credit a strong relationship between the customer, the distributor and the distributor salesperson. Forty-eight percent believe the customer needs to free up credit, and 27 percent believe the customer pays because it allows the customer to invoice its own customers more quickly.

Respondents were also asked how frequently they invoice customers. Recognizing that each company uses multiple methodologies, distributors said:

Interestingly, 75 percent of respondents have the capability of electronic invoicing, but few take advantage of this capability.
E-invoicing capabilities include:

Most distributors reported, however, that few customers utilize these services and those that do typically use EDI capabilities. Further, they are aware that large national distributors, such as Grainger and Hagemeyer, and some large regional distributors offer these services.

Research conducted by Allen Ray Associates and Channel Marketing Group with electrical contractors revealed that larger contractors are seeking these services and are transitioning business to distributors that can help them improve their administrative productivity while still being competitive on price and service.

Fifty-two percent of survey respondents believe that more than one-fourth of their customers have the ability to accept electronic invoicing but do not take advantage of the distributor’s capabilities. Electronic invoicing represents a cost-saving and productivity enhancement opportunity for the distributor and customer, as well as a sales differentiator for distributors.

Research from other industries indicates that electronic connectivity between a distributor and customer (or manufacturer) can significantly reduce error rates. Plus, customers establish a tolerance level on unit items, unit prices and extended totals to facilitate timely payments.

Why would a customer run a tolerance test and potentially pay slightly more? In any business transaction, both sides incur built-in costs. The distributor’s costs include salespeople, inventory, warehousing, invoicing and accounting processes and so on. Customers have similar procurement and account reconciliation costs. E-invoice connectivity enables both parties to reduce their administrative costs and improve productivity. Additionally, electronic connectivity fosters better business relationships. Once customers understand the value of electronic connectivity, they become more “connected” to you, and it becomes easier for them to do business with you.

Distributors can differentiate themselves if they take the initiative to establish electronic connectivity with key customers. It may not be possible with all customers. In fact, 33 percent of survey respondents feel that no more than 25 percent of their customers understand the concept of “total cost of relationship.”

The key to making your investment deliver a favorable return is to educate your sales organization about how connectivity benefits you and your customers, and get them to promote your services to selected customers. One word of caution, however: It’s best for your senior management to approach the customer’s senior management and for back-office people to talk with back-office people. Salespeople typically do not want to engage in these conversations because it’s outside of their element and they may not be able to answer questions that may arise. To be successful, minimize their anxiety and consider this a team-selling approach. You and your customer will benefit. Automating a non-productive process can help you avoid stagnating.

Allen Ray is principal of Allen Ray Associates, which helps companies improve profitability through effective pricing strategies and streamlining business processes through effective eBusiness utilization. Reach him at (817) 704-0068 or allen@allenray.com.

David Gordon is a principal of Channel Marketing Group, which develops growth strategies for manufacturers and distributors. He can be reached at (919) 488-8635 or dgordon@channelmkt.com.

This article originally appeared in the March/April 2007 issue of Progressive Distributor. Copyright 2007.

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