Progressive Distributor - Making it easy creates a competitive edge

Making it easy creates a competitive edge

by Allen Ray and David Gordon

Synchronizing price and product data represents a significant opportunity for the industrial channel to become more cost-efficient. Companies that embrace this opportunity can reduce error rates, enhance customer service and improve profitability.

Synchronization benefits manufacturers and distributors alike. Manufacturers that actively track and promote product and price synchronization can:

► Quantifiably improve the profitability of their line with distributors through operational efficiencies

► Reduce customer service overhead, enabling personnel to be reassigned to more productive activities

► Increase their throughput, generating incremental profits while maintaining overhead

► Reallocate their sales organization’s time from fixing problems to calling on customers

► Gain a competitive advantage by being the easiest and most efficient supplier to do business with

In a recent study by Channel Marketing Group, distributors were asked to rank the importance of various manufacturer financial benefits. “Ease of doing business” ranked third, after competitive into-stock pricing and the ability to make more than an adequate margin.

With so many advantages, why don’t manufacturers focus more effort on improving system synchronization between their distributors and their company? Why don’t they promote the use of the GS1 system of globally unique keys for trade items, assets and locations, which provides a framework for manufacturers to standardize their product data?

Marketing needs to be involved in IT
Unfortunately, price and data synchronization have been the domains of IT departments. Senior management for most companies understand the financial benefits, but many lack the technical expertise to address issues their IT departments raise (priority of projects and allocation of resources being the main issues).

For a company to capture the benefits of price and data synchronization, manufacturer marketing people need to become more knowledgeable. Marketers need to express the customer benefits of data and price synchronization and show how improved processes and adherence to widely accepted standards can generate incremental profits and revenues with targeted distributors.

To achieve this, marketers should promote their company’s ability to provide price and data synchronization through industry-supported standards and methodologies. Excel spreadsheets and faxed price lists inhibit synchronization and are not easy for distributors to handle (think about getting 50 different Excel files or faxes, all with price changes).

Additionally, leading distributors are beginning to look toward some type of standardized data exchange that can provide attributed data to populate online and print/electronic catalogs. For a manufacturer to be accurately portrayed by a distributor, the manufacturer needs to populate its attributed data to a GS1 standard. This is currently being done in the electrical industry through an organization called IDEA, an industry-owned e-business service for electrical distributors and manufacturers (www.idea-esolutions.com).

For these reasons, marketing needs to become more involved in communicating customer needs and collaborating with their IT departments to identify opportunities.

Why is price and data synchronization important?
When two data points are the same, there will be no errors when comparing the data. Further, if these data points are communicated electronically, the data is correct and communicated on a timely basis. This is one of the major reasons retailers and large distributors such as Grainger, Fastenal and MSC are more profitable than independent distribution – the transactional ease of doing business without manual intervention by either party.

Distribution can strive to be as efficient as retail. While no manufacturers expect 100 percent of their distribution customers to transact business electronically, price and data synchronization would significantly reduce errors and make these relationships more profitable. Using the Internet as an EDI transmission vehicle could further enhance the profitability equation.

Anecdotal evidence reveals that one of the biggest reasons distributors change lines is because of the cost of doing business with a manufacturer and frustration with manufacturer processes. A recent Allen Ray Associates project reviewing an electrical distributor’s price files showed that 28 percent to 31 percent of the data files had an error relating to incorrect data input from a manufacturer or a third-party service. Close examination determined that almost 2 percent of gross margin dollars were lost during the preceding 12 months as a result of the bad data.

A white paper commissioned by IDEA showed data and price synchronization processes, utilizing a centralized database, can increase distributor gross margin by up to 2.5 percent. Manufacturers can improve their distribution business profitability by .25 percent of sales through error reduction and process efficiency.

The centralized database provides distributors the ability to frequently download price increases/changes, and integrate the information into their ERP systems. This reduces errors and enables distributors to update their customer pricing and reduce profit leakage.

Price synchronization can facilitate pricing strategies. Recent distributor research showed that 27.1 percent of distributors prefer net pricing and 36.1 percent prefer some type of transactional differentiation pricing. To manage this, technology and accurate pricing data is essential. Since special pricing allowances or claim backs depend upon accurate data, synchronization increases claim back dollars in an automated fashion. The net result is these claims can go from a negative to a positive very quickly for a distributor synchronized with its manufacturers.

Getting the most from your technology investment
Aside from streamlining processes and the potential for cost-reduction, from a marketing perspective, there are a number of opportunities manufacturers may wish to consider. They include:

Promoting data accuracy. Manufacturers should incorporate enhanced synchronization processes as part of their preferred distributor marketing programs and reward distributors for utilizing these resources. Consider this a way to share cost savings and generate future efficiencies.

Manufacturers should provide an incentive to distributors to conduct multiple EDI transaction sets with them. The more transaction sets a distributor utilizes with a manufacturer, the more efficient (and profitable) the relationship is for both.

Manufacturer EDI activity increases when management makes it an issue. Salespeople then determine what transaction sets distributors can implement. Achieving tighter EDI relationships to reduce channel costs can strengthen relationships (and VMI users have found it increases sales!). Advocating EDI should be a sales and marketing responsibility. Buying groups can help by identifying which of their members can implement specific transaction sets.

Most salespeople currently do not discuss data synchronization with distributor management or their IT people. For the most part they are uncomfortable with the topic and may not know the IT person.

To initiate a discussion, manufacturers should develop tools to show distributors their missed profit opportunity, train salespeople on distributor processes and appoint an individual to work with sales on targeted accounts.

Synchronizing data so distributors can talk the same product language creates future opportunities to:
   • Conduct data mining
   • Mine customers
   • Mine customer usage

The quality of data is the foundation to enable distributors and manufacturers to mine their respective information. Once the data is in an appropriate format, they can identify trends that reveal opportunities to develop growth strategies, enhance new product introductions and drive suggestive selling (or achieve higher account penetration).

Perhaps this is the future of partnering relationships between selected distributors and manufacturers. While the concepts require investment, leading manufacturers and progressive distributors that seek dominant share can take advantage of retail techniques to drive their growth.

Next steps
Get more involved. Learn your company’s status. Start with IT, talk to sales, and talk to key channel partners about the importance of data to them. Identify how many of your channel partners are capable of price and data synchronization and their ability to increase their electronic relationship with you. At what level are they using them? With whom do you do many transactions, and what is your error rate with them?

Identify operational opportunities. Do manufacturers know their data and pricing error rates with their national or regional chains and their top 20 independent distributors? Could this be reduced through synchronization? What percentage of your transactions are handled via EDI? How many EDI transaction sets do you conduct with your larger channel partners? Who should you target?

Review pricing file dissemination. How much time do channel partners spend sending pricing files to one another? Would it be easier for manufacturers to send product and pricing data to a single industry data warehouse from which distributors, and third-party providers (sales reps), can download information?

Use marketing to drive adoption. Think of the need to streamline operational processes as a product. How would you market it? How would you gain adoption? What tools are needed by sales? How would you target customers? Develop a “product” introduction strategy to capitalize on this opportunity.

Market your success. Once you know that you are more operationally profitable based upon trial efforts, market your success to your sales organization and to a broader customer segment. Use your operational efficiency as a tool to convince other channel partners to do business with you.

The goal is to reduce errors between channel partners, and to actively promote that you are easy to do business with and a more profitable partner.

Allen Ray is the principal of Allen Ray Associates (www.allenray.com), which helps manufacturers and distributors improve profitability through effective profit pricing strategies and streamlining business processes through eBusiness utilization. He can be reached 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. Register for monthly newsletter at www.channelmkt.com.