August 18, 2017


















Sell Products AND a Win-Win Relationship

Imagine a room full of top sales reps from an outstanding, industrial-supply, distribution chain. The group is struggling through a discussion that I am leading on the general topic of "selling profitable business" as measured by "profit before interest and tax" (PBIT) contribution, not by gross margin percent (GM%) or by gross margin dollars (GM$). The discussion is jump started by an initial group of assumptions and questions that can be read on an overhead screen. (1 - Note: All of the numbers in parentheses (#) relate to "Support Notes for Article # 4.9 that is posted at www.merrifield.com under the Articles section.) Those assumptions and questions are:

Assumption One: We are, in general, selling to customers of different sizes that are in different, but mostly mature industries. Many of our customers are suffering from too much capacity and not enough pricing power in their competitive space. They arenít excited about their current profitability or their growth prospects.

Assumption Two: 90% of our sales to these customers are repeat purchases involving items that the customers would probably consider commodities. They know that they can readily source the same or equal brands from two or more potential suppliers and always get a lower price, although not necessarily the best total value on all of the MRO needs. (1.5)

Question #1: What is the #1 procurement need that these customers have that we should be filling?

In response to question #1, the group looked generally stunned, but one chap quickly offered: "To sell them new product solutions that will save them money!" Many heads nodded in agreement, including mine.

Another chap stated: "They are obviously under a lot of pressure to buy their commodities better, so we have to work hard to maintain the business we have. Because competitors are always offering to quote lower prices, we have to work to get last look and try not to give our product away." Again, many heads, including mine, nodded affirmatively.

The next Socratic prompt was unmasked on the overhead projector:

Question #2: What is the over all driving-force objective that is behind those companies that have been pushing us along a continuum over the years from:

  • trying and buying a product that we may have first pitched to them long ago to
  • issuing blanket P.Oís, for repeat supply items that have become commodities to
  • co-creating MRO systems contracts at the local plant level to now, at the extreme,
  • seeking suppliers for a centralized (for multiple locations) supply contract that is: global, integrated, unified (covering multiple MRO categories) inside of which the variety of similar items is reduced to as few standard items as possible?

There was a moment of silence, perhaps due to the ambition of the question, but then a non-planted response was offered: "To reduce their total procurement cost (TPC)".

Most heads did not nod; they remained frozen. So, I quickly reviewed the chronological process of buying, storing and using stuff with the different procurement costs incurred along the way. This included about 6 elements of cost in the buying stage: shopping time; price; paperwork; expediting; receiving; and error curing. We then added 5 carrying costs for inventory before tangible goods are consumed in the "keeping stage": space overhead; money opportunity; housekeeping; shrinkage; misc. tax and insurance. And, finally we added in, for some items (tools and equipment), the costs for not getting best utilization productivity, lifetime cost/unit of equipment, psychic benefits, etc. (2)

We also spent a few minutes explaining how having the best, most consistent common service metrics (best 1-stop-shop assortment of items for a customer niche, highest fill-rates, zero errors, on-time delivery, etc.) can each help to lower one or more of the 11 TPC elements. (3)

Then, a new exhibit of related questions was projected on to the screen, and a copy of the exhibit was handed out to all attendees. Discussion on any and all of the following questions in any order was encouraged:

Question #3: If TPC has been the hidden, driving and organizing force behind ever more comprehensive supply contracts for the past 40 years, wouldnít that be the same driving force that all of our mature customers have even if they have not formally defined and pursued it?

Question #4: Shouldnít we also be looking for the lowest TPC from our suppliers? For a distributor how should we define lowest TPC? Or do we? Shouldnít we, for example, prefer to buy from a commodity supplier with a higher price, because their total product/service offering yields both higher fill-rates and a "turn x earn" ratio?

Question #5: If TPC is a largely hidden, but still a universal need, how could we do a more proactive job of selling the potential of our total service package to offer the lowest TPC?

Question #6: Why have we (and probably most of our competitors) been distracted from trying to fill our customersí #1 universal need? Why have we been so fixed on trying to sell incremental products with occasional reminders that we sure would like a chance to bid someday on the commodity volume that we donít currently enjoy?

Question #7: Back to the notion of getting last look and trying to hold the line on margin erosion. What would be a more profitable account for the company: one in which our average GM% is 25% and our average order size has $50 of GM in it; or, one in which we average a 20% GM with an average of $100 in GM? (Hint the average industrial supply distributorís average cost per transaction is about $80.) (4)

Question #8: Which of the following choices should be our ultimate, guiding objective:

  • Get an order for some product that we are pushing?
  • Get a stream of repeat orders on the products we are pushing?
  • Get repeat orders and last look to meet the price to keep the business?
  • Get repeat orders, last look and a bit more for our own individual value-added contributions that have put incremental profits to the customersí bottom lines?
  • Sell a one-stop-shop assortment of items to and through the customer at both a lowest, best TPC for them and at the lowest total service cost for us so that we can make a profit?

Question #9: What percent of our current face-to-face time with customers and our sales meeting/education time is currently spent on each of the options in question 8? How should we theoretically, re-allocate our selling and education time over the 5 options in question 8?

THE ENSUING DISCUSSION

Questions 3 Ė 8 sparked a lot of discussion on a variety of related topics, such as:

  • Why and how sales reps could be part of the leadership solution for re-defining and improving basic service excellence processes.(5)
  • Team selling strategies and tactics to help customers better define and pursue their own-flavor-of-TPC solutions that the company would be glad to co-create.(6)
  • How the sales/marketing meeting agendas could be better balanced with less product promotion material and more win-win, TPC system selling strategy, tactics and skills.
  • How the sales force could work together to free up and re-assign the bottom 50% of the customers that were generating only 10% of the GM$ (7).
  • To start thinking about how the sales force incentive plan could be tweaked so that the reps would be motivated to grow profitable order size economics and PBIT/customer and not just GM$ (8).

The meeting planners purposely did not bring up the issue of how many of the existing customer base could economically be served by outside reps pushing a win-win TPC replenishment solution. Preliminary numbers suggested that the sales force should be reduced by 50%. Although the attendees were the top 15% of the force who were all keepers, the timing of the new math was not appropriate (9).

CONCLUSIONS

The big agreement point for the entire discussion was that the guiding vision for the sales reps should no longer be to get an order, but to co-create a win-win replenishment system with the right customers that had a stable or growing future.

The big question then became: how do we get from where we are, which is too focused on getting orders on incremental products, to being the supplier of the win-win system. Everyone agreed that the meeting was a good start on the first stage of a total transition process: the educational, emotional comfort-zoning stage. (10)

One brave participant had this interesting, specific conclusion.

"I canít wait for a customer to ask me if I would like to meet a price to keep the business or if I would like to bid on something. Iím going to give the judo answer and throw him in the direction he wants. Iím going to say: hey, letís not just stop at price, why donít we work together to get all of your TPC costs to go down along with my companyís total service costs, because then we will really have the best total solution together!"

And when he says, "Whatís TPC?" Iíll tell him that we will figure that out together if he is really interested. I bet some of them will cave and just say: "Ah, forget it, here just take the order." And we will keep the old price.

Merrifield Consulting Group, Inc., Article 4.9