A new bag of tricks
Integrated supply requires outside sellers to apply a different set of knowledge and expertise
By Susan L Srikonda -- Industrial Distribution, 11/1/1998
The world changes the moment a traditional outside salesman enters the realm of integrated supply. Suddenly he's called upon to speak a new language, within a new community of prospects, and talk about issues that are outside his usual bag of tricks.A recent study published by Frank Lynn & Associates estimates the 1997 market for integrated supply at $5 billion, and predicts that the market will surpass $10 billion by 2000. Jeff Baden, of Frank Lynn & Assoc., expects integrated supply to claim an increasingly larger share of the market in the approximately 15,000 plants in America that have 500 or more employees, typically the largest customer base for integrated supply.
"Eventually I think that most large plants will go to integrated supply or some variety of it," Baden says. "I also suspect that by the year 2000 there will be an evolved version of integrated supply that will have some new name. I suspect that the relationships for MRO will increasingly not just include end-users and distributors, but also the manufacturers of MRO products."
Though there are varying definitions of integrated supply, the definition offered by Frank Lynn & Associates and accepted for use here is "a long-term partnership whereby an end user outsources to a supplier, or suppliers, some or all of the procurement, inventory and material usage functions in order to reduce the total channel costs of fulfilling MRO needs."
As distribution moves further toward integrated supply, it will have to wrestle with several issues related to the outside salesman: How involved will he be in negotiations? How responsible will he be for maintenance of the account? How should he be compensated?
Transforming the salesman
There are major integrated supply companies, such as Grainger Integrated Supply and Fairmont Supply, that create distinct divisions between the staff that handle integrated supply accounts and the staff that handle traditional outside sales. Arguments for that approach maintain that a different knowledge base is required in each scenario, that integrated supply requires an operating expertise that few traditional sellers have, and that separating the processes allows each division to focus on their specialty.
But many companies entering the integrated supply arena rely on existing sales staffs to handle integrated supply accounts. At companies like General Tool & Supply in Portland, Oreg., where integrated supply accounts for about 40 percent of the business, outside salesmen are learning integrated supply the hard way.
Randy Shearer, an outside salesman recently named sales manager for General Tool, has first-hand experience with the change in thought process integrated supply requires.
"When you get into integrated supply, the relationship is there and the commitment is already there," says Shearer. "So then you start putting yourself in the customer's shoes and you look at it from their perspective and say, 'What can my company do/provide/recommend that is going to take it to the next step? How am I going to show cost savings through certain products or by recommending something different?'
"You actually feel like you're working in unison or in partnership with the customers," Shearer continues. "You don't have the feeling that there's a competitiveness between you and the perspective buyer or the customer. You end up having common goals and if you're successful in providing the cost savings and value to the customer that they're looking for, you both win. Your relationship grows and they come to you for more opportunities, which hopefully results in more business."
Though Shearer says a salesman doesn't stop selling while handling an integrated supply account, he admits he sometimes misses doing the technical hands-on demos polished through years of promoting specific products. In response to that common reaction, General Tool is in the midst of creating a solution that will build in more selling time for their experienced sellers.
"We have more big customers that dominate our people's time and we're working through creative ways to try and address that," says Jim Miller, vice president of sales and marketing for General Tool. He says one possible solution is to create a second tier of sales trainees who will be responsible for some of the routine matters associated with maintaining the account. But it's a sensitive issue, Miller says, because, "You've got good solid people who in many cases got the customers interested in them and it is somewhat of an ownership issue."
Warner Industrial Supply, a general line house in Minneapolis, Minn., has handled integrated supply contracts for two years in order to meet the needs of larger customers looking to narrow their vendor base. Like General Tool, the firm is rethinking the outside seller's role.
The outside salesman handling integrated supply is no longer selling products, but instead selling services like cost reduction and inventory management. It's a whole new selling paradigm.
"I think the biggest issue for [outside salesmen] is that they have to be more of a consultant than a sales rep," says Jim Zechmann, president of Warner Industrial. "What's difficult for the sales rep to comprehend is that the sale has already been made. We have to take them from a sales role to a service role, which is hard to do because it requires a different level of organization on their part ... We're really asking them to change their role with that account."
The new role of an outside seller has many names -- solution provider, account manager, consultant, service rep, application specialist -- which points to the difficulty the industry is having redefining a role that has, traditionally, been such a constant.
"Integrated supply is asking for the distributor's inventory expertise to be transferred from the distributor inside the customer's facility," says Barry Lawrence, assistant professor in the Industrial Distribution Program at Texas A&M University. "The salesman is going to have to become an expert on the company's processes. As an outside salesman, you're going to have to demonstrate how you can save a company money in inventory. The salesperson is going to have to understand more than the technical aspects of the product and come to understand how to carry out inventory and to be an expert in supply chain management, because that is what the [customer] is looking for."
Widening the circle
Integrated supply changes the outside seller's world not only by changing his focus, but also by changing his target audience.
Traditionally, an outside seller would spend his selling time talking with a purchasing agent or with the end-users of the products. A seller might return home from a day out selling on the floor with dirt under his fingernails, chips in his shoes, and a smudge on his nose.
A day selling integrated supply is more likely to take place across a polished oak conference table. Suddenly, the salesman is facing an audience of executives and the stakes are much, much higher. It's the difference between negotiating for a piece of a pie and asking for the whole pie.
"As you move to systems contracts and on to integrated supply, people higher and higher in the end-user's organization become involved," says Baden. "Before, the sales rep wouldn't know where the [chief financial officer] sat and may not even get in to see the plant manager. And so now, it's somebody wearing a tie. The skills that it takes to deal with a person who wears a tie are usually different than the skills that it takes to deal with the end users on the floor and the purchasing agents. The sales rep is going to have to be educated upon, understand and articulate those issues that relate to total cost and ... be able to identify where there are inefficient processes and be able to steer the end user toward appropriate solutions."
Not only does the seller now have to talk a new game to a new audience, but he also has to learn to share ownership of the account. He won't be sitting at the conference table pitching integrated supply as the sole representative of his company; indeed, there are some cases where the outside salesman is not involved in the integrated supply pitch. But assuming he is involved, he will likely be sharing that spotlight with executives of his company and technical experts who can speak to issues such as information management and logistics.
And once the contract is signed, the outside seller will be called upon to share ownership of the account with even more people because of the scope of the business.
"When you get into integrated supply, it makes the title 'account manager' take on more meaning because you're managing the account both at the customer level and internally at your business because there are so many details," says Shearer. "All the knowledge you gain at the customer level you've got to bring back and inform the support staff. And if you're sourcing outside of your company, then you've got to transmit that knowledge out to the second-tier sources also so that the product arrives at the customer's plant in the way that they want and at the time that they want."
The compensation issue
Though ownership of an account is a sensitive issue, it pales in comparison to compensation. The question is how to compensate an outside salesman whose job is no longer defined as selling products and is geared more toward cost reduction and inventory management than toward the age-old concept of buy low, sell high. Distributors venturing into integrated supply are struggling with this juxtaposition in some creative ways.
Integrated supply requires sellers like Shearer to think in terms of reducing costs for their customers and to document that cost savings for the customer in order to build the business long-term. As a result, General Tool is considering alternative ways of compensating its integrated supply sellers.
"Our responsibility to the customer is to bring products in that will reduce their costs and therefore the seller's role is not to go in and fight that battle and sell new products," says Miller. "So what we're changing to is that part of their pay is related to the actual cost reduction that they bring about in the plant, rather than just paying them for the dollars that are flowing in from the account."
Warner Industrial has chosen another compensation alternative. Warner has created a compensation system whereby integrated supply sellers are given a base salary which is augmented by bonuses set up based on parameters created within integrated supply contracts. Those parameters may vary from customer to customer, but they share a common purpose of driving down the customer's costs. One example might look like this: Company A wants to achieve six percent savings in the first year. The salesperson managing the account would get a bonus after documenting, to the satisfaction of the customer, that a six percent cost savings was achieved.
"Essentially, we're paying the sales rep for accomplishing what the customer is asking for, rather than on gross margins. So the customer is really driving that process," says Zechmann.
Baden notes that some integrated suppliers are moving toward service fees as a mode of compensating themselves as a company and/or adopting a gain-sharing and risk-sharing pricing mechanism. If the company's profits are based more on services than gross profits, he says, then it makes sense for them to compensate their sellers based on the same criteria.
Accepting the challenge of integrated supply -- changing thought processes, learning a new audience, acquiring new organizational skills, and embracing a new compensation package -- is no small undertaking. But for those who do it well, the winnings are big.
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