New strategies for a changing marketplace
You can create a distinct competitive advantage by showing the value you add
By Tim Underhill -- Industrial Distribution, 5/1/1999
In many ways, the traditional industrial distribution channel is faced with unprecedented change. Different channel formats are being developed, including Internet purchasing and integrated supply, and new threats are emerging such as the "box" companies starting to sell on the streets. These changes, along with the increased pressures customers are putting on pricing while expecting additional services, are creating a need for distributors to re-think how they present themselves in the market and what it is they really sell -- products or solutions?Perhaps one of the most critical aspects confronting distributors today is the ability to show customers, in dollars, the value you add. Every distributor talks about the value they add, but what is it? True value is what you do that allows your customer to be more profitable. And since most customers do not know how to quantify the value you add, you must do it for them.
Why must the value be shown in dollars? Because if you cannot show the value in dollars, how will your customers know the worth of what you provide? Or, how will they be able to differentiate between you and another distributor offering a different value-added package? When customers cannot see the difference, they buy on price.
Companies that can show the value they add in this way can achieve a significant competitive advantage because customers are looking for ways to improve their profits. The more value you bring, the more profitable they become -- even if they pay you a premium. Some distributors can already show their customers that for every dollar spent with them, they added 30 cents of additional value through cost reduction opportunities! If we equate that to price, by how much would you have to reduce your pricing in order to compete?
Customer pressures continue to rise
Since about the mid 80s, customers have been putting increased pressures on pricing while demanding increased services. This can have a negative impact on profits unless distributors and manufacturers can find ways to get paid for what they add. In a recent study by the Center for Advanced Purchasing Studies, 18 key purchasing/supply executive issues where identified, 15 of which focused on lowering their total cost of doing business in some form. The 15 issues are:
* Electronic commerce
* Strategic cost management
* Strategic sourcing
* Supply chain partner selection and contribution
* Tactical purchasing
* Purchasing strategy development
* Demand-pull purchasing
* Relationship management
* Performance measurement
* Process uncoupling (ABC)
* Global supplier development
* Third-party purchasing
* Virtual supply chain
* Competitive bidding and negotiations
* Strategic supplier alliances
The good news is that the vast majority of these cost-saving initiatives are focused on total cost, not just price. But the bad news is that if purchasers cannot see the value added from the solutions you provide them, they will be forced to focus on price. That's because price is a very attractive target when you consider that 55 cents of every sales dollar your customer receives goes to the purchase of goods and services.
As pressure is put on customers -- by both management and stockholders -- to improve profits, the most obvious place to look will be at the price paid for these goods and services. Add to this the prospect of softer markets and it is easy to see why the pressures to find ways to improve bottom-line performance will be increasing.
But profit improvements can come from places other than price. In fact, there are five main categories for measuring the total cost impact you have on your customers:
* Revenues. Often overlooked as an area for adding value, revenues can be one of the most significant opportunities for improving a customer's profitability. Anything, service or product, that can help minimize downtime or increase output efficiency adds tremendous value to your customers.
* Assets. Your ability to minimize the asset requirements of your customers -- primarily inventory -- reduces their possession costs, thereby improving their bottom line.
* Process costs. Reductions in transaction costs, such as summary billing, are one of the most commonly documented savings that distributors show today. But even here, most companies fail to capture the savings from improvements to MROP processes.
* Expenditures. If viewed on an annual basis, not on a unit basis, many opportunities exist that can make both companies more profitable. Substitutions that may cost more but reduce usage requirements is just one example.
* Services. Offerings such as training and technical support often go unnoticed, but provide value to the customer that should be documented.
Keep in mind that the impact you have is not measured by what it costs you, but by what it does for your customer. For example, suggesting a change in a cutting tool or grinding wheel that reduces downtime or improves output can have a dramatic profit impact for your customer even when it costs you next to nothing to provide.
Here's another example: one company recently suggested a different socket on an assembly line that reduced change-out requirements. The result -- $783,000 in increased profit for the customer. And the total annual sales to this customer is less than $700,000! What did it really cost this customer to do business with this supplier? Less than nothing, but unless the distributor shows the customer the value, do you think the customer would have seen that kind of impact?
Developing a unique selling proposition
To get customers to see and buy on the value you add, you must develop a unique selling proposition. This proposition needs to be based around your ability to improve your customer's bottom line. In effect, you don't sell them products. Rather, you make them a profit improvement proposal. That's unique. While everyone else is selling products, you are selling profitability. They can get most products from a number of places, but how many distributors can show them how to make more money?
There are four areas to consider in making a profit improvement proposal:
* Price
* Value Added
* Performance
* Compatibility to their needs
The first three areas can be measured in dollars and can therefore be related directly to profit improvement opportunities. This is what many key accounts are looking for and can provide you with a competitive advantage if you can show them the impact.
I recently helped a distributor build a modular presentation around 30 value-added solutions they provide their customers. Each solution is related to a specific need that they can help their customers attain. The solution outlines the potential dollar impact expected for that customer as well as the resources the distributor has to achieve the objective. The distributor chooses which solutions to include and fills out a short worksheet on each solution. The result is a customized profit improvement proposal with minimal effort.
The ability to quickly create a proposal unique to each customer's needs provides this distributor with a real competitive advantage for two reasons:
* Most distributors cannot, or do not, do a good job showing the value they provide so the ability to present it is a significant advantage.
* Most customers cannot measure the total cost impact their suppliers provide, so having a supplier who can measure the impact helps the personnel they work with prove to their management that they are achieving their goals.
But to create a profit improvement proposal you must be able to measure the total cost impact you have on your customers. Today, this ability will be a competitive advantage. Tomorrow, it may be a requirement for doing business.
Keeping it simple
The need to document and show the value added by both distributors and manufacturers is being seen by more and more companies every day. In the new "Facing the Forces of Change" report, conducted by the National Assn. of Wholesaler-Distributors' Distribution Research and Education Foundation, one of the trends discussed is Supply Chain Integration. Most of the panelists involved in that study agree that the need to document and show customers the value distributors add is critical to long-term success.
But many companies feel that documenting the value you add is easier said than done. This does not need to be the case. When the documentation is difficult or time consuming, most people will put it off. So the solution needs to be simple, and a workbook developed by a joint ASMMA and I.D.A. task force can show you how simple it can be.
There are three cases listed in the workbook showing savings of $60,000, $229,000, and $358,000. These cases, and the $783,000 example above, each took less than 20 minutes to document. Less than 20 minutes, but what is the value to the distributors and manufacturers with those accounts? Documenting the value you add need not be time consuming. However, it does take time to learn to do it well. And for companies interested in retaining and penetrating key accounts, it can offer a significant competitive advantage.
Tim Underhill is a consultant working with ASMMA and I.D.A. on their value-added promotional campaign. For information on the value-added workbook he refers to, contact I.D.A. at (404) 266-3991.
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