A valuable lesson
As distributors fight to maintain their place in the supply chain, value-added reporting becomes critical to survival
By Susan L. P. Srikonda -- Industrial Distribution, 3/1/2000
Industrial distributors have been talking to their customers about the value they add for decades. It's simply what distributors have always done: provided their customers with the products and services necessary to improve operations and raise profit margins.But in the past four to five years, there's been a renewed interest among distributors -- and even among supportive suppliers -- to reach end users with the message of the value-added benefits that distributors bring to the supply chain.
As the industry invests more deeply in value-added services, it's appropriate to examine how well distributors are recognized for the value they add to the supply chain; what customers think of distributors' value-added efforts; how distributor salespeople respond to the value-added concept; the work distributors have ahead of them to further promote their value; and what the impact of trends like integrated supply and electronic commerce will be on this effort.
Today's push for value added
Customers are the driving force behind the recent emphasis on value added and the movement to document the dollar impact of distributors' value-added services.
"Distributors have talked about [value added] for years, but it's the customers who are now saying 'Okay, I've bought into this idea of value added. Tell me what it means for me and tell me how you're doing it differently than everyone else,'" says industry consultant Tim Underhill, of Underhill and Associates.
There are many distributors focused on providing their customers with value-added services -- which can range from improved deliveries, product recommendations, technical support, inventory management to streamlining operations and more -- but very few distributors are documenting the dollar impact of their efforts.
Samson Industrial Corp. and Vallen Corp. are two distribution firms that are making concentrated efforts to build relationships with key customers by establishing value-added programs and documenting the results.
Samson Industrial, headquartered in Tulsa, Okla., works with select customers to quantify the costs Samson is taking out of their customers' operations. Samson limits this effort to companies with which it has established partnerships, where the two companies' operations and often their computer systems are interfaced.
Dave Hancin, president of Samson Industrial, says it's important to choose those customers carefully.
"You have a finite number of resources you can put into true partnerships like this, and you need to make certain you're getting a return on those resources," Hancin says. "And there's a finite group of customers who are willing to do business this way, who take a longer term approach to doing business with suppliers. We need to deliver a positive and measurable return on what they invest in the relationships.
"We come face-to-face every day with customers who say they want to build partnerships, but still take bids on nearly every order," Hancin says. "Much of American industry is still really focused on short-term profitability and the price of an SKU versus the total cost of doing business. And our value-added programs are about the total cost of doing business. The ultimate message here is, when the relationship is successful, both the supplier and the customer achieve a better bottom line."
Vallen's various methods of capturing, or documenting, the value-added services it provides to customers have been evolving for more than five years. Currently the company's salespeople use an electronic value-added reporting system.
"The key is that you have to submit [savings documentation] to the customer," says David Dewey, vice president and managing director for Vallen. "We report things to the customer today as cost savings that in the past we thought was part of our job and that we were paid to do."
"We in distribution are not good at tooting our own horns," Dewey says. "Well today, you have to go tell people about it. If you do something great, and the customer never knows about it, don't get mad at them for not knowing about it. They can't read your mind. ...It's a change in business that you have to capture that data and report it. Showing the customer that we bring them value and cost savings offsets any price difference with our competition or in the cost of the product."
Recognizing the demand on sellers
No matter the point of origin of value-added programs -- whether it's through the customer or through a distributor's executive management team -- the onus for a program's success inevitably falls heavily on the distributor salesperson.
Selling value-added services requires distributor salespeople to make a real paradigm shift from selling products to managing the total business process with their customers. Distributors moving toward a value-added approach to selling must be prepared for some initial resistance from their sales teams.
"The response [of the sales team] to our value-added program was in fits and starts at the beginning because it does require a different approach to the business," Hancin says. "They're not just out selling as much product as they can. But they're learning what the total business process is about and that there's a lot more to a customer's success than just getting a product to them at the right time."
Samson's strategy was to involve two senior outside salespeople in the development of the company's value-added program.
"You can't convert your whole sales staff at the same time," Hancin says. "You've got to start with the leaders. And because they're leaders, they're probably pretty progressive about looking for new ways to help their customers, so they're involvement is critical."
Vallen ties a portion of each salesperson's compensation to the cost savings they bring to their customers, which creates an incentive for success.
However, the rigors of day-to-day business often provide enough incentive to sway even the most paperwork-shy salesperson, Dewey says.
"Once a salesperson has been in a reactionary mode where he or she had to go back after-the-fact to prove to a customer the value that they've brought to them, then their eyes open up and they say 'if I'd been doing this continually, the customer would have recognized my value all along and I wouldn't have gotten to this place," Dewey explains. "Plus, value added, in many cases, eliminates the adversarial role that sometimes exists between the salesperson and the customer because the customer realizes 'hey, these people are working on my behalf.'"
Another important aspect of winning the buy-in to a formal value-added program is to make sure salespeople are adequately trained for their new roles.
"Salespeople who are extremely good at selling product need to understand that as a business partner they have to be able to identify their customer's problems and identify solutions and then show the customers the dollar impact of those solutions," Underhill says. "They become almost like a consultant partner to that business. Distributors need to train them on how to sell solutions as well as they've been trained to sell product."
The end-user perspective
In its November 18, 1999, issue, Purchasing Magazine, another Cahners Business Information publication, reported the results of a survey that confirmed end users' growing interest in having distributors provide value-added services.
In fact, 71 percent of the survey respondents said they had outsourced value-added work to suppliers during the past three years, and 94 percent said their suppliers performed the outsourced tasks as well or better than they did in house. The remaining six percent said their suppliers' performance lagged.
Champion International Corp., a producer and distributor of coated and uncoated papers, has embraced the concept of value add and has established alliances with three MRO distributors who supply power transmission, electrical and PVF products. Champion requires their alliance relationship suppliers to document the dollar impact of their value-added efforts.
"We take a total cost of ownership approach and we encourage them to be the engine to initiate, manage, push and work together with Champion on taking cost away from transactions by product substitution, holding inventory or whatever. There are no bounds," says Dick Piela, Champion's director of sourcing for capital projects and MRO.
Champion asks its suppliers to submit a request for acknowledgement of the cost savings that they've provided to the company. Champion personnel at individual mill locations then review the request and either accept it as a valid cost saving or dismiss it. Champion then tracks those cost-savings figures on a monthly and annual basis, and that becomes the foundation by which the company manages its alliances.
"There's an old adage that 'if you can't measure it, you can't control it or manage it,'" Piela says. "If you measure it, you've got key performance indicators that you can focus on and drive performance for both companies."
In order for such alliances to be successful, they have to be beneficial to both the distributor and the end user.
"The customer's got to take cost out of his operation, and in return you've got to give more business to the supplier," Piela says. "The customer gets an immediate benefit that is a burden to the supplier, but as they grow that business with a customer, they'll start to see some growth benefits probably a year later than the customer does."
The future of value add
The push for distributors to prove the value they add to both their individual customers, and to the supply chain as a whole, is not going away. The bottom line is that the more options end users have at their disposal -- which grow every day with developments in integrated supply and electronic commerce -- the more critical it will be for distributors to show the value of what they do day-to-day.
Citing the Facing the Forces of Change series of reports from Arthur Andersen and the Distribution Research and Education Foundation, Underhill says customers are looking at significant price reductions by using the Internet.
"If they can get 10 to 15 percent better prices because the total cost of doing business is less using the Internet, then the local distributor better be able to show that the value they add is worth that 10-15 percent in order for [end users] to continue to do business with them," Underhill says.
It seems distributors have their work cut out for them.
Hancin says distributors will be forced to make the value-added business approach work as the industry heads for even more change.
"Where this business approach really works is when there's a great amount of change going on," he says. "Where this partnership really comes to bear is when a customer is needing to make changes and they're looking to real partner-suppliers to help them create that change. Within two years, we're going to see dramatic change in industrial distribution -- with B2B, e-commerce -- and when that happens, distributors like us will be called on more than ever to demonstrate and document value.
"In this brave new B2B world, validating value is going to be more important than ever and if you can't as a distributor, you'll just get pushed right out of the process," Hancin says. "The customer will use e-business efficiencies to measure which suppliers add value."
For an industry long focused on product, the products themselves are beginning to seem almost ancillary. The focus is increasingly on the efficiency of the supply chain and distributors will have to fight to maintain their position in that chain.
"Everyone is afraid of customers being able to bid over the Internet and not needing the distributor," Dewey says, "but if you've done your job and the customer understands that you bring value and savings to their company, they'll respect that. So it's critical that you capture and report the things you do for your customer. If you ask me, value-added reporting is critical for the distributor in today's world."
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