In distribution, expansion in one area of the business often demands expansion in another. Any growth or shift affects the entire company and magnifies existing business structure complexity.
It's easy to get caught up in growth and end up with disjointed, inefficient processes that suffer from lack of attention – or, more importantly, lack of strategy. Trying to capture every opportunity with every potential customer will mean blurring your focus. It will also require adding salespeople, suppliers and other resources to accommodate incremental customer needs. Moreover, the more uncontrolled complexity you pursue, the more difficult it will be to manage and the harder it will be to capture the margins you need.
Prioritizing strategic complexity management is vital to success in distribution. If you can successfully manage complexity, you are more likely to thrive, grow and achieve greater profitability.
Stratification as the Trick to Simplify Complexity Management
Stratification is an ideal tool for managing complexity. With it, you'll better understand the makeup and performance of critical areas of your business to pursue growth strategically.
Stratification involves segmenting or identifying levels of hierarchy and performance in areas of your business so you can better manage activity in those areas, determine the best focus and define business rules. It can help you identify where you should channel your energy and investments, where you can reduce your efforts, and where you can streamline a process that is causing issues across your organization.
One of your main goals with stratification should be to identify your core business: core customers, core products and services, core suppliers, etc. These core segments represent the “few” that drive most of your business activity, in agreement with Pareto's 80/20 principle.
However, knowing where to start and which business processes to stratify can be challenging. The analysis and insights gleaned from decades of work done with distributors highlight which stratification strategies most effectively drive specific goals. Keep in mind that you don't need to do all of them simultaneously. Focus on those that will have the most significant impact on your company.
Supplier Stratification
Distributors stratify suppliers to understand their supply base better and allocate resources accordingly. Metrics used in supplier stratification include profitability, service levels, performance and loyalty. You could also rank suppliers using risk, strategic fit, and growth potential. Or, focus on your top suppliers responsible for 80% of annual spend across your supplier base.
Product Stratification
Product stratification, also known as item or inventory stratification, helps distributors rank or classify products based on performance. This makes it easier to manage the complexity of carrying hundreds to thousands of items. It also helps distributors understand which items are most critical.
Demand Stratification
Stratifying demand can help you understand ordering patterns among slow-move and fast-move items to more accurately forecast product demand and optimize inventory levels. It involves adjusting the peaks and valleys of demand before forecasting. Keep in mind that such stratification can be challenging when performed manually, so we suggest using automation whenever possible.
Warehouse Space Stratification
Most distributors understand the importance of optimizing their facilities and warehouse space to fill orders efficiently. However, it's challenging to produce a clear view of how you're using your facilities and identify where you can improve. Stratifying your space into zones to make more efficient use of your buildings can help you maximize volume capacity, easily stock and retrieve parts, optimize pick rates of different products and more.
Service Stratification
Stratifying the services you provide your customers helps you determine their value and how you should price them. Stratify services based on cost, profitability, popularity, product dependency and time involved. This will help you capture the margin you need on these services, rather than breaking even or losing money on them.
Market Stratification
Market stratification helps distributors understand and make determinations about serving various types of customer segments to focus their sales and marketing resources more strategically. This can be a complex process that involves finding the optimal breakdown of market segments. At one extreme, you could view your entire customer base as a single market segment, which is easier to manage but treats customers as though they all have common needs. At the other extreme, you could view each customer as its own segment, which accommodates unique market needs but is considerably more difficult to manage. Finding a middle ground between the two is the best solution.
(H3) Customer Stratification
When you stratify customers, you're analyzing factors such as how much business they do, how profitable they are in gross margins, how loyal they are and how much they cost to serve. You're ultimately evaluating them in terms of their value to you. You can then categorize them according to those characteristics to allocate effort and resources better. This will help you identify which customers are likely to grow and remain profitable and which might be more of a drain on your resources.
Salesforce Stratification
Stratifying your salesforce (also known as a form of “skill-will stratification”) can be complex, but it is also critical. It involves assessing what individual salespeople are capable of and what they are likely to do so that you can more effectively define their roles, assign them tasks and train them in your strategy. It also helps you determine the optimal allocation of resources by matching specific salespeople to appropriate customer types.
Simplify the Complex One Process at a Time
Most distributors strive for optimal growth that is controlled and well managed, but it's incredibly challenging considering the complexities distributors face each day. This stratification framework can help you understand how to manage complexity at your company and make better-informed decisions. Choose which processes will have the most significant impact on your company and begin delving deeper into analytics to segment, categorize and identify the core business you should nurture and protect to drive profitable growth.
Pradip Krishnadevarajan is the co-founder and managing director of ActVantage.
