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Stop being a victim – the winners of the future are acting now

Despite falling revenues, many technical distributors are not taking any fundamental action to structure themselves for a successful future. Too few of them can boast significant growth through new markets, customers and business models. Instead they are still living off yesterday's successes. What to do?

The outlook for technical distributors has become markedly gloomy in recent times.

The outlook for technical distributors has become markedly gloomy in recent times. Growth is stagnating, earnings are even falling. Gone is the golden age when technical distributors pulled in plump EBITDA margins up to eight percent and enjoyed annual growth rates of more than four percent. The January edition of the technical distribution periodical "TH Technischer Handel" says: "One in five technical distributors is complaining about a lack of income". The share of distributors with revenue concerns, it goes on to say, increased considerably in 2016. 

New demands on technical distributors

 At first glance that comes as quite a surprise. After all, Germany is one of the most attractive European markets for the technical distribution industry: around 52 percent of all industry products are still sold through dealers. And the European machinery industry has also exhibited impressive growth rates of around seven percent in recent years – with the same high profitability. Why isn't the technical distribution sector profiting from this good situation?

One explanation lies in the increasing demands being made by industrial customers. For a long time, the stocks of products, the breadth of the product range, the technological expertise and the on-location service were the deciding factors in market success. But current developments are giving rise to an entirely new pressure to act – for example the commoditization of products, greater price transparency, the internationalization of the customers, increasingly interlaced markets, greater pressure to be efficient, new competitors arising through digitization and advancing market consolidation. And that list could go on and on. 

Slump inevitable

It is becoming increasingly apparent that a commercial company that only reacts to customer inquiries and restricts its value generating activities to the product range, inventories and "unpaid services" can no longer stand up to the pressure and will in future quite simply have no chance of surviving.

The business associations are calling to action. The press is reporting on the new pressure. Initiatives are arising to bundle joint interests, and events and workshops are being held all around the country on the topic of the new challenges. But earnings aren't improving, because the majority of the companies are proving unwilling to let go of the past, thus knowingly accelerating their downhill slide and the market consolidation. 

Keep an eye on the market and costs

But what exactly do technical distributors have to do to get back on course? A simple commercial consideration based on the cost of sales or advertising and staff costs no longer suffices. No, revenue-growth programs have to encompass both the market (pricing and distribution) and the cost side of the equation. Minor modifications are no longer enough – the business models have to be rebuilt from the ground up. But that cannot succeed without the right basis. Trading companies first have to systematically analyze and optimize their internal processes (operational excellence). So there are two key strategic aspects to the demands being faced by trading companies. 

Project No. 1: Growth initiative in sales

The situation on the market: Technical distributors often have a diverse base of customers from all conceivable industries, so they have a broad product range and a variety of brands in their portfolio, and they also offer numerous services. But there is a downside to this broad basis for the distributors, because it brings with it inefficiencies in the sales work, and hence a purely opportunistic sales model. As a result, it becomes too complex to fulfil the value proposition throughout the entire value chain, which causes margins to crumble dangerously.

So technical distributors should start by putting more emphasis on structuring their sales organization in line with clearly defined customer segments. Continuously segmenting existing and potential customers based on their needs and buying behaviors enables sales activities to be focused more precisely. This means customers can be served in accordance with their potential, so that sales resources can be employed on target and without wasting capacities, from consulting through to execution. Growth initiatives are anchored in sales management in line with the customer segments, where required with the aid of appropriate manufacturers – because not every manufacturer offer fits the corporate strategy, and it is not the number of initiatives that decides on success or failure, but how they are implemented.

Develop new services and price them properly

In addition to this, a palpable change in growth patterns can be observed along the value chain, with the result that the sales and profit pools are also shifting towards services.

Many trading companies still consider service to be something you don't sell, but that somehow just goes along with the product (for free). At the same time, nobody denies that service is something of value to the customer. And for just that reason, it shouldn't just be some kind of appendage attached to the real business, it can also be used to generate revenues. Standard and additional services can be developed from mere extras into stand-alone products. For a start that will often be relatively close to the product itself, but the enormous potential for value generation can only be extracted from services if they are priced on their own right, and independent growth arises -  i.e. they have their own business model.

Comparing its services and competitiveness with the market is an indispensable prerequisite for any trading company wishing to improve its earnings. But it mustn't forget that traditional price models no longer apply. Sales has to look at how to price the new offers; and pricing shouldn't be seen as a one-off action, but become an integral part of the continuous effort to increase profits. 

Three questions for the author:

Mr. Hackstein, why do so few technical distributors look outside the company for management assistance?

Alongside the already highly demanding daily business, most of these companies also have too many topics on their agenda that are important for them. This brings great pressures with it and leads to frustration. There is often little or no time left in the day for strategic work, least of all together with externals. 

How important are the costs?

The management is often fully aware that it cannot make any progress in this context using only internal competencies and resources, but in view of the already extreme pressure on costs, the decision-makers often shy away from the cost of external projects. That is very short-term thinking, because the investments in transformation programs pay off over the long term. Indeed: if you don't invest, you lose.

What do I have to consider when choosing an external advisor?

Technical distribution is a complex field that only experienced consultants really know their way around. Standard methods pulled out of the Power Point draw seldom lead to success here. Also, an external consultant should always be a sparring partner for the implementation, and accompany the process until visible results have been achieved. 

Project No. 2: Cost to serve

On the cost side, it no longer suffices to have the costs "under control" – i.e. being able to plan, manage and understand them. Many companies still use antiquated management systems and KPIs in their controlling work. But these performance indicators often refer only to turnover and margin. In addition, their reporting is not regular enough, so that changes often cannot be accounted for until weeks after they occur. The consequence is falling earnings, excess inventories and negative cash flow.

In this modern age, management has to have transparency on the cost and value drivers at all times, and be able to react immediately to changes at its customers and suppliers, enabled by "early warning systems". This means, for instance, immediately translating manufacturer price increases to the own prices. It no longer has to be the case that price hikes are realized with a delay or not at all, burdening earnings and costing percentage points.

But that is not all: the pressure on costs at companies will presumably keep increasing in the foreseeable future. In view of the growing complexity of customer demands and increasing competitive pressure, trading companies will have to better understand in the future how much it actually costs to serve customers and keep performance promises. An analysis of the true costs to the enterprise ("cost to serve") at customer level provides valuable insights into key accounts, customer segmentation and profitability.

Sound numbers for well targeted cost reductions

The cost to serve analysis quantifies the profitability of products, the value of the negotiated service levels (e.g. the cost of customer-specific solutions), shipping exceptions, the binding of resources or other broad overheads in the organization, across customers and customer segments.

The analysis also enables customers to be re-segmented on the basis of the new findings. Ultimately it can prepare decisions such as reducing or adequately pricing expensive additional services, in order to improve profitability. Within the company itself, the analysis enables efficiency-enhancing programs for the customers and customer segments. These can include, for instance, the centralizing of order processing from transaction customers or the establishment of project management for the process-oriented provision of services – again achieving major cost cuts and/or sales increases.

Emphasize on structuring the sales organization in line with
clearly defined customer segments

Technical distributors have to act – fast!

Technical distribution can still play an important role as intermediary, even in these times of digitization, increasing competition and market consolidation. But it can only succeed in doing so if the distributors offer true added value for their customers, and charge a fair price for it! They also have to gain a better overview of their cost structures, in order to be able to remain competitive. Time is running out, and only the higher performers will survive.

Published in an edition of the specialist publication www.technischerhandel.com // 05-2017

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