Redefining How The Game Is Played

1
Redefining How The Game Is Played In
The Distribution Industry Part Two
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Executive Summary

• This is Part Two of our thoughts on how the
  business of the distributor is being redefined.
  Part One enumerated the five imperatives, which
  have evolved over the last thirty years, for all
  distributors. These imperatives are to
• Fully understand the customers needs and wants
  and how those needs and wants change over time,
  so as to engage your customers over time at a
  profit
• Only perform those activities that are valued
  by your customers, suppliers, employees, and
  other stakeholders
• Continually improve the effectiveness and
  efficiency of those activities you must perform
• Develop competencies and capabilities in your
  people, processes and systems and
• Effectively manage your resources
• In Part Two, we will focus on the distributors
  stakeholders, in particular suppliers and
  employees, and how distributors can continually
  be in the loop as to their stakeholders
  changing needs and wants (imperatives 2 and 3).
  Our focus is not only on identifying the
  stakeholders needs and wants and the activities
  that satisfy them, but is also on performing
  those activities over time at a profit.
• All distributors are urged to consider how
  their stakeholder relationships are structured.
  The traditional transaction based relationship,
  the bow tie, is contrasted with a multi- and
  cross-functional structure of the diamond. The
  benefit of the diamond structure is illustrated
  through numerous examples (slides 5 through 14)
• Utilizing the diamond structure for its
  stakeholder relationships, the distributor is
  positioned to enable its organization to
  understand the needs and wants of its
  stakeholders as they change over time. With this
  insight the distributor can focus its resources
  only on those activities that enable it to most
  effectively and efficiently serve its customers
  over time at a profit.
• Continually improving the effectiveness and
  efficiency of the activities the distributor must
  perform is a requirement for serving customers
  over time at the optimum level of profit. This
  thinking piece offers a high-level road map for
  the distributor wishing to transition its way of
  doing business to a longer term view of
  continuous improvement and activity level
  management. There is also a caution to the
  distributor about the role of information
  technology in the process and activity
  management. (slides 15 through 20)
• Finally, a new overall view of the
  interrelationships between the distributor and
  its stakeholders is presented (slide 21)

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Focusing On The Stakeholders

• Part Two addresses the second and third
  imperatives
• Only perform those activities that are valued
  by your customers, suppliers, employees, and
  other stakeholders
• Continually improve the effectiveness and
  efficiency of those activities you must perform.
• Our focus will be on the distributors
  stakeholders, in particular suppliers and
  employees, and how distributors can continually
  be in the loop as to their stakeholders
  changing needs and wants. Our focus is not only
  on identifying the stakeholders needs and wants
  and the activities that satisfy them, but is also
  on performing those activities over time at a
  profit.

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Serving Stakeholders At A Profit

• In order to Only perform those activities that
  are valued by your customers, suppliers,
  employees, and other stakeholders, and then
  continually improve the effectiveness and
  efficiency of those activities you must perform,
  you must
• Think and act cross-functionally, not only
  within your own company but across the companies
  within your channel of distribution
• Continually understand the changing needs and
  wants of your stakeholders
• Continually act to eliminate or reduce
  non-valued or less-valued activities, at the same
  time you add new activities or augment existing
  activities
• Constantly keep in mind why you are doing the
  above - to serve your customers over time at a
  profit.
• Effectively manage your resources

5
The Bow Tie And The Diamond

• The bow tie and the diamond are graphic
  depictions of two different ways of doing
  business
• The bow tie represents a transactional approach
  with one point of contact between the distributor
  and a stakeholder (slide 6)
• This approach optimizes at the point of the
  transaction
• Goals are achieved within a functional silo
• This approach is traditional
• The diamond represents a systems or team
  approach with many points of contact between the
  distributor and stakeholder (Slide 7)
• This approach optimizes across the many points
  of contact within the relationship for a
  particular series of transactions or a set of
  transaction types
• Optimization considers all dimensions
  surrounding the transaction, defined as the
  relationship
• Optimization is multi- and cross-functional
• Our examples focus on suppliers and employees
  (slides 8 to 14)

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Traditional Supplier Interface
The traditional relationship between distributor
and supplier looks like a bow tie, with the
distributors buyer and the suppliers
salesperson at the midpoint of the tie only
communicating directly with each other across the
companies. Each of the opponents are
attempting to reach the best deal they can,
despite the transactions impact on the rest of
the organization. For example, the supplier
might have a 12-pack on special and the
distributors customers only order 3-packs. The
buyer gets a great price per unit, but the
warehouse is left the task of repacking the goods
into 3-packs. Looking at another dimension of
the same transaction, the distributors accounts
payable department spends a significant amount of
time reconciling receiving reports to purchase
orders and to invoices because of incomplete
information. Because of the lack of the right
information, the accounts payable detail does not
reconcile to the total amounts due as claimed by
the supplier. This results in the payments, sent
by the distributor to the supplier, having
incomplete cash remittance information. This in
turn results in the suppliers accounts
receivable department expending additional time
reconciling the distributors account.
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Enhanced Supplier Interface
A different approach is to turn the bow tie
inside out so the interaction with the supplier
looks more like a diamond, with a number of
points of contact between the companies. There
are two benefits with this approach. First, the
buying and selling processes become
multi-functional. This affords visibility to the
impact of buying decisions across the company.
In our previous example of the 12-pack special,
the receiving department would be able to provide
input on the disruption and additional cost
required to repackage the goods. This would give
purchasing a more holistic context for the buy
decision on the special. The second benefit with
this approach is the opening of direct
communication lines across the points of contact
between the supplier and distributor. In our
previous example, additional man-hours are being
incurred in the account reconciliation process
because the accounts payable department of the
distributor does not have the right
information. This lack of the right information
is driving behavior in the distributor, which in
turn causes additional man-hours to be incurred
in the suppliers accounts receivable department.
Opening the communications lines across the
companies could eliminate this additional work
for both parties.
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The Diamond And Suppliers
The Problem A consumer products distributor owed
a large amount to a key supplier, and it was
significantly past due. The reason the large
balance was in arrears was the numerous
unreconciled errors in the account transactions
detail, which were attributed to perceived
invoicing problems at the supplier. The
situation had escalated to the point the supplier
slowed its shipments to the distributor and was
threatening to stop all shipments until full
payment was received. The Cause Both the VP of
Sales and the VP of Purchasing were feeling the
product squeeze from the supplier and decided to
visit the Accounts Payable Manager and
Controller. What they heard from the Accounts
Payable Manager was that the supplier was not
providing the right information to support the
invoiced amounts. And, no payments would be made
of balances not fully supported. The
Solution Internal and External Events - The
Controller took the lead. He arranged a meeting,
with the assistance of the VPs of Purchasing and
Distribution, with the buyer assigned to the
product line provided by the supplier and with
the manager of the Receiving Department. They
found that part of the missing right
information was in the Receiving Department, but
the rest of it was with the supplier. (Changes
were made in the internal business processes to
ensure the right information in house would start
flowing to Accounts Payable.) Next, the
Controller called the Controller at the supplier.
A conference was set for the appropriate Credit
and Accounts Receivable personnel at the supplier
and the Controller and Accounts Payable personnel
at the distributor. At the conference all the
details of who had what information were
understood.
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The Diamond And Suppliers
Cross-Company Problem Solving and Process
Simplification - A week after the conference, a
second meeting was held. This meeting included
representatives from the Sales Department,
Shipping Department and Customer Service
Department, in addition to the accounting
personnel at the supplier. From the distributor,
in addition to the accounting personnel, the
Receiving Department manager and Buyer were in
attendance. For this meeting, all brought the
business process maps from their departments and
close attention was focused on the interfaces of
information between the departments and the two
companies, i.e. between shipping and receiving,
between accounts receivable and accounts payable,
etc. Glitches were found in the information
hand-offs both within and across both companies.
Actions were taken to remedy the causes of the
errors. The account transaction errors were
reconciled, and new business process activities
were put in place to ensure the errors do not
arise again. While this example is from what
may be considered a mundane dimension of the
relationship between supplier and distributor, a
lack of attention to these details can cause
major headaches. Attention to them can result in
a stronger more efficient and effective
relationship between distributor and supplier.
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The Diamond And Suppliers
The Sought For Advantage A distributor of health
care products was operating in an industry
segment undergoing rapid and massive
consolidation. Competition was cutthroat, cost
pressures were monumental. The distributor was
looking for ways to create barriers to
competitors by leveraging its relationship with
one of its primary suppliers. The distributor
had access to POS data from a number of its
customers, but had not really ever used this
information. The Opportunity The distributor
and supplier held a series of meetings to
identify ways in which they might work together
to reduce the total cost of the distributors
product to his customer. They both understood
that the suppliers lowering of the product
acquisition cost (one component of total cost)
was not a practical solution for the supplier.
The distributor and supplier decided to form a
team of IT personnel from both companies. This
team took the demand data (POS information) over
time and performed a series of sophisticated data
mining and analytical exercises. Through this
work the team identified consumer purchase
behavior patterns within various SKUs,
demonstrated during certain days of the week and
months. From this work the team created a tool
for crafting a sales forecast for over one-half
of the SKUs the distributor purchased from the
supplier for the distributors customers.
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The Diamond And Suppliers
Cross-Company Problem Solving and Process
Simplification Next, a team of personnel from the
Sales Department of the supplier and the
Purchasing Department of the distributor began to
review the historic demand data and the results
of the IT teams work. This team compared how
the distributor had purchased from the supplier
historically, against the amounts the
distributors customers were actually selling to
their customers. They noted how the purchasing
patterns were historically out of synch, gaining
visibility into both long and short stock
positions of the distributors customers. They
also could see how scheduling their business
using the forecasting model (which is based on
the weekly demand data) could potentially smooth
out the flow of product through the supply chain,
reducing inventories for the supplier and
distributor. Interestingly, they developed a
six-month sales forecast, inventory level and
turnover goals for each of them, and a schedule
of planned order releases against the sales
forecast. They shared each others goals and
held each other accountable for the attainment of
each others goals. The distributor then took
this data and analysis to the Distribution Center
manager. They began to discuss how the change in
product flow patterns would impact the work in
the DC. The DC manager began to consider smaller
unit, more frequent deliveries from the supplier
and began to think of ways the supplier could
package the inventory at shipment to make it
easier on the DC managers receiving and put-away
processes. It was decided another team should be
created. This team would be made up of the DC
managers of the supplier and distributor. The DC
manager of the distributor invited
representatives of the receiving and put-away
work groups to join this team. The DC manager of
the supplier invited representatives of the
pulling and shipping work groups to join the
team. From a series of meetings with this team
it was concluded that new product packs could be
designed for the distributor. It was also
determined that with better information they
could eliminate the backorder method of
purchasing/receiving and change to a fill or kill
method. This not only speeded up the receiving
process, but also eliminated major tracking and
reconciliation issues in both inventory control
and accounting.
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The Diamond And Suppliers
Cross-Company Problem Solving and Process
Simplification (continued) Seeing how these teams
worked to impact inventory levels, receiving and
shipping activities, and the activities in the
inventory control and accounting areas, it was
decided that cross-company multifunctional
communication was good. Accordingly, a weekly
telephonic Sales and Operations Planning meeting
is now held with representatives of all the
departments in both companies to review the
weekly sales forecast for the distributors
customers. Decisions are made from the
information shared at that meeting on what
product to move through the supply chain and what
work to schedule in both DCs. The result is that
inventory levels and over-time are both down.
Extending the Opportunity Now that the
distributor is comfortable managing the flow of
product from the supplier to himself, he is
getting ready to turn toward his customers. He
wants to extend his command over the flow of
product and the management of transaction related
costs from the supplier to his customer. He
wants to anchor his management of product flow in
demand planning and be the driver of the supply
chain, managing and controlling the information
necessary to do this effectively.
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The Diamond And Employees
The gains that can be obtained by effectively and
efficiently linking business processes between
the distributor and the supplier are very
tangible. The gains typically improve
productivity, i.e. reduced man-hours of effort
per unit of work, lower manning levels, and
elimination of unnecessary activities and related
work. In addition to the business process
efficiencies to be gained, there are less easily
measurable gains to be obtained from the
employees of both the distributor and supplier.
Employees are given an opportunity to contribute
to the improved efficiency of their jobs by
changing the causes of inefficiency at the
source. They are working outside the bounds of
their traditional jobs making change to improve
the methods used to perform their work. They
become ambassadors of the company working for
improvements across company boundaries.
Relationships are formed open communications are
fostered and employee satisfaction improves.
This environment should have two tangible
results. First, the employee turnover levels
should decrease. Second, the cross-company
relationships should create barriers to entry for
other suppliers. This is because the
relationship is built around the interaction of a
many multi-functional personnel versus one sales
person and one buyer.
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The Diamond And Employees
The Situation An industrial products distributor
collected warranty returned units from its
customers and returned them to the supplier for
credit. Returns were picked-up from customers,
held at the branch until certain minimum
quantities were accumulated, then sent to the
regional DC for consolidation with units from
other branches, then periodically sent to the
main DC for further consolidation and return to
the supplier. Transfer transactions were
recorded at each step of the physical movement of
the units to be returned. These transactions
were processed by the distributors accounting
department moving the inventory from one location
to another, and eventually claiming the return to
the supplier. The supplier was receiving the
returns and issuing the appropriate paperwork to
the distributor. This business process had been
in place for twenty years. Cross-Company Problem
Solving and Process Simplification For the first
time, at its annual key supplier meeting, the
distributor invited its accounting personnel and
the supplier brought its accounting personnel.
As the two groups of accountants met, the topic
of warranty returns and the laborious process
associated with processing the activity at the
distributor became the focus of the discussion.
As the accountants commiserated, a larger issue
emerged, that being, the cost to the distributor
to move the returns from the customer through the
main DC and on to the supplier. The
distributors accountants took ownership of the
effort to review and change the way returns were
processed. After a series of meetings with
product, distribution, and transportation
personnel at the distributor and product,
distribution, and transportation personnel at the
supplier, the accountants modeled a new process
to transfer returns from the branches directly to
the suppliers DC. In addition to the change in
the physical flow of the returns, the accountants
also clarified a number of the return rules
that were complicating the processing activity
between the supplier and distributor.
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Process And Activity Management
Eliminate All Activities That Do Not Contribute
To Serving The Customer At A Profit Over Time

• Eliminate nonvalue added activities
• Augment valued activities
• Adjust over-performing activities
• Allocate resources to critical areas

• Part One outlined a technique for mapping
  customer preferences to activities performed by
  the distributor.
• Elimination of nonvalue activities is required,
  but all distributors should be adjusting those
  activities valued by the customer to the minimum
  levels required by the customer.
• It is not the intent of this thinking piece to
  review the theory of process simplification and
  management. The next slides will focus on
• Presenting a high-level road map that
  distributors can use to begin to think about the
  process of activity based management. (slides 16
  and 17)
• One all to common error made when attempting
  process simplification. (slides 18 to 20)

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A Road Map To Change

• The focus of process management is on the
  management of the distributors business
  processes for long-term continuous improvement.
  Its logic in anchored in only doing the right
  things and doing those things effectively and
  efficiently. That is, serving the customer over
  time at a profit. To do this effectively the
  distributor must adopt a longer-term view of
  management and adopt a methodology for creating
  and maintaining the organizations effort so as
  to deliver change on a continuing basis. Our
  suggested methodology is systematic and has four
  phases.
• Focus - There is a familiar story about a
  blind man feeling around the side of an elephant
  attempting to determine what it is. Thinking
  about process management in a distributor is a
  similar experience. The first step in the
  methodology is to start to chunk down the
  business processes within the company (assuming
  you have them defined), identifying those areas
  where you believe there is opportunity for
  improvement. Identifying these areas is a big
  step, for from there you can begin to identify
  business issues related to the opportunities and
  to identify who should be responsible for the
  further investigation.
• Define - This second phase in the methodology
  suggests that the group you have assigned
  responsibility for further investigation bounds
  the opportunity for improvement. This means the
  group more fully describes the designated
  business process and how it fits across the
  organization, identifying what the inputs and
  outputs are, what a standard of performance might
  be, and what measures would be best to determine
  if the performance standards are being achieved.
• Analyze - This phase is where the suggestions
  for change arise and are implemented.
• Improve - This phase is the continuous
  improvement phase. The enhanced process is
  monitored and further opportunities for
  improvement are identified.

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A Road Map To Change
The key elements of each of the high-level road
map steps in the process management methodology
are illustrated above. (Again, this methodology
assumes you have your business processes mapped.)
Changing the way a distributor does business
through impacting business processes is not a two
week exercise. This truly represents a change in
the way business is viewed and conducted on a
day-in and day-out basis. As seen in the
diagram, the underlying logic in this way of
doing business is as simple as the four steps
described and as complex as all the
communications and cultural change that underlies
the effort. When considering all of the
dimensions of change for the distributor, this
undertaking will likely seem daunting. As
daunting as it may seem, there is likely not an
alternative.
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Technology Is Not The Silver Bullet

• Information Technology Does Not Drive
  Sustainable Competitive Advantage
• When asked how distributors can best create
  sustainable competitive advantage in todays
  environment, one immediate response is
  information technology.
• First, competitive advantage is not
  sustainable. This is relatively easy to see.
  Just recall Federated Department Stores, Eastern
  Air Lines, Kodak. None of these organizations
  had true sustainable competitive advantage.
  Today, markets continue to redefine themselves
  and what was good yesterday, does not carry the
  mail today.
• Second, information technology makes a
  difference. It has obliterated former sources of
  advantage by making customers and suppliers more
  powerful and by increasing the speed and
  discontinuity of change. By having this impact,
  information technology is making process,
  organizational knowledge and leadership more
  critical. In fact, the critical and scarce
  organization resource is now people and the
  knowledge they carry about how things get done.
• People And Business Process Drive Sustainable
  Economic Improvement
• Information technology does not drive business
  process optimization. While by definition, there
  are business process and work flow inherent in
  the logic of software applications, these
  applications do not rationalize business
  processes surrounding the applications.
• The processes surrounding the applications are
  those that need to be integrated and focused on
  serving customers profitably over time.
• It is this integration and focus,which drives
  down the number of errors and the cost of doing
  business. It is this integration and focus,
  which ensures information to be used by
  management for making critical decisions is
  accurate and reliable.
• Process can be rationalized and redirected,
  then supported by technology, but sustainable
  economic improvement comes from people serving
  customers over time at a profit.

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Technology War Stories
Technology to Ensure Timely, Consistent and
Accurate Information - A national industrial
products distributor with over 300 branches had
grown by opening new branches and acquiring other
distributors. The company installed the same POS
system into the newly opened/acquired branches,
but the accounting, purchasing and other primary
business functions resided in three different
legacy systems. The distributor decided it was
time to streamline its business activities in
order to eliminate non-essential activities and
to improve the accuracy and speed with which
transactions were processed. (This was driven by
demands from vendors and customers for more
timely and accurate information, and by the need
to reduce costs.) The IT manager suggested that
it was also time to look at new ERP software to
replace the different legacy systems. The IT
manager suggested that the software installation
process be the driver for the changes in business
processes across the company. IT consultants
were engaged, software was selected and the
installation process was initiated. After nine
months the system was ready to go live. The
switch was flipped, and it was 45 days before the
next invoice was generated by the system. The
problem was two fold (1) business processes
surrounding the sales and invoicing
process/activities were not changed to reflect
all of the changes demanded by the new software,
and (2) people were not adequately trained in the
linkage of business processes and the new system
requirements. Technology to Solve Operational
Efficiencies - A consumer products distributor
was growing rapidly due to tremendous product
acceptance and its sales forces success with a
number of large customers. The growth was
straining the operations in the distribution
center as new customers brought new demands and
volumes increased. To remedy the problem, the
distributor purchased a new warehouse software
application. One-hundred and twenty days after
installation, headcount was up, overtime was up
and shipments were late. The problem the
bottlenecks and operational strains were not
being caused by the old system, but were being
driven by the business processes employed by the
people in the DC. The old system was just a very
visible target to assign blame.
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Technology Is An Enabler
Process
People
Technology
Information technology will not catapult the
distributor ahead of others in any reliable way.
However, the distributor can find sustainable
advantage in process and people. The definition
of business processes and the simplification,
augmentation and elimination of the activities
that make up the business processes will increase
transaction speed and lower costs. The building
of capabilities within people will enable them to
execute the business processes in a way that
drives increases in accuracy, speed and customer
satisfaction. The integration of technology into
the platform of well defined and managed business
processes and capable people will bring faster
and cheaper information for the people to
assimilate into the performance of their business
processes. All three people, processes and
technology should help to ensure that customers
are served over time at a profit.
21
A Shifting Mindset
The distributors view of his business and the
roles of all of those in the channel with him are
being redefined. And, the rate of this change is
increasing. A primary driver of this change is
the estimate that .25 of every dollar expended
in the supply chain is expended on redundant
activities. The major cost components of these
activities are inventory holding costs, selling
costs, and transaction costs. The potential cost
efficiencies to be gained by rationalizing and
optimizing these areas are too great to be
ignored. The signs that this change is upon
distributors can be seen in the current emphasis
in the literature and by consultants on demand
planning and in the boundary spanning software
applications which are being introduced. If the
distributor does not take the lead in driving
this change, the supplier or the customer will.
If this occurs, the fate of the distributor will
become even more tenuous.
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MAY WE BE OF ASSISTANCE
Berling Associates has been providing an array of
proven services to the distribution industry for
over 25 years. Our perspective, forged over
time, can assist executives to redefine how they
play the game.
Business Strategy Supply Chain Analysis Market Analysis
Strategic Assessment Inventory Management Segment Profitability
Market Segment Analysis Cargo Management Customer Profitability
Competitor Evaluations Sales/Service Analysis Product Profitability
Acquisition Evaluation Vendor Management Perception Analysis
Strategic Alliances Purchasing Management
Strategic Planning Customer/Vendor Surveys Business Process Management
Activity Cost/Value Analysis Process Analysis
Measurement Tools Site Location Analysis Process Simplification
Activity Based Costing Warehouse Cost Management Process Integration
Product Line Profitability Logistics Network Optimization Customer Process Integration
Customer Impact Management 3PL Analysis Vendor Process Integration
Key Business Metrics Decision Support Systems Knowledge Management
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CONTACT INFORMATION
Rob Berling Berling Associates 550 Pharr
Road Suite 212 Atlanta, GA 30305 Tel.
404.365.9836 Fax. [phone] Email
rberling_at_berlingassociates.com Website
www.berlingassociates.com