Distribution

Distribution pricing is unique. Few other business are as sensitive to changes in pricing as is distribution. Substantial increases in free cash flow can be driven by even modest improvements in pricing processes, tactics, and strategies. Additionally, distribution pricing can be inefficient, especially in unnecessary complexity which does not drive commensurately more margin dollars.
Often, there is often little correlation between distribution pricing performance and its traditional drivers, such as order size, unit price, account volume, or transaction frequency. Customer performance linkage with desirable outcomes such as increased share of wallet, broader market basket, or larger volume may be missing. Product line performance also suffers when judged against such factors as product uniqueness, specification/code conformance, or match to competition. In the worst cases, sales efficiency suffers from administrative burden in managing customers' pricing matrices, contracts, bids, and vendor cost changes. Best-in-class pricing leverages customers' transactional behavior, combined with the distributor's specialized knowledge of product and competition, to develop pricing matrices, contracts, and vendor cost management processes which both maximize net customer profitability and reduce administrative burden on the sales force.
It is a tall order to accomplish. The first objective is to understand the organization's priorities around volume, inventory turns, GMROI, free cash flow, and gross margin. The next step is to understand performance around key customer and product profitability. You must identify the 80-20-10 in the customer base:

• 80% of customers who the company serves at breakeven
• 20% of the customers who the company serves at 100% of its loss
• 10% of the customers who the company serves at 200% of its profit

Understanding this allows you do a number of things:

• Understand account profit and loss
• Create peer group comparisons to know which accounts to grow, which ones to "fix"
• Understand account revenue potential by product mix and target share of wallet
• Drive improvements in gross profit dollars per account and transaction
• Broaden account market basket

Achieving this is not easy. It requires a disciplined, focused process approach. Multi-functional teams must deploy optimized enterprise processes for establishing processes driving improved profitability. Typical steps may include the following:

• Analyze transactional data from the company's IT systems
• Establish current performance baselines
• Identify key drivers to price/profit variation
• Re-segment both customers and products based on identified key drivers
• Identify benefits
• Deploy modified pricing matrices and processes
• Train and compensate personnel accordingly
• Monitor and manage for program compliance

It is not a simple process, but the average distributor can achieve significant improvements in net profitability. Transcend Strategic Consulting specializes in accomplishing just this for our distribution clients. Our team has extensive experience "in the trenches", dealing with and solving real world problems encountered along the way to price excellence. We can help you jump start your efforts and speed up the time until receipt of benefits. So, if you want to improve net profits, contact us now.

Transcend Strategic Consulting is a proud member of the Industrial Supply Organization.