Does a PAR Win?

Last month NAED released the results of the most recent PAR report, which highlights distributor performance for 2010.  For many this becomes the "Bible" of distributor benchmarking and profitability.  It is also frequently cited to manufacturers as the reason why distributors need better rebates or other financial considerations.

But is PAR the benchmark that privately-owned distributors should use to measure their performance?

According to PAR, distributor net profitability before tax increased from 1.1% in 2009 to 2.4% in 2010.  Doubling profitability in a year of growth, especially after 2009, is admirable.  Unfortunately, rebate as a percentage of sales for distributors in 2010, according to PAR, was between 2.5-2.7% (depending upon size of distributor.)  So rebates = net profitability?

And remember, these are privately-held companies.  Many are sub chapter S companies. But they are privately owned and can do what they want within their company.  In fact, the proper measurement is for each company to aspire to stretch net profit objectives or set an objective with excess funds being reinvested back into the business (or shared with employees).

So what's feasible? There are two companies in the industry that are publicly held ... Rexel and Wesco.  And remember, everyone's business is different ... different market focus, different margins, different objectives.  Wesco just released its Q2 earnings.  They reported a 5.6% operating margin.

Given the breadth of PAR, about 125-150 distributors, and the fact that 33-35% of distributors are in either A-D or IMARK, perhaps a better benchmark would be for each group to conduct its own PAR study and share the results.  Suspicion is that A-D's affilitates would be higher given their industrial weighting (at least over the past couple of years.)

Now for some of us shooting a par would be great on the golf course.  But is striving for PAR good enough for your business?

What do you think about PAR? Is PAR level performance what you strive for or do you set internal goals?

Changes Coming in Servicing the Industrial Market ... New Report

The industrial market continues to power growth for many distributors.  Recently we spoke with a number of manufacturers and distributors to get the current pulse of the industry.  The result ... industrial continues to grow fueled by the OEM market, industrial MRO and capital expenditures.  Additionally, many industrially-oriented electrical distributors are excelling in the energy market (perhaps because they are more used to selling to end-users) and a number are getting into renewables.  Contractor-oriented electrical distributors still, for the most part, are challenged with limited larger projects around the country and it seems fewer small, light construction projects.  There are some exceptions as we spoke with one contractor-oriented distributor who is up 29% ... as they repositioned to focus on the energy market and are in a state that only has 7.6% unemployment.

While industrial is expected to continue to power the electrical industry until more credit is available, companies start hiring and business confidence improves to enable new private commercial construction, there are a number of changes taking place in the industrial market.

Channel Marketing Group recently gathered insights from almost 2000 industrial end-users and industrially-oriented electrical contractors.  They shared their challenges; what they desire from distribution; their move, and acceptance, of "e" initiatives and more.

Some of our key observations:

• The market is getting more nuanced.  Mass marketing won't work in the future.  Customer intimacy will be key to account development, account penetration and account retention.
• "E" is accepted, and growing, for everything from product research, training, account management and procurement.
• Distributors are viewed as transactional or service-oriented.  The key is deciding what you want to be and managing to profitability accordingly.

The report is available for purchase in the Research section of ElectricalTrends.

What are you seeing in the industrial market?

Is Your ERP system a Mother-ship or a Satellite?

Most distributors of any size invested in a distribution-specific ERP system that handles the specific nuances of the wholesale distribution business, save a few goliaths. The goliaths invested in SAP or an Oracle based system. But there are not that many goliaths.

ERP Software Consolidations

If you noticed, there have been quite a few software consolidations that have taken place over the years, and for good reason. The first few were because the distribution industry consolidated for the most part, yielding fewer 'check writers'. Then the industry took a swan dive with the recession, hit bottom and didn't rise very much from there. Capital investment wasn't the number one thing on distributor's minds, so more consolidation among business systems could be expected.

That's exactly what happened. Epicor recently bought Activant, which had previously acquired Eclipse, Prophet 21, Array (TSS), Prelude and Speedware. Activant also has Vista Information Services (which distributors and manufacturers use) and is the platform / partner for IDEA. And Infor just completed purchasing Lawson. And these are just a couple of examples.

So, now what? What happens when an ERP company buys others? Well they want a return on their investment, of course. The way to get that return is to minimize the investment in multiple platforms necessary to keep the profitable part of the customer base. They have issues, though. Distributors tend to hang on to their older systems and don't migrate as quickly as the acquirers would like.

The acquirers do like any stock portfolio manager would do. They look at products like stock and calculate the return they can get. Then they pick the winners and invest in those. And they look for products that cover multiple industries, unless an industry is very large and lucrative. The other products are slowly taken off life support. Sometimes not so slowly, like when we're still in a very slow capital investment environment and they can't rely on new installation income as much to hide the poor performers.

ERP for GROWTH or cash flow?

Having kicked the tires on a few business systems, there are some favorite criteria for choosing ERP systems in different situations. But the probable fate of your system in the ERP maker's portfolio of platforms has risen to number one on the list. And it should rise to number one in your criteria as in this "new" economy.

Here's a baker's dozen of other difference makers you might consider....

1. What comes with the base package? How do they charge for it? How do they install and train your people?
2. What are the add-on modules and what do they cost? What type of pay back do you get?
3. How well do they execute EDI transactions-orders, invoices, automatic shhp notifications, SPA price notifications, SPA claims and credits????
4. How complete and easy is it to use their product data warehouse or file?
5. How complete and easy is it to use their warehouse management/wireless bar code reading equipment?
6. How complete and easy is it to export data to Excel and PDF documents?
7. How easy is it to link your product database to a web store front?
8. How accessible is the DATABASE? Is it proprietary or an open access database like SQL or Oracle?
9. How easy is it for order entry to look up non-stock items in a complete product database outside of the production file?
10. How easy is it to execute matrix pricing? Or load a price matrix you prepare off line?
11. How good is the forecasting and purchasing capability in generating automatic replenishment orders? Can it handle multiple logistics setups, like CDC, hub and spoke, or multiple instances of these?
12. How easy does it execute 3-way matching of orders, thus streamline accounts payable work?
13. What new capabilities are they investing in with this specific system? Like mobile apps. or margin control.

Of course, there are more that can be added to the list. But do you have the above considerations on your list?

ERP Lifespan

Most of all...you really need to determine what the lifespan of your current ERP system is. Will it be supported? If so, how long? How fast will you be able to get support? ("All support technicians are busy, your approximate holding time will be 45 minutes...give or take an hour"). Will they invest in it? What is their deal to migrate you to the "Mothership" package?

This is business,folks. When you have branches that don't deliver or people that don't deliver, you look to serve the customers some other way than through the branch or person that's not making it.

ERP product lines aren't all that different. Whatever is not delivering to the bottom line has to be consolidated or cost reduced. Plus if you slowly draw down the resources devoted to a package (i.e. additional programming investments and installed base support), maybe the buffalo herd won't notice as much and will stick around so you can migrate them over time to your Mothership.

The moral of the story? Get on a Mothership. Start compiling your criteria now if you're not already on one.

And here's another tip. Find out what percentage of the parent company's sales your package is. And if you can get it, the percentage of the total INCOME (revenue) for the company, then you will know where you stand. Is it the Mothership or a small satellite?

Distributor needs change

Tell us how you look at your current ERP system. Does it meet your current and future needs?

Who Should Be Carrying Product ... Reps or Distributors?

Over the past few months we've been talking with a number of reps throughout the country as we work with an electrical manufacturer to review their reps and, in some instances, recruit new reps.  Because of their product type we've inquired about their warehousing capabilities, solely because their competition has a number of reps with warehouses.

In many instances we've had reps tell us that the had had a warehouse but closed it a number of years ago, frequently to positive reaction from medium to large size electrical distributors... and have seen their business grow.

Which then led to a thought, and some conversation about reps as an inhibitor (today) and possibly a contributor (tomorrow), especially for larger markets, of distribution consolidation.

Now you may ask why but consider, whom does a rep warehouse benefit?  In reality it benefits those who don't want to carry inventory ... either due to logistical reason or financial reasons.  Typically this is a small distributor or a small branch.  What would be the impact on small distributors, or small branches, if they couldn't send a truck to a rep warehouse, sometimes multiple times a day, to pick up material?

And couple this with manufacturers increasing pre-pay shipments to cover increased freight fees?

A major role of a distributor is to carry inventory to support their customers' needs.  This can be at a location or through a distributor-owned redistribution system.  Well run medium to large distributors can invest in systems and inventory to bring value to manufacturers and their customers.  The smaller companies frequently don't want to carry the inventory (they can't afford carrying the inventory).

So, could reps be helping small distributors stay in business (and are they getting a premium for it)?  Should reps have warehouses or should product go directly from the manufacturer to the distributor (or customer if it is a drop shipment)?

Would you prefer to work with a rep that has a warehouse and enables your competition (and puts them on a level playing field with a distributor that carries stock) or with one that supports distribution / end-users and you are responsible for your inventory management?

It also makes one wonder if NEMRA has done a study to identify which model is more profitable for a manufacturer and for a rep?

Thoughts?