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Ever since 1979 when I taught my first distributor seminar at the National Paper Trade Association’s Young Executive Forum session, which happened to be on "Solving the Small Order Problem", I have been able to get executives to shake their heads both ways at the same time. "Yes, we have a big opportunity/problem!" And, "No, we won’t/can’t do it, because the sales force wouldn’t stand for it".

If you do change any incentive plans, make sure that you don’t do it in a strategic vacuum. Your very best sales reps are going to be wary about being averaged into (and weighted down thereafter) by the bottom 80% of the sales force. To get the best reps to go along with compensation changes, they have to believe that the new, improved, refined strategic direction and initiatives will be better for them in the long run. Will the strategy reduce their risks and/or increase their expected, discounted, net present value income stream from the one they currently have? This is not a challenge that is easy to teach, sell and execute.

A few tools to help you get there:

A reader wrote in stating that he was a bit confused about my definitions and recommended practices for different types of important customers: "core, target, gazelle and living edge". Knowing how guilty I am of borrowing and coining terms, I thought a review of the customer types and a few relationship guidelines might help. Before jumping into my taxonomy for customers, a few caveats:

1. Classification names for customers are necessarily rough approximations; any one customer will not necessarily fit perfectly into any category. Our goal is to be roughly right to a degree that allows us to out-perform our competitors at how we segment, serve and grow best accounts.
2. Customers can initially fool you, so reserve the right to reclassify them as needed.
3. The four types mentioned above can overlap. A core customer could, for example, also be in one or all of the other categories.

On to the definitions: "core customers" are the 5 or so out of the top 10+ most profitable customers that we have at a given distribution location that can all comfortably fit into the same niche; they are birds of a feather. While there can be a bit of art required in defining all of the aspects of this niche and why they buy most everything from us, one thing they do have in common is that they buy a lot of our fastest moving, higher fill rate items. In fact, their collective pleas over time have been one of the key shaping forces for why a given location stocks what it does and often differs significantly from what other locations within the same chain can have. Because we sell core accounts lots of fast movers in larger than average orders often with more lines per order due to (in)formal replenishment systems, these accounts are sensationally profitable.

More specifically, when it comes to strategically increasing fill rates for a more perfectly rounded out one-stop-array for these core customers; there are two DCC topics to check out:

Target accounts are the 5 or so most likely to improve accounts in our defined #1 niche for which we aren’t the #1 supplier and for which we think we have the best chance of capturing significant new share of account volume in a year’s time or less. There are a number of selection criteria that we could use to pick these target accounts for each distribution location, but two of the big reasons to pursue them should be:

1. With our re-tuned and improved service metrics starring highest fill rates on the most robust one-stop-array of items for the niche, we now have a measurably, distinctively better (lowest) total procurement cost solution to offer them than any other competitor in a given location area. And,
2. If:

Then, we can typically make our luck start to work within these accounts within 3 to 6 months. Our luck will often happen at the intersection of the goodwill we have generated and an entrenched competitor dropping a few service balls or not following through on a new opportunity as quickly as our hero team.

Gazelle accounts are the 1 to 3% of the customers within our #1 niche that are growing 2 to 5x faster than their peers and very profitably so, because they are perpetual value-creation innovators on a mission for their customers. They don’t talk about what they should be doing; they act quickly and try lots of cheap experiments to fall forward toward their vision to learn and try again smarter. They have all of the bottom-up, can do spirit needed to make new stuff happen. All employees emote a sense of ambition and destiny, they aren’t just trying to be consistently better than the rest, they want to reinvent their industry, be world-beaters. Any employee in the company can tell you what "we" (not "they" in the corner offices) do to be the best value proposition for some target customer and what’s in it for them and why they love working there.

Gazelles are rare enough that if there are only 50 accounts in your number one niche at a given location, there might not be a true gazelle in your niche/market. Distribution chains with 1000 active accounts or more will statistically have some gazelles that should be on corporate management’s team selling schedule. I was a top executive with a mid-west, distribution chain in the mid-‘70s. At this time I obsessed with partnering with Caterpillar Tractor at $4B in sales in ’74 on its way to $14 B in ’80 and a ’75 start up in Memphis called FedEx. They both took our chain for an awesome ride.

"Living Edge" customers are like gazelles in the sense that they are perpetual innovators, but they do all of their innovating in small, incremental ways often without understanding their underlying strategic market proposition in a formal way. They don’t have world-beating ambition and goals, they just like to try new incremental stuff with a rational, objective view of the world. They intuitively understand or quickly learn "total procurement cost" purchasing, and they know how to partner with all of their stakeholders to create 1 + 1=3 or more economics to share.

Living Edge customers are the best to work with on trying to improve inter-company process re-engineering that can then be applied to the rest of the niche. Gazelles, on the other hand, will tell you what breakthrough new things that they expect of you which the rest of the niche may never understand or dare to try. Living Edgers also tend to move into new production areas that are extensions of the past; these efforts need new inventory item support. The higher-energy, lower-concept, fast followers within the niche will then copy the living edgers and start consuming new products, especially if you are able to teach them why and how to do the new production activity.

In a way this taxonomy for customers can also be applied to suppliers and distributors. A big question is do the best types of customers and suppliers see you, the distributor, as one of these best types of partners? If so, then as a winner you can ask winning customers and suppliers if they would like to work together with you on a more formal team-to-team basis. Here are some guidelines and ideas for how:

For target customers/suppliers the team-selling is focused on building a relationship rope of many strands comprised of our people to their counterpart people with common, constant agenda items of:

1. How could we work with you better in order to not only lower your TPC for goods, but to also improve your internal productivity to grow your bottom line.
2. What have been the best and worst service incidents that you have experienced (at each contact point/level)? What can we learn from that? How can we change to guarantee you a higher level of better total service value and experience?
3. What are your latest, new initiatives that will cause changes in what and how you might purchase? Our first opportunities will often come with new needs or old needs for which a competitor has been slow or weak at solving.

For the living edge customers, we might try to create a working committee of 3 to 5 of these customers at each location. It is important that they don’t compete head-to-head with one another, that we probably already know and get along with each other and like to brainstorm together (good chemistry). The goal should be to meet 2 to 4 times per year depending upon how many compelling projects and issues arise for an agenda. We would provide the organizational energy with their agenda input and pay for the (off site?) meeting expenses. Honorariums to get them to show up and care are usually not needed; they are on the win-win hook, especially if we follow up to make sure that win-win benefits or worthwhile lessons come out of the experiments that are concocted. This committee of guinea pigs for new, incremental stuff is really an applied research effort to give each distribution location new growth opportunities that can be sold to much of the remainder of the core niche. The new stuff will be both product centric and extra services. The extra services may apply to few, large accounts and/or have to be sold on an un-bundled basis to most of the niche’s customers.

Working with living edge suppliers should be done at the corporate, not branch, level. We should be looking for the incremental innovators that are ideally predominate #1s in their respective niche with upward momentum that have a lot of product line overlap with the present and/or future needs of our #1 niche of customers. Unless some manufacturer comes along with a world-beating, new selling proposition offering territorial exclusives around which new selling divisions can be built, we should choose the customer niche we want to own first, then choose the appropriate living edge suppliers to support the customer niche second. A key mind-shift for most traditional distribution channel executives.

First some background. As a long-time student of both independent distribution channels and Sysco, here is my view of how Sysco grew up. Sysco may have been the original "poof", publicly-traded, distribution company. It was formed by about eight private distributors all putting their stock into one pot to create a $115MM revenue company that went public in 1970 at the tail end of an IPO frenzy. The fact that the stock market started to slide toward an ultimate bottom in ’74 perhaps saved Sysco from expanding too rapidly like the publicly traded distribution roll-ups of the late ‘90s. Those guys rushed to take advantage of a bull-market blow-off and often bought too many companies, too fast at too high prices and now are either bankrupt or faltering badly with acute operational indigestion, too much debt and declining sales in a tough post-bubble economy.

From the outset, Sysco had two strategic levers to work that most other chains don’t. The first lever is there are large, commodity, volume, price-sensitive regional/national contracts to be won that really work. There are, for example, monster "infeeder" service companies. These service companies run corporate and institutional cafeterias on out-sourced contracts. In many other channels, there are national distributors that go after national accounts at HQs that look good on paper, but the compliance by the local facilities is quite spotty. Often the local plants are far more sensitive to special, local stocking needs and very reliable service than are the local infeeder buyers.

The second and bigger lever is that private label products are a majority of sales in the foodservice channel; no other distribution channel has as much private label volume. This has allowed Sysco to make a total science out of lowering total costs on their national private label goods. I would guess that they may make more money as a percent of sales on the buy side through private labeling than any other distributor in any channel. The service excellence/value side of their business, however, is Sysco’s weakness; they have a record of being very inconsistent on service quality across their locations and generally below average compared to local independents.

Now for the article from the 4-27-03 issue of the New York Times entitled: "A Deft (some say heavy) Hand in the Kitchen"( the URL is at the bottom), here are some quotes:

"some chefs said they were put off by the thought of a deeper relationship with Sysco….Sysco pressures them to continually increase their orders, threatening to drop them if they don’t…there is a widely held belief that Sysco is this 500-lb. gorilla that bullies operators."

"(says the Sysco CEO) the company runs a profitability analysis on each of its 400,000 customers. If they do not make the cut, we either ask for a bigger order, reduce service by sending trucks out less often or help find them another distributor."

"Chefs also complain that Sysco offers rock-bottom pricing on crucial ‘center of the plate’ foods like chicken or steak, only to make it up by charging high prices on other products…Sysco sells more than 300,000 products." The URL: http://www.nytimes.com/2003/04/27/business/yourmoney/27SYSC.html
(you have to be a subscriber to New York Times to read.)

What do I conclude?

1. We have such reliable service metrics tuned to your type of business, you can trust us and park all of your business with us.
2. We will help you get a larger order size as a by-product of helping you to rethink your planning and replenishment systems. This will help you to lower your TPC and improve your internal productivity. set order size through better planning and replenishment system ideas that lower the customers’ TPC and improve their internal productivity.

That’s all for this week!

Bruce

Bruce@merrifield.com, 919-933-7474