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The Effects of Globalization: Survival Discussion for BSA

The Effects of Globalization: Survival Discussion for BSA. BSA Annual Convention May 2005 Scott Benfield Benfield Consulting The Effects of Globalization. Slowing growth in domestic markets Rapid growth in worldwide markets exceeds North American growth

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The Effects of Globalization: Survival Discussion for BSA

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  1. The Effects of Globalization:Survival Discussion for BSA BSA Annual Convention May 2005 Scott Benfield Benfield Consulting

  2. The Effects of Globalization • Slowing growth in domestic markets • Rapid growth in worldwide markets exceeds North American growth • Nominal profitability for North American Distribution • Cost of material and cost of service are the playground for North American Distributors • You won’t sell your way out of this-at least in North America

  3. Slowing Growth in Domestic Markets* • North American Market will grow from $7.6 billion in 2002 to $9.55 billion in 2007 to $11.8 billion in 2012 • Average growth rate of slightly more than 5% for North American Market (2002-2012) • U.S. Market is expected to grow 4% per year from 2002 to 2007 and near 5% per year through 2012 • Canada and Mexico are expected to grow 8% per year through 2002 to 2007 and 6% per year through 2012 • Western Europe’s growth rate will approximate that of the U.S. Total Market 9.6 billion by 2012 *Data Source the Freedonia Group

  4. Worldwide Growth is On the Move* • China grew from $2.65 billion in bearings purchased in 2002 to $4.44 billion by 2007 and 7.25 billion by 2012 • China’s average growth is 13% per year from 2002 to 2007 and from 2007 to 2012 • Eastern Europe grew from $1.95 billion in bearings purchased in 2002 to $2.65 billion in 2007 and $3.55 billion by 2012 • Eastern Europe’s average growth is 7% per year from 2002 to 2007 and slightly over 7% from 2007 to 2012 *Data Source The Freedonia Group

  5. Worldwide Growthis on the Move* • Pacific Rim/Other Asian Markets will grow from $2.75 billion in 2002 to $4.04 billion in 2007 to $5.6 billion in 2012 • Average growth rate is slightly over 9% from 2002 to 2007 and slightly less than 8% from 2007 to 2012 • Total of China, EEU, Pac Rim grows from $8.65 billion in 2002 to $16.4 billion by 2012 or a slightly less than 9% average growth over 10 years • These three markets will be approximately 40% larger than the North American market by 2012 and average annual growth rate is almost double • Russia market growth at a rate of 5.6% per year to 1.5 Billion by 2012 but central government control worrisome *Data Source the Freedonia Group

  6. World Bearing Demandby Application* • Industrial machinery will grow 7.7% per year through 2007 to $20.1B, and 7.3% per year to 2012 to $27.5B • Motor vehicle will grow 2.8% per year through 2007 to $7.7B and 2.7% per year through 2012 to $8.8B • Aerospace and misc. will grow 7.3% per year to $7.6B by 2007 and 6.8% per year through 2012 to $10.12B *Data Source Freedonia Group

  7. Nominal Profitability forNorth American Distribution* • Durable Goods Distribution in the bottom 10% of productivity in US Economy • Wholesale Durable Goods sales per employee grew .6% per year from1997 to 2002 while wages per employee grew 2.75% during the period • Industrial Distributors (IDA, PTDA,BSA, NAHAD, etc.) had sales per employee of 1.23% growth from 1997 to 2002 and 2.36% growth in wages per employee • Approximately 20% or slightly over 2000 industrial distribution establishments “disappeared” during this period (Economic Census 2002) *Source Benfield Consulting White Paper

  8. Financial Trends forBSA Distribution*

  9. Financial Trends forBSA and Associated Distributors • Growth of sales per employee is 1.6% per year vs. average U.S. inflation growth of 2.6% per year • Pre-Tax profit of IDA Distributors in 2004 was .7% of sales, in 1996 it was 1.6% • Return on Net Worth for Electrical Distributors fallen from over 20% in the late 1970’s to less than 10% today • The vast majority of Durable Goods distribution is in a declining financial mode

  10. The New Playground inNorth American Distribution • Cost of service will be integral to financial survival • Expect sales and solicitation costs to fall • Expect definition of service to increase and “embedded” services to decrease or have lesser cost alternatives • Alternative suppliers will come from China and India • Master distributors will rise as competition for major manufacturers • Pricing systems will be developed and sales driven pricing will decrease

  11. Aligning Services To CustomersTwo Poles Of Service Provision One size fits all, over-serve, Under-serve, don’t serve specifically Bowling Ball Starburst Services + Product + Cost Plus Price Segment Based Services Customize by segment Scale by segment Account A Account B Services By Account All things to all people, can’t scale can’t keep up Account C Account D Account E

  12. Research on the Distributor Sales Effort • 2001 Research on Sales Valuation 4% Price Decrease or Outside Sales Call-75% Price Decrease (Progressive Distributor-Valuing the Sales Effort) • Nine out of 10 Distributor Sales Managers use total margin dollars as a sales allocation methodology (Benfield Consulting Sales Audits) • Durable Goods distribution is in lowest decile (10%) of productivity in US Economy (Benfield Consulting White Paper-2004) • Sporadic use of Hybrid Marketing or matching cost of sales to solicitation method (Benfield Consulting Sales Audits) • Expect book in 2005 and new research in 2006

  13. Knowing if Your Sellers are Productive • Can you answer the following questions with solid mathematical analyses: • How many sellers do we need calling on accounts? • What is a seller’s call capacity? • What accounts are worth calling on and which aren’t based on their cost to serve? • What is the probability of an account group growing with sales calls? • If these questions are difficult to answer, you likely are less productive than you could be

  14. Aging Concept Of Sales Productivity (Thousands) Total Sales Rev. Sales Cost Wasted Productivity = (Time in years)

  15. Aging Concept Of Sales Productivity $GM call Cost call • ROTI- return on time invested has dominated sales management lit. since mid 80’s • ROTI example: 5 calls/day x 250 days/yr = 1250 calls year • Sales cost $65K salary, 17K benefits, 12K expenses = $94K total • Cost per call = = $75/call • Territory $GM = = = 5.3:1 • Territory $GM = = = 2.7:1 $94K sales cost 1250 calls/yr 500K 1250 calls/yr $400GM/call $75GM/call 250K 1250 calls/yr $200GM/call $75GM/call

  16. Aging Concept Of Sales Productivity • ROTI encourages larger territories $250K GM territory vs $500K GM territory • “Arithmetically convenient” to “give” sellers large territories to increase ROTI • Little regard to account size (Account Hording) • Little regard to segment need (want of a seller) • Productivity was driven by territory design, not market need • Future measurements should consider the cost of incremental investment

  17. Sales Productivity In The New Millennium • ROITI = Return on incremental time invested Year 1 2 3 4 5 Account sales 25K 50K 200K 250K 275K Account GM% 25% 20% 18% 17% 16% Account GM$ 6.2K 10K 36K 43K 44K Incremental GM$ growth 3.8K 26K 7K 1K GM$ call 1 call/wk 73 500 134 19 ROITI 1:1 7:1 2:1 .25:1

  18. The New Models Of Sales Allocation Functional – Allocates sellers by function performed (technical, trade, missionary, new product, relationship) Segment - Allocates sellers to well defined segments (res. tract plumbers, repair & remodel plumbers, mechanical contractors) Consultative – Sellers as consultants (technical process, service products, supply chain process) Enterprise – Firm to firm strategic partnering (supply chain, VMI, I/S, reverse customer buying) Transactional – Take the cost out of how they buy Hybrid/Queuing – Inside/outside and call queuing logic (time, pre-arranged schedule)

  19. The New Models Of Sales Allocation Difficulty of Change Medium-High Medium High High Very High Low Management Implications Define and support functions Good segmentation and support functions Definite testing of service value Solid plan of firm to firm projects May be a new model of business Rearrange call plan Compensation Mix Varies- typically low at risk comp. Varies- med. To high at risk comp. High base- high at risk High base- med. To high at risk Compensation and bonus parallel other functions Slightly more than inside sellers Model Functional Segment Consultative Enterprise Transactional Hybrid/Queuing

  20. Segment To Solicitation Decision Matrix Segment Number of GM% Number of Number of Tech. Solicitation size accounts transactions deliveries need strategy Small Large Many Few Low High Low High Low High Low High X X X X X X 5,7,8,9 X X X X X X 1,2,5,6 X X X X X X 8,9 X X X X X X 1,2,3,4 X X X X X X 5,8,9,6 X X X X X X 2,3,4,1 X X X X X X 6,7,8,9 X X X X X X 1,2,5,6 Solicitation Key: 1 = Functional 5 = Transactional 9 = E-commerce 2 = Segment 6 = Hybrid/queuing 3 = Consultative 7 = Telesales 4 = Enterprise 8 = Catalog

  21. Why Services? • Services may or may not be unbundled and priced • Reasons for unbundling include: - Commoditize service value, road to unique value - Align service capability and capacity with segment needs - Allows for flexible market or “naked solutions” marketing - Escapes the death spiral of consulting for your competitor - Limits the risk of backing a service warranty without making the product sale

  22. Service Basics • Unlike products….. - Services cannot be inventoried - Services are produced, consumed and sometimes transacted in the same moment - Services are intangible - Services are more difficult than products to maintain quality for - Services are remembered by customers when they are provided in a low quality mode

  23. Service Basics • Since services are unlike products, this means: - You must understand their importance relative to the customer segment - You must be able to identify, process correct and measure customer satisfaction of service - Learn how to “tangibilize” service - Learn which services are expected, augmented and potential

  24. Service Product Ideas • Storage and delivery services (overnight, emergency, 2ndpart warehouse, secured box on site) • Design and layout services (CAD/CAM, engineered drawings, P.E., M.E. or E.E. approved designs) • Process redesign services • New product or new application services • Payment options, differing terms, leasing services • Software services to speed transactions, provide information or tighten supply chain controls • Light manufacturing, product augmentation or “kitting” services • Packaging services • Inspection service (fire extinguishers) • Training services (product or process) • Labor services

  25. Service Basics The Service Hierarchy Price Competitive Increases Offerings Decrease Strategic Goal Develop and test market. Launch as a service product Separate and price where necessary. Develop winners into service products. Take the cost out and align with segments Potential: proprietary or exclusive products, engineered design and applications services, unique software capabilities Augmented: managed inventory, design services, process reorganization services, new product application services Basic or expected: outside sales, inside sales, reasonable delivery, inventory, break bulk, extend credit, warranties and returns

  26. Aligning Services to Segments The Service Pricing Matrix SegmentAutomotive Aftermarket Service Type Price Category/ Basic Augmented Potential Mechanism Service (Expected) Freight 2 hour emergency X Per delivery Same Day X Per delivery Overnight X $30 Flat Early A.M. Next Day X $15 Flat Next Day X N/C 2nd Day X N/C Sales Design and Layout Service X $60/hour Site Visit for design X $75 Flat Product Recommendation X *****The Service Matrix Makes Pricing Consistent To The Segment*****

  27. New Service Development Process Typical Internal Costs $15,000 to $60,000 $8,000 to $15,000 $40,000 to $80,000 $60,000 to $120,000 $36,000 to $70,000 $159,000 to $345,000 Success Rate 200 Go In 48 Financially valid ideas 24 Pilots 12 launch 6 Succeed Service Funnel Idea generation Concept development & testing Business & financial analysis Communications & strategy development Test market Service launch Post launch support Successful service product

  28. Flexible Market Offerings Wholesaler: E-Z Cutting Tools Segment: S.I.C. 25 – Furniture Manufacturers

  29. Flexible Market Offerings

  30. Activity Costing or Approximations are a Prerequisite Activity Decision Tree Streamline Process Increase transaction size Negative Raise price Activity Charge fee for activity Margins Change buyer behavior Eliminate activity

  31. Need for System Pricing • Factors that influence pricing include: • Segments-Type of customer • Type of Transaction-stock, non-stock, direct • Geography or branch location (diminishing) • If a distributor has 5 segments, 3 transaction types, 7 geographic markets and 15, 000 sku’s then pricing permutations are (5x3x7x15,000) or 1.57 million • Can your seller keep this in his/her head?

  32. Sourcing BecomesGlobal • “We are contemplating buying foreign products to become increasingly competitive.” 57% Agree/Strongly Agree (China Syndrome) • “We believe the value of the industrial brand will decline…” 79% Agree/Strongly Agree (China Syndrome) • “Master Distribution will increase as a percent of purchases.” Benfield Consulting CIPH Survey • Expect distribution to offset profit losses with lower cost product • Expect some distributors to become Master Distributors • Expect distributors to band together to source foreign goods

  33. Sourcing BecomesGlobal • Distribution will, where financially viable, invest in joint ventures with foreign manufacturers • Much of yesteryear’s channel power, driven by strong brands, will decrease • Distribution alliances will move beyond co-operatives to investment groups in new product sources • Channel power, at the manufacturer level, is increasingly dependent on supply chain excellence and marketing excellence

  34. Back Door Programs And The DPI Distributor Profit Index Gross margin % x Turns – Operating expenses % = Profit Index Example: 25%GM x 4 turns – 20% operating expenses = 80%DPI Gross Margin % Increase revenue or decrease COGs Drop ship programs Quick ship programs Add on orders Pick-up privileges Lower freight rates Lower storage rates Lower Storage by better packaging Turns Increase Decrease Sales Velocity Average Inventory Factory tech-support i Order size 800 numbers Quick deliver C&D items Usable lit. Regional warehousing “Sticky” websites No hassle warranties Troubleshooting programs Product line reduction Cross reference lists Consolidation Distributor-Technician EDI or internet programs Completed orders Operating Expenses Decrease operating Expenses Vendor managed programs Factory tech-support Immediate warranty credits Simple freight claim policy Bar code inventory Complete orders Accurate labeling

  35. Service Planning And Vendor Involvement DPI Front Door Model Gross Margin% Turns Expenses% Increase Revenue or decrease COGS Joint sales calls Prospect list services Account Qualification services New, innovative products Product training Advertising End user literature Seller training Increase sales velocity Sales spiffs Key account programs Direct mail Honor & recogni- tion programs Product specials Loss leader products New, innovative products Decrease average inventory Free goods “Bakers dozens” Purchase programs Consignment- inventory Returned goods- allowances Direct ship programs Decrease operat- ing expenses Complete orders Accurate labeling Dating programs Co-op advertising Trade or end user seminars Open houses Application Support

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