Optimizing Channel Compensation Texas A&M – NAW Research Consortium

1. Optimizing Channel Compensation Texas A&M – NAW Research Consortium Best Practices in demonstrating value and creating fair compensation for channel partners

2. Current Members of the Consortium

3. OCC Consortium Member Profiles • 14 members • 3 manufacturing members (5 firms) • 11 distributors (15 firms) • 9 Lines of Trade • Bearings, Seals, and Lubrication Systems • Building Materials • Chemical • Electrical • Electronics and Industrial • Fluid Power • HVAC • Process Control and Automation Solutions • PVF / Industrial

4. Optimizing Channel Compensation (OCC)

5. Channel Focus • To who do we create value in the channel? • Who is important to us in the channel? • Equally important is, to who are we important?

6. Channel Focus • The volume or spend is the typical criterion to decide important suppliers (e.g. top suppliers who account for 80% of business) • The volume or spend tells how important a supplier to distributor’s business but not the distributor’s importance to supplier • Need to go beyond volume in order to understand to who we are strategic • Mutual importance is the prerequisite to optimize channel compensation

7. Mutual importance – Criteria • From Distributor Perspective • Relative share of business • What % of business from supplier X? • What % of supplier X’s business is from distributor? • Relative difference is key • Supplier’s channel strategy • For a given supplier, % of direct business vs. distribution • Supplier’s distribution model • Intensive • Selective • Limited or Exclusive

8. Example • Distributor’s total business = $ 40 MM Lower the gap, higher the mutual importance

9. Example • Who is the strategic supplier for this distributor? • To which supplier, is this distributor strategic? • Mutual importance is the prerequisite to optimize channel compensation

10. Optimizing Channel Compensation

11. Channel Pressure • End-customers call the shots on how distributors should be compensated in certain trades • Large customers go around distributors to direct negotiation with suppliers • Continuous pricing pressure Sales & Marketing Optimization Operational Excellence InnovatioN ExecutioN

12. Evolving Channel Value Proposition

13. Business Process Framework Customer Supplier

14. Distributor Value Proposition

15. Supplier’s Value Proposition to Distributors Example – SKF

17. SKF Overview Established 1907 Sales 2011 USD 9,960 million Employees 46,039 SKF presence over 130 countries with production sites in 32 27% Return on capital employed 8% Changes in sales in local currency 15% Operating margin, level

18. Local Presence Flexibility to fulfil customer demands Multiplication of SKF presence in market Distributor sales people Distributors essential to SKF

19. Maintain customer relations Improve SKF brand awareness Value sell SKF offering Close to the customer Understand the customers needs Distributor sales people

20. Develops trust Increases market intelligence Optimises resource allocation Communication

21. Local Inventories People selling our product Investment

22. Increased level of mutual engagement and joint activities toward final customers Equipping distributors' employees with arguments to defend the SKF value proposition Cost savings in supply chain and inventory level optimization Customer solution selling with the Certified programs and Solution Factory Areas to support distributor growth Pro-Active Selling Education Supply Chain Optimisation Differentiation

23. Development programs Structured follow up Collaboration Pro Active Selling

24. Development programs Structured follow up Collaboration Documented value tools Education

25. Improving information flow Collaborative forecasting Maintain good service level Supply Chain Optimisation

26. Joint development of distributor services Knowledge sharing Utilising distributor reach for service provision Differentiation

27. Build sustainable and profitable customer relations in partnership with Distributors Industrial Distribution Strategy

28. Channel Value Creation

29. Optimizing Channel Compensation

30. Alignment Supplier Distributor Supplier Distributor Performance Business Objectives • Supplier performance • Distributor performance • Product performance • Customer performance

31. Supplier performance through stratificationReal-world Example

32. Low Profitability • High Spend Volume • Collaborative Relationship • Hard to Do Business With Custom Vendors • High Profitability • High Spend Volume • Collaborative Relationship • Easy to Do Business With Strategic Vendors Transactional Vendors • Low Profitability • Low Spend Volume • Limited Relationship • Hard to Do Business With • High Profitability • Low Spend Volume • Limited Relationship • Easy to Do Business With Emerging Vendors Supplier Stratification Framework Supplier Profitability Supplier Loyalty Growth Potential Ease of Doing Business

33. Real World Example

34. Supplier Stratification Model

35. Supplier Stratification – Real World Example

36. Distributor performance through inventory & customer stratificationReal-world Example

37. High Profitability • No Relationship • Low Cost to Serve • Low Volume Opportunistic Customers • High Profitability • Sustained Relationship • Low Cost to Serve • High Volume Core Customers Marginal Customers • Low Profitability • No Relationship • High Cost to Serve • Low Volume • Low Profitability • Sustained Relationship • High Cost to Serve • High Volume Service Drain Customers Customer Stratification Model Customer Loyalty (Life) Customer Profitability Cost To Serve (CTS) Customer Buying Power

38. Customer Stratification – Real World Example

39. Inventory Stratification Model GMROII Revenue & Hits

40. Inventory Stratification – Real World Example

41. Supplier-Inventory-Customer Alignment Alignment

42. Supplier-Inventory-Customer Alignment Real World Example Better Alignment

43. Supplier-Inventory-Customer Alignment Real World Example Low Alignment

44. Supplier and Distributor Performance Alignment Example – L&W Supply

45. L&W SUPPLY: Overview • Founded 1971 • 142 Locations • Largest Specialty Dealer in North America • Largest customer for our suppliers

46. L&W’s History with TAMU • Consortia Member • Sales & Marketing Optimization • Optimizing Distributor Growth & Market Share • Best Practices in Customer Service – Talent Incubator Lab • Optimizing Channel Compensation • Capabilities assessment in 2009-10 • Implemented Inventory Stratification in 2011 • Received PAID “Award of Distinction” in 2012 • Currently implementing Customer Stratification

47. THE L&W TRANSFORMATION Federation Corporation Branded Customer Experience 2009 2010 2011 2012 2013 2014 2015 47

48. Distributor / Manufacturer: Inventory Management & Replenishment Jan 2011 – Dec 2011 • Inventory Stratification • Supplier/L&W collaborated in the development of an Inventory Stratification process across shared key product categories • Process Improvements • Aligned processes with Supplier’s customer service center and L&W’s purchasing agents to streamline replenishment and delivery processes • Supplier /L&W instituted a 3PL tendering process to improve service to the branches • Supplier/L&W evaluated order sizes and adjusted the shaping of purchase orders to increase pool opportunities, thus increased frequency of deliveries to the branches • Increased Visibility to Demand and Availability of Product • Supplier/L&W coordinated process to enable increased visibility to slow moving inventory • Supplier/L&W coordinated process improvement and training of existing processes unfamiliar to L&W enabling improved visibility to manufacturers product availability. • L&W provides Supplier daily demand data for future demand projections in Supplier’s S&OP planning process.

49. Distributor / Manufacturer: Inventory Management & Replenishment Jan 2011 – Dec 2011 • Shared Benefits • Alignment of service level policies for A&B items improved product availability & service lead times resulting in increased sales • Supplier reports lower costs via better asset utilization, more efficient order processing at CSC, fewer shipping errors and additional capacity utilization at plants during increased demand cycles • Re-investment of more A&B to Supplier came from substantial reduction of C&D. C&D fell from 52% of inventory to 44% in 12 months. GMROII improves double digit %. • Challenges • L&W change management for full adoption of new replenishment process and tools • L&W data challenges on fully capturing GMROII (Supplier acceptance) • Supplier’s Sales Management questioning L&W’s commitment to inventory • Supplier’s Supply Chain/Mfg. building consensus internally with sales leaders

50. Distributor / Manufacturer: Alignment for GrowthOctober 2012 - Present • Field Sales Alignment • Competitive Market Pricing • Participation in Regional Sales Meetings • Product Knowledge events at vendor plants • Leveraging vendor expertise to collectively grow the market • National training by vendors to educate L&W teams on best practice selling • Customer webinars and training to educate the market on coming trends • Value Stream Mapping and Continuous Improvement events • Collaborative efforts to identify waste/inefficiency in the process • Joint Marketing to create awareness and demand • Developing processes for getting leads to the field • Partnership with vendors on various national and local marketing efforts • Identifying unique ways to engage customers together