Distribution Channel Case Study

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Turning Around a $100 Million Distribution Channel

Background

The director of distribution accounts for a large company offering water filtration systems had a problem. In the early days of the market, the company had been able to make its revenue targets by signing on additional distribution channels. Now, as a $100 million business, this strategy no longer worked. Instead, they needed to make the existing channels more productive.

For several years, the director and her general manager searched for ways to improve. They knew it boiled down to getting the salespeople, who were managing the distributors, to change their behaviors. But how? And what new sales behaviors would create improvement? Workloads were already stretched to the limit.

The general manager had seen Lean methods create dramatic improvement in other divisions of the company. The idea of eliminating anything that didn’t add value for the customer appealed to him. He wondered if this might help him find the market growth he needed.

Client Discovery & Root Cause Analysis

The client went through a guided discovery and diagnostic process. This revealed issues that were already known, as well as new and different issues that provided interesting clues:

  1. Distributors were frustrated with the division’s level of service and lead-time performance. These issues generated waste. They prevented account managers from spending their time on generating customer demand.
  2. To meet increasing revenue targets, the division used quarterly discount promotions. This caused shipments to spike at the end of each quarter. In addition to the lower margins from discounting, the swings in volume increased production costs significantly. This was not Lean, and the swings were getting worse.
  3. Hitting their stretch revenue targets was so important, the company hadn’t paid much attention to the ratio between systems (“razors”) and supplies (“blades”) being sold. This hid the fact that unit sales of systems had been slowly declining for years, affecting long-term demand for the supplies.
  4. Relying on distributors to develop new accounts was not working. Neither the distributors nor the account managers knew how to reliably create new customer demand.

Before Sales Process Excellence

The company’s market channels varied widely in size, expertise, market focus and strategies. Account managers sought to learn the personalities and quirks of all these companies. They wanted to be as easy to do business with as possible.

Account managers began to “work the system” by offering promotional discounts quarterly. This caused revenues to appear to be increasing. It also caused cyclical spikes in shipments, which became very

costly. Stress and uncertainty increased. They knew this approach was unsustainable. Things felt about to come apart at the seams.

In the process of creating a Sales Value Stream Map, the reasons that distributors were complaining about service levels and lead time became clear. Although this was largely the responsibility of another division, their quarterly discount program was a contributing factor.

Further, the distributors carried a large number of bigger-ticket product lines. During adverse economic conditions, the firm struggled just to get the attention of distributors, much less to take market share away from their direct competitors.

Sales Process Excellence Approach

The general manager asked the sales director to form and lead an improvement team. The team’s initial research led to the conclusion that a primary cause of their problems was their inability to increase demand at the source—with end-users and dealers that the distributors sold to. They knew the distributors would not support their efforts to connect directly with their customer base. But, after evaluating the alternative of doing nothing, they decided it was worth the risk.

One sales engineer and one field marketing manager teamed up to research the market. In two carefully selected regions, they interviewed all the dealers serving their target end-users. Which kinds of dealers could profit the most by offering water filtration? What would it take to make them successful?

It turned out that some of the dealers who were the best fit were delivering services to the restaurant industry. To make such dealers successful, three “customers” had to be sold: the restaurant chain (end-user), the dealer’s field representatives, and the owner of the dealership. A breakthrough was realizing that they could no longer succeed by simply selling a product. Instead, they had to sell a relationship—a process—that would increase everyone’s profits.

After a significant amount of effort, the team learned to properly define the business problems of each type of customer. They used data to diagnose causes and to conduct valuable Voice of Customer (VoC) research in the field. They learned the requirements for making a new sales process successful and sticky for the dealers. They visually tracked the stages of qualifying, onboarding, and expanding new dealer accounts. They developed training for dealer salespeople, and began to engage distributor salespeople in these new dealer accounts.

Results

The client’s distribution channels had lots of moving parts, which was not unusual. Sales Process Excellence provided a new way of seeing how their system worked (and didn’t work), and what changes might generate improvement.

Their new process took hold gradually—one account representative, distributor salesperson, and dealer field technician at a time. However, they could measure the increase in the closing ratio for systems. As expected, this drove the additional sales of supplies. As the initiative expanded, the following results were evident:

  1. The client had found a proven, repeatable model to find and launch new dealers and make them successful.
  2. This model could be institutionalized into a training program to be rolled out to all their account managers (representing more than 200 distribution salespeople).
  3. Average new system sales through participating dealers increased 14%.
  4. They learned how to reverse the decline system unit sales, turning around a $100-million business.

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