Value-based management: using Tel-Sell to drive distributor value

Modern Brewery Age, March 29, 2004 by Lamont Seckman

It is truly unfortunate that someone coined the term "Tel-Sell" and that it stuck. The title of this article notwithstanding, I am on a personal crusade to convert this industry into using the term, "Inside Sales" instead of "Tel-Sell". The development of an effective Inside Sales (IS) function is a legitimate--and smart--means of re-allocating resources within your sales department to more adequately match perceived account base opportunities. Such a resource re-allocation can be an important tool for growing the value of a distributor.

To me, Tel-sell has a negative connotation. Many distributor sales managers wrongly view the assignment of an account to a Tel-Sell route as roughly akin to banishing the retail owner to a life in Siberia. In fact, the development of an Inside Sales function should be viewed as a strengthening of the distributor sales effort. Overall sales efforts are improved when they are provided with more focus and a properly implemented Inside Sales function adds to this focus.

There is, in fact, a little-known secret about the Inside Sales system: it is more than just an efficient method for handling certain accounts. In fact, properly implemented, it is also a more effective system for accounts meeting the right criteria.

That's right, let's just state it again because this is a key point: Inside Sales is a more efficient and effective system for certain accounts.

Most have only viewed Inside Sales in the perspective of cost reduction. But companies have actually grown volume in accounts sold via Inside Sales functions in addition to reducing the attendant cost of doing so. Such results are indicative of two strong arguments in favor of an Inside Sales capability.

Economic Argument for Inside Sales

There is a relatively straightforward economic argument for Inside Sales and it goes right to the very nature of distribution economics and to the determination of which retail accounts are profitable for a wholesaler--and which retail accounts are actually serviced at a loss. What is perhaps surprising is the relatively large percentage of accounts which are arguably economic losers when applying reasonable cost accounting analyses.

In theory, for a retail account to be economically profitable, it should generate gross profits that more than offset the direct costs of selling, merchandising, and servicing the account--as well as contributing to a portion of the overhead costs associated with the overall distributor operation. Believe it or not, the accounts actually achieving all this are in the minority in most distributor environments. Because cost accounting exercises can be more art than science in some respects, this article will avoid the arcane details of various methods of allocating overhead. Instead, let us focus on the lower-volume portion of the account base--and the identification of accounts that do not even cover just the direct costs of sales and service.

First, the concept of "direct cost" should be defined. A direct cost is any expense directly associated with daily "in-account" activities. Generally, direct costs include the labor and labor-related expenses for selling and delivering the account [assuming smaller-volume accounts do not generally receive merchandising calls]. In addition to direct labor and labor-related charges, certain non-labor charges should also be included such as uniforms expense, cell phones, gas, vehicle maintenance and depreciation, etc. It is a useful exercise to calculate all such expenses and estimate what they cost a distributor on a per-minute basis. Then it is easy to estimate the total direct cost associated with any account according to the average number of minutes it takes to sell and service the account. This cost can be compared to the average gross profits received from the account and--bada boom, bada bing--you can tell if the account is an economic winner or an economic loser [on a direct cost basis only].

In analyzing the customer files of five client distributors, I discovered the number of retail accounts defined as "economic losers" [i.e. accounts with average gross profits that do not even cover reasonable allocations of direct costs only] to be in the range of 22%-37% of the entire account base.

Similarly, it is interesting that wholesalers actively utilizing an Inside Sales strategy indicate that the number of accounts on such a system is generally in the range of 20%-40% of the total. This is no coincidence. Astute managers realize that many low-volume accounts are not providing an economic return and most would remain unprofitable even if grown at relatively high percentages.

Indeed, for one wholesaler I calculated the lower quadrant of volume accounts [i.e. the lowest-ranking 25% of accounts in a volume ranking] contribute only 1.5% of total volume [See Figure 1]. Arguably, such low-volume accounts are serviced with relatively less frequency and therefore do not occupy one-quarter of that wholesaler's entire sales and delivery resources. However, such a disparity clearly indicates the resources expended in these accounts are far in excess of the volume contribution received.