The re-route: designing and conducting a re-route of distributor sales and delivery systems Part 2 of 2 - Wholesaler Seminar

Modern Brewery Age, Sept 9, 2002 by Lamont Seckman

Some distributor owners are plagued with a kind of "victim" mentality and believe that distributor financial performance is more or less out of their control.

This view garners the notion that gross margins are highly impacted by local market factors and supplier activities - both of which are largely outside the distributors' sphere of influence. Similarly, operating expenses are largely perceived as uncontrollable. Oh sure, the thinking goes, some things can be impacted, but for the most part a distributor's cost structure is dictated by the volume of cases delivered and the number of retail accounts serviced. And, therefore, not much can really be done to increase operating efficiencies.

Such a defeatist attitude becomes readily apparent during a re-routing project and places artificially low expectations on process outcomes. In addition to being unhealthy, this thinking belies the reality of like businesses exhibiting wide variances in operating expense structures and margins.

Owners moving forward with re-routing projects need to begin with an appreciation of the potential positive impacts successful re-routes can have on operating performance. Otherwise, they risk missing opportunities at best. At worst, a poorly designed and implemented re-route can have significant negative effects on business operations.

In my experience, companies conducting the more successful re-routes have done so by bettering the alignment of the following two critical factors:

1. Corporate strategy is better aligned with ownership objectives.

2. Internal resources are better aligned with real and defined market opportunities.

ALIGNING STRATEGY WITH OWNERSHIP OBJECTIVES

It is very difficult for your management team to design an effective and efficient system if the end goal is not made entirely clear. The first step in the re-route process is to arrive at--and clearly communicate--ownership goals and expectations. Remember, the system should be designed to support ownership goals and strategic objectives. What are ownership goals for the re-route? Is the main goal to improve customer service? Is it to create a re-balancing of route volumes? Is the main goal to drive volume and market share? Or to improve profit? Or is cost-reduction the main target? Many re-routes will have multiple objectives. These objectives should be prioritized with appropriate parameters developed as guidelines. For example, if cost reduction is a main objective, what are post-implementation targets for operating expenses per case? What are fulltime equivalent (FTE) headcount targets? If the main objective is market share growth, how much share is expected and when? Growth objectives should be accompan ied by return-on-investment (ROI) analyses. For example, what is the firm's historical ROI? What ROI is expected in the short-term after implementation of the new route system? What ROI is expected in the long-term after market share growth goals have been obtained?

ROI is, in fact, a starting point and a main consideration that should drive all re-routing projects. More owners should become knowledgeable of their company's historical performance in this area and how this compares to industry standards-and to possibilities. If the business underperforms in ROI measurements, what can be done in the rerouting process to bring the company up to standard? If the company's main objective in the short-term is to drive volume, it is logical to tolerate a lower ROI in the growth years. But as the company achieves its volume targets, what ROI levels should follow? How long should this take? Most importantly, based upon the answers to all of these questions, how will retail account service policies and corresponding manpower plans be modified to develop an appropriate operating expense structure and approach that will support the objectives?

ALIGNING RESOURCES WITH MARKET OPPORTUNITIES

As loyal readers of my column are well aware, most accountants savvy in the ways of activity-based-costing can demonstrate that significant portions of a distributors' retail account base are actually serviced at an economic loss.

This phenomenon is a reality in many distribution--and other business--environments. And let's face it, many business owners would find it prudent to eliminate unprofitable customers--an alternative generally not available to the typical beer wholesaler. However, wholesalers do have the ability to differentiate service methods and frequency to better match service costs with the return [and potential return] available from retail channels.

Service differentiation is in fact a key to managing profitability. Many distributors' provide little differentiation in service to their customers--perhaps because such an approach seems ominous when dealing with thousands of retail accounts. However, begin by breaking down the account base into its logical components and understanding how service differentiation can be developed based on more manageable numbers.

The matrix in Figure 1 provides a method of classifying accounts for strategic purposes. The accounts are classified according to current and potential increases in profitability. The quadrants on the left side of the matrix represent those accounts with low or no profitability. The quadrants on the bottom half of the matrix are those with low potential for incremental profit. The process of assigning accounts - or account groups - to their appropriate quadrants can lead to meaningful discussions of appropriate service strategies, methods, and frequencies. This, in turn, leads to planning for the quality and type of sales, merchandising, and delivery personnel assigned to the account. For example, accounts lacking profit and little possibilities for meaningful improvement [Box 1] should be viewed differently than those not making money now but having profit potential [Box 2]. The appropriate strategy for Box 1 accounts is perhaps one of least-cost service. Because we cannot sever the relationship with such ac counts, we should at least minimize our losses. We can minimize losses in these accounts through reduced service frequencies, implementation of cost-effective systems such as driver-sell or tel-sell, by reducing time commitments in the accounts, and by reducing POS and merchandising levels, among other things.