Annual Meeting Keynote: Dr. Al Bates on Growing Distributor Profitability
At the NetPlus 2017 Annual Meeting, keynote speaker Dr. Al Bates, founder and director of research of the Distribution Performance Project, spoke about growing distributor profitability.
We talked with Dr. Bates following the conference about what he thinks is most important:
NetPlus: As price transparency becomes the norm rather than the exception, is it possible to maintain and even grow margins in this highly competitive industrial sales environment?
Dr. Bates: I think it’s always possible to grow margins. I don’t think there’s any doubt that the availability of price information in many forms from many companies, and not just Amazon, makes it difficult to generate additional margin on what I would call the core of the product line. But these are products that have been price-competitive since the dawn of mankind. It’s just more obvious now. That places a much greater emphasis on the backend of the product line.
In articles I’ve written about the last 5%, which are products that are not widely available from many sources. Exclusive distributors might carry them, but they are rarely purchased or only bought in an emergency mode. I think there are still some margin opportunities there. I don’t think they’re great, but I think they’re enough to trickle margins up a little bit.
NetPlus: You’ve said there are two life-and-death drivers of profitability in industrial sales organizations. What are they and what should distributors do to shift focus to those?
Dr. Bates: The two drivers are expenses and gross margin. My philosophy, which I think is becoming a lot of other people’s philosophy, is that we need to stop doing things that don’t really have a profit payout for us. I think we can very actively work with small accounts and some large accounts that have a lot of small orders and change the nature of the business. We do too much work. We process too many small orders. We have too many returns. We have too many emergency orders. We need to not just be more productive, we need to rethink the workload that we have.
NetPlus: What role do buying groups like NetPlus play in the drive for profitability?
Dr. Bates: All the suppliers have their own rebate program. But on top of that, NetPlus has an additional rebate program. I think all distributors need to be in some sort of network such as NetPlus. We need that additional rebate. The problem I see is that there’s a tendency to cut price in anticipation of the rebate, which is a kiss of death. If I am utilizing the rebate to help me put more money in my pocket after the fact that’s great and that’s the way the programs are structured. I don’t know how I could argue against a rebate.
NetPlus: If you had one bottom-line message for distributors, what would it be?
Dr. Bates: It would be that they must develop a plan. The key to success in this market is a four-point financial plan, as opposed to a marketing plan, operations plan, or anything else. Profitability requires that distributors:
- Increase sales by at least the inflation rate plus a safety factor of 3%.
- Force payroll to grow slower than sales to create a sales-to-payroll wedge of 2%.
- Increase the gross margin percentage (not gross margin dollars) by 0.2%.
- Decrease the other expense percentage (not expense dollars) by 0.2%.
Thank you, Dr. Bates, for your time and insight at the 2017 Annual Meeting. We enjoyed learning from you.
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