I MPROVING C USTOMER P ROFITABILITY D R. F. B ARRY L AWRENCE, P H.D

© 2012 All Rights Reserved  Texas A&M University  Global Supply Chain Systems Lab Industrial Distribution (ID) Program Overview 2

© 2012 All Rights Reserved  Texas A&M University  Global Supply Chain Systems Lab The ROI Equation Financial Statements 3

© 2012 All Rights Reserved  Texas A&M University  Global Supply Chain Systems Lab Financial Drivers 4

© 2012 All Rights Reserved  Texas A&M University  Global Supply Chain Systems Lab Connecting Processes and Shareholder Value 5 $ hareholder Value

© 2012 All Rights Reserved  Texas A&M University  Global Supply Chain Systems Lab Sales & Marketing Framework Concept 6 Business Process Customer Stratification Process Metric Cost-to-serve Financial Element Revenue, A/R Financial KPI GM & DSO Financial Driver Profitability & Cash Flow Shareholder Value Increased ROI

© 2010 All Rights Reserved  Texas A&M University  Supply Chain Systems Lab 7

© 2012 All Rights Reserved  Texas A&M University  Global Supply Chain Systems Lab Translating Vision & Mission into….. 8

© 2012 All Rights Reserved  Texas A&M University  Global Supply Chain Systems Lab Strategic Planning Process 9

© 2012 All Rights Reserved  Texas A&M University  Global Supply Chain Systems Lab Functional Strategy 10

© 2012 All Rights Reserved  Texas A&M University  Global Supply Chain Systems Lab Sales & Marketing Strategy 11

© 2012 All Rights Reserved  Texas A&M University  Global Supply Chain Systems Lab Market Segmentation 12

© 2010 All Rights Reserved  Texas A&M University  Supply Chain Systems Lab Industrial Commercial Residential Utilities Availability Price Tech Support Credit Terms Shipping Accuracy Delivery

© 2012 All Rights Reserved  Texas A&M University  Global Supply Chain Systems Lab Sales & Marketing Strategy 14

© 2012 All Rights Reserved  Texas A&M University  Global Supply Chain Systems Lab Target Market Selection MEASURE segment potential – revenue & cost-to-serve UNDERSTAND company capability – critical success factors DETERMINE required investment and resources ASSESS Risk EVALUATE ROI (shareholder value) (Revenue – Expenses) Net Assets ALIGNMENT with company objectives Return On Investment = 15

© 2012 All Rights Reserved  Texas A&M University  Global Supply Chain Systems Lab Sales & Marketing Strategy 16

© 2012 All Rights Reserved  Texas A&M University  Global Supply Chain Systems Lab Value Proposition – 3 Types 17 VendorsCustomers Value Proposition Internal stakeholders

© 2012 All Rights Reserved  Texas A&M University  Global Supply Chain Systems Lab Customer Value Proposition – 3 Dimensions Attractive to Customer Distinct from Competition Meet Shareholder Value 18

© 2012 All Rights Reserved  Texas A&M University  Global Supply Chain Systems Lab Value Proposition Development – Process 1. Perform customer stratification 2. Identify the business we want to do 3. Why they should buy from us? 4. Educate and enable sales force 5. Communicate to customers 19

© 2012 All Rights Reserved  Texas A&M University  Global Supply Chain Systems Lab Value Proposition Development – Step 1 1. Perform customer stratification 2. Identify the business we want to do 3. Why they should buy from us? 4. Educate and enable sales force 5. Communicate to customers 20

© 2012 All Rights Reserved  Texas A&M University  Global Supply Chain Systems Lab Customer Stratification Model  High Profitability  No Relationship  Low Cost to Serve  Low Volume Opportunistic Customers  High Profitability  Sustained Relationship  Low Cost to Serve  High Volume Core Customers  Low Profitability  No Relationship  High Cost to Serve  Low Volume Marginal Customers  Low Profitability  Sustained Relationship  High Cost to Serve  High Volume Service Drain Customers Customer Life (Loyalty) Gross Margin Sales Volume Cost To Serve (CTS) 21

© 2010 All Rights Reserved  Texas A&M University  Supply Chain Systems Lab EquipmentInsuranceTransportFacilityCashHRAdmin COGS CTS Net Profit (NP) PRICE Zero The Price Equation Activity Based Costing (ABC) is a Best Practice Surrogate Measures also serve the purpose CTS is critical to any successful pricing decision Activity Based Costing (ABC) is a Best Practice Surrogate Measures also serve the purpose CTS is critical to any successful pricing decision Inventory 22 Floor

© 2012 All Rights Reserved  Texas A&M University  Global Supply Chain Systems Lab Cost To Serve (CTS) Indicators Avg. # of Line Items Avg. Order Size ($) Avg. Days to Pay % Sales in ‘C’ & ‘D’ Items Returns to Sales Ratio Delivery Reqmts # of Sales Calls Each Indicator can be weighted according to importance 23

© 2012 All Rights Reserved  Texas A&M University  Global Supply Chain Systems Lab Depth of collaboration Consistency of collaboration Breadth of collaboration HIGH LOYALTY ZONE LOW LOYALTY ZONE MODERATE LOYALTY ZONE MODERATE LOYALTY ZONE Customer Loyalty Factors

© 2012 All Rights Reserved  Texas A&M University  Global Supply Chain Systems Lab Loyalty Metrics DimensionFactorsMetrics Loyalty Breadth of collaboration Number of product lines accessed Number of SKUs accessed Depth of collaboration Percentage of customer’s total spend with us Revenue trend Number of hits (orders) Consistency of collaboration Order consistency Customer’s life span

© 2012 All Rights Reserved  Texas A&M University  Global Supply Chain Systems Lab Customer Stratification Summary FactorWeight Days to Pay25% Order Size12.5% No. Lines12.5% Returns12.5% C & D items12.5% Will Call12.5% Delivery12.5% FactorWeight Sales $100% FactorWeight Orders40% Consistency30% Trend40% FactorWeight GM $50% GM %50% S ALES C OST TO S ERVE (CTS) C USTOMER L OYALTY G ROSS M ARGIN Customer Lifetime Value Net Profit 50%

© 2012 All Rights Reserved  Texas A&M University  Global Supply Chain Systems Lab Value Proposition Development – Step 2 1. Perform customer stratification 2. Identify the business we want to do 3. Why they should buy from us? 4. Educate and enable sales force 5. Communicate to customers 27

© 2012 All Rights Reserved  Texas A&M University  Global Supply Chain Systems Lab How to define the business “we want to do”? 28

© 2012 All Rights Reserved  Texas A&M University  Global Supply Chain Systems Lab Value Proposition Development – Step 3 1. Perform customer stratification 2. Identify the business we want to do 3. Why they should buy from us? 4. Educate and enable sales force 5. Communicate to customers 29

© 2012 All Rights Reserved  Texas A&M University  Global Supply Chain Systems Lab Critical Success Factors Why customers buy from us? ◦ Functionality – Technical specifications ◦ Quality ◦ Delivery reliability ◦ Availability ◦ Breadth of product applications ◦ Perceived strength of the supplier (brand) ◦ Technical support ◦ Channel preference ◦ Shipping accuracy ◦ Credit terms ◦ Etc. 30

© 2012 All Rights Reserved  Texas A&M University  Global Supply Chain Systems Lab Value Proposition Development – Step 4 1. Perform customer stratification 2. Identify the business we want to do 3. Why they should buy from us? 4. Educate and enable sales force 5. Communicate to customers 31

© 2012 All Rights Reserved  Texas A&M University  Global Supply Chain Systems Lab Value Proposition – Can your sales force answer? ■Company (internal perspective) ■What is good business for us? (or) ■Define the business we ‘want to do’ ■Customer (external perspective) ■What are the definable, quantifiable difference between us and our competition? (or) ■Why should the customer buy from us? 32

© 2010 All Rights Reserved  Texas A&M University  Supply Chain Systems Lab Core Customer Profile Revenue$ 74,207 GM $$ 18,722 GM %25.2% Days to pay33 # of lines8 Order size$ 1,532 Returns11% Quote conversion 72% Inventory A & B Items79% C & D Items21% Strategic Suppliers (Top 70%-80 of Spend) Supplier – 0140% Supplier – 0230% Supplier – 0318% Supplier – 0412% 33 Non-Strategic Suppliers (Top 5% of Spend) Supplier – 073% Supplier – 082%

© 2010 All Rights Reserved  Texas A&M University  Supply Chain Systems Lab Service Drain Customer Profile Revenue$ 42,389 GM $$ 8,194 GM %19.3% Days to pay53 # of lines4 Order size$ 882 Returns32% Quote conversion22% Inventory A & B Items56% C & D Items44% Strategic Suppliers (Top 70%-80 of Spend) Supplier – 0135% Supplier – 0225% Supplier – 0320% Supplier – 0420% 34 Non-Strategic Suppliers (Top 5% of Spend) Supplier – 0720% Supplier – 0815%

© 2010 All Rights Reserved  Texas A&M University  Supply Chain Systems Lab 35

© 2012 All Rights Reserved  Texas A&M University  Global Supply Chain Systems Lab Value Proposition Development – Step 5 1. Perform customer stratification 2. Identify the business we want to do 3. Why they should buy from us? 4. Educate and enable sales force 5. Communicate to customers 36

© 2012 All Rights Reserved  Texas A&M University  Global Supply Chain Systems Lab Increase NVM Decrease CTS CORE SERVICE DRAIN OPPORTUNISTIC MARGINAL Strategy to move Service Drain to Core Group 37

© 2012 All Rights Reserved  Texas A&M University  Global Supply Chain Systems Lab Life Cycle of a Core Customer 38

© 2012 All Rights Reserved  Texas A&M University  Global Supply Chain Systems Lab Service Innovation – Extend Life of Core Customer 39 Innovation

© 2012 All Rights Reserved  Texas A&M University  Global Supply Chain Systems Lab Profiling the Core Customer 40

© 2012 All Rights Reserved  Texas A&M University  Global Supply Chain Systems Lab Business Development 41

© 2012 All Rights Reserved  Texas A&M University  Global Supply Chain Systems Lab Market Communication 42

© 2012 All Rights Reserved  Texas A&M University  Global Supply Chain Systems Lab Pricing Optimization 43

© 2012 All Rights Reserved  Texas A&M University  Global Supply Chain Systems Lab Sales Force Design, Development & Management 44

© 2010 All Rights Reserved  Texas A&M University  Supply Chain Systems Lab Vision and Strategy Supply Chain Planning Store & Ship SourceStock Sell Support Services Value Proposition & Customer Service EnableImplement People, Process, Technology & Metrics Customer Internal Business Processes Financial Learning & Growth Balanced Scorecard Source: Adapted from Kaplan and Norton’s Balanced Scorecard 45

© 2012 All Rights Reserved  Texas A&M University  Global Supply Chain Systems Lab Resources 46

© 2010 All Rights Reserved  Texas A&M University  Supply Chain Systems Lab Thank You! For more info please visit: “Total Solutions For Industrial Distributors and Manufacturers” 47