B EYOND S URVIVING O PTIMIZING P ROFITABILITY

© 2008 All Rights Reserved  Texas A&M University  Supply Chain Systems Lab M&A Activity in Wholesale Distribution * Excludes transactions in the retail consumer markets Source: Pembroke Consulting 2

© 2008 All Rights Reserved  Texas A&M University  Supply Chain Systems Lab Distribution Trends – EBITDA Multiples Source: MDM, Vol38, No. 4, February 25,

© 2008 All Rights Reserved  Texas A&M University  Supply Chain Systems Lab Top 10 Public Distribution Firms By ROIC% Source: MDM, Vol38, No. 4, February 25,

© 2008 All Rights Reserved  Texas A&M University  Supply Chain Systems Lab The ROI Equation Financial Statements  “Balance Sheet” &“Income Statement” encapsulate the results of the above activities 5

© 2008 All Rights Reserved  Texas A&M University  Supply Chain Systems Lab Distribution Business Process Framework 6

© 2008 All Rights Reserved  Texas A&M University  Supply Chain Systems Lab Educational Session Deliverables 7

© 2008 All Rights Reserved  Texas A&M University  Supply Chain Systems Lab Business Process Framework SupplierCustomer SourceStockStoreSellShip Supply Chain Planning Information Management Human Resource Management Finance Managemnet Support Services Key Performance Indicators (KPIs) 8

© 2008 All Rights Reserved  Texas A&M University  Supply Chain Systems Lab Business Process Groups – Summary 9

© 2008 All Rights Reserved  Texas A&M University  Supply Chain Systems Lab Financial Framework 10

© 2008 All Rights Reserved  Texas A&M University  Supply Chain Systems Lab Financial Drivers 11

© 2008 All Rights Reserved  Texas A&M University  Supply Chain Systems Lab Optimizing Distributor Profitability Methodology 12

© 2008 All Rights Reserved  Texas A&M University  Supply Chain Systems Lab Optimizing Distributor Profitability – Methodology 1. Identify Gap (Process Assessment Workbook & Benchmarks) 2. Map Shareholder Value (TAMU Distributor Profitability Framework) 3. Assess Profitability (Profitability Analyzer) 4. Understand Best Practices (Best Practices Road Map Report) 5. Enable & Implement (Educational Sessions) 13

© 2008 All Rights Reserved  Texas A&M University  Supply Chain Systems Lab Performance Assessment Process Assessment Financial Assessment Performance Assessment 14

© 2008 All Rights Reserved  Texas A&M University  Supply Chain Systems Lab Time Performance Common Practices Good Practices Best Practices Best Practices Framework 15

© 2008 All Rights Reserved  Texas A&M University  Supply Chain Systems Lab Process Assessment 16

© 2008 All Rights Reserved  Texas A&M University  Supply Chain Systems Lab Custom Process Assessment Report – Sample 17

© 2008 All Rights Reserved  Texas A&M University  Supply Chain Systems Lab Process Assessment Workbook – Applications ■Workbook can be used to ■Assess other branches / regions, hence set company-wide process benchmarking ■Assess acquisition targets’ process potential ■Custom report identifies process and financial gaps 18

© 2008 All Rights Reserved  Texas A&M University  Supply Chain Systems Lab Cross-Channel Financial Benchmarking 19

© 2008 All Rights Reserved  Texas A&M University  Supply Chain Systems Lab Cross-channel Financial Benchmarking Report 20

© 2008 All Rights Reserved  Texas A&M University  Supply Chain Systems Lab Optimizing Distributor Profitability – Methodology 1. Identify Gap (Process Assessment Workbook & Benchmarks) 2. Map Shareholder Value (TAMU Distributor Profitability Framework) 3. Assess Profitability (Profitability Analyzer) 4. Understand Best Practices (Best Practices Road Map Report) 5. Enable & Implement (Educational Sessions) 21

© 2008 All Rights Reserved  Texas A&M University  Supply Chain Systems Lab Connecting Processes and Shareholder Value 22 $ hareholder Value

© 2008 All Rights Reserved  Texas A&M University  Supply Chain Systems Lab Distributor Profitability Framework – Concept Business Process Inventory Stratification Process Metric % of slow- moving inventory Financial Element Inventory Financial KPI GMROII Financial Driver Profitability Shareholder Value Increased ROI 23

© 2008 All Rights Reserved  Texas A&M University  Supply Chain Systems Lab Distributor Profitability Framework 24

© 2008 All Rights Reserved  Texas A&M University  Supply Chain Systems Lab Optimizing Distributor Profitability – Methodology 1. Identify Gap (Process Assessment Workbook & Benchmarks) 2. Map Shareholder Value (TAMU Distributor Profitability Framework) 3. Assess Profitability (Profitability Analyzer) 4. Understand Best Practices (Best Practices Road Map Report) 5. Enable & Implement (Educational Sessions) 25

© 2008 All Rights Reserved  Texas A&M University  Supply Chain Systems Lab Source Group Analyzer – Schematic Diagram Supplier Lead Time Variability Safety Stock Average Inventory GMROII %RONA 26

© 2008 All Rights Reserved  Texas A&M University  Supply Chain Systems Lab Optimizing Distributor Profitability – Methodology 1. Identify Gap (Process Assessment Workbook & Benchmarks) 2. Map Shareholder Value (TAMU Distributor Profitability Framework) 3. Assess Profitability (Profitability Analyzer) 4. Understand Best Practices (Best Practices Road Map Report) 5. Enable & Implement (Educational Sessions) 27

© 2008 All Rights Reserved  Texas A&M University  Supply Chain Systems Lab Best Practices Roadmap – Sample 28

© 2008 All Rights Reserved  Texas A&M University  Supply Chain Systems Lab Best Practices Roadmap – Sample 29

© 2008 All Rights Reserved  Texas A&M University  Supply Chain Systems Lab Optimizing Distributor Profitability – Methodology 1. Identify Gap (Process Assessment Workbook & Benchmarks) 2. Map Shareholder Value (TAMU Distributor Profitability Framework) 3. Assess Profitability (Profitability Analyzer) 4. Understand Best Practices (Best Practices Road Map Report) 5. Enable & Implement (Educational Sessions) 30

© 2008 All Rights Reserved  Texas A&M University  Supply Chain Systems Lab Balanced Score Card ( Kaplan & Norton ) 31

© 2008 All Rights Reserved  Texas A&M University  Supply Chain Systems Lab Linking Implementation Components 32 People Process enabled by Technology Profitability tracked by Metrics

© 2008 All Rights Reserved  Texas A&M University  Supply Chain Systems Lab Implementation – Complexity vs. Decision-making 33  High ROI Centralized Decision-Making De-centralized Decision-Making Complex Models Simple Models  Low ROI  Lack of Local Knowledge  Low ROI  Lack of Local Knowledge  High ROI  Need Training  High ROI  Need Training  Low ROI  Low Level of Acceptance  Low ROI  Low Level of Acceptance Everything should be made as simple as possible, but not one bit simpler - Albert Einstein Everything should be made as simple as possible, but not one bit simpler - Albert Einstein Majority of distributors

© 2008 All Rights Reserved  Texas A&M University  Supply Chain Systems Lab IDENTIFY GAP 34 MAP SHAREHOLDER VALUE ASSESS PROFITABILITY UNDERSTAND BEST PRACTICES ENABLE & IMPLEMENT SourceStockStoreSellShip Supply Chain PlanningSupport Services ODP Methodology Process Framework

© 2008 All Rights Reserved  Texas A&M University  Supply Chain Systems Lab Time Performance Common Practices  Purchase price variance  Landed cost  Lacks segmentation framework  Segmentation based on COGS by supplier  Pareto framework (80%-20%)  Loyalty, Profitability, Services, Performance  Risk/Exposure – supply availability, technical requirements, financial factors, technological factors and environmental issues  Landed Cost (TCO)  Combination Methodology Good Practices Best Practices Source – Supplier Management – Supplier Stratification 35

© 2008 All Rights Reserved  Texas A&M University  Supply Chain Systems Lab Supplier Stratification 36

© 2008 All Rights Reserved  Texas A&M University  Supply Chain Systems Lab IDENTIFY GAP 37 MAP SHAREHOLDER VALUE ASSESS PROFITABILITY UNDERSTAND BEST PRACTICES ENABLE & IMPLEMENT SourceStockStoreSellShip Supply Chain PlanningSupport Services ODP Methodology Process Framework

© 2008 All Rights Reserved  Texas A&M University  Supply Chain Systems Lab Linking SOURCE Processes to Shareholder Value Process GroupProcessProcess Metric Financial Elements Financial Metrics 38

© 2008 All Rights Reserved  Texas A&M University  Supply Chain Systems Lab IDENTIFY GAP 39 MAP SHAREHOLDER VALUE ASSESS PROFITABILITY UNDERSTAND BEST PRACTICES ENABLE & IMPLEMENT SourceStockStoreSellShip Supply Chain PlanningSupport Services ODP Methodology Process Framework

© 2008 All Rights Reserved  Texas A&M University  Supply Chain Systems Lab Source Analyzer – LT & LT Variability – Schematic Diagram 40 Basic Input Parameters P&L and Bal. Sheet Lead Time LT Var % of re- investment Expected Turns Additional Revenue RONA GMROII Turns EBITDA Average Inventory Safety Stock Re-invest ? YES NO

© 2008 All Rights Reserved  Texas A&M University  Supply Chain Systems Lab Source Group Analyzer – On-Time Delivery 41

© 2008 All Rights Reserved  Texas A&M University  Supply Chain Systems Lab Potential Profitability – Olympic Distribution 42

© 2008 All Rights Reserved  Texas A&M University  Supply Chain Systems Lab Potential Profitability – Olympic Distribution 43

© 2008 All Rights Reserved  Texas A&M University  Supply Chain Systems Lab Potential Profitability – Olympic Distribution 44

© 2008 All Rights Reserved  Texas A&M University  Supply Chain Systems Lab 45 SourceStockStoreSellShip Supply Chain PlanningSupport Services IDENTIFY GAP MAP SHAREHOLDER VALUE ASSESS PROFITABILITY UNDERSTAND BEST PRACTICES ENABLE & IMPLEMENT ODP Methodology Process Framework

© 2008 All Rights Reserved  Texas A&M University  Supply Chain Systems Lab Time Performance Common Practices  No customer stratification  Customer groups based on – Market Type or Product Line  Top customers based on revenue  Based on single factor – Sales, Gross Margin, Business Potential  Based on multiple factors – CTS, Business Potential, Relationship, Customer Lifetime Value, Net Profit, Loyalty  Combination methodology Good Practices Best Practices Sell – Sales Management – Customer Stratification 46

© 2008 All Rights Reserved  Texas A&M University  Supply Chain Systems Lab Customer Relationships 47

© 2008 All Rights Reserved  Texas A&M University  Supply Chain Systems Lab Time Performance Common Practices Cost Plus Pricing Cost Plus Driven Matrix Pricing List Price or List-Less Pricing Value based pricing Pricing matrix based on customer stratification and seller’s item visibility Pricing Optimization Pricing matrix based – Customer Stratification, Seller’s Item Visibility, Buyer’s Item Visibility and Cost Levels & Margin Levels Pricing Rules / Heuristics Good Practices Best Practices Sell – Pricing Management – Pricing Methods 48

© 2008 All Rights Reserved  Texas A&M University  Supply Chain Systems Lab Potential Profitability – Olympic Distribution 49

© 2008 All Rights Reserved  Texas A&M University  Supply Chain Systems Lab SELL Real World Example 50

© 2008 All Rights Reserved  Texas A&M University  Supply Chain Systems Lab Real World Implementation Results 51

© 2008 All Rights Reserved  Texas A&M University  Supply Chain Systems Lab Process Assessment Survey Summary 52

© 2008 All Rights Reserved  Texas A&M University  Supply Chain Systems Lab Business Process Assessment Survey – Summary 53 62%

© 2008 All Rights Reserved  Texas A&M University  Supply Chain Systems Lab Potential Profitability 54

© 2008 All Rights Reserved  Texas A&M University  Supply Chain Systems Lab Potential Profitability (EBITDA) – Olympic Distribution 55

© 2008 All Rights Reserved  Texas A&M University  Supply Chain Systems Lab Potential Profitability (RONA) – Olympic Distribution 56

© 2008 All Rights Reserved  Texas A&M University  Supply Chain Systems Lab Conclusion Actionable Learnings 57

© 2008 All Rights Reserved  Texas A&M University  Supply Chain Systems Lab Optimizing Distributor Profitability – Methodology 1. Identify Gap (Process Assessment Workbook & Benchmarks) 2. Map Shareholder Value (TAMU Distributor Profitability Framework) 3. Assess Profitability (Profitability Analyzer) 4. Understand Best Practices (Best Practices Road Map) 5. Enable & Implement (Educational Sessions) 58

© 2008 All Rights Reserved  Texas A&M University  Supply Chain Systems Lab Conclusion ■POTENTIAL for improving profitability exists ■Process and financial performance can be MEASURED to assess potential ■A ONE-to-ONE connection can always be established between business processes and shareholder value ■This connection can be QUANTIFIED and PRIORITIZED ■Best practices can be ACHIEVED ■Education will ENABLE distributors to realize POTENTIAL profitability 59