SPRING 2019 EDITION

The year 1937 must have been a pretty good year for starting restaurants in small-town America. Two restaurants, in particular, started out as small businesses and were essentially what could be called family operations. Both were located in small, but thriving towns. One had a prime location just a block off the main square in a small town in central Illinois. The other occupied a less desirable space close to a racetrack, but otherwise just a short drive away from the main traffic pattern.

Today, one serves 68 million people every day. The other still has its original 11 counter stools. The menus are roughly the same, the owners equally intelligent and the patrons similarly loyal. However, one is a billion dollar business while the other struggles to provide a living for its owner. While it could be blind luck or simple happenstance, I believe the whole thing is tied to processes.

The small place off the beaten track was founded with $5,000 by a couple of brothers named McDonald. The other restaurant was started by a guy named Bill. Until processes were added to McDonald’s, both restaurants were most likely destined for obscurity.

Processes are strange to contemplate. Let’s look at how they made a difference in our example. If you go to a McDonald’s anyplace in the world, the fries are consistently hot and just crispy enough. A visit to Bill’s in the early afternoon might get you perfectly wonderful fries, but order them after shift change in the evening and things are different. The locals know when to order them and who can cook them just right. Consistency eliminates surprises and improves overall perceived quality, so say the 68 million people served at McDonald’s every day. Processes play a major role in quality, but also have other impacts.

McDonald’s has a little more than 1.9 million employees. I would hazard to guess there are less than a dozen McDonald’s workers with backgrounds in rocket science, brain surgery or quantum physics. Furthermore, according to Bloomberg, the turnover rate in the fast food business in 2018 was 150 percent. That means a business with 20 employees would need to hire 30 per year. Simply put, without a process, any chances of establishing some “historical memory” style of training just doesn’t exist. When all of these factors are taken into account, one could hardly expect to get a fountain drink much less a finely fried potato from McDonald’s, but largely due to processes it happens.

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Processes apply to electrical distributors, too

By now you might be wondering if this article is an accidental insert into this magazine. However, processes apply to the world of electrical distribution, too. I doubt if anyone can imagine an electrical distributor who does not follow standard accounting procedures. The bank, accountants and tax man pretty much insist on a process here. Imagine running a business in an environment where the accounts payable department didn’t follow a process. Supplier errors would go unnoticed. Trade discounts would be left on the table. And, at the end of the year, it would be nearly impossible to determine if the business made money.

Sticking with this accounts payable analogy, let’s recall the time just a decade ago when ship and debit special pricing agreements (SPAs) first came into vogue. I remember conversations with more than a dozen distributors who discovered a year or more later that they somehow missed filing for the credits from their supplier. Those dollars could have added up to a lot of money, yet they had fallen through the cracks.

How did this happen? Sometimes, the person responsible for the work was out due to an extended illness and the reports weren’t run. Other times, communication broke down between sales and accounting personnel. Occasionally, it was just a simple filing error. Simply stated, there was no process.

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What is a process?

To be a process, the actions around doing something must have three basic components:

  1. Documentation: A description of what happens, when it happens and how decisions are made. Having documentation also allows new employees to better understand what is expected on the job. It’s important to note, documentation need not be fancy and formal. In many instances, a simple flow chart will suffice.
  2. Metrics: Measures that eliminate (or at least minimize) subjective decisions that cause variation in how things are done.
  3. Management points: These allow management to occasionally tweak the process for improvement and ensure the team actually follows the process.

Without these three touchstones, there is no process, yet many distributors falsely believe they have a process in place. For instance, a few years ago, my firm conducted a survey for an industrial distribution magazine about targeting opportunities in its sales group. The answers we received were disturbing. While nearly every distributor indicated they had a process, the next question uncovered a gigantic chasm. The vast majority of the distributors said their process was either “informal with no documentation, metrics or management points” or “left up to the individual sellers.” Simply stated, they had no process.

Where should you apply process and why?

First of all, I understand how busy you are and realize the whole “process thing” might seem a little daunting. Secondly, I believe processes are interactive. Building a process in one area intrinsically impacts processes interacting with it in a positive way. With this point in mind, I suggest process building in areas with potential financial impact and where processes intersect.

1. A Pricing Process: Reports from distributors who have implemented a regimented pricing process indicate a two-point bump in their overall gross margin. These results are too important to ignore; two points in a margin equates to a 50 percent bump to the bottom line. Too many distributors leave pricing to the sales team, believing the sales team has the greatest handle on the customer market.

Establishing a pricing process impacts the distributor’s ability to segment customers, which improves marketing. A pricing process improves inside sales and customer service processes by taking the burden of price/cost research out of the hands of busy inside sales people. A pricing process also forces better handing of customer SPAs, especially those negotiated by customers who don’t deliver on quantities purchased or willingness to open the door to ancillary sales tied to the negotiated product.

2. A Targeting Process: One major sales research organization indicates companies that formally develop a targeting process are 47 percent more likely to reach their sales goals. And, the results remain constant through all kinds of economies, good and bad. The research also pointed out that the companies customers view as valued business partners always had a robust targeting process.

Targeting could be one of the keys to a sales process. One of the core tenets is to direct sales efforts toward accounts capable of providing your company with a profitable return; sellers spend less time on accounts with little opportunity for success.

A vibrant targeting process also improves inventory turns for new products, reducing the amount of time products languish in the warehouse waiting for customers to start buying them.

3. Onboarding Process: Our firm has devoted a lot of the past year to what we call “The New Sales Guy Project.” In our interviews with new salespeople, the message comes across loud and clear—distributors don’t spend the right amount of time coaching new sellers on how to sell. In spite of the passing of several generations, new sales people are still basically receiving cursory computer training and the keys to a company car before they are sent out to sink or swim based on a trial and error approach.

Research by Brent Grover indicates it costs a distributor approximately $150,000 to hire a new seller and launch a new sales territory. Common sense dictates it would be worthwhile to ensure the endeavor is successful. An onboarding process can both minimize risk and accelerate the time required for the territory to reach profitability.

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Rapid fire discussion of other processes

Time and space limits our ability to discuss every process a distributor needs to master. I’ve prioritized the ones listed above based on their ability to generate revenue for distributors. There are others that are equally important, including:

  • A process for handling open orders: Customer orders that get lost in your system are expensive to fix and cause customer irritation. If the inside sales team does not have a process, establish one soon.
  • A process for using CRM: This is not a plug for you to go out and purchase a CRM, most distributors already have one. Instead, I’m advocating for you to create a plan to get the right data and use it.
  • A process for managing suppliers: Most distributor managers can quickly point to their top five or six supply partners and talk about how they handle interactions. The details get sketchy after discussing those few. The wrong vendor can be just as damaging to the bottom line as the wrong customer set.
  • A process for delivery: Does your delivery truck spend time dropping off $50 orders to low-potential accounts? Inside sellers often have the power to decide if orders are shipped via company van or UPS. Most of the time, however, there is no process for deciding when to use either method.

Let’s revisit McDonald’s and how processes work

A reoccurring theme in conversations about processes is, “We have put processes into place but have a tough time getting our employees to follow them.” There comes a time when processes become as important as people. If there are no consequences for employees who do not adhere to a process, you really don’t have a process.

Imagine a cook with years of experience joins McDonald’s and one day exclaims, “I don’t need to follow the process for cooking fries.” My guess is management would instruct the cook to either follow the process or leave. Sadly, you may need to take a similar stance with stubborn employees. I believe it’s worth the pain.

Frank Hurtte
Straight talk, common sense and powerful interactions all describe Frank Hurtte. He speaks and consults on the new reality facing distribution. Contact him at River Heights Consulting via frank@riverheightsconsulting.com or 563-514-1104.