In our last installment, we reviewed the Change Management Process for Digitization of the distribution firm. We now apply the process to Sioux Falls Supply for their use in changing the firm to take advantage of their online technology.
Sioux Falls Supply is a PHCP distributor with an ESOP structure and $400 million in sales. The company has 35 branches stretching from the Plains through the Mid-West, and from Texas to North Carolina. It has 112 outside sellers with territories ranging from $750,000 to more than $6 million in annual sales. The average seller covers 55 accounts, making the assigned account list in the neighborhood of 6,100 or so and representing 85 percent of total annual sales — or about $56,000 in annual sales per assigned account.
The average cost of an outside seller — including salary, bonus, benefits and expenses — is $110,000 per year. Accounts are assigned based on a combination of annual sales, annual margin dollars and sales forecast. The company has more than 20,000 accounts on open credit status.
Territory Assignments and Research
Sioux Falls assigns territories based on geographic barriers along with the financial goals. Management uses a call maximum of 1,200 calls per year, which means each account is seen around twice per month. In actuality, some accounts are seen once per week or more while others are seen once per quarter.
Sioux Falls strategic management team includes Gordie McGrath, CEO; Sofia Espinoza, CFO; Mary Anworth, vice president of marketing; Sid Kinson, vice president of sales; and Jason Hostrom, vice president of operations. The team is scheduled, within the coming year, to finish build-out of a full e-commerce platform including transaction platform, PIM, punch-out suite, faceted search and quotation management system.
McGrath is determined to use the technology to streamline the sales and branch complement of the organization along with increasing sales. His overall position on investment of the technology has been that efficiencies in organizational structure are a significant part of the ROI for the technology investment.
His common statement to the executive team is this: “If we get only sales growth out of the technology, we are not getting the full benefit of the investment. Supply chains use new technology to streamline operations while improving quality and this will come from reductions in personal selling and the branch footprint. If we don’t get significant sales increases from e-commerce and don’t reduce operating costs, we’ve simply added cost to the channel and have to charge the customer more to cover our technology investment.”
Ironically, most of the executive team and most of Sioux Falls’ competitors don’t believe that e-commerce can be used to reduce the infrastructure of the company. Kinson and Hostrom are especially distressed about McGrath’s plans and have voiced their concerns inside and outside of the executive team. They view the existing sales and branch complement as a mechanism to “serve the customer,” and there is no need to reduce operating costs from the deployment of self-service.
McGrath instructs Anworth and Kinson to survey customers on their e-commerce usage and their preferences on sales call frequency, including the option to not receive a sales call and to self-serve. From their survey, they learn the following:
20 percent of customers don’t want a regularly scheduled sales call and feel they can self-serve online using inside sales when they have an issue.
30 percent of customers say they are satisfied with a call per quarter.
20 percent of customers say they are satisfied with a call per month.
30 percent of customers want a sales call at least twice per month.
Additionally, 20 percent of sales-assigned customers have negative activity profits, meaning they generate less in gross margin (GM) dollars than they cost to serve. Overall, 40 percent of Sioux Falls’ customer base has negative activity profits. However, more than half of these accounts are $5,000 and less in annual purchases and are unassigned. From their activity costing, the Sioux Falls inside sales cost to process an invoice is $8.50 versus an estimated $1.25 for e-commerce.
Cost/Benefit for Sales Force Change
To understand their cost/benefit options for the change of the sales effort, McGrath works with CFO Espinoza to develop a financial understanding of the sales force options. They are seen in Exhibit I.
In the table, we have listed the research of accounts under Call Status as no calls, once per quarter, once per month and twice per month. We listed the number of accounts per call status, which totals to 6,100 assigned accounts. Under the heading Number of Calls, we have listed the number of calls specific to the number of accounts. In the Before column, we have listed the calls at an average of twice per month or 24 per year. In the After column, we have listed the cost of calls after the company implements e-commerce.
Sales cost per call is $110,000/
1,200 calls per year or about $92. The Business Retain Probability (BRP) ratio is the expected number of accounts retained after sales call reduction and substitution of e-commerce. The net cost or gain in sales and margin dollars are listed in the next two columns.
Reading across the No Call row, we have 1,220 current accounts taking 28,800 calls that cost $2.6 million under the current configuration of two calls per month. After e-commerce, the outside sales cost is nothing; however, there is an 80 percent BRP ratio or a 20 percent loss of accounts and the cost is $13 million in sales dollars and $3.4 million in margin dollars. Each row is configured with the same analysis based on the customer research and substitution of e-commerce for sales calls.
At the once per month and twice per month call frequencies, sales gains are at 7 percent and 15 percent, respectively, and this results in a total gain in sales of $38.9 million and a gain of $9.7 million margin dollars. (Note: We use a 25 percent GM for Sioux Falls.) Adding this to the savings in sales expense of $7.7 million, we have a gain equivalent to $17.4 million in margin dollars to the annual income statement.
We base the assumptions for Sioux Falls on gain or loss in sales volume when rolling out e-commerce on our consulting experience. As sellers decrease call frequency, even for accounts who want no calls from outside sales, there is usually a drop in sales volume. Before reducing call volume, distributors should review account profiles.
If the account has complex needs, then sellers should be placed on the account. If the account orders mainly commodities, with few hassles in their internal processes, the seller should be removed if requested. Often, accounts where sales frequency is reduced will resort to finding information and ordering online. This frees up the outside seller to do more value-added selling and volume increases.
We encourage readers to make their own Exhibit I and use it to understand the implications of moving some customers online while others receive little change in sales volume. E-commerce is going to be used to reduce the outside sales complement, making it more efficient and effective. It is being done by leading distributors but also by new models of business who have few sellers and who are targeting full-service distributor customers. As sales calls are reduced, the efficiencies are taken to the market for a reduced price or plowed-back into the business to make it more efficient.
In our next installment, we will look at what happens when Sioux Fall’s CEO makes the results of the analysis available to his management team. The adoption of the sales change plan by members of the management team has a big effect on the attitudes of the workforce. Large-scale corporate change, if not managed carefully, can stymie or destroy the best of e-commerce technologies.