Distributor Differentiation through Value Added Services – Part 1

12/11/2017

Guest Blogger, Dr. Bill McCleave, PE

In 2003, I partnered with Tom Gale, editor of Modern Distribution Management magazine to write a NAW/DREF book entitled Standout from the Competition . Through extensive primary research, the book examined how distributors across North America differentiated their firms in various market environments. 

Four differentiation dimensions emerged as critical for creating competitive advantage for distributors, including:

  • Position-choosing the Big Idea for The Firm
  • Pitch-creating and delivering appropriate market messages along with effective selling processes
  • Performance- delivering the Pitch promises through high quality activities and reliable processes
  • Proof- closing the delivered value loop with customers in demonstrative and quantitative methods

Over the past decade, distributors that have the resources to invest in growth have gained in size such that they have changed the competitive landscape for the industry as a whole. These large companies – with annual Distributor Differentiation through Value Added Services – Part 1revenue in excess of $1 billion – have used their purchasing power to command bulk discounts, expanded their product and geographic portfolios, and leveraged new technology to reach customers when and where they want to purchase. 

This has left smaller distributors looking for newer, better ways to compete with these large firms. The following are four ways smaller companies can gain a competitive advantage.  While all of these approaches are important strategies, an expanded description on two – technique and technology – is provided.

Financial:  Companies may determine that the best way to compete is by increasing their operations through mergers or acquisitions leveraging traditional sources and/or private equity

Talent: Employing the right people in the right positions and bolstering their productivity through training, advancement and retention activities is a cornerstone to any company’s success. 

Technique: Distributors can extend their current operations with value-added services that differentiate them from large competitors. Traditionally, distributors have provided their customers with a multitude of services – from product selection and stocking, to picking, packing and shipping – that, simply put, are easier to execute for larger firms. However, there are several techniques smaller distributors can employ to add value to their operations, including:

  • Online product selection assistance
  • Vending machines
  • Product and services bundling
  • Advanced technology products
  • Alternative selling methods, such as Amazon or eBay
  • Inventory sharing
  • Buying groups
  • Limited franchise relationships

While it’s true that smaller firms can survive selling traditional products and providing traditional services, the secret to longevity may lie in cost reduction, efficiency, speed and product application skills. Many smaller firms gain a competitive advantage because of their customer knowledge, proximity, flexibility and ability to take on a variety of customer problems and provide solid solutions. In addition to simple value-added services, distributors may decide to offer further services that differentiate them from the competition, such as: 

  • Installation of Products
  • Field service and maintenance
  • Fabrication
  • Project staging
  • Component assemblies
  • In-house repair
  • Custom products
  • Solution design and engineering

These services can provide excellent opportunities for growth, enhanced customer intimacy and higher technology product applications, but there are some challenges. These include added costs, risks and scope creep. Value-added offerings must be carefully orchestrated to match distributor effort with solution results and customer perceived value. Unfortunately, many distributors have failed to manage the value they provide and fall into traps where services for sale get blurred with standard offerings and the customer tries to get more for less. 

Before adding value-added services as differentiators, consider these points and actions:

  1. Make sure customer requirements are well understood.
  2. Establish a clear distinction between product-attached and optional services, and make sure both types are priced correctly.
  3. Develop and use a menu (or family of) service offerings.
  4. See that additional organizational burdens are considered—and defined processes in place—to manage new service offerings and opportunities. These could include, activities, labor and asset utilization, equipment and technology, billing and receivables, inventory, and distraction / risk factors
  5. Have confidence that your organization can sell new services and negotiate any new relationships these services may entail.
  6. Ensure that the service team puts processes in place to assure ongoing service improvement through standardization and the application of automation, tracking, and analytic technologies.
  7. Remember that not all "value-added" opportunities are worth pursuing, and assure that those pursued are.

To be effective, value-add services must be supported by sufficient processes and technologies to make them profitable and deliverable.  Some examples include:

  • Accurate Costing
  • Effective Pricing
  • Service Message Development
  • Focused Services Selling
  • Custom Performance
  • Contained Flexibility
  • Learning Curve Improvement
  • Cost Tracking
  • Risk Management
  • Reporting Value Contribution
  • Automated Support Processes.

In Part 2 of this two-part blog series, I’ll cover the fourth way that smaller companies can gain a competitive advantage.

Dr. William R. McCleave, Jr. P.E. is a nationally recognized speaker, trainer and president of W. R. McCleave & Associates, a consulting firm specializing in relationship management for industrial distributors, manufacturers and their customers. He is also a leading expert on Integrated Supply. He has over 30 years of industry experience in executive managerial roles and has served as an advisor and trainer to a wide variety of distributor and industrial clients.

Guest Blogger, Dr. Bill McCleave, PE

 

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