How Reps Create Value for Care
Givers
Presenter
J. Michael Marks, Managing Partner INDIAN RIVER CONSULTING GROUP
www.ircg.com
Thursday, June 20, 2013
8:00 AM to Noon
Ft. Lauderdale, Florida
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Antitrust Disclaimer
Plan on being deposed in the next 24 months about this meeting
• It is important to be able to enthusiastically tell the whole truth
• If you aren’t deposed- then you can be happy either way
We are NOT going to discuss any specific customers or any specific products or any specific prices or any specific geographical markets, however
• We can speak freely about distributors, in general
• We can speak freely about trading practice alternatives and channel economics
We are not going to make any agreements, either explicit or implied, with any other participant with respect to our future trading practice plans or intentions
• Every firm is free to pursue their own best commercial interests unencumbered by any other participant in this room
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About Us
We are a mid size consulting firm founded in 1987 that
provides advisory services for manufacturers and
distributors of products or services in mature, often
complex, B2B markets
Our expertise is in market access which measures how
well resources are aligned with growth opportunities
• Strategy development and execution
• Channel management
• Sales effectiveness and compensation
Well recognized for our industry depth, experience
and practical approach
• Permanent faculty members at UID/Purdue
• Senior NAW Research Fellow & 5 years on HIDA’s board
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Agenda
This industry is
rapidly accelerating
to an unsupportable
future and the great
hope is innovation
driven from the
center
Market dominance
requires selling skills
and channel
management skills
for the independent
rep
Healthcare market issues
Channel design principles
Your downstream role
Your upstream role
Innovation trends
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The GPO Industry Impact If the only tool that you have is a hammer, then everything looks like a
nail
They are unique to the healthcare industry
• They now extract more value from the supply chain than they add
• They will not go away
• Why do we still have labor unions?
They are having lifecycle issues
• IDNs are regaining strength
• Compliance is a continual battle for them
• As time progresses the incremental value drops (diminishing returns)
• While distributors complain, the transaction complexity is a barrier to entry to distribution firms outside of healthcare
• They are driving hard to get beyond the acute marketplace
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Healthcare Has Two Terminal Diseases
Transaction Pricing Myopia (TPM) to the exclusion of market based pricing*
Incremental Plant Loading (IPL)
Symptoms of the combination include:
• Back end rebates, tracking fees, meeting participation fees, regional meeting support fees, meet comp or SPA (Special Pricing Authorizations) discounts, special stock rotations, inventory price protections, consignment inventories with forgiveness, Ship From Stock and Debit transaction costs, free samples and demo equipment, etc.
GM%ƒ(1/Transaction Size)
“5% Greater capacity utilization has an incremental
net profit of 72%”
*The McKinsey quarterly, “The Power of Pricing,” Michael V. Marn, Eric V. Roegner, and Craig C. Zawada, February 2003
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The Wal-Mart Disease
Many large, and leading, companies have not created much
shareholder value the last decade
The Wal-Mart disease is focusing on executing the business’s
long-standing success formula better, faster and cheaper —
even though it’s not creating any value for their shareholders
Wal-Mart is now paying dividends so they look more like a
bond than an equity
http://www.business-
strategy-
innovation.com/wordpr
ess/2010/12/walmart-
disease/
What Happens When You Get To The Bottom?
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Gray Market Products Our industry’s problems are self inflicted
There are many sources and causes of gray market product
creation* but healthcare issues center around a primary cause:
• When the (Cumulative effects of pushing sales and increasing
incentives to buy) > (Consumption plus channel storage capacity) then
product reemerges as gray market for resale
• For example, acute care groups place a big order to get a great discount
and then resell the excess product to other users or channel partners
(BTW: it also makes it easier to camouflage counterfeit product)
Managing the problem with legal agreements works as well in
healthcare as it does in music downloading
The root cause is the industry myopia with the terminal
diseases- TPM and IPL
Bottom line is that it is not going to change for a while *http://infosciencetoday.org/type/research-type/the-gray-market-as-a-growth-tool-for-small-
high-technology-firms-a-conceptual-framework.html
* Source:
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Private Label Is A Catch All Term
Distributors average twice the margin compared to branded products
There are branded products provided by a manufacturer
• Sometimes with many price points and brands
There are generic products provided by a manufacturer
These same products can be provided by a distributor or a group under their name
• There are even suppliers who only do private label production
It is not about the products, it is about the brand promise
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Figure 6 % of Contractors Willing to
Use Private Label Products
Trusting Private Label
The
percentage of
surveyed
contractors
who indicated
they were
willing, very
willing, or
already buying
different types
of private label
items
Source: Emerging Trends & Traps in Residential Construction: The NAED Roadmap to
Future Opportunities http://www.naed.org/Education%20and%20Research%20Foundation/Foundation%20Research/Foundation%20Research%20Completed%20Research.html
No
Yes
Maybe
The electrical market is instructive for healthcare because screw ups kill people
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Group Activity
Break into groups as instructed
Choose a group leader by determining who has traveled to the most exotic
location
The role of the group leader is to ensure that everyone weighs in with their
own views and that the group stays on track
Consider these statements and questions
1. Share views with respect to the current race to the bottom on pricing
and whether anyone has seen examples of forces that may change the
trend
2. Over the next five years will the role of private label products in this
industry increase or decrease or stay about the same?
3. How does the role of the independent rep change when looking at
private label products?
The purpose is simply to help you clarify your own thinking
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Agenda
Healthcare market issues
Channel design principles
Your downstream role
Your upstream role
Innovation trends
The channel is an integral
part of healthcare markets,
customers choose the
distributor before they
choose the brand
“Good enough is now good
enough” The Healthcare mandate on private label
“Products are built in
factories while brands are
built in the mind” Walter Landor
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What Is A Marketing Channel?
A channel is an interdependent group of firms who are involved in how a product is used or consumed
Compensation is provided to channel members to reflect the value of services that they provide
• Some are over and under compensated as channels evolve
Many firms confuse products and channels
• The wiener is the product; the bun and condiments are the channel; and all the customer wants is a good lunch
• Even more firms mistakenly assume that the brand is only about the product
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Marketing Channel Functions
Marketing channels connect end customers with suppliers by
providing demand creation, logistics, financing and support
services
• Distributors can provide lower cost coverage with their gross margin
basket, they can pull through sales by winning ties when the customer is
indifferent, and they can lower transaction costs independent of order
size
Including distributors, buying groups, agents, reps and brokers
• They survive if they perform activities more cost effectively than those
they buy from (suppliers) and sell to (customers)
Gross margin or commissions compensate them for their value
added
Channel players can be eliminated but channel functions
cannot
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Manufacturer
The Channel Story Gather information from multiple sources and look for key drivers and
incorrect assumptions to create actionable choices.
Optimized
Channels Economics Coverage Recommendations
& Action Planning
Channel
Partners Customers
Segmentation
IRCG Channel Analysis Model
We’ve all got cherished beliefs
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17 The Channel Design Objective
1. Each customer segment’s service demands are met at an
acceptable level (Segmentation based on buying behavior) e.g. how critical is the distributor field sales role?
2. We have visibility and access to our customers when
needed (Coverage) e.g. our customer’s current distributor sells our stuff
3. Channel services costs are acceptable and partners get an
appropriate economic return (Economics)
e.g. our customer’s current distributor wants to sell our
stuff
The 2 Channel Design Factors are
Service Output Demands (SOD) and Service Outputs Supplied (SOS)
SOD > SOS = lost sales
SOD < SOS = lost profit
In the beginning SOS = SOD
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Distributor Position Defines Their Strategy
Distributor Product Lines Dollar
Share
These products are higher
margin and get pulled
through with the primary
products
Gap
Fillers
Primary Products
50%
30%
~1-5 Top Vendors
20%
Tertiary
Products
Mfr says jump,
disty says “How
high?”
Next 5-10
Everyone
Else
Distributors need and nurture secondary and tertiary products to expand
their share of spend in their customers
ETDBW* always
trumps price and
quality
* Easy To Do Business With
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Cost to Serve Considerations
The nature of the business makes direct cost calculations difficult, as channel
partners routinely
• Lose money on individual items to secure an overall profitable order
• Lose money on individual orders to secure an overall profitable customer
• Accept lower margins on high velocity items or strong brands
Manufacturers are often incapable of providing transactional support services for
end users (i.e. “mass customization”)
• Credit risk analysis and customized terms
• Processing millions of small transactions
• Providing highly flexible logistics (e.g. deliveries accepted between 6:00 and 6:15 AM on
Thursdays only)
% of Sales Gross Margin % of Gross Profit % of Sales Effort
Primary Products 60% 8 – 10% 47% 68%
Secondary Products 30% 15 – 25% 37% 30%
Tertiary Products 10% 30% 16% 2%
Where is your product bundle in the distributor product mix?
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Group Activity
Break into groups as instructed
Choose a group leader by determining who has the least total tenure in the
healthcare industry
The role of the group leader is to ensure that everyone weighs in with their
own views and that the group stays on track
Consider these statements and questions
Winning the new game for the rep firm requires true analytical expertise far
in excess of that of your principals, the old time sales guy won’t make it
1. Compare notes with each other on your agreement or disagreement
with the statement above
2. What are some best practices where the rep firm uses market data and
insight to educate their principals and help set appropriate
expectations?
The purpose is simply to help you clarify your own thinking
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Agenda
Healthcare market issues
Channel design principles
Your downstream role
Your upstream role
Innovation trends
For the manufacturer
employee sales rep, this
position used to be a
source of a company’s
competitive advantage-
but it has devolved into a
two year training course
for most
The independent rep has
become the last
repository of tenured
market knowledge and
insight
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Your Mission
Is to gain market dominance for your product bundle offering in
your assigned geography
Selling is, at the base, customer interruption behavior
You and your boss will have a conspiracy of effectiveness
Success requires the efforts of your channel partners who will
always act in their own self interest
You need to reward and punish channel partners and not all
should like you
Your success in this mission is dependent on your talent, your
value offering, and your time investment decision processes
Effective performance requires that upstream and downstream
partners are often equally irritated with you
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What You Need to Determine First
What should be the distributors role in your overall market development plan?
• Are they market makers or market servers or both?
• Which distributor locations or reps give you the best return on invested time and money?
Who really determines choosing your brand, end users, distributors, GPOs, or IDNs?
Do you clearly know what is in it for them and know why they “want to play”?
What are the areas of ambiguity between corporate policy (with your principals) with big nationals and favoritism to local operations?
What is your level of autonomy?
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Rank Each Distributor Rep*
Characteristic Winners Potentials Losers
Growth Rate Ranking Top 25% 26%-74% Bottom 25%
Help needed from you Little Moderate High
Price whining Little Moderate High
Your time investment Feels good Easy to ignore Demand lots of
help
Your ability to influence
growth
Low
High
No hope
Typical time investment /
Ideal time investment
25% / 10%
10% / 50%
65% / 40%
* Or branch location
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The Principle of Calculated Neglect
The distributor’s opinion of your skill and competence changes
based on your view of their ability to help you achieve market
dominance on your products in your assigned geography
• If they are losers, they need to think that you are a loser as well
• One or two annual complaints to your boss is the goal
• Make sure that your boss is expecting the calls first
Your evaluation is by location, or person, not corporate entity
• You always pay public homage to the big national distributors
If you want everyone to think that you are a great rep- then
you are investing time with losers that could get a better return
if invested with winners
• Never forget your mission
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This Book Is About Relationship Economics
The law of legitimate cross purposes
• Manufacturers care most about plant utilization and new
product introductions
• Distributors want to maximize customer share of spend,
overall margin mix, and provide mass customization
The law of perpetual change
• Relationships always start in coyote love (with poor or
nonexistent agreements) and become dysfunctional due to
death by a thousand cuts when incremental damage is not
managed
Manufacturing Retail Distribution Service
Fixed cost portion of
revenue High Medium Low Low
Labor portion of fixed
costs Low Medium High High
http://www.naw.org/publications/pubs_item_view.php?pubs_itemid=2
http://www.naw.org/publicat
ions/pubs_item_view.php?p
ubs_itemid=2
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This Book Had Several Key Messages
Messages were sent, but not heard
• The constant din of transaction negotiating drowned out significant
messages that led to profound crises, i.e. termination
The manufacturer’s sales rep was the critical link in the
relationship
• Good ones respected confidences, were slightly disobedient, and could
effectively carry messages
• The independent rep is a sovereign external peer and has more power
Distributors could be classed as winners, potentials, and
losers
• Many manufacturers made the mistake of treating the good ones like the
bad ones for the sake of consistency
How did you feel about your time investment choices?
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How to Manage the Distributor Only if you are Primary or a large Secondary
1. Annual planning
• Your commitments to them: Fill rates and lead time fluctuations, stock
rotations, technical & business development support
• Their commitments to you: Resale volume and some kind of sales
tracing, inventory levels, competitive intelligence
• Mutual Commitments to each other: Pricing, freight, and terms, customer
creation activities
2. Quarterly reviews
• Milestone measurement, corrective action, intelligence sharing,
concurrent training
3. Customer creation activities
• Competitor displacement, joint calls & promos, no “suck up” visits,
provision of qualified leads
Always Hold Up Your End!
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How to Manage the Distributor If you are Tertiary or a small Secondary
Be very easy to do business with (ETDBW) as this trumps price and product performance, hands down
• Internet availability & your home phone
• Don’t overreach your value to them
Provide some channel compensation to the individual instead of the channel partner firm
• Intrinsic (non cash) is also valuable
Develop a pricing strategy that leverages non-recurring investment activities
• Discounts for number of reps with a successful sale or demo or passing knowledge tests (you drive e-learning, not your principals)
Find an internal champion and reward lead “bird-dogging”
• You do demand creation and give the orders to your chosen ones
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Your Economic Power Market power is never given, it is taken
You compete for their mindshare against other suppliers by making a case for your features and benefits
• Sometimes this is an issue or a non event
• Alignment means that you win all the ties where the customer doesn’t care about brand, your product is simply bought and doesn’t need to be sold
Most customers have a preferred distributor rep
If the preferred rep protects your position with the customer, then you will support that rep over the other distributor sales reps
• You will not take other competitors into that account
• If competitors go on their own, bad accidents will happen to them
• You will take the loyal distributor rep into new end users that others have screwed up
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Do The Math
Any time you accompany a distributor sales rep (market
making pull through) to get only a product reorder (without
presenting products that the end user or contractor currently
doesn’t buy) you are wasting a sales call
• Calls to replenish inventory are market serving only
If you have a short tail (low switching costs) you will never
achieve market dominance for your products because of
• Existing distributor sales rep sabotage via movement to private label or
competing brands
• A competing distributor sales rep visits with a competitor
How do you identify when the two circumstances above occur in your
territory and what can you do about them?
How sticky is a sold customer to competitive encroachment?
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Your Specific Task
Know the preferred distributor of every major user of your
products
Your ride-along task is not about selling your stuff, it is about
aligning your support to specific customer-distributor rep pairs
Getting this right creates both high latency (resistance to
change) and channel power (leverage) with your distributor
reps
The dumbest thing that you can do is help a distributor get
business that you already have through another distributor
• Unless you are intentionally punishing the incumbent distributor rep- then
make it very public
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Group Activity
Break into groups as instructed
Choose a group leader by determining who has the most spouses,
children, and grandchildren
The role of the group leader is to ensure that everyone weighs in with their
own views and that the group stays on track
Consider these statements and questions
1. Compare views on Mike’s assertion that the principal of calculated
neglect is required to achieve market dominance
2. Without naming local names of distributors (big guys are OK) what are
the tradeoffs between how giant distributors and independent
distributor can help you make a market?
The purpose is simply to help you clarify your own thinking
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Agenda
Healthcare market issues
Channel design principles
Your downstream role
Your upstream role
Innovation trends
An independent
manufacturers rep, when
listened to, provides
significant market insight
to their principals
improving their alignment
of resources to real
growth opportunities in
the market
Reps often deliver
messages that are hard
to hear
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The Manufacturer Representative Function
The old school is a low and variable cost model providing a manufacturer
with access to a sales force that gets replaced with a direct sales force
when scale is achieved
The new school for manufacturers that understand channel insight is to
replace the direct sales force with rep firms gaining the following
• Significant cost savings in market serving (the bundling effect)
• Clear competence in market making by discrete tasks (2 tier rates)
• True market insight that challenges assumptions rather than simple
obedience (more effective market access)
• Access to distributor mindshare by leveraging the reps product portfolio
capturing channel led business
There is a growing gap between new school and old school rep firms
Old guy deep relationships versus quantified market insight
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Oversimplified Bundling Impacts
Situation: a manufacturer with total selling costs of 6% and margins of
30% and a fully loaded employee sales rep cost (W-2, T&E, benefits) of
$100,000 who makes 4 calls each day
Cost/call = $100,000 / (4 calls/day X 250 days/yr.) = $100/call
Sales required to break even = $100 / 30% margin = $333/call
Situation: A manufacturers rep for the above manufacturer where that
manufacturer’s revenue equals 10% of the reps line card on a 5%
commission line where the rep makes $100,000 fully loaded and makes 6
calls day
Cost/call = $100,000 / (6 calls/day X 250 days/yr) = $66/call
Sales required to breakeven = $66 / 5% = $1,320
Smallest customer covered for that mfr. =$1,320 X 10% share = $132
A rep can cover over twice the customer base at 16% lower cost
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37 The Manufacturer Challenge Most manufacturers have a pie splitting strategy
These strategies often just drive short-term, unsustainable results where
companies are merely "renting share” often destroying long-term industry
profitability for everyone involved
A market access category growth strategy examines and
invests on three variables
Category Growth = A (# of customers) x B* (units per user) x C (price per
unit). To grow a category, you can focus on A (by luring new customers into
the category), or B (by convincing existing users to buy additional units) or
C (by increasing prices).
Adjacency analysis is used to define new categories
http://blogs.hbr.org/cs/2013/04/the_rising_tide_lifts_one_boat.html
?utm_source=feedburner&utm_medium=feed&utm_campaign=Fe
ed%3A+harvardbusiness+%28HBR.org%29
Variation in plant utilization is the hidden profit leak
* e.g. Recency, frequency, **BER-age X utilization
** Beyond Economical Repair
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How Far Do You Reach For Growth?
We do market access and we
have learned
• It is much better to start with
customers than with what
someone at a principal decides
that they can make (internal view)
Why? Because they offer the
most realistic growth
opportunities for most B2B
manufacturers
• A new category is worth 100X the
revenue of a new product
• Line extensions are a distraction
Customers
Existing New
Pro
ducts
Exis
ting
Hard
2X Harder
Ne
w
2X
Harder
4X Harder
“Hail Mary” (New + New) growth opportunities are
expensive, distracting, and rarely successful (1% for P&G)
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Bought Versus Sold
A product is sold when a customer chooses it from competitive alternatives
for the first time
• A sales rep is often, but not always, involved
• Sometimes there is a thoughtful evaluation of price/performance criteria
• With channel led business the customer doesn’t care or their choice is
independent of price/performance criteria (they choose the distributor
first)
If the product is satisfactory it will be purchased again (bought) when the
customer’s requirement reoccurs- generally independent of sales efforts or
investments (interruptions are often irritating)
When the product is repurchased it is bought, not sold, as the market has
been made
• The long tail repurchase rate measures brand power and customer
switching costs
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Insight Is All Around You The automatic negotiating response is for customers to want distributors, and distributors to want manufacturers, to think that price is the only thing that matters
In negotiating, you want to buy from the best supplier at the worst supplier’s price
Since healthcare is primarily a channel led business, the manufacturer who wins ties, but loses head to head comparisons, will always have dominant market share
• What is required to capture discretionary distributor energy necessary to win the ties when the customer doesn’t care?
• Why do your principals spend so much time trying to get customers to care?
Examine your current volume and determine how much is bought versus sold (of the sold share how much is winning non-caring ties)
• Allocate your selling costs appropriately
You will make major changes is your resource deployments
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Functional Discounting
Functional discounting is about aligning channel compensation (distributor
margin) to your desired channel partner activities
• This reduces discounts for big orders (classic take-away power) to increase the
compensation for desired activities
• Most efforts fail because we are hostage to quarter end load up programs by
looking at invoicing rather than market position (the monkey on cocaine)
Distributor Annual Volume
<300K 101-300K <100K
Base discount 32% 29% 26%
Market data 3% 3% 3%
EDI Ordering 4% 4% 4%
Meeting plan 2% 2% 2%
Total discount 41% 38% 35%
VPA* for Over Plan 5% 5% 5%
*VPA = Volume Purchase Agreement
In healthcare
products, the
higher the ticket
price, the lower
the product
margin
&
The larger the
distributor take
away power, the
better their margin
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Distributor Compensation Changes When
They do more of these things
• Order in standard quantities or in truckload quantities
• Provide responsive point of sale reporting
• Price their activity within my guidelines
• Increase the number of market leading users of my product
• Sell the full product offering not just the fast movers
• Stock appropriate product breadth
• Increase their sales (not purchases) of my product
• Increase my revenue share of a given product category
They do less of these things
• Carry competing brands in my core product areas
• Take unauthorized discounts
• Competitively capture business that I already have with another distributor
• Ordering product with rush expediting
Think about market making versus market serving
These are about
market making or
lowering your
cost to serve
them
These are the
opposite
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Agenda
Healthcare market issues
Channel design principles
Your downstream role
Your upstream role
Innovation trends
The major driver of
innovation is always an
outsider’s perspective that
examines the status quo
The independent rep is one
of the primary sources
along with consultants and
other service providers
True open innovation
processes are magnets for
external input that
challenges assumptions
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The Weak Link in Supply Chain Management
Traditionally, SCM has centered around logistics and buy/sell
transactions. This is why technology is so prevalent in discussions
between partners. But is this really the most critical link? Maybe instead
of operations, distributors and manufacturers should focus on the sales
efficiency and effectiveness of their supply chain.
Supply chain management is a lot like marriage counseling:
most people consider it only because they hope it will fix their
partner
When suppliers talk about “taking costs out of the channel”
they’re usually not referring to their own profit margins
• Likewise, distributors are much more eager to create vendor score cards
than to participate in benchmarking of their own performance
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The IRCG Enterprise Model
This approach to sales is very different from the typical annual planning confrontation, where the manufacturer assigns
aggressive targets and pushes the distributor to devote more sales resources
Both parties take an honest look at their combined approach and ask the question, “Would this make sense if we were part of the same company?” • Financials are combined and shared with both executive teams
• A list of dumb stuff is identified and those practices are eliminated as “muda”, or non value added activity
• The other activities are sorted by who can perform them most effectively (this is not a negotiation)
• Roles are reassigned, compensation and incentives are agreed and scorecards are developed
• CFOs are always involved
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An Idea for Consideration Demand-driven channels is a term first used in NAW’s 2007
Facing the Forces of Change Study that described products
being pulled down the supply chain by actual customer
demand. As a new term, it captures the essence of a quietly
growing class of competitive activity. Success in these
efforts requires simultaneous adoption of technology, a
higher level of mutual trust and dependence than is typical,
some new analytics, and a clear recognition of some new
responsibilities to trading partners.
http://blogs.hbr.org/cs/2012/07/the_game_b
uyers_play_with_vend.html
Relationship buying and
sourcing has been replaced by
economic buying and sourcing
• Trusted relationships have
migrated to rabbits &
advantaged players
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47
The Whipsaw Effect
From suppliers
From customers
Research by Pembroke Consulting, published by the NAW Institute, 2007
Order from www.nawpubs.org
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48
WAL-MART “QUICK
RESPONSE” SYSTEM
SF BSF B SFB SF B
PUSH / LOAD UP STRATEGY
SF B
PULL THROUGH / JITPS = PRIMARY SUPPLIER B = BUYERS
SF = SALES FORCE DC = DISTRIBUTION CENTER
TRADITIONAL APPROACH
“QR” RESPONSE
DAILY, PAPERLESS, ERROR FREE
PS MFG DISTY WM END USER
PS MFG DC WM END USER (35% LESS)
• Better scale and efficiency from shifting selling and marketing resources
to the end of the supply chain
• Eliminate redundant functions and improve balance of supply and
demand costs
• Reinvest savings to create and capitalize on the power of brand
Quick Response System
This was built
in the
eighties
And the first
application of
two tier rep
commission
rates
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Vendor Managed Inventory (VMI)
Auto-replenish agreed SKU’s (Min/Max)
Clear, non sales, rules of engagement
Redeploy upstream sales rep to demand creation activities
FIFO and freight prepays go out the window
CHANNEL INVENTORY
MFR. DISTY CUST
$ 2 MILL $10 MILL $1 MILL
Manufacturer
Production
End Use
Demand
$ 2 MILL/MO $ 2 MILL/MO
What about the drop in sales?
The decision of when to replenish rests with the upstream supplier
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50
What if...
…we covered both ends?
Distributor
Cost reduction opportunity = 10N
where N is the number of channel partners
VMI DMI Manufacturer Customer
When deployed and stable, production
planning is driven by end user
consumption, not forecasts
Demand Driven Channels
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51
How About Consignment? Consignment = Category Exclusive
Current Situation Optimized Consignment
Days Cost of Sales in Inventory 75 50 0
+ Days Sales in A/R 40 40 3
- Days Purchases in Payables 35 35 3
= Cash to Cash Cycle 78 55 0
The supplier retains title to the inventory, replenishes based on agreed min/max levels, invoices based on final sale and is paid in 3 days
The distributor’s customer is liable for insurance and physical security, and provides POS (sales tracing) data for invoicing
The agreement can be terminated by either party with 30 days notice
Single annual blanket PO with documented stock rotations
What impact does this have on margin requirements (dramatically
lower), fill rates (much higher) and forecasting (almost perfect)?
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52
Group Activity
Break into groups as instructed
Choose a group leader by determining who has had the slowest
commission paying principal in days to pay (please don’t name names)
The role of the group leader is to ensure that everyone weighs in with their
own views and that the group stays on track
Consider these statements and questions
1. Share views with respect to the most valuable learning insight you
have picked up this morning.
2. Based on this session are there any activities that you will do less often
or even stop?
3. Based on this session are there any activities that you will start or do
more in the future?
The purpose is simply to help you clarify your own thinking