Sales and Marketing Optimization

Texas A&M's School of Industrial Distribution is renowned for its research capabilities on the practical aspects of the business of wholesaling. HARDI was pleased to have the HVACR industry represented in a recent consortium on "Sales and Marketing Optimization (SMO)." Through the generosity of the HARDI Foundation, several HARDI member companies participated in this landmark study, conducted over nine months. Three firms were chosen after a solicitation to all distributor members. The companies are: Johnson Supply, Houston, TX; Meier Supply Co., Johnson City, NY; and GBG Inc., Pittsburgh, PA. Sixteen additional distribution firms from seven lines of trade formed the remaining research subjects. The research was conducted based on the five-step methodology as follows:

1. Identify gap through process assessment

   As a first step, a one-day personalized research workshop was conducted with each participating member company separately. The objective was to assess sales and marketing processes of participating distributors. This initial step helped develop a detailed framework for sales and marketing processes in the wholesale distribution industry. The framework consisted of 21 business processes. The processes were assigned into seven categories — sales & marketing strategy, business development, marketing communications, pricing optimization, sales force design, development and management. Through research, common, good and best practices were identified for each of these 21 processes. Pricing optimization was treated as a single process, though it is comprised of three activities (analytics, optimization and execution). See Figure A.

   These processes were assessed along this spectrum of common to good to best and then rated based on inputs received during research workshops. Out of 19 participating firms, two firms had two best practices, nine firms had one best practice and eight had no best practice. One of the participating HARDI members was part of that "top spot" of having two best practices out of 21 processes that were assessed.

2. Map shareholder value

   Having identified process gaps, the next logical step was to understand the impact of these gaps on shareholder value, so distributors can prioritize and improve performance. The research group developed the logic to connect business process to shareholder value through process metrics and financial elements. Following this logic, process metrics were identified for each business process and then linked to financial elements and metrics. For example, customer stratification is one of the business processes under the business development category. One of the process metrics to measure customer stratification is cost-to-serve, which can be linked to a financial element — accounts receivable. This can be measured through a financial metric — days sales outstanding (DSO). The shareholder value is represented by four financial drivers — growth, profitability, cash flow and asset efficiency — and DSO is a cash flow driver. See Figure B.

   Thus, each business process is linked to shareholder value. This resulted in the 'Sales and Marketing Framework' map — a key deliverable depicting the link between sales and marketing strategy (market segmentation, target market selection and value positioning), business processes, metrics (process and financial) and shareholder value.

3. Understand best practices
   

   With the "Sales and Marketing Framework" map as reference, the research team identified best practices for each business process. The best practice for each consisted of key elements, methodology, examples and implementation components. For instance, sales force compensation had five key elements — level of pay, method of pay, performance metrics, variable pay structure, and three-way alignment. The best practice methodology for the second element (method of pay — fixed vs. variable) included two major perspectives — degree of influence wielded by sales person and degree of differentiation demonstrated by firm through value proposition — and the combination method to arrive at a final pay structure. See Figure C.