Profit Levers For a Tightening Year

One quarter through 2023 the pricing pendulum appears to be reversing with volume moderating across most distribution sectors. Dorn Group’s James Dorn and Tom Gale discuss sell-side, buy-side and program improvements distributors can make in this year’s environment of contraction to protect and improve profit.

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Podcast Transcript:

Tom Gale: Welcome to this edition of MDM’s Quicktake. I’m Tom Gale. My guest today is James Dorn, president and CEO of Dorn Group, a strategic advisory to manufacturers and distributors. James, welcome.

James Dorn: Hey, thanks Tom. It’s great to be here with you.

TG: I’m excited to announce that our team at MDM is co-hosting a virtual profitability summit with the Dorn Group on July 19th. It’s a one-day event for you to attend, and we have a great lineup of speakers and panelists. We’ll be sharing cutting edge pricing and profit strategies in 2023, AI’s impacts on distributor pricing, methodology for better budget variance forecasting, special pricing agreement management, taming price changes, and much more. We have a great lineup of speakers. James, I’m excited to co-host this program with your team. We just finished this first quarter and I thought it’s a great time to focus our conversation this week on profitability. You work with many of your clients on pricing and profit strategy, so what are you hearing from your community on pricing trends so far in 2023?

JD: Thanks Tom. And yeah, it’s exciting opportunity for us to join MDM in producing that. Super excited to share some of what we’re hearing and seeing out in the marketplace, but when it comes to really where the pulse is in the industry with what we’re hearing in the street today, I mean the big questions coming back from distributors are where is pricing going? As supply chain starts to correct itself, what are we going to see from a pricing standpoint and you have other factors like the market slowing in demand that’s also creating some uncertainty around really where pricing is going and how that’s going to impact overall profitability for distributors. I think there’s another question we’re getting a lot, and it’s actually research we’re doing to track really more of the sentiment when it comes to the end customer because there’s been so many price increases passed to the end customer over the last two, three years.

They’re at a point to where they are in full productivity, cost efficiency mode where they’re seeking new ideas, new ways, new suppliers to actually reduce some of their overhead and costs. So the more distributors can play into this with value added services, with new ways of doing things with different suppliers, I think that puts them in a really good position to help end customers really reduce some of those price increases that they’ve taken over the last two, three years. But big picture, what we’re hearing in scene is just the pendulum is going to start swinging back the other way. And in some markets it is already where distributors are going to need to work a lot more proactively to protect the profits that they’ve captured over the last two, three years because there’s going to be more pricing pressure, there’s going to be more pressure put on them from end customers and potentially even on manufacturers still trying to pass some cost increases through the channel we’ll say.

TG: I’m excited for the timing of our pricing summit on July 19th for the reasons that you state. It seems as though price increases the last couple of years was just many distributors are saying this month after month, and there’s definitely been some slowing on that. But things are shifting here and I think the timing mid-year and after that second quarter we’ll have another update from our partnered Baird-MDM MarketPulse where we really are tracking the pricing impacts and trending. It’s going to be really interesting to see how that back half of the year shapes out.

JD: That’ll be insightful to see that data come back, Tom.

TG: So today I’d be really interested, James, you’re going to be giving a little bit of a keynote in framing a lot of the conversation that we’re going to be having in that summit. I’d like to get your take in terms of where you are focusing right now and the kinds of guidance that you are giving to your clients.

JD: Yeah, a lot of the advisory that we do, Tom with distributors, is helping them with a holistic approach to profitability, how they can look across their enterprise, across all functions, across branch level, across corporate, and really formalize the way in which they approach profitability. And pricing of course is a big part of that, but there’s also a lot of other factors, but we really break it down into three dimensions of protecting and improving profitability. And this is what we’ll be diving deep into at the virtual summit here. But those three dimensions are sell side as the number one, look at as a distributor, how you can protect and how you can increase your margins when you’re selling your products to your customers. And this is where it comes down to basically getting paid more for what you sell, increasing that gross margin. And this is both a science and an art because you want to be able to do this without curtailing your top line sales growth.

And that’s where there’s a lot of finesse that comes into this. But in big part with what we’re hearing and seeing in this dimension in today’s marketplaces, you’ve got to look at your product categories, your high moving items versus your low moving items, really focus aggressively on your As and Bs and try and ensure that you’ve got the right pricing strategies across your product categories. And then beyond that, it really comes down to taking a current look at your customer base, really segmenting it down to a customer level to see what are these customer segments buying a lot of, what are they not buying a lot of? What can they buy more of? What are their purchasing preference and patterns? All of this kind of gets rolled up into this sell side dimension where distributors are just getting more sophisticated about how they assemble their teams and capabilities to improve and protect profitability within the sell side.

The second side, or the second dimension here is really on the cost side. And this is where historically distributors have focused a lot of attention on it, but it’s probably in more of a disparate or fragmented approach. If you ask nine out of 10 distributors, they’d say, “Yeah, we have buyers, but we don’t have a purchasing department per se.” It’s individuals who are really good at working with key suppliers. And it might even be at a branch level, it might be at a corporate level. So there’s a lot of room in this dimension of cost side to really formalize how a distributor can improve their profitability on the cost side. But basically it comes down to working with your supplier base to figure out, hey, are we getting the right first cost level types of programs versus our competition? Are we really partnering with these suppliers to a point to where we are top on their list?

Things like that. But I would say in today’s market, what we’re seeing a lot of in this bucket is really are you tiering your suppliers into preferred levels versus strategic levels? And are you ensuring that across your organization as a distributor, you’re leveraging those strategic suppliers more so than the preferred ones? Because those are the ones that are going to give you the best types of SPAs or special pricing agreements. Those are the ones that are going to be giving you the best rebates. So things like that would all come down to the cost side of it and helping distributors get a little bit more organized and formalized around what they can do to improve profitability in that bucket we’ll say. But the last one is really comes down to what we call program improvements. And this is where if you’ve got a pretty good handle on both sell side and cost side, there’s definitely opportunities to optimize your profitability into this last dimension of what we call program improvements.

And this is where we’ll have a lot of content at the session on this one, but it’s trying to work with your suppliers in a more sophisticated way to where you’re actually doing joint planning with them and in more of a strategic sense of, hey, let’s use data. Let’s use our history together to say, “Hey, here’s how we can actually sell more volume to our customers. Here’s how we can go after market demand and market development in a more concerted fashion.” So it really comes down to trying to work with your supplier base in a more strategic way. And this is looking across all aspects of the business. So within these three dimensions, Tom, this is where we’ll be diving a lot into at the event, and it should help distributors really get a pulse on, hey, what are others in the industry doing? What are other top performers doing? And where can we make some improvements? What levers can we pull to really improve our pricing, improve our profitability as an organization?

TG: I really like the three dimensions that you outlined here, James, and absolutely this is really the framework for our entire event. If I were to force you to pick one of these threes as where in 2023 distributors can get the most leverage, do you have a good answer for that?

JD: Oh, that’s a tough call, Tom. I would ground it on how sophisticated or how far along you are in each one of these areas because depending upon how far along you are, that’s where this third dimension of program improvements is going to help you improve even further. But I would say big part where we see the most improvement that needs to be made is probably on the sell side. A lot of distributors have the cost side, a lot of resources there, but when it comes to the sell side, there’s probably more of a opportunistic type of approach that distributors are taking either at a branch level or at an individual seller level. If they can contain some of the special price concessions they’re giving to customers, that’s where really we can make some substantial improvements there.

TG: I was reaching for my gong that I bang when I start hearing the consultant answer of it depends, but you did a really nice job of dodging that and actually answering the question. So kudos on that, James. So the final thing, you talked about sell side, cost side program improvements, and we’re going to be diving into a lot of dimensions from a lot of different angles and really I think from some awesome speakers that are going to be in the room. There’s going to be more in depth around this segmentation piece that you mentioned because that is such a critical element and really sort of a base for really a lot of the other efforts out there. Cost to serve also going to be talking through that some and just all the process and policy pieces. But finally it’s really about getting the team, the capability and the incentives to make sure this gets executed on the front lines.

JD: And it’s going to be really exciting Tom, to see how all this comes together and see everybody really share their current research and ideas with the MDM community here.

TG: Yep. Look forward to working with you on it. We’ll have a great program on July 19th. Talk soon.

JD: Great, thanks Tom.