Wholesale Distributor uses 80/20 Rule to Increase Accountability, Grow Revenue and Reduce Operating Expenses

CLIENT SUCCESS STORY

Customer Challenge

A $600 million wholesale distributor, part of a multi-billion dollar entity, was struggling with a variety of issues, including:

• Drop-through of added revenue dollars to the bottom line
• Accountability and pricing strategies
• Meeting the needs of the company’s top customers
• Understanding where the company was and wasn’t making money

BDO’s 80/20 team was engaged to assess the effectiveness and efficiency needs of the client and advise on steps that would lead to increased accountability and organizational change.

 

BDO’s Solution

The BDO team did a deep dive into the company and found that:

• 95% of revenues/margin were generated by the top 25% of customers and products
• 25% of the transactions for the company were only accounting for 6% of the revenues
• The operating plan could be achieved with fewer employees and branch locations
• Pricing strategies weren’t aligned with driving “core” business
• Various market segments weren’t being treated differently (alignment of resources, strategy, etc.)
• Incentive compensation programs where mis-aligned
• Very little rigor existed around the addition of suppliers

Filters were then created for implementing a new supplier using an approval process, as well as a new approval process for implementing a new product line and the development of a new credit policy that was directed at their most important customers. Pricing and terms were revised to raise pricing on a lower-tier customer by 10%, in addition to creating a minimum order due policy. The number of relationships were simplified in all areas, including consolidating spend to fewer, more profitable supplier partners, as well as headcount rationalization and closing four consistently unprofitable branches. Additionally, the team was able to consolidate 70% of inventory into six distribution centers.

Accountability was greatly increased by changing management compensation plans to reflect 60% of bonus opportunity on profit objectives and 40% on growth targets, as well as re-focusing resources on “overserving” top customers and maximizing opportunities with current customers, implementing a target selling program and incentive plan, and creating profit rate improvement objectives and “compensation kickers” for sales. The business was aligned around four market segments and specific strategies were created for these segments.

 

Results and Benefits

After implementing the new system, the company saw many benefits including:

• Operating income improvement of 6%
• Target account growth exceeded 30%
• Significant reduction in operating expenses
• Increased business focus on important issues, including accountability
• Growth rates above market in strategic segments
• Organizational alignment

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