BEYOND SURVIVINGOPTIMIZING PROFITABILITY
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M&A Activity in Wholesale Distribution
* Excludes transactions in the retail consumer markets
Source: Pembroke Consulting
28 22 21 25
55
112
2001 2002 2003 2004 2005 2006
# announced acquisitions in Wholesale Distribution: 2001 - 2006 *
2
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Distribution Trends – EBITDA Multiples
Source: MDM, Vol38, No. 4, February 25, 2008
2004 2005 2006 2007
9.2x
9.8x
9.0x
9.7x
9.4x 9.4x 9.3x 9.3x
10.1x
9.1x
8.5x
8.9x
9.4x
10.0x
9.5x
8.6x
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Distribution Median EBITDA Multiples(based on 30 publicly traded wholesale firms)
3
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Top 10 Public Distribution Firms By ROIC%
30%
28%
24%23%
21% 20%18%
15% 15% 14%15%
18%20%
8%
19%
13%
9%7% 8% 7%
Houston Wire & Cable
Company
Smith International
Inc.
Fastenal Co. Applied Industrial
Technologies Inc.
MSC Industrial Direct Co.
Inc.
WW Grainger Inc.
Genuine Parts Co.
Bunzl plc Pool Corp WESCO International
Inc.
ROIC (%) EBITDA Margin (%)
Source: MDM, Vol38, No. 4, February 25, 2008
4
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The ROI Equation
Financial Statements “Balance Sheet” &“Income Statement” encapsulate the
results of the above activities
5
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DistributionBusiness Process Framework
6
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Educational Session Deliverables
7
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Business Process Framework
8
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Business Process Groups – Summary
9
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Financial Framework
10
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Financial Drivers
11
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Optimizing Distributor Profitability
Methodology
12
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Optimizing Distributor Profitability – Methodology
13
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Performance Assessment
14
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Time
Perf
orm
ance
Common Practices
Good Practices
Best Practices
Best Practices Framework
15
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Process Assessment
16
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Custom Process Assessment Report – Sample
17
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Process Assessment Workbook – Applications
■ Workbook can be used to ■ Assess other branches / regions, hence set company-wide
process benchmarking■ Assess acquisition targets’ process potential
■ Custom report identifies process and financial gaps
18
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Cross-Channel Financial Benchmarking
19
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Cross-channel Financial Benchmarking Report
20
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Optimizing Distributor Profitability – Methodology
21
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Connecting Processes and Shareholder Value
22
$hareholder Value
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Distributor Profitability Framework – Concept
23
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Distributor Profitability Framework
24
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Optimizing Distributor Profitability – Methodology
25
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Source Group Analyzer – Schematic Diagram
26
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Optimizing Distributor Profitability – Methodology
27
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Best Practices Roadmap – Sample
28
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Best Practices Roadmap – Sample
29
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Optimizing Distributor Profitability – Methodology
30
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Balanced Score Card (Kaplan & Norton)
31
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Linking Implementation Components
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Implementation – Complexity vs. Decision-making
33
High ROI
Centralized Decision-Making
De-centralized Decision-Making
Com
plex
M
odel
sSi
mpl
e M
odel
s Low ROI Lack of Local
Knowledge
High ROI Need Training
Low ROI Low Level of
Acceptance
Everything should be made as simple as possible, but not one bit simpler - Albert Einstein
Majority of distributors
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IDENTIFY GAP
34
MAP SHAREHOLD
ER VALUE
ASSESS PROFITABILI
TY
UNDERSTAND BEST
PRACTICES
ENABLE & IMPLEMENT
ODP Methodology
Process Framework
© 2008 All Rights Reserved Texas A&M University Supply Chain Systems LabTime
Perf
orm
ance
Common Practices
Purchase price varianceLanded costLacks segmentation framework
Segmentation based on COGS by supplierPareto framework (80%-20%)
Loyalty, Profitability, Services, PerformanceRisk/Exposure – supply availability, technical requirements, financial factors, technological factors and environmental issuesLanded Cost (TCO)Combination Methodology
Good Practices
Best Practices
Source – Supplier Management – Supplier Stratification
35
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Supplier Stratification
36
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IDENTIFY GAP
37
MAP SHAREHOLD
ER VALUE
ASSESS PROFITABILI
TY
UNDERSTAND BEST
PRACTICES
ENABLE & IMPLEMENT
ODP Methodology
Process Framework
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Linking SOURCE Processes to Shareholder Value
Process Group Process Process Metric Financial Elements
Financial Metrics
38
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IDENTIFY GAP
39
MAP SHAREHOLD
ER VALUE
ASSESS PROFITABILI
TY
UNDERSTAND BEST
PRACTICES
ENABLE & IMPLEMENT
ODP Methodology
Process Framework
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Source Analyzer – LT & LT Variability – Schematic Diagram
40
Basic Input Parameters
P&L andBal. Sheet
Lead Time LT Var
% of re-investment
Expected Turns
Additional Revenue
RONAGMROIITurns
EBITDA
Average Inventory
Safety Stock
Re-invest ?
YES
NO
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Source Group Analyzer – On-Time Delivery
41
Decision Variable - On-Time DeliveryPotential Lead Time Variability Reduction 25%% of Inventory Reduction Re-invested 75%Expected Turns on Re-investment 8.00Interest Expenses for additional capital 12%VariablesLead Time (Days) 30.0 days 30.0 days 0.00 days 0.0%Lead Time Variability (Days) 15 days 11 days 4 days 25.0%Average Inventory $17,470,663 $16,007,358 $1,463,305 8.4%Average Inventory (Days Of Supply) 57.5 DOS 52.7 DOS 4.8 DOSAverage Inventory after re-investment $17,104,836 $365,826 2.1%COGS $110,902,877 $119,682,708 $8,779,830 7.92%
Current Potential Change in Performance
71.366.0
Cash Conversion Cycle (days)
Current Potential
214%
236%
GMROI (%)
Current Potential
6.35
7.0
Inventory Turnover
Current Potential
23.57%
28.22%
RONA (%)
Current Potential
7.92%
Revenue Growth (%)
Potential
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Potential Profitability – Olympic Distribution
25.08% 25.55%24.53%
26.00%
31.54% 31.79%
26.28%
36.73%
23.57%
29.03%28.22%
25.72%
28.50%
20%
30%
40%
Base Case Lead Time Lead Time Variability Completeness Index Payment Terms
Potential Profitability Curve - SOURCERONA % - MINIMUM RONA % - MAXIMUM RONA % - Typical Distributor
42
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Potential Profitability – Olympic Distribution
29.19%
36.86%
26.93%
40.86%
49.14%
31.77%
23.57%
39.19%
42.81%
29.38%
20%
30%
40%
50%
Base Case Forecasting Stratification Min-Stock Policy
Potential Profitability Curve - STOCKRONA % - MINIMUM RONA % - MAXIMUM RONA % - Typical Distributor
43
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Potential Profitability – Olympic Distribution
23.81%
25.64%
23.75%
27.20%
24.20%24.12%
26.81%
23.95%
28.05%
25.04%
23.57%
24.27%
29.33%
24.00%
28.62%
25.44%
20%
25%
30%
35%
Base Case Rec/Stag/Putaway Space Utilization Cycle Counting Transportation Pick & Delivery
Potential Profitability Curve - STORE & SHIPRONA Minimum % RONA - Typical Distributor RONA Maximum %
44
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IDENTIFY GAP
MAP SHAREHOLD
ER VALUE
ASSESS PROFITABILI
TY
UNDERSTAND BEST
PRACTICES
ENABLE & IMPLEMENT
ODP Methodology
Process Framework
© 2008 All Rights Reserved Texas A&M University Supply Chain Systems Lab
Time
Perf
orm
ance
Common Practices
No customer stratificationCustomer groups based on – Market Type or Product LineTop customers based on revenue
Based on single factor – Sales, Gross Margin, Business Potential
Based on multiple factors – CTS, Business Potential, Relationship, Customer Lifetime Value, Net Profit, LoyaltyCombination methodology
Good Practices
Best Practices
Sell – Sales Management – Customer Stratification
46
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Customer Relationships
47
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Time
Perf
orm
ance
Common Practices
•Cost Plus Pricing•Cost Plus Driven Matrix Pricing•List Price or List-Less Pricing
•Value based pricing•Pricing matrix based on customer stratification and seller’s item visibility
•Pricing Optimization•Pricing matrix based – Customer Stratification, Seller’s Item Visibility, Buyer’s Item Visibility and Cost Levels & Margin Levels•Pricing Rules / Heuristics
Good Practices
Best Practices
Sell – Pricing Management – Pricing Methods
48
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26.24%
29.72% 28.90%
32.54%
24.73% 24.91%
26.73%
43.77% 43.81%
37.84%
30.09%
25.57%
23.57%
26.45%
37.43%
32.99%34.23%
27.08%25.17%
10%
20%
30%
40%
50%
Base Case Customer Strat (Sales Force Redeploy)
Cost To Serve Customer Stratification
(Customer Reassign)
Pricing Optimization
Internal Sales Force Benchmarking
Customer Payment Terms
Potential Profitability Curve - SellRONA % - MINIMUM RONA % - MAXIMUM RONA % - Typical Distributor
Potential Profitability – Olympic Distribution
49
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SELL
Real World Example
50
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Real World Implementation Results
51
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Process Assessment Survey Summary
52
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Business Process Assessment Survey – Summary
50%
58%
45%
47%
91%
45%
34%
42%
53%
50%
9%
5%
4%
2%
3%
STORE (Warehouse MGMT)
SHIP
SELL
SOURCE
STOCK (Inventory MGMT)
Supply Chain Planning
Percentage of Processes
Distributor - Business Process Assessment Summary
COMMON GOOD BEST
53
62%
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Potential Profitability
54
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Potential Profitability (EBITDA) – Olympic Distribution
5.20%
9.32%7.17%
11.41%10.29%
11.52%
Base Case Source & Stock Store & Ship Sell Combined Best Practices - MIN
Combined Best Practices - MAX
Impact of SOURCE, STOCK, SELL, STORE & SHIP best practices on EBITDA % - Typical Distributor
55
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Potential Profitability (RONA) – Olympic Distribution
56
23.6%
75.2%
33.4%
61.2% 67.7%85.0%
Base Case Source & Stock
Store & Ship Sell Combined Best Practices
- MIN
Combined Best Practices
- MAX
Impact of SOURCE, STOCK, SELL, STORE & SHIP best practices on RONA - Typical Distributor
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Conclusion
Actionable Learnings
57
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Optimizing Distributor Profitability – Methodology
58
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Conclusion
■ POTENTIAL for improving profitability exists
■ Process and financial performance can be MEASURED to assess potential
■ A ONE-to-ONE connection can always be established between business processes and shareholder value
■ This connection can be QUANTIFIED and PRIORITIZED■ Best practices can be ACHIEVED■ Education will ENABLE distributors to realize
POTENTIAL profitability
59