March 13, 2007

Eliminating Waste: NEMRA’s whitepaper on eliminating wasteful activities in the electrical market

Electrical manufacturers and independent manufacturers’ representatives agree that much can and should be done to improve each other’s performance and profitability in the marketplace. To pump up profits by eliminating waste in the channel, the National Electrical Manufacturers Representatives Association (NEMRA), Tarrytown, N.Y., and its affiliate, the NEMRA Manufacturers Group (NMG), worked with Thomas O’Connor, president, Farmington Consulting Group, Farmington, Conn., to identify best practices in the market and develop a plan that independent manufacturers’ reps and manufacturers can use to eliminate waste and improve their performance.

O’Connor conducted the study, a white paper titled "Eliminating Wasteful Activities in the Representative and Manufacturer Sales and Marketing Channel," by visiting reps and manufacturers, conducting focus groups and surveying NEMRA members by telephone.

NEMRA and NMG believe the study will help the electrical industry and its channel participants become more productive and profitable by eliminating wasteful activities. Manufacturers and reps weren’t shy with their suggestions about how each other could refine their operations, and they jointly identified more than 20 specific areas they felt must be improved. This article highlights many of these key findings. Contact NEMRA at (914) 524-8650 to get the entire study.

One of the key findings in O’Connor’s research was widespread inefficiency in the exchange of data between manufacturers, manufacturers’ representatives and electrical distributors. As a result, sales order-entry personnel, customer service personnel and inside salespeople at both manufacturers and reps often perform slow, redundant, labor-intensive, error-prone manual activities. These wasteful activities increase operating costs to all three channel partners and result in shipping errors, invoicing errors and returned goods.

KEY FINDINGS

Systems integration. Reps and manufacturers who participated in the study saw more effective systems integration as the most promising solution to eliminate wasteful activities in the channel. They said data is exchanged inefficiently between electrical distributors, reps and vendors and that order-entry personnel, customer-service personnel and inside salespeople at both reps and manufacturers too often perform slow, labor-intensive, error-prone manual activities.

The study also found that manufacturers and several larger reps have separate order-entry personnel and customer service/inside sales personnel to handle the "non-value" sales order entry activities. Another finding was that reps’ customer service/inside sales personnel say they can’t perform value added "selling" functions because they are inundated with manually keyboarding sales orders, checking order status, expediting, and dealing with return goods authorizations (RGAs).

Sales order-entry processes.

This area is laden with wasteful business practices, according to the study. For instance, the majority of electrical distributors’ purchase orders are sent via fax from distributors to reps – who in turn often fax them to manufacturers for them to re-enter into their sales order-entry systems. Reps receive purchase orders from distributors via telephone, postal mail, e-mail and flat files. In some instances, the manufacturer directs their reps to enter the sales orders into their business system and fax the sales orders. Because sales orders must be re-keyed, this increases operating costs and often results in shipping errors, invoicing errors and returned goods.

EDI still not widespread.

The study found that the electrical market has been very slow to adopt transactional e-commerce activities and that, overall, few electrical distributors make efficient use of electronic data interchange (EDI) transactions. To make matters worse, many manufacturers and reps interviewed for the study do not fully understand how EDI can significantly reduce transaction costs for manufacturers, reps and distributors. In many other industries- including the retail market with big-box stores – EDI is the preferred method of transacting business because it streamlines processes and reduces costs in the channel. If you consider the cost to transmit the data and the hardware, software and staff resources, the total cost to send an order has been reported as follows: EDI purchase orders are estimated at $0.25 to $1 dollar each, while faxing a purchase order costs approximately $25. The most significant cost differential of any paper or text-based approach (mail, fax, e-mail, etc.) is the wasteful resource inefficiencies of delays and errors versus an integrated approach such as EDI that reduces document processing cycle time and costs. The study suggested more electrical distributors should follow the lead of IMARK, Oxon Hill, Md., in utilizing

EDI a cost-saving tool. The buying/marketing group has created a Technology and Channel Cost Reduction Committee; recently established E-Commerce Uniform Standards with three tiers of e-commerce capabilities; and offers its members financial incentives to use EDI. According to the study, EDI is not being effectively sold to electrical distributors by reps and manufacturers, and it suggested that NEMRA and NMG should consider taking a leadership position with EDI.

Widespread discontent with NEMRA’s Independent Representative Information System (IRIS).

IRIS, which NEMRA members use to manage their businesses, attracted many negative comments, and the study recommended that NEMRA explore these problems and determine why some manufacturers and manufacturers’ representatives do not use IRIS. The complaints varied, but many focused on a need to update the IRIS software so it could keep pace with the ERP systems used by manufacturers, and a more userfriendly interface for reps.

Profitability of vendors’ lines for reps.

The study said manufacturers need to acquire a better understanding of their line’s profitability from the rep’s perspective. Many independent manufacturers’ representatives conduct a line-profitability analysis so they can relate a line’s profitability to how much time the line demands per dollar earned, and how well it fits with the rest of their lines. Several manufacturers’ representatives have automated their line-profitability analysis in Excel and conduct semi-annual reviews that they share with all employees. Line-profitability analysis is taught in the Certified Professional Manufacturers Representatives (CPMR) course sponsored by Manufacturers’ Representatives Educational Research Foundation (MRERF), Arvada, Colo. The study said all reps should use line-profitability analysis and add specific process activities such as quotes, sales order-entry, checking order status, expediting and RGA to their analysis. The white paper also said more reps should share their line-profitability analysis with vendors.

Said one reluctant rep, "We do the line profitability analysis but are afraid of communicating it because it sets up a possible adversarial discussion and because we are afraid of losing lines." To maximize profit opportunities, the study said manufacturers and reps need to conduct and share line-profitability analyses to become "partners in profit," not "adversaries in profit."

Channel process specialists.

To help improve the lines of communication between manufacturers and their channel partners, the study recommends more manufacturers follow Ferraz Shawmut in its development of a "channel process specialist" position responsible for improving all "critical to service" processes that exist between their company and their reps and distributors. This person recommends improvements in areas such as sales reporting; pricing management, including the Special Pricing Authorization (SPA) process; commission reporting, including Point-of-Sale (POS) and

Point-of-Transfer (POT) reconciliation; marketing and sales communications to the sales team and external channel partners, including new product communications; Web-based customerself-service offerings; and electronic commerce communications/EDI.

Using Kaizen to eliminate waste.

When it comes to eliminating wasteful activities, the study identified two reps as standouts: Brazil Brothers & Associates, Metuchen, N.J., and Nelson & Associates, Santa Fe Springs, Calif. Both companies passionately believe in the value of continuous improvement utilizing the Kaizen Continuous Productivity Improvement Process. A Kaizen is a team that achieves continuous, incremental improvement of a specific activity to eliminate waste. No matter what size of company, reps would be well-served to employ Kaizen teams focused on process improvement. The study said Wiremold was the first company in the electrical industry to adopt a "Lean" philosophy, and that the manufacturer introduced Brazil Brothers to the Kaizen Continuous Productivity Improvement Process. Nelson & Associates participated in its first Kaizen with Hoffman Enclosures, Anoka, Minn., in 2004 to improve its order-fulfillment process.

The Kaizen team improved Nelson’s customer will-call response time by 105 minutes and reduced the administrative and tracking time by 165 minutes a day.

Manufacturers’ Web sites.

Manufacturers and reps receive countless telephone inquiries from electrical distributors that should be easily addressed online. Apparently, great disparities exist between the userfriendliness and information availability among manufacturers’ Web sites. Reps cited Pass & Seymour/Legrand, Syracuse, N.Y., as having a good Web site. Said one rep, "If every manufacturer did what P&S has done with their Web site, huge costs would be taken out of the distributor channel." The top manufacturer sites allow users to check stock and pricing, obtain quote information, enter sales orders, check delivery tracking information, obtain product information and specsheets, enter RGAs, request samples, request Material Safety Data Sheets (MSDS) and conduct training.

Reps’ Web sites.

There are also great disparities in the user-friendliness and information availability among reps’ Web sites. The study recommends that all reps have high-speed, networked Internet access and Web sites with hyperlinks to their manufacturers’ sites.

Customer-relationship management (CRM) programs.

It appears unlikely that the industry will universally adopt a standardized CRM program for all manufacturers and reps. The study encouraged NEMRA and NMG to partner with Industry Data Exchange Association (IDEA), Arlington, Va., to create CRM and sales reporting systems for the electrical market. The net result would be improved communications between reps and their manufacturers on activities in the field, new product rollouts, line conversion, quotation and lead updates, depending on the CRM system utilized.

Standardized sales-activity reporting.

It also appears unlikely that the electrical wholesaling industry will adopt a standardized sales-activity reporting format. The study also suggests that NEMRA and NMG partner with IDEA to create a monthly report exchange. The efficiencies gained here would allow reps’ field sales organizations to increase field selling time and increase the quality of information provided to manufacturers.

Performance metrics.

The study called for the development of standardized performance measures to evaluate manufacturers and manufacturers’ representatives. Expectations change from manufacturer to manufacturer asto performance metrics, and these performance drivers are often very poorly communicated to manufacturers’ representatives. On the flip side, reps said they need standardized performance metrics to analyze their vendors.

Vendor understanding of the rep’s inside-sales function.

Reps’ inside sales personnel universally complained that manufacturers’ customer service personnel do not understand and therefore do not appreciate the demands of their workloads, which in part comes from working with so many vendors. The study said NEMRA should organize a task force of reps’ customer service/insidesales personnel to create a Manufacturer’s Customer Service Representative Training Program (MCSR) for manufacturers’customer service personnel.

Product champions.

The white paper said reps should designate customer service/inside sales personnel to be "product champions" for specific product lines, and that manufacturers need to commit to quarterly training with the product champions. The product champions could then cross-train customer service/inside sales personnel so all distributor and/or end-user inquiries can be forwarded to anyone at the agency.