Driving Enterprise Value In Wholesale Distribution—Part II The Need To .
Driving enterprise value inwholesale distribution—Part IIThe need to balance SG&Aefficiency and effectiveness
IntroductionAlbert Einstein used to say that "everything should be made as simple as possible, but not simpler." A similar principleapplies to managing selling, general and administrative (SG&A) expenses in wholesale distribution (WD). Companiesshould strive to leverage SG&A spend to effectively execute their business strategies, while controlling SG&A cost, whichin case of wholesale distributors includes distribution operations as well. In many cases, this means spending more thanthe bare minimum on SG&A. This finding seems to fly in the face of conventional wisdom, which has long viewed lowerSG&A costs as the key to improving return on operating capital. So what’s really going on?Our research(1) shows that top-performing wholesale distributors—those with the highest return on operating capital(ROC)–tend to have higher SG&A-to-revenue ratios than their peers with lower ROC. Is this because top performersenjoy the luxury of larger profit margins and can thus get away with less than optimal SG&A efficiency? In part, yes. Butthe bigger reason is that top WD performers typically feature a much broader product portfolio and larger geographicfootprint, enabling them to serve customers more effectively. This service-oriented strategy generates much highermargins, but also increases overall complexity which in turn drives SG&A costs as a result of a more skilled sales force,wider distribution network, and supporting capabilities such as pricing, category management and network optimization.In this second article in our series on “Driving Enterprise Value in Wholesale Distribution,” we take a detailed look at theindustry’s SG&A practices, and offer new insights into how companies at every performance level can manage SG&A costsmore effectively to support their business strategies and improve their return on operating capital.A contrarian finding on capital efficiency and SG&AThe first article in our series(2) revealed that the traditional mantras of operational excellence and cost reduction are nolonger the keys to success in wholesale distribution. In fact, our analysis of three different WD lines-of-trade (denotedby the large bubbles in figure 1) showed that companies that emphasize revenue quality over pure operations excellence(denoted by the darker shaded smaller bubbles) often deliver increased returns on capital. We identified four strategiesproduct portfolio expansion, price optimization, sales-force effectiveness and operations excellence – to drive higherreturns. As is obvious, supporting these strategies will require re-thinking of SG&A infrastructure.Figure 1: Performance in wholesale distribution varies widely58%TBDCompany A, 42.2%48%Cluster 1Line of Trade Medium to High MarginIndustrial Supplies Low to Medium Inventory TurnsGrocery & Food Service High ROCElectrical / ElectronicsCompany B, 51.8%Top Performerswithin a clusterGross Margin % (3 yr. avg)Company C, 43.6%38%Cluster 2Company W, 33.5%Company D, 32.0%28%Company F, 38.2% Low to Medium Margin High Inv Turns Low to Medium ROCCompany E, 32.4%Company V, 25.7%Company G, 22.7%18%Company I, 27.3%Company J, 15.0%Company U, 37.7%Company H, 20.1%Company L, 27.8%Company K, 19.9%Cluster 38%As used in this document,"Deloitte" means DeloitteConsulting LLP, a subsidiary ofDeloitte LLP. Please see www.deloitte.com/us/about for adetailed description of the legalstructure of Deloitte LLP and itssubsidiaries. Certain services maynot be available to attest clientsunder the rules and regulationsof public accounting.-2% Low to Medium Margin Low to Medium Inv Turns Low to Medium ROC5Company M, 26.3%Company N, 18.4%Company O, 19.5%Company P, 17.0%Company S, 9.3%Company T, 10.8%Company R, 15.2%Company Q, 21.3%101520Inventory Turnover (3 yr. avg.)Note: 3 year averages for Gross Margin, Inventory Turnover and ROC considered based on FY10, FY11, FY12 figures; ROC EBIT/ (NFA NWC)Source: Deloitte Consulting Analysis; S&P Capital IQ Database(1) Deloitte Consulting Survey, 2014(2) Driving Enterprise Value in Wholesale Distribution—Sanjay Agarwal and Raj Nagarajan, January 20142
Peer setElectrical/ElectronicsGrocery & Food ServicesIndustrial SuppliesTop RoC performers18%22%21%SG&A as a % of salesRest8%11%18%Overall11%15%17%Note: 3 year averages for Gross Margin, Inventory Turnover and ROC considered based on FY10, FY11, FY12 figures; ROC EBIT/(NFA NWC)Source: Deloitte Consulting Analysis; S&P Capital IQ DatabaseAccording to our in-depth analysis(1) of SG&A spending in the wholesale distribution industry, top performers have madea strategic choice to feature a broader product selection, greater geographic coverage, and superior customer service(i.e., one-stop shopping, better fill rates, faster delivery times, and more knowledgeable sales team), which helps themgrow revenue and market share while earning higher gross margins. Of course, these superior capabilities don’t magicallyappear out of thin air; they require a higher level of investment and ongoing spending in SG&A. The good news for topperformers is that their increased SG&A spending is more than offset by faster revenue growth (4x) and higher grossmargins (nearly 2x), resulting in higher financial results and return on capital (figure 2).Figure 2: Higher rates of SG&A spending correlate with faster revenue growth and higher gross marginsPeer setRev CAGRSG&A CAGRGross marginTop performers6.7%5.5%29.1%Rest1.6%2.2%15.0%This is not to suggest that wholesale distributors should go on a mindless SG&A spending spree. Far from it. Thekey is to strike a balance between efficiency and effectiveness: spending as little as possible on SG&A to effectivelysupport a winning business strategy. Wild spending on SG&A in single-minded pursuit of growth can be recipe for poorperformance. But so can single-mindedly focusing on SG&A cost reduction at the expense of strategy.To help companies identify a targeted balance, we have developed a simple framework that categorizes SG&A activitiesand capabilities based on two dimensions: (1) centralization vs. decentralization (locally managed) that impacts the abilityto leverage scale—across Y-axis in figure 3, and (2) efficiency vs. effectiveness across X-axis, which impacts the focusbetween transactional and value-added capabilities. Activities for each SG&A function can be evaluated by mappingthem to the framework based on where they are performed within the organization, and whether they primarily focus onefficiency or effectiveness.Company-wide orCentrally ManagedBusiness Unit (BU) orDistribution Center (DC)specific/locally managedFigure 3: SG&A Framework: Balancing efficiency and effectiveness through SG&A service delivery modelEfficiency- FocusEffectiveness- FocusLocal DeliveryBusiness PartnershipWhat transaction workneeds to be in BusinessUnit (BU) or DistributionCenter (DC)?Shared or OutsourcedDeliveryWhat transaction work canbe delivered centrally toleverage scale?Transactional WorkWhat knowledge based/specialized capabilities need tobe located in Business Unit (BU)or Distribution Center (DC)?Centers of ExcellenceWhat knowledge based/specialized capabilities can bedelivered centrally to BUsand DCs?Capability orKnowledge-Based Work3
Efficiency-focused initiatives typically contribute to overall performance by reducing transaction costs in SG&A activitiessuch as payables and collections by leveraging economies of scale and labor arbitrage through centralization in a sharedservices center or outsourcing. Effectiveness-focused initiatives typically contribute to overall performance by improvingbusiness competitiveness and building strategic capabilities in knowledge-intensive areas such as pricing and categorymanagement that are delivered centrally through “centers of excellence.”Top performers, who have already made significant investments in SG&A as part of transforming their business models,should focus on optimizing their SG&A platforms by leveraging scale in transactional shared services and centers ofexcellence. This implies that they would need to shift the center of gravity of their SG&A models towards the bottom ofour SG&A framework. The rest of the peers have a more challenging proposition. They will not only need to shift to thebottom of our framework to optimize their current SG&A models, but also build out SG&A capabilities towards the rightof SG&A framework in support of transforming their business models to realize ROCs similar to top performance.Figure 4: Transitioning from current to future models for top performers and rest of peersCurrent SG&A modelsFuture SG&A modelsBU/DC ledCenter-ledCenter-ledTop performersBU/DC ledTransactional Value-addedCenter of Gravity representingconcentration of SG&A resourcesCenter-ledCenter-ledCenter-ledRest of PeersLower SG&A investmentsin largely transactionalareas.Transactional Value-addedBU/DC ledTransactional Value-addedBU/DC ledTransactional Value-added.which can be optimized by lowering the centerof gravity to become more center-led SG&AmodelBU/DC ledHigher SG&A investments in both transactionaland value added areas, but SG&A center ofgravity is biased towards BUs/DCs.which can be firstoptimized by center-ledtransactional sharedservices.to free-up investments andexpand SG&A to include valueadded capabilities in supportof ROC expansion.Concentration of resourcesLowHigh4
Digging deeper into SG&A spendingAs we discussed, top performers tend to spend more on SG&A in order to support their high margin business strategies.But SG&A is a very broad cost category. Where exactly are they focusing their spend?To find out, we conducted an in-depth SG&A survey(1) to better understand what top performers are doing differentlythan the rest of the pack. The survey looked at companies in similar and adjacent lines of trade, dividing SG&A spendinginto three major categories: Selling, Operations, and General/Administrative (figure 5). The survey results show thattop performers focus most of their additional SG&A spending on Selling (about 25% higher than their peer group ofwholesale distribution companies across Industrial supplies, Electrical/Electronics and Grocer/Food Services), and onOperations, (about 35% higher than peer group). For General/Administrative, the spend levels are comparable, implyingthat top performers are generally competitive with peer group.Figure 5: Selling, Operations, and General/Administrative comparisons as % of 5.4%4.3%3.2%Top PerformerAverage PerformerTop PerformerIS Median2.5%2.1%Top PerformerIS MedianFurther analysis of the survey data reveals specific capability areas within each cost category where top wholesaledistributors are out-investing and out-performing their lower-performing peers.“Selling” capabilities where top WDs out-invest and out-perform their peersTo support their high margin strategies, top performers significantly outspend their peers on selling costs as a percentageof revenue. Their investments in selling are targeted in three areas, each supported by comparing a relevant metricbetween top performers and their peers in the survey. First, investing in a capable and skilled sales-force that is able toleverage a broader product portfolio to cross-sell and up-sell – as observed in higher average sales rep compensation fromour survey. Second, investing in sales expertise and account management capabilities for growing national accounts – asobserved in allocation of selling expenses between national, field and inside sales segments. And finally, higher technologyinvestments in sales capabilities – as observed in technology investments as a percent of revenue.These strategies contribute to top performers realizing 30-60% higher gross margins per sales rep. A sales support centerof excellence with supporting pricing and analytics is key to increasing the return from these investments. Mapping theseinvestments and resulting capabilities onto our SG&A framework shows that when it comes to selling, top performersprimarily focus on improving effectiveness. At the same time, top performers are delivering these capabilities (e.g., pricing,territory optimization, request for proposal (RFP) response, customer service) through central centers of excellence (CoE) toleverage economies of scale.“Operations” capabilities where top WDs out-invest and out-perform their peersAccording to our survey, for distribution operations, top performers spend twice as much as average. In particular, theyspend 90% more on operations staff in order to support a more expansive distribution network that puts them closer totheir customers, enabling them to provide high service levels across a wide geographic market. Also, they pay 30% morefor product supply labor in order to maintain the higher category management and product supply capabilities requiredto support their broad portfolio of product offerings. In making these investments, top perfomers are adopting efficiencymeasures through evaluating outsourcing models to not only optimize operating costs of the expanded network, but alsoto exercise flexibility in network design where needed.This higher level of spending on distribution operations results in higher on-time delivery rates and fill rates, bothcontributing to higher customer service levels and gross margins. These results often offset the additional spendingrequired to achieve them, enabling top performers to produce higher market growth, capital efficiency and bottom-lineprofitability.5
Top performers are focusing on efficiency by balancing captive and outsourcing mix for warehousing and logistics and alsoimproving effectiveness by delivering network planning and route optimization capabilities through “centers of excellence”(CoE) to leverage economies of scale.Improvement opportunities for “General/Administrative” spendingGiven the relatively small difference in General/Administrative spending between top performers and the rest of the pack,it is difficult to draw conclusions that are statistically significant. However, a cross-industry benchmarking analysis suggeststhat wholesale distributors as a group have significant room for improvement. The manufacturing industry provides aparticularly good benchmark in this area, since manufacturers have faced severe cost pressure and global competitionfor decades and thus have invested a tremendous amount of time and effort moving up the maturity curve to reduceand optimize their G&A spending. If wholesale distributors can achieve maturity levels anywhere near those of themanufacturing industry, the positive financial impact could be significant (figure 6).Figure 6: Moving up the G&A maturity curveAchieving maturity levels similar to manufacturing would requiresignificant scale , a strong ERP foundation, process standardizationand relatively stable growth levelsG&A models withhigh nessScalabilityTarget G&A modelfor WholesaleDistributorsCurrent positioningof WholesaleDistribution% of Headcount CentralizedFinance0%100%HR0%100%Procurement 0%100%0%100%ITWholesale DistributionFragmented G&Ainfrastructureresiding in DivisionsSingle functionshared services(mostly regional)Multi-functional G&Ashared services/OutsourcedManufacturingMultifunctional businessprocess based SS/Outsourced6
Potential Future State SG&A ModelAn optimized SG&A model with positive impact on both efficiency and effectiveness across all three SG&A cost drivers ofSales, Operations and G&A is shown in Figure 7.Figure 7: Future optimized SG&A models with a bias for center led capabilitiesBU/DC ledOptimized future SG&A model(with illustrative examples of resource deployment)Sales Local order fulfillment and trackingOperations Pick-pack and shipSales Local/regional salesOperations Operations scheduling Backhaul planningG&A Onboarding and recruitment IT infrastructure supportSales Sales reporting Sales trainingOperations Purchase order managementG&A Payables Receivables General Ledger and Fixed Assets/Accounting HR Data Administration Help desk Benefits AdministrationSales Inside sales National Account Management Pricing CoE Sales and customer service CoEOperations Enterprise wide network optimization Inventory management Route planning CoE Center-led Category managementG&A Analytics & Reporting Performance Management Technology architecture Recruitment strategy and compensationFuture SG&A modelsCenter-ledCenter-ledBU/DC ledTransactional Value-addedTransactionalValue-addedMoving forwardOur research and analysis highlights the importance of aligning SG&A spending with business strategy. To achieve thehigher returns, wholesale distributors need strategies with the potential to deliver improved margins and market growth.But they also need to support those strategies with adequate levels of SG&A spending. Blindly focusing on SG&A costreduction at the expense of the business strategy is likely a losing formula.Wholesale distributors in the middle or bottom of the pack might want to follow the lead of top performers and movetoward a high-margin business model that features a broader product portfolio to enable one-stop shopping, a moreexpansive distribution network to enable higher fill rates and faster delivery times, and a more knowledgeable sales staffcapable of supporting a broad category of products and delivering superior customer service. Key investment areas tosupport this new business model include selling, distribution operations, product supply, and category management. Suchan approach has the potential to deliver much higher margins, but will almost certainly require a company to increase itsSG&A spending -- a bold choice that flies in the face of conventional wisdom for managing SG&A costs.On the other end of the spectrum, many top performers face the opposite challenge. Having moved to the front of thepack through a combination of organic and inorganic growth, these leading companies may need to take some time toconsolidate their complex SG&A activities and infrastructure to improve efficiency and scalability. Although their SG&Ainvestments to date may have been purposeful and rational, in many cases their absolute SG&A levels have grown rapidlyand inefficiencies may be somewhat masked by strong revenue growth. In the future, complexities and inefficiencies couldmultiply -- or growth could slow -- causing SG&A costs to quickly eat away at their margins.At every performance level, managing SG&A successfully involves a delicate balancing act between optimizing efficiencyand enabling an effective business strategy. This means keeping SG&A costs as low as possible -- but not lower.7
AuthorsSanjay AgarwalPrincipal and Wholesale DistributionConsulting Industry LeaderDeloitte Consulting LLPStamford, CT 1 917 331 9902s1agarwal@deloitte.comRaj NagarajanDirectorDeloitte Consulting LLPWilton, CT 1 440 991 6992rnagarajan@deloitte.comAbhijit ChakravertySenior ManagerDeloitte Consulting LLPBoston, MA 1 952 270 6991achakraverty@deloitte.comA special thanks to Karan Rao, Consultant, Deloitte Consulting LLP, for his contributions to this articleThis publication contains general information only and Deloitte is not, by means of this publication, rendering accounting, business, financial,investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor shouldit be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect yourbusiness, you should consult a qualified professional advisor. Deloitte shall not be responsible for any loss sustained by any person who relies onthis publication.Copyright 2015 Deloitte Development LLC. All rights reserved.Member of Deloitte Touche Tohmatsu Limited8
Figure 1: Performance in wholesale distribution varies widely (1) Deloitte Consulting Survey, 2014 (2) Driving Enterprise Value in Wholesale Distribution—Sanjay Agarwal and Raj Nagarajan, January 2014 Company G, 22.7% Company L, 27.8% Company M, 26.3% Company J, 15.0% Company P, 17.0%"Deloitte" means Deloitte Company N, 18.4% Company K, 19.9%
13 POINTS 3,600 wholesale 12 POINTS 3,000 wholesale 11 POINTS 2,400 wholesale 8 - 10 POINTS 1,800 wholesale 5 - 7 POINTS 1,200 wholesale 2 - 4 POINTS 600 wholesale 1,200 4 POINTS 800 - 1,199 3 POINTS 400 - 799 2 POINTS 100 - 399 1 POINT I am committed to attending success meetings each week. 3 POINTS I am committed to attending success meetings twice per .
Diminished Value Worksheet CONDITION: Extra Clean Months Since Loss 0 Appraiser's Adjusted Opinion Preloss Black Book Wholesale Value Adjusted Loss Percentage 31.90% Black Book Wholesale Value Adjusted SOLD Wholesale Value to Era Clean 150 150 Black Book 24 Month Value Trend 2014 0.00 Total Recon Adjustments 300 2016 0.00 Monthly Historic .
CBDC, but no wholesale-focused CBDC project has yet gone live 4 a Helvetia l s n Test CBDC Architectures A Bank of Canada-led project focused on wholesale payments clearing and settlement for domestic high-value interbank payments. Later expanded beyond wholesale payments to include securities settlement, giving
PWC Driving Licence In NSW it is compulsory for every person driving a PWC to hold a current PWC driving licence. There are two types of PWC driving licence: 1. PWC driving licence for those aged 16 years and over. 2. Young Adult PWC driving licence for people aged from 12 to less than 16 years. A Young Adult PWC driving licence
Eating while driving and talking on a hand-held cell phone while driving are the two most common distracted driving behaviors. 15 %Yes-No Total Eaten food while driving 46%-53% Talked on a hand-held phone while driving 32%-67% Dealt with your car's navigation system while driving 23%-75% Texted or answered a text on your hand-held cell phone .
Associated Wholesale Grocers - Version 1.0 810 Invoice Functional Group IN Version 005010 Mapping Procedures and Tips on Associated Wholesale Grocers’ 810 Document Associated Wholesale Grocers utilizes the 810 Grocery Products Invoice Set for all divisions within the company. The 810
Gold Status Vendors earn 10% Commissions on all of his/her Frontline* Standard Wholesale Sales Volume. Platinum Status Vendors earn 10% Commissions on all of his/her Frontline* Standard Wholesale Sales Volume plus 2% on sales volume from tiers 2-7 wholesale sales. * Frontline is
4 ASTM D 4255 Two-Rail Shear Test 4 5 ASTM D 4255 Three-Rail Shear Test 5 6 Iosipescu (V-Notched) Shear Test Fixture and Specimen 6 7 Compact Shear Test Fixture and Specimen 6 8 Orientation of Finite Element Model 8 9 Initial Rectangular Specimen Investigated 10 10 Initial Trapezoidal Specimen Investigated 10 11 Standard Tab Specimen Configuration 12 12 Extended Tab Specimen Configuration 12 .
