The Chemical Industry is changing. Global competition, emerging markets, demand uncertainty and increasing costs are affecting your business more than ever. During these times, there is an even greater need to focus on profitability. This requires innovation, marketing and execution. To focus on these key drivers, you must eliminate complexity and allocate resources to meet key-customer needs. The right channel strategy can help eliminate noise from small customers, reduce complexity costs and thus improve profitability.
Before examining the economics of the most common channel options, it is important to understand the small customer segment by exploring a typical example within the specialty chemical segment. The "A" customer segment typically represents the top 20% of customers and 80% of the total sales. Meanwhile, the "B" customer segment is the next 40% of customers and 15% of sales. Finally, the small or "C" customer segment typically represents the last 50% of customers and 5% of sales.
A typical specialty chemical product line has 500 customers, $100 Million in revenue, 25% margin and 4500 transactions. The "C" customer segments typically has a higher margin but it doesn't always tell the whole story. To calculate the actual profit, the variable costs or "cost-to-serve" must be taken into consideration and is typically estimated at $500.
Consider the advantages and disadvantages of the common options to serve small customers. The 4 most common channel options are regional distribution, national distribution, direct inside sales and direct outside sales.
Using a director outside sales channel leads to a 10% profit for the “C” customer segment. 10% is still not bad and this segment is profitable. But if a customer places an order for $2,000 then you are losing money. 1 out of 3 small customers will place an order for less than $2,000. However, this channel strategy has profitability potential with aggressive business rules such as higher minimum order quantities, tier pricing discipline, made to order SKUs, lengthened lead times, etc. in order to reduce costs.
Using a director inside sales approach actually causes expenses to go up. The order fulfillment, supply chain and back office costs still remain. And in many instances, the SG&A savings is offset by the additional expenses related to process development, technology and employee training and retention. This option has higher profit potential assuming:
In this option the expenses have dramatically reduced, but there are other inherent costs. Highly complex relationships with many regional distributors require a large number of resources to provide direction, create transparency and manage relationship. Costs will increase significantly as this will inevitably lead to a duplication of efforts and resources.
This option has very high profitability potential assuming:
In addition to the decline in costs, consider the potential profitability gain from utilizing a partner that will provide Joint Strategy Execution, Product Line Focus, Customer Transparency and Market Development. The need for profitability growth and simplicity has led to a new distribution option.