Flip the Script – “Out Clause” to “In Clause”

In a recent update published by Modern Distribution Management, there was an article  entitled, “Tip: Don’t Let Risk-Aversion Prevent Growth”. The article is a good read and contains important information that will provoke many to do some re-thinking about their business.

One paragraph in particular caught my attention. It caused me to step back and reconsider my approach to day-to-day operations and eventual success:

“In this new competitive environment, customers seem more willing to exercise their ‘out clauses’ if a distributor doesn’t meet their demands 100 percent of the time“, says Bill Moore, president of Industrial Profit Strategies LLC.  (Link)

It is important that an “out clause” in most cases does not represent a contractual obligation but rather an option all our customers have. This “out clause” essentially gives customers the option to stop doing business with your company. Unless you manufacture a product or service that is totally unique with no competition, all customers have an “out clause” and can do business with other vendors at will.

Consider further that today – in a world of instant gratification – the “out clause” option is being applied if you do not meet their demands 100% of the time. That’s right… one mistake and you could be on the outside looking in.

I did not come up with that figure, so we could argue about the actual percentage. However, the percentage is not the issue. The real issue is that customers are much more demanding and less forgiving in today’s distribution landscape. This is across the entire supply chain, not just the supply chain link above or below you. Your customer has to provide the same “out clause” to their customers – meaning they will not allow your errors to affect their customers and sales.

Why would a customer exercise an “out clause”?

• Poor Customer Service (or lack of)
  • Long wait times on the telephone.
  • No computerized order management system for direct view into their orders.
• Late Deliveries
• Quality Issues
  • Product is damaged or not working.
  • Information is inaccurate.
  • Order process is inferior.
    • Invoicing
    • Shipping
    • Packaging
  • Poor Automation/Collaboration
    • EDI
    • Mobility – real time connection
    • Visibility
  • Lack of Shared Vision
    • Are you capable of assisting your customers in achieving their business vision? Or are you standing in their way?

Think of all the issues that cause you to reconsider your vendors – now look in the mirror and what do you see? Be honest!

If you can truly be honest and self-audit your firm’s performance, I would recommend:

1. Make a list of issues for each customer. You will notice that each one has different results.
2. Identify what you believe are the shortcomings – then brainstorm a solution.
3. Be proactive. Schedule a meeting with your customers to compare notes and offer solutions.
4. Apply the agreed upon solution.
5. Build a solid relationship with your customer that goes beyond being a supplier. Truly become a partner in their business by helping them achieve their goals and objectives.

The Other Way Around – Reverse, Reverse

Guess what?! News flash – vendors often employ the “out clause” with their customers. Yes, more and more vendors are dropping difficult customers because they are negatively impacting their performance with other customers.

Divesting difficult customers isn’t new and it isn’t constrained to distributors.  In this Harvard Business Review article going back to 2008, we see examples of companies up and down the supply chain making hard decisions to manage profitability and meet customer service expectations.  “The Right Way to Manage Unprofitable Customers” identified four common reasons why businesses terminate relationships with end users:

• the declining profitability of specific customers
• the lower productivity of employees as they deal with unprofitable customers
• changes in the capacity to serve large volumes of customers
• shifts in a company’s business strategy.

At the time this article was written, the vendors interviewed were all hesitant to admit publicly that they were choosing to divest customers.  They were afraid their company would be perceived as “service-unfriendly” or to be violating ethical or legal obligations to customers.

Today, companies are much more focused on providing the best possible customer experience from day one.  If divesting difficult customers helps them achieve that, then so be it.

As much as we all like to think that we are the most important customer to a business, that is simply just not the case. Vendors have many customers and if one customer is negatively affecting a vendor’s performance, they will reconsider their relationship with that customer. Many vendors’ goal is to protect the majority of their customers and keep them satisfied. They will not risk losing their sales book because a client cannot manage their business.

If the above scenario sounds familiar, you may need to go through the five steps, mentioned previously, and sit down with your vendor to get on the same page.

Is This Process Model Attainable?

You manage a wide range of customers, vendors and products. So, I will try and make this short and sweet. Can you apply this process to every customer, vendor and product? Simple answer – probably not.

The decision to divest specific customers or segments of customers isn’t one that should be made casually.  Identifying these customers and their impact to profitability, customer service levels or long-term loyalty requires accurate data and long-term trending.  Most companies simply don’t have comprehensive software solutions in place that provide the depth of data necessary to look at customers across multiple planes.  Even if they are able to identify patterns of profitability, they find it impossible to manage the divestment process correctly and to ensure proper vetting of new customers.

Do you already have a solution that will allow you to apply and deliver on the revised processes?  Do you have the right infrastructure to support the modern requirements that will be placed on your software system?

Think carefully… Remember, how much revenue/profit/margin the process can help you generate? I bet you would gladly sign up for some of that. However, if you don’t have the proper solution in place, how would you feel not reaching that number because you cannot execute efficiently enough? The cost of inaction can be steep.

AXIO for Distribution is built with template processes that help you manage and apply the changes that will result in these revenue gains. AXIO for Distribution will provide the sound base and direction you need to be successful in avoiding the “out clause.” You can turn the “out clause” into the and the “in clause.” A little cheesy, but the fact is you will have satisfied customers/vendors that will want to do business with you. Not to mention, you will have a stronger negotiating position.

How might that impact your margins?

Dominic Telaro CFPIM, CIRM
Vice President Industry Solutions, SBS Group

Dominic Telaro brings over 35 years of Manufacturing, Distribution, Software and Consulting experience. Half of his professional career has been in Manufacturing and Distribution from shop floor and warehousing positions to management. During this time he implemented ERP, DRP and Logistics solutions as internal Project Leader. The second half of his career has been in consulting, product management, product development and both consulting and software sales. He has held positions as VP Of Industry Solutions, VP of Product Development, VP of Sales and Marketing and Global Practice Leader for companies like IBIS Inc., IBM, Janis Group, Metamor, Marcam Corp. and more. Presently he is responsible for Industry Product Vision for multiple ERP solutions at SBS Group USA.

APICS Fellow and Certified in Integrated Resource Management, Instructor at Universite de Montreal, Vanier College and Granby CEGEP for APICS certification; Lead instructor for internal APICS training at Bell Helicopter, Avon, Le Groupe Hamelin

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