Wesco Case
Harvard Business School 9-598-021 Rev.
February 9, 1998. WESCO Distribution, Inc. Late in June 1997, Jim Piraino, VP marketing for WESCO Distribution, Inc. (see Exhibit 1), was preparing for a yearly review meeting with his CEO Roy Haley. At the top of the agenda was the performance of the National Accounts (NA) program during the first half of 1997 (see Exhibit 2). Haley had ambitious plans for WESCO over the next five years.
He had charted out a course that called for an annual growth rate of 6% to 8% in sales, and more important, an annual increase of 12% to 16% in profitability. In 1996, we were a $2. 2 billion company with an EBIT of around 3%. I want us to be a $3 billion company with an EBIT of over 5% by the year 2000. This target is very much achievable.
In the last few years, our customers have made significant changes to their business processes. These changes provide us a unique opportunity to provide greater value to our customers while improving our market position and profitability. I want WESCO to be recognized as a leader in learning, adapting, and responding to changes in customer needs,” said Haley.Although acquisitions of other companies were expected to contribute over half the revenue growth, most of this business was not expected to exceed current profitability levels. WESCO’s current NA program, which had been initiated in 1994 as a response to the changing market dynamics, was expected to deliver the additional revenue growth and obtain the desired increases in profitability. Yet, as of mid-1997, the NA program had not delivered the expected increases in sales and profitability.
Haley had now asked Piraino to examine the NA program and present recommendations for improvements. We need to get more out of our NA effort. This is our best growth avenue with existing customers and new prospects. We have to generate significantly better results with this program,” Haley had told Piraino. Preparing for the NA Review Meeting In early May, Piraino had spoken with WESCO national account manager (NAM) Mike McKinley about one of his NA customers, who had signed an agreement in late 1996. During the first five months of 1997, the account had generated only 40% of its target sales volume, with gross margins falling a full 2% from the prior year.
Piraino reflected on the meeting: From our account analysis prior to signing the agreement, this was a very promising NA customer offering immediate, exclusive access to their 28 U. S. plants. We thought we could increase their existing $1. 5 million annual purchases from us Professor Das Narayandas prepared this case with the assistance of Research Associate Sara Frug as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. Copyright © 1997 by the President and Fellows of Harvard College.
To order copies or request permission to reproduce materials, call 1-800-545-7685 or write Harvard Business School Publishing, Boston, MA 02163. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permi ssion of Harvard Business School. 1 598-021 WESCO Distribution, Inc. by a factor of ten. However, ever since implementation began in January, we have discovered an unexpectedly poor alignment between the customer’s local and corporate interests.
This was their first national purchasing agreement, and it turns out that despite corporate enthusiasm, some of their plants were reluctant to abandon local distributors with whom they had developed very strong relationships. We are now being charged with the responsibility of developing the program up from the local level. Managing headquarters has turned out to be only half the task. The second conversation that came to mind was with John Whitney, a WESCO sales representative at a $30 million per year branch. Whitney was currently serving the local plant of a $5. 4 million per year NA customer.
Once the NA agreement was signed, the customer lant, which generated only $50,000 per year in sales and which was located two hours away from WESCO’s branch, had demanded semi-monthly sales calls. Whitney described his situation bluntly: They may be a good customer for the company. But from my perspective, they and other NA customers demand a lot of service that is not commensurate with their sales volume — either current or potential. Unless compelled, I wouldn’t call on NA customers in my region even without the long commute they usually require. The opportunity costs of serving these customers are way too high — both for me and for the branch.
I would rather spend my time selling to other customers. The third conversation that Piraino considered was with Larry Worthington, a WESCO branch manager whose branch had traditionally obtained a major portion of its sales from electrical contractors. In order to serve recently acquired NA customers, the branch had been forced to change the way it managed its business. Worthington was concerned: “We’re investing an awful lot of resources to serve NA customers, and it’s tempting our contractor customers to abandon u s. ” Piraino realized that he needed to develop a clear plan for the upcoming meeting with Haley.We must isolate the root cause of the NA program shortfall.
If we are trying to market a new way of doing things that our customers don’t really understand or appreciate, then it’s time to make some hard decisions. Will it make more sense to promote this program proactively to our customers, or to be passive and offer the NA program only when customers show a legitimate interest? In addition, if the issue of is one of improper implementation at our end, then we’d better get our act together very quickly, before we lose important customers. The Electrical Equipment and Supplies BusinessElectrical equipment and supplies (EES) referred to any products needed for channeling and using electricity. (Exhibit 3 provides details of the different products that formed the EES market. ) Most manufacturers of EES products had specialized product lines, but customers generally had to buy a range of products made by several manufacturers in order to manage their electrical needs.
Like other EES distributors, WESCO represented many EES manufacturers and offered customers the convenience of one-stop access to all of their EES needs. WESCO Distribution, Inc. WESCO Distribution, Inc. as founded in 1922 as the distribution arm of Westinghouse. Following a period of disappointing performance in the early 1990s, the company was sold to the investment company of Clayton, Dubilier & Rice in February 1994, with Roy Haley taking over as 2 WESCO Distribution, Inc. 598-021 CEO.
Under Haley’s leadership, the company had rebounded from an annual revenue run rate at purchase of $1. 4 billion to become the third largest full-line wholesale EES distributor in the United States by 1996 with over $2. 2 billion in sales globally (see Exhibit 4) of which US sales were a little over $1. 6 billion.Customers WESCO had three types of customers: Electrical Contractors, Industrial Customers, and Commercial/Institutional/Government (CIG) Institutions. ( Exhibit 5 provides more details on the nature of WESCO’s business in each of these customer segments.
) Electrical Contractors Electrical contractors installed lighting and electrical systems for construction projects and had been WESCO’s primary customer base in the past. In 1996, the electrical contractor market was estimated at $17. 9 billion and accounted for $465 million of WESCO’s sales. This was commonly referred to as bid-and-quote business.Contractors obtained business by bidding for contracts. Very few contracts required a bill of materials that covered all parts of the EES system as shown in Exhibit 3.
After winning a bid, contractors requested quotes from several EES distributors for the required bill of materials. Next, due to inflexible contracting timetables, the contractor short-listed those distributors that appeared capable of delivering all the materials on time. The contractor then generally negotiated with the short-listed distributors and placed the final order with the distributor who offered the lowest overall price.Industrial Customers Industrial customers accounted for slightly more than $1 billion of WESCO’s sales in 1996 and were expected to grow in importance. Industrial customers had an ongoing need for EES products in their Maintenance, Repair, and Operations (MRO) activities such as replacing a safety switch that did not work, repairing a worn out motor before it failed, and upgrading a lighting or drive system to make it more energy efficient and reduce costs.
In order to facilitate their MRO activities, industrial customers maintained inventories of EES products.Under Haley’s direction, WESCO was currently pursuing customers in several industry segments including utility, manufactured structures, pulp and paper, lumber, petrochemical, mining and metals, and transportation. (See Exhibit 6 for a breakdown of top industrial segments. ) WESCO’s NA program was designed to serve large, high potential industrial customers. Commercial, Industrial, and Government (CIG) Customers WESCO’s CIG business was substantially smaller than the contractor and industrial businesses.
In 1996, this market was estimated to be just over $5. 9 billion, of which WESCO had a 2. 5% share.Commercial customers such as hotels and motels, and institutional customers such as hospitals and universities were small, stable, and low-potential customers to WESCO. Government, on the other hand, was more concentrated in demand and was a source of very large orders.
Managing the Different Customer Types Piraino perceived several difficulties in managing the various kinds of large customers: The conflict lies in the different business styles across customer types. For instance, industrial customers require a steady flow of EES products and are therefore more likely to negotiate long-term contracts.They often demand a high level of service. Electrical contractors, on the other hand, have a project mentality. Their needs vary from project to project and they often define their relationship with 3 598-021 WESCO Distribution, Inc. us transaction by transaction.
Because contractors usually win orders by offering low prices to their customers, they want us to give them the best possible quote every time, keeping our margins low. There is no guarantee of business here and we find it very tough to forecast sales accurately. Such different businesses require different management approaches.Our sales reps need to be hunters when it comes to the contractor business. Every day, they need to find the contractor who has won a project bid, give a quote, negotiate a deal, and move on.
The hunt for a new customer is always on. By contrast, in order to serve our industrial customers, our sales reps need to be farmers. They know exactly who the customer is, and once they have a contract it is usually for the long haul. The primary mode of interaction is to ensure satisfactory service and educate customers about new products and services that become available over time.Managing these customers is all about cultivating relationships and being a good materials manager.
Traditionally, we served the contractor business. Many of our sales reps and branch managers have the hunter mentality. It is not easy for them to become farmers, as they seek rewards in the constant pursuit of new opportunities. Suppliers On the other side of the distribution equation, WESCO maintained strong ties with over 150 suppliers, the largest of which were Cutler-Hammer, Thomas & Betts, Philips, and Leviton. Piraino said: There are several reasons why it makes sense for EES suppliers to go through distributors like us.First, most suppliers make only part of a customer’s total EES requirements while customers prefer a one-stop solution.
Second, the relatively small volume of business from each customer can make direct sales economically unfeasible for the EES supplier. Third, and most important, we add a lot of value to all stages of the sales process. We call this the WESCO selling story (see Exhibit 7). Competitors WESCO had traditionally functioned in three competitive arenas: specialization, geography, and peer (see Exhibit 8 ).First, along with other full-line distributors, WESCO shared a market with both product specialists and retail generalists.
Specialty distributors focused on small product niches such as alarms or lamps. Retail generalists, such as hardware stores and home centers sold simpler products to homeowners and small contractors. They carried a broad range of supplies, though without the depth of full-line distributors. Second, as a national chain, WESCO competed with regional chains and local distributors. Local distributors competed with individual WESCO branches for local business.
Piraino pointed out, “although they lack our national size and the breadth and buying power that goes with it, these guys can often be formidable competitors. They have developed excellent, long-term relationships with major customers in their markets. Making inroads can be a daunting task. ” WESCO also faced competition from regional chains. Piraino explained, Although regional distributors are significantly smaller than us, their sales are more concentrated than ours in the regional markets in which they compete with us. Based on revenues, this usually makes them one of the top two distributors in their local markets.
4WESCO Distribution, Inc. 598-021 Within its peer group, WESCO competed with several major national distributors, among which it placed third in sales volume in 1996 behind W. W. Grainger, a broad-line distributor of MRO products, and Graybar, the largest electrical/telecommunication products distributor. These competitors were pursuing similar customer management strategies to WESCO. Branch Office Organization WESCO was organized into 279 US branches.
Each branch maintained its own inventory, had its own P&L responsibility, and enjoyed substantial autonomy in its own territory, including the authority to prospect for customers.In 1997, one third of WESCO’s branches served customers in a specific industry. These branches carried inventory that was tailored to meet the needs of that specific customer segment, and it affected their ability to serve other customers in their region. WESCO had found that the disadvantages of these branches serving a narrower customer base were heavily outweighed by their ability to serve the chosen customers better than anybody else. Currently, WESCO had no plans to change the orientation of these branches.
Amongst the other twothirds of WESCO’s branches, the typical WESCO branch had $9 million to $10 million in sales, with about 40% to industrial customers, 40% to contractors, and the balance to CIG customers. Direct cooperation between branches was limited because each branch operated in its own markets. In addition to the branch manager, a typical WESCO branch had four outside sales reps, four inside sales reps, one warehouse specialist, one administrative officer who was also in charge of inventories, and one office manager who managed the branch’s policies, procedures, tra ining, and office maintenance.Outside sales reps served 20 to 40 customers with a total market potential of $10 to $30 million. These reps were responsible for visiting customers regularly, identifying new sales opportunities, and developing solutions together with customers.
For each outside sales rep, there was a corresponding inside sales rep whose job was to process new orders, expedite existing orders, and provide all necessary service and support. Broadly, outside sales reps acquired customers, and inside sales reps ensured their retention. In the past, sales reps would shuttle between inside and outside sales positions before becoming a branch manager.This pattern had been fading recently, however, as each job required increasingly specialized skills. Currently, sales rep compensation had both a fixed salary component and a variable commission component.
Commissions were the same regardless of whether sales were made to industrial customers, contractors, or CIG customers. Trends in the EES Industry in the 1980s and Early 1990s During the late 1980s, the EES industry, like other component and supplies industries, had witnessed a dramatic change in the way many large customers dealt with suppliers and distributors.In order to bridge the quality gap with international competition and improve their overall competitive stance, American companies implemented stringent supplier/distributor quality programs while demanding price reductions as well. In the process of implementing these programs, customers pared their lists of suppliers/distributors and signed long-term contracts with those that remained. These few suppliers/distributors felt compelled to make substantial investments in order to provide the higher level of service and quality now demanded 1.At the same time, the growth of reengineering in organizations had encouraged customers to examine their procurement costs, i.
e. , the costs of placing and following orders, and monitoring and managing suppliers/distributors (see Exhibit 9). In order to improve supply chain efficiency, customers reduced inventory, which necessitated a Just-In-Time (JIT) procurement policy in which suppliers/distributors carried inventory and provided components on an as-needed basis (see Exhibit 10). 1 Not making such investments meant risking the sales volume provided by these large customers. More m portantly , once an opportunity was missed, it could be several years before a distributor had another shot at doing business with that c ustomer. 5 598-021 WESCO Distribution, Inc.
To make matters more complicated, the move toward long-term collaborative JIT contracts with a select few suppliers/distributors was not universal among customers. Piraino explained: Many of our industrial customers still prefer to do business the old way — simultaneously maintaining arms-length, bid-oriented relationships with multiple EES distributors. (See Exhibit 11 for the evolution of customer needs).Periodically, they send a “request for quotation” (RFQ) for all their requirements to several EES distributors, selecting the one with lowest overall prices. These customers do not appear to be interested in streamlining procurement processes in collaboration with their EES distributors and are more resistant to change.
WESCO’s National Account Program WESCO’s National Account (NA) program had been established under the premise that large contracts could mean significant savings for both customers and WESCO. In exchange for giving their EES business to WESCO, NA customers received competitive, year-long, national pricing regardless of volume.In the early stages of the NA program, most contracts pertained to individual products. Art Hersberger, WESCO’s Director of National Accounts, described: In years past, before the time of WESCO’s new ownership, all of the major customer agreements were for single products. In fact, over 80% of these agreements were just for lamps. These agreements were essentially product driven and required minimal value-added services.
We had hoped that customers who signed such agreements would buy their national EES needs from us exclusively, as per the contracts. What we learned was that customers treated these agreements as nonexclusive.Many even signed contracts for the same products with other national EES distributors. By 1997, there were 300 customers in the NA program. Piraino classified these 300 customers by sales volume and commitment into three groups: key, focus, and others. Key customers were the top fifty NA customers by sales volume.
With each of these customers, WESCO had moved beyond a single-product, single site relationship 2 and implemented some form of a multi-site agreement. In many instances, WESCO now also supplied multiple EES products at each of these sites, and some customers were even asking WESCO to supply non-EES products as well. Sales to these fifty customers were a little over $180 million in 1996, giving us an average of a little less than $4 million per customer. In most of these cases, we can now supply about 60% to 90% of the customer’s EES needs. While we count on these relationships as our successes, we still don’t have total compliance from all of these customers,” said Piraino.
He continued: The story is very different with the next 250 NA customers. Our focus customers, comprising the 100 accounts below our key accounts, have yet to use us to fill a major portion of their needs.These customers give us an average of $500,000 annually. Despite pockets of compliance, most of these relationships are still single product agreements and they are very often restricted to a single site. The bottom half of the NA customers were like “hunting licenses,” said Hersberger: ” In return for getting a low price from us, these customers have given us permission to find opportunities to sell within their organizations. On average, these customers purchase less than 2 An NA customer that purchased lamps at one plant exclusively from WESCO would be an example of a single roduct, single site relationship.
6 WESCO Distribution, Inc. 598-021 $250,000 annually. They are typically the non-exclusive, product-only accounts, and we have a long way to go before we tap their full potential. ” NAM Sales Organization In addition to the branch sales force, WESCO had 18 national account managers (NAMs) based across the country, with half reporting to the director of national accounts, Art Hersberger, and the other half reporting to Jim Piraino. Each of the 18 NAMs was responsible for a particular industrial segment, with a complement of 10 to 15 customers plus 15 to 20 prospects.NAMs were expected to call on prospective customers, lead the active selling and implementation processes with new NA customers, and maintain long-standing relationships with existing NA customers.
For current NA customers, NAMs were responsible for volume and profitability targets. They were expected to meet regularly with the customer’s corporate purchasing staff, ensure compliance to the volumes agreed upon in the NA contract, build relationships with local plant personnel, and facilitate relationship building between WESCO’s branch sales reps and the NA customer’s local plant personnel.With each NA customer having anywhere from 5 to 20 sites all over the country, NAMs were not able to spend much time at the local level and focused more on the NA customer’s corporate offices where the NA agreement was usually negotiated and monitored. Consequently, it was the branch sales reps’ responsibility to build relationships at the local level. Most of WESCO’s NAMs had been successful branch managers prior to their current jobs.
Since building a relationship with an NA customer could take a long time and demanded extensive technical skills, selecting a NAM was a very ifficult and painstaking process. The need for industry expertise, a good understanding of WESCO’s business, and the ability to get the support of sales reps to build local relationships with NA customers made it very difficult to find suitable NAM candidates from the outside. Currently, only a couple of WESCO’s NAMs had come from outside. NAMs received commissions for all sales to their customers. At the same time, the branch sales rep assigned to the account also received commissions for sales to the NA customer’s local plant or facilities within their territory.
This double counting of sales credit ensured that branch office personnel did not see any threat from NAMs visiting their NA customers in the local area. In fact, NAMs were in great demand at the branches since sales reps saw this as an easy way to get sales. Building NA Agreements The process of building NA agreements involved several stages. During the initial prospecting stage, NAMs called on customers that had high potential EES sales. They made presentations to the customer’s corporate purchasing group on the total cost of ownership and how WESCO’s national accounts program might enable companies to reduce procurement costs.Bill Lawry, a National Account Manager (NAM) explained: The average MRO order from an industrial customer ranges from $100 to $135.
Each purchase order itself, however, can cost the customer $150 to generate and process. Even the very best purchasing agent can only get a price reduction of maybe three to five percent. If you’re in charge, you want to get rid of the $150-ashot purchase orders, not nickel and dime at the margin. Reducing these costs incurred in purchasing is a compelling proposition, but not every organization is prepared to make the sort of changes that our NA program requires.Many of our presentations are just to get our prospects thinking.
When a prospect expressed a strong interest in WESCO’s proposals, the account could be moved into an active selling phase. During the usual six to nine months of this phase, the NAM made presentations to the purchasing staff and other executives in each plant, matched WESCO 7 598-021 WESCO Distribution, Inc. branches with potential customer branches, addressed customer concerns about staffing, inventory, emergency service, and so forth. This period of intensive selling could demand between 30% and 40% of a NAM’s time.When the selling effort succeeded, the signing of the NA contract initiated an even more intensive implementation phase, requiring half of the NAM’s time for the first several months.
The NAM became part of WESCO’s national implementation team (NIT), which included the director of national accounts and national sales support services. As part of this team, the NAM worked with a counterpart in the customer’s NIT. These two representatives traveled to each customer site, meeting with local implementation teams (LITs) to help implement NA directives and to work on any initial stumbling blocks.Hersberger explained: “A NAM might travel for 30 to 60 days with the customer counterpart after the contract is finalized. This allows them both to meet with all the branches as well as to iron out between them any major decisions that arise during the meetings.
Within 90 days, if implementation succeeds, the NAM will have obtained from each branch a list of items to be sourced from WESCO, a detailed inventory management plan, and target areas for value-added services. ” Once the major initiatives were implemented, the account moved into a maintenance or development mode.Maintaining a national account meant continuing to hold NIT meetings to resolve any difficulties that could not be solved on a local level, and presenting new cost saving initiatives. An average account in this mode required at least 15% of a NAM’s time, with large customers demanding much greater time commitments. For instance, NAM Mark Houston estimated that he spent 75% of his time in 1996 maintaining two large key NA customers, one with $20 million and the other with $9 million in annual sales.By the time the account reached maintenance level, WESCO could decrease its costs to serve these customers and sufficiently improve gross margins to over 20 percent, compared to contractor accounts, which earned from 11 to 18 percent.
In addition, WESCO could offer its lowest prices to these customers, Piraino explained, “since we take part in planning procurement, we can obtain better prices ourselves and pass the savings along. ” If the process stalled at the implementation phase, however, WESCO had found that it could be stuck with high costs and low margins.A Success Story One NA program success story was WESCO’s partnership with an industrial customer in the paper segment managed by NAM Walter Thigpen. This customer had undertaken extensive communication and training programs at all management levels as part of a cost management initiative, ensuring support for the supplier reduction effort and working at the senior management level from day one. Thigpen explained: Even though we had done relatively little business with this customer before, they asked us to compete for their EES business in 1995.
During the selection process, we used questionnaires to develop details of programs they had proposed to reduce the customer’s inventory and energy costs. We determined that we could currently serve all but three of their plants. In order to serve these three plants, we decided it would be best to purchase the current local distributors to two plants and to open a new branch near the third. Hersberger and I made presentations to the selection committee, and by the time we secured the account in June 1996, we had a good idea of what implementation would look like.As soon as the agreement was signed, we formed NITs and held a national rollout meeting to begin implementation. During the next few months, we moved toward compliance at each customer plant, agreeing to hold monthly NIT meetings to address LIT concerns at various mill sites.
As planned, we acquired two distributor branches and opened one new branch. We conducted a complete energy audit and recommended more energy efficient systems for all their plants. We also 8 WESCO Distribution, Inc. 598-021 reduced inventory and implemented EDI procurement. With the exception of a few small difficulties in setting up information systems, the process moved like clockwork.
Everyone in their organization seemed to know exactly what to expect of the process and how to manage change. By June 1997, the intensive implementation phase was over. Sales had increased tenfold from the year before, reaching $1 million per month (see Exhibit 12). Between transaction cost reductions, energy savings, and inventory reduction, WESCO was able to document over 20% cost savings to the customer, far more than expected (see Exhibit 13).Common Characteristics Across Successful NA Relationships Piraino summarized the results of a recently conducted in-depth analysis of all the key NA customers. He said: Several pieces need to be in place to develop a successful relationship with an NA customer.
First, we need to be in the sweet spot of our customer’s procurement strategy. For most of our customers, over 70 percent of the annual procurement budget is accounted for by the top five to ten suppliers.It is with these suppliers/distributors that customers are usually interested in developing a relationship based on value more than price ( see Exhibit 14 for the purchase profile of this customer). The purchase dollar volume and effort involved in these relationships makes customers willing to go beyond transaction prices and focus on the total cost of procurement and ownership. They are open to national-level proposals for managing inventory, maintaining storerooms, and coordinating supplies. That is only part of the picture,” Piraino continued: It is also important that top management at the customer’s headquarters be committed to making this happen.
Many times, we have found that this occurs when the customer hires a consultant to conduct a study of how to re-engineer the organization toward greater efficiency in operations, manufacturing, and service. Some of the most successful national accounts have begun with requests from customers in the wake of such studies. Once there is a mandate from the top, pockets of resistance in the rest of the organization are relatively easy to overcome.Even among a customer’s senior management, there is an enormous difference between a VP of Purchasing championing our cause and the CEO spearheading the effort. Lawry added: In several less successful NA relationships, unanticipated differences in procedures and purchases across customer sites have made implementation difficult.
In some cases, a local plant’s bill of materials has turned out to be very different from the list covered by the NA agreement. The local WESCO branch has ended up having to resolve all matters locally, often with no cooperation from the customer.In these cases, you can try as hard as you want, but it just won’t make a difference. The customer’s corporate staff accuses us of not working hard enough. Their local purchasing and materials management folks will not cooperate because they would need to make changes to their systems. Our people get caught in the middle, quickly losing interest in the face of implementation headaches, and small potential sales 3 Electronic Data Interchange (EDI) was a standardized system for electronic purchasing and information exchange between companies.
9 598-021 WESCO Distribution, Inc. olumes. Even the NAM shifts focus to accounts that might be easier to manage. With no champion on either side, the NA agreement has almost no chance for recovery. “Local ties can make all the difference,” explained Piraino: In all our success stories, our branch managers and field reps had existing relationships with the customer’s local personnel, making local compliance relatively simple for both sides.
It’s funny the way it works. Our main weapon to fight local and regional EES distributors is to offer an NA customer the opportunity to standardize procurements and reduce costs.This is very attractive to the customer’s corporate procurement staff. But this is not what the plant level purchasing staff want. Their power base has been built on managing their own suppliers and developing relationships that are good for the local plant. When you go into these accounts with an NA contract, unless they know you, their first reaction is to throw you out.
The NA contract erodes their power and can affect their position. Who in their right mind would want that to happen? The NA Customer of the Next MillenniumIntegrated Supply and the “New Age of Procurement” As part of their effort to win sole-source agreements, WESCO had offered customers a set of value added services such as inventory analysis and reduction programs. Although demanding and labor intensive for WESCO, these programs produced substantial savings to NA customers time and again, savings that justified the margins WESCO realized on sales to these customers. Recently, however, the tables had turned and several of WESCO’s key NA customers had demanded an increased service commitment.Bill Cenk, WESCO’s Director of Integrated Supply, explained: We have found that two to three years after establishing successful partnerships with their top 5 to 10 suppliers/distributors, NA customers typically reach a stage at which the cost of monitoring and managing these top suppliers/distributors drops to 10-20% of their total procurement costs. 4 In effect, the top 10 supplier/distributors now account for over 70% of the customer’s MRO purchase dollars, while demanding less than 20% of the customer’s procurement costs.
The hundreds of other suppliers/distributors from whom these customers buy now account for just 30% of the customer’s purchasing dollars yet over 80% of the procurement costs. These customers next try to reduce their costs of purchasing further by asking one of the top 5 to 10 supplier/distributors to manage and monitor the smaller supplier/distributors. In effect, these customers are creating “supplier tiers” (see Exhibit 15). Suppliers in the highest level of the hierarchy are referred to as “primary” or “first tier” suppliers/distributors.They make money by marking up the products and services provided by “second tier” suppliers/distributors. The customer does not mind paying a higher price because the price increase is more than offset by the decrease in procurement costs.
4 Procurement costs are the costs of placing orders and monitoring and managing suppliers/distributors. These are different from costs of the products and services themselves. 10 WESCO Distribution, Inc. 598-021 As early as 1994, soon after he arrived, Haley had anticipated these trends in outsourcing and had been preaching this approach internally as well as to WESCO’s major customers.In fact, one of the main reasons why Haley had developed WESCO’s National Account program was to develop a path for the organization to become capable of offering these integrated solutions (IS) systems to customers. Cenk added: Right now, when NA customers and prospects ask us to take business that is different from our traditional activities, the decision to do it or not is made in Pittsburgh.
We have a detailed process to analyze costs and potential benefits from the relationship. First, using publicly available information on product prices and discount structures5, we estimate the revenue stream from this additional business.Next, based on past experience, we estimate how much it will cost us to serve the customer. If the products/services involved are things that we have never handled before, then for a reference or benchmark, we look for existing products/services in our portfolio that are closest to the new ones. We also take into account the availability of the concerned NAM ‘s time.
Overall, here in Pittsburgh, I think we do a pretty good job of estimating revenues and costs involved in each of these situations.Yet, to many in our company, this is still an ad hoc process. For example, in the last six months, we have been asked to shovel snow for one customer, manage janitorial supplies for another, and manage the industrial gases requirements for a third. This is not to say that it is wrong in principle to do these types of things. If the margins are good, then it makes sense.
Especially under Haley’s definition of integrated supply, it is something that we shouldn’t shy away from. We add value to a customer’s MRO procurement process and that’s the bottom line.The issue is whether we should standardize on what we want to do when each customer comes to us with a unique set of needs? We need to have some quick answers here since every major player in the EES business has now started talking about managing their customer needs with an IS philosophy. Another area of concern for Cenk was another new trend amongst large NA customers: A few NA customers have taken a cost reduction route that is a little bit different from tiering. These customers are talking about forming alliances and consortia of non-competing distributors (see Exhibit 15).They want groups of MRO suppliers and distributors to partner and offer the customer a one-stop solution (see Exhibit 16 for a profile of the MRO purchases of this customer type).
They expect us to share warehousing facilities with other distributors, create common billing formats, develop integrated product/service solutions, and so forth. The question that we face here is how to plan for these customer migration paths. Without the benefit of tiering-related profits, each player will have to invest in learning about the others’ businesses and integrating logistics functions and systems.What if each customer comes up with a different set of suppliers and distributors for their alliance? Developing these systems can be prohibitively expensive unless we can replicate the process across customers. Yet, if WESCO tries to establish itself as the leader of its own alliance, offering customers solutions before they ask, then we 5 In many consumables and supplies industries, third party organizations published product specifications, pricing information, volume discounts, and special terms from various manufacturers.
This information was publicly available and easy to use.For example, in the EES business, the NEMA Publications and Materials Catalog published by the National Electrical Manufacturers Association served as an industry reference book. 11 598-021 WESCO Distribution, Inc. risk losing their confidence if they disapprove of our partners. We also risk taking on new forms of competition, since we will have to compete with competitors of our alliance partners.
Jim Piraino had also recently become concerned that integrated supply solutions were putting WESCO in a position to compete with some of its traditional customer base of electrical ontractors. Donald Mitchell, a WESCO branch manager, saw this happening in the process of branch-level implementation: In our NA program, we have been telling our industrial customers that we can add significant value by auditing their electrical systems and suggesting ways in which they could improve the quality and efficiency of these systems. These customers now want us to apply the same skills to new projects. So, if we want their MRO business, we also need to get involved in the specification and installation of new systems — the electrical contractor’s traditional business.In these situations, the electrical contractor could now see us as a competitor and could decide to stop buying their EES needs from us. Going Ahead: What Should WESCO Do? Piraino had to find answers to several questions.
With a budget of $12 million in 1998, the decision of whether or not to continue the NA program was a non-trivial one. Piraino said: “If we decide to drop the program, most of the $12 million goes straight to the bottom line. I need to make a strong case if we are to proceed. ” Was this the right time to scale back the NA program?S hould WESCO take a proactive stance in developing NA customers, or should it simply react to explicit customer demand? If the decision was to be proactive, how should WESCO define its approach? What should the firm do about supplier/distributor tiering and supplier/distributor alliances? How should they manage the demands of their traditional customer base during this period of change? Being proactive, said Piraino, could require substantial investments: Seeking out new national accounts is wasteful unless we know how to optimize our existing NA relationships.Strong individual partnerships have brought us to where we are and they may even be able to keep us going for some more time. Do we now need a better approach to managing our current NA customers? Do we need a better model to anticipate customers’ needs? Can we manage the migration path of an NA customer? How will this help us make reasoned decisions about what services we really want to provide our NA customers while recognizing that every customer is different? How should we plan to handle the new trends in NA customer behavior? Do we need to reorganize our company’s structure?The reactive model had the advantage of attracting only those customers interested enough to seek out WESCO’s services on their own.
Piraino ‘s only concern here was that WESCO could start losing potential key customers very quickly. There were cases already where this had happened. We are already in a second tier relationship with one of our best customers who used to purchase substantial levels of EES products from us. This customer should have been one of our “key” national accounts. Although we used to deal directly with the customer, during the last twelve months, the picture has changed.Now, we sell to Smith Industries, a distributor of power transmissions, who in turn sells our product to this customer after marking up our prices.
We have lost touch with this customer. 12 WESCO Distribution, Inc. 598-021 Exhibit 1 xxx The WESCO Executive Organization Chart B. Charles Ames Chairman BOARD OF DIRECTORS Roy W. Haley President & CEO John R.
Burke Vice President EESCO William M. Goodwin Vice President International Group Mark E. Keough Vice President Product Management and Supply Michael Ludwig Director DataComm Group Patrick M.Swed Vice President Industrial/Construction Group Donald H. Thimjon Vice President Utility Group Steven A.
Burleson Corporate Controller Michael S. Dziewisz Director Human Resources James H. Mehta Vice President Business Development James V. Piraino Vice President Marketing Group M. Craig Rand Director Training and Development Steven A. Van Oss Director Information Systems Robert E.
Vanderloff Vice President Manufactured Structures Group Source: Company records 13 598-021 WESCO Distribution, Inc. Exhibit 2 xxx Sales to National Accounts ($ Millions)Class of Account Key Focus Other Total Number of Customers 50 100 150 300 1996 Sales 180 52 34 266 YTD Sales May 1997 89 25 14 128 Source: Company records 14 598-021 -15 – Exhibit 3 xxx The EES Market 3 8 4 4 2 2 POWER IN THE TOOLCRIB 1 Switchgear Fuses Transformers Generators Substations Transmission & Distribution Lines 8 1 1 5 5 Replacement breakers fuses motors & relays Portable cord Circuit breakers Wire markers Caulking//Sealant 6 PROTECT & DIRECT LIGHTING & LOADS MOTORS COMPUTERS & COMMUNICATIONS INDUSTRIAL CONTROL TOOLS OF THE TRADE CURRENT CARRIERS 2Compression & Mechanical Connectors Terminals Wire & Cable Bus duct & related equipment Wiring Devices GFCI equipment 3 Rigid Hubs Liquidtight Cord Connectors Cable Tray Cable Ties Metal Framing Enclosures Explosion proof equipment Engraved signaged for control stations 4 Hi-Bay Lighting H. I. D. Fluorescent & Incandescent Floods & Wall packs Roadway Lighting & Parking Lot Lighting Hazardous Environment Lighting Fixtures Motors Industrial fans, heaters and blowers Lamps, ballast and lighting fixtures Reflectors Occupancy sensors Exit Lighting Lighting Fixtures 5Hubs Raceways & Struts Voice and data cabling and related supplies Signaling Equipment UPS systems Surge suppressors Bar coding equipment Building management systems 6 Timers Programmable logic controllers Motor controls Motor control centers Variable-frequency drives Relays Pushbuttons Proximity sensors Photo eyes 7 Lockout/Tagout Identification Products Electricians’ Supplies Tool boxes Multimeters Cable-pulling lubricant Electrical tape Electricians’ tools Source: Company records 598-021 WESCO Distribution, Inc. Exhibit 4 xxx Selected Financial Information ($ Millions)Fiscal Year Ended December 31 1994 Revenues EBITDA Operating Income Sales Growth Operating Margin Pro Forma Net Working Capital Long-Term Debt Debt/Equity EBITDA/Total Interest $1635.
8 29. 9 21. 2 4. 1% 1. 3% $196. 5 $180.
6 1. 7x 1. 9x 1995 1857. 0 63. 1 55.
7 13. 5% 3. 0% $222. 5 $172. 0 1.
4x 4. 0x 1996 2274. 6 79. 1 68. 2 22. 5% 3.
0% $291. 6 $260. 6 1. 7x 4. 3x Source: Company records Note: As of 12/31/96, total long-term debt was $260 million As of 12/31/96, common equity was $158 million.
16 WESCO Distribution, Inc. 598-021Exhibit 5 xxx Price, Cost, and Value Added Indices by Customer Segment (for 1996) Customer Type Industrial Customers NA Customers • Key NA Customers • Focus NA customers • Other NA Customers Other Industrial Customers Industrial Contractors CIG Customers International Overall 266 180 15-19 90 80 120 Sales ($ millions) Forecasted Annual Growth 1996 to 2000 (%) Customer Value Index c Price Index a Cost Index b 52 93 110 105 34 95 100 100 721 1-3 100 95 95 465 2-4 93 105 105 148 2-4 105 90 90 675 2275 1-3 105 100 110 100 95 100 Source: Company records aPrice Index refers to average prices obtained from customers in a specific customer segment. The weighted average price across all customer segments is 100 (the weights used being sales to a customer segment). b Cost Index reflects WESCO’s average costs to serve a customer segment. The weighted average cost across all customer segments is 100. c Customer Value Added by WESCO Index is an indicator of the average differentiation created by WESCO compared to other EES distributors.
An index value below 100 means that WESCO has below average opportunity to add value to this customer segment.It does not mean that WESCO is at a disadvantage with respect to competition in its ability to differentiate itself from other competitors. 17 598-021 WESCO Distribution, Inc. Exhibit 6 xxx WESCO’s Market Share of the Industrial Customer Market Segment Industrial Top Segments High Market Potential ($ Billion) Utility Manufactured Structures Machinery Electrical Equipment Primary Metals Mining Petroleum & Chemicals Transportation Pulp & Paper / Lumber Food Instrumentation Other MRO Source: Company records WESCO Share (1996) 8. % 35.
9 2. 5 3. 7 7. 0 7. 3 5.
8 10. 8 7. 5 3. 7 1. 9 3. 0 3.
4 0. 6 4. 0 2. 5 0. 9 0.
7 0. 8 0. 4 0. 5 0. 6 0.
5 1. 8 18 WESCO Distribution, Inc. 598-021 Exhibit 7 xxx The WESCO Selling Story 2 3 Customer recognizes value and decides to act WESCO recognizes customer need or opportunity Customer does not recognize need or opportunity 1 4 WESCO ensures that customer identifies WESCO/Supplier as potential solution 5 Customer commits to WESCO/Supplier 7 Customer works with WESCO on next value creation opportunity 6Customer/WESCO/Supplier act -Value is created, demonstrated, and documented Source: Company records 19 598-021 -20 – Exhibit 8 xxx Distributor Channels Total Electrical Market By Distributor Channel Sales/ Location $7. 8M Cumulative Sales Sales $8. 6B Location 1,100 6 National Chains Graybar CED WESCO Anixter GE Supply Grainger $8. 6B $3.
5B 655 $5. 3M 8 Regional Chains Rexel, All Phase, Hughes Electrical, McNaughton-McKay, Mayer, Platt, Border States $12. 1B $10. 6B 1,510 $7. 0M Top 250 Full-line Distributors Sales ranging from $20-$200 million $22. 7B $20.
B 12,351 $1. 5M All Other Full-line Distributors Sales ranging from $0-$20 million $43. 4B $3. 6B 714 $5. 0M Specialty Distributors Product or application-oriented niches—transformers, alarms, signalling, motor repair shops $47.
0B Others Who Sell Electrical Products Home centers, hardware stores, residential lighting specialists, energy service companies $13. 0B $60. 0B Source: Company records. Adapted from Electrical Wholesaling June 1997 WESCO Distribution, Inc. 598-021 Exhibit 9 xxx Total Procurement Cost Total Procurement Cost Cost of Product ItselfCost of Acquiring The Product Originate a requisition Interview salespeople Select suppliers & negotiate Issue purchase orders Expedite delivery Receive materials Distribute to stock locations Receive & edit invoices Maintain accounts payable records Pay invoices Cost of Holding the Product Create & maintain storage area Annual physical inventory Inventory control Stores accounting Cost of money tied up in inventory Insurance Taxes Depreciation Obsolescence Pilferage Source: Company records 21 598-021 WESCO Distribution, Inc. Exhibit 10 xxx Value Added ServicesInventory Reduction Initiatives Inventory Buy-Back Disposition of Obsolete Inventory Inventory Classification Consignments Bin-Stock Replenishment Part Standardization Part Substitution Inventory Sharing Inventory Management Options Just-in-Time Delivery Systems Contract Bin-Stock Replenishment Single-Source Commodity Supply Single-Source Storeroom Supply On-Site Trailer Storeroom Management Efficiency Improvement Unit Price Reductions Use of Electronic Technologies Information Management Usage Reporting Reduced Paper Transactions Reduced Processing Transactions Reduced Personnel Requirements Miscellaneous Plant ServicesSource: Company records 22 598-021 -23 – Exhibit 11 xxx The Range of Customer Needs Across Market Segments Storeroom Management Integrated Supply Preferred Alliances Multi-Year Agreements Annual Blankets Project Quotes JIT Key NA Customers Focus & Other Industrial Contractors CIG Source: Company records 598-021 -24 – Exhibit 12 xxx A Typical National Account Development and Program Implementation Initial Meeting Signing of NA Agreement 6/1/95Opening of new branches Synchronizing WESCO Formation of Local & National branch personnel with Ongoing Presentations Implementation Teams NIT & LIT Meetings customer’s plant Proposal Preparation at Customer purchasing Departments Plants Branch Manager/ Branch Ramp-Up Plant Customer Managers Visits (Resources & Inventory) Kickoff Meeting 1,000,000 800,000 600,000 400,000 200,000 0 10/1/95 11/1/95 12/1/95 10/1/96 11/1/96 12/1/96 6/1/95 7/1/95 8/1/95 9/1/95 1/1/96 2/1/96 3/1/96 4/1/96 5/1/96 6/1/96 7/1/96 8/1/96 9/1/96 1/1/97 2/1/97 3/1/97 4/1/97 5/1/97 6/1/97 Source: Company recordsWESCO Distribution, Inc.
598-021 Exhibit 13 xxx Customer Cost Savings By Category for a Successful NA Implementation Productivity Improvement 30% Application Engineering 1% Administrative Improvement 1% Service Improvement 1% Other 2% Inventory Reduction 12% SKU Deletions 3% Product Substitution 3% Transaction Cost Reduction 20% Training 2% Energy Savings 20% Price Improvement 5% Source: Company records 25 598-021 -26 – Exhibit 14 xxx Commodity and MRO Purchase Profile of a High Potential NA Customer Raw Materials Electrical Mechanical Item Value PVF Industrial Supplies Filtration FastenersLab & Safety Paper, Janitorial Supplies Paints, Oils, Lubricants Office Supplies MRO Source: Company records 598-021 -27 – Exhibit 15 xxx Different MRO Procurement Models Procurement Models Single-Source Commodity Supply Some customers are reducing their supply base to one distributor per product category . . . Customer Distributor Manufacturer WESCO Pipe, Valves, & Fittings Industrial Supplies Safety Multi-Source Commodity Supply Some customers elect to use one or more integrators to reduce their supply base even further . . .
Customer Distributor Manufacturer Alliances & ConsortiumsSome customers are choosing to contract with an alliance of noncompeting distributors . . . Distributor Manufacturer Customer WESCO Integrator Alliance Pipe, Valves, & Fittings Industrial Supplies WESCO Pipe, Valves, & Fittings Industrial Supplies Safety Source: Company records 598-021 -28 – Exhibit 16 xxx Commodity and MRO Purchase Profile of a Consortium Customer Raw Materials Item Value Electrical Paints, Oils, Lubricants Mechanical PVF Industrial Supplies Lab & FiltrationFasteners Safety Paper, Janitorial Supplies Office Supplies # of Items MRO Source: Company records
