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A Transformation in Logistics Strategy

David Faoro

Often the way companies perceive a business challenge is important in determining their success to meet it. Today, Canadian wholesale distributors have identified a wide array of new challenges and trends that have prompted some to review their traditional business practices. For example, they might have observed a manufacturing customer’s plant bursting at the seams because its purchasing team orders in truckload quantities to get the best price. In these circumstances, it would not be uncommon for the wholesale to be asked for a solution.

These challenges go beyond the requirements of manufacturers. Another common challenge might involve retail customers that may have too many suppliers delivering too often, causing their staff to needlessly spend a lot of time placing and receiving orders and, to aggravate this situation, it seems some other suppliers can’t control store-delivery times.

Do these challenges to wholesale distributors represent opportunities to help the customer? Perhaps. Traditionally, many customers of wholesale distributors have sidestepped this question and turned to third party logistics providers (3PLs) to find the answers and solutions.

However, in the last decade new options have come to the fore. It’s evidenced by a handful of wholesale distributors that have evolved from conservative family- or privately-run operations to become companies offering sophisticated integrated supply chain solutions. These companies have transformed their traditional business models and broken business paradigms to better serve the changing needs of their customers.
A case in point is the transformation in the business and logistics strategy of Unisource Canada, Inc. Several years ago, Unisource, based in Richmond Hill, Ontario, was a typical wholesale distribution company serving multiple-market segments with a broad market focus. Its roots were in the paper distribution business. Through acquisitions Unisource expanded into the packaging and industrial supply sectors. Standard services were provided to its customers, the company’s service levels were on par with industry standards, its sales growth was commensurate with the economic performance of the country and its customer base was stable.

In this context, Unisource chose to transform its business and recast the way it worked with its clients. The assessment of the company’s business strategy began with an analysis of external factors and their implications. Four major external trends emerged from Unisource’s review:

“A review of these external forces and an extensive internal analysis showed the current strategy would not lead to a continuation of Unisource’s leadership position in the market.”

Concurrently with this analysis a series of internal studies were conducted along with a management review of the supply chain organization within Unisource. Other areas that were reviewed included the company’s positioning within market segments, a review of competitive activities and customer requirements.

A review of these external forces and an extensive internal analysis showed the current strategy would not lead to a continuation of Unisource’s leadership position in the market. In fact, if Unisource had held its current course, either existing competitors would move to fill the emerging need in the market or 3PLs might soon offer the services provided by wholesale distributors. Another possibility was an e-commerce solution that stripped out key-product categories currently sold to customers.

The analysis of these trends and carefully conducted research resulted in Unisource’s recasting its customary product focus on paper and packaging supplies to concentrate its resources on selected customers and services targeted to unique segments; Unisource transformed its business strategy to be closer to that of a 3PL business model.
To support this change, many new initiatives were undertaken. Some of the key challenges included sales training, inventory management, the pricing of services and internal resources. They also involved new technologies, such as warehouse management systems, e-commerce solutions and ERP programming changes, all of which were essential to refocus Unisource’s service offering.

Some of the resultant programs offered today by Unisource include inbound supplier consolidation programs, Just In Time (JIT) inventory management solutions and retail store distribution services. These programs provide ways for Unisource’s customers to reduce costs and inventory, as well as lead times for products with increased service levels.

Key Initiatives

Sales Training
Sales associates had strong product knowledge based on a traditional product-focused sales strategy. The shift from selling a product to a service, or even a concept, was a major departure from previous practices. To help, a team-selling approach was implemented, enabling people from Unisource’s Logistics, I.T. and Operations teams to participate together in sales presentations. This helped to transfer knowledge from its technical specialists to both Unisource’s customers and sales professionals. In addition, focus teams were formed to create sales templates and other selling tools. Internal training educated other disciplines about supply chain practices. As a result, meetings with customers focused on conducting business reviews in which collaborative opportunities were discussed instead of the customary focus on selling products.

Inventory Management
In the typical wholesale distributor business model, inventory is owned by the wholesaler and sold to customers. The wholesaler is responsible for the care and control of inventory. However, when a customer wants a logistics solution and desires to retain ownership of the inventory, internal systems need to be reviewed and modified. Clear rules must be developed to ensure goods are insured, and that business processes and related costs are clearly defined. Unisource developed clear work instructions and operating principles for its customers. One noteworthy example involves a U.S.-based company that recently entered the Canadian market. This company looked to Unisource to provide a total supply solution. It wanted to retain control over proprietary products. So Unisource provided logistics services (including inventory management) for these products and sold other products to them under a typical wholesale distributor model.

Pricing of Services
When the traditional business model of a wholesale distributor is built on return on sales and metrics are geared towards cost ratios as a percentage of sales, what happens when services instead of products are sold? To address this question, a strong discipline of activity-based costing and structured use of pro-forma business models was applied. This allowed multiple people to assess business opportunities in a consistent manner. Secondly, metrics were changed to shift from return on sales to an Enterprise Value Earnings Before Interest Taxes (EBIT) percentage and return on capital employed, as well as other performance indicators.

Internal Resources
This process involved segmenting the customer base and understanding the cost to serve individual segments. As larger, more complex customers began to require customized solutions, internal resources needed to be released. In the past, all customers, regardless of size and complexity, were treated equally.

Through segmentation process and a thorough study of Unisource’s customer base, we found that some groups of customers were consuming internal resources disproportionate to their relative financial contribution. A service matrix was created that enabled levels of services to be tailored to the size and complexity of the customer. This afforded internal service providers more time to spend with customers that had more complex needs, and it simplified the process to serve smaller customers possessing less complex needs. This clear and concise understanding of customer profitability was rooted in the discipline of activity-based costing.

This strategic shift has produced staggering results. Key customers with integrated supply programs now account for approximately 20 percent of Unisource’s total sales, up from virtually nothing four years ago. Unisource now has multi-functional sales teams exploring collaborative supply chain opportunities with customers. These same opportunities are also being explored with the company’s suppliers to ensure the total supply chain is being reviewed. In summary, we are now speaking the language of a logistics service provider, a dramatic transformation from a company that only sold products just a few years ago.

What is on the horizon? We believe traditional 3PL’s will soon begin their foray into the realm of wholesale distributors. But their competition will comprised of a different breed of companies; They will be vying for business against re-born distributors that embrace the concept of integrated supply chain management and customers will have an unprecedented number of options to meet their constantly changing requirements.