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The DVM in Action
In business for more than 50 years, ABC Distribution
(ABC) has made a name for itself in wholesale distribution
across North America by providing high levels of service.
ABC’s sales staff is organized geographically into branches
and districts. Sales from warehouses represent 65% of volume; direct shipments are at 25%; counter sales are 5%;
and Internet sales are 5% today, but expected to be 25% by
the year 2010.
ABC is a leader in its segment, yet during the recession
of 2002, the company’s revenue declined by 25%. Since
then, ABC has been scrambling to regain its past revenue
numbers. One strategy for doing that was a comprehensive upgrade in the company’s information applications
and infrastructure intended to improve a broad range of
enterprise business processes. In fact, ABC is still in the
early stages of realizing the full benFIGURE 1-1
efits of the upgraded technology.
Early in the upgrade project, management realized that considerable
value could be generated from a performance improvement initiative.
The DVM became the company’s
framework of choice to enable the identification of opportunities.
Note that in this story, ABC applied
the DVM to plan and execute improvements to its business processes
in a four-step approach. When you
use the DVM, you might choose to
follow a similar approach. Here is
how the DVM worked for ABC.
Step One: Look at Performance
To what extent was ABC achieving its business plans?
Where were the gaps between planned and actual performance? Benchmarking provided ABC’s leadership with a
view of its competitive position with its peers. What
became clear? The company could do a lot better in more
than one area.
ABC compared its performance across eight metrics as
illustrated in figure 1-1. The diamond on each metric scale
represents ABC’s performance. The vertical red hash marks
represent ABC’s selected competitive peer group. (Note
that a similar analysis could be developed using competitors, and other admired peer companies that are not necessarily direct competitors.)
Illustrative Peer Benchmarking
Return on Assets
Top Ranking
Bottom Ranking
16%
2%
......................................................
9%
Revenue Growth
60%
COGS/Sales
37
Inventory Days
34
......................................................
Competitors
C-
Self-Assessment of
Actual Performance:
C-
A Leading
B Above Average
C-
70
......................................................
66
Payables Days
D
30%
......................................................
35
Receivables Days
95%
......................................................
15%
SG&A/Sales
2%
......................................................
Legend:
ABC Distribution
1%
......................................................
11%
EBITDA
D
C-
C Average
D Below Average
B
65
......................................................
B
CHAPTER ONE—THE DVM IN ACTION
| 3
Step Three: Prioritize
and Plan
ABC performed lower than its selected
peers/competitors on most metrics (see
figure1-1), and the company graded its
actual performance with letter grades
A through D. A similar self-assessment
approach and grades were used to indicate performance in figure 1-2.
Optimization. ABC conducted a
detailed analysis of pricing in its
organization. The company analyzed
transaction data from two of its eight
districts for 6 months to determine
the potential for margin improvement.
Revenue Growth as the Driver
ABC decided that Revenue Growth
was its number 1 priority. The DVM
in figure 1-3 illustrates two alternative subdrivers (i.e., paths): Volume
and Price Realization. Both subdrivers needed a lot of attention and
benefited from a fresh perspective and
rationalization. Was one subdriver
more likely to yield immediate results
and, therefore, immediate return on
investment? The levers Acquire New
Customers and Suppliers, and Retain
and Grow Current Customers and
Suppliers under the Volume subdriver were two areas where ABC executives believed they needed to excel.
However, the company had no current
projects in those two areas. As a
result, they became good targets for
future investment. At the same time,
under the Price Realization subdriver,
the red dotted box around the Price
Optimization sublever and around
several of the actions below it indicated an urgent need to act. As a result
and based on hot-spot opportunities
ABC identified under the Price
Realization subdriver (see figure 1-3),
the top area of focus became Price
Step Two: Follow the Map
The findings from the benchmarking
analysis motivated the executives and
managers to brainstorm improvement
ideas and use the DVM framework as a
guide. On the DVM, they compared
notes and identified hot spots: What
were the company’s strategic imperatives? Those strategic imperatives that
ABC identified are circled in dark blue
(see figure 1-2).
ABC executives and managers then
debated their company’s strengths
and key business issues and identified
the most vexing business issues that
could impact value creation as indicated in red dotted boxes in figures
1-2 and 1-3. Where did the company
consider projects or initiatives (i.e.,
called actions on the DVM) that
would push the levers that drive
value? The sublevers where ABC
launched current/ongoing improvement projects are circled in green.
Price Realization as the Subdriver
ABC used a pricing tool from a software vendor to analyze its price setting
and price execution data. Through the
pricing analysis and a number of intensive working sessions, ABC management identified $5 million of margin
improvement that could be obtained
in less than 6 months. ABC’s implementation approach was as follows:
• Microsegmentation: By analyzing
customers within very specific
groups and within and across districts, ABC found that customers
were not differentiated by volume
sales. For example, low-volume
customers who bought one or two
times a year received the same
pricing as customers in other
districts who had much higher
volume and earned the higher
discounts. There were a couple of
reasons for this happening.
— The pricing managers in the
districts with the low-volume,
FIGURE 1-2
Prioritized Distribution Value Map (DVM)
Acquire New Customers &
Suppliers
Marketing
& Sales
Product &
Service
Innovation
Retain and Grow Current
Customers & Suppliers
Account
Management
Cross-Sell/
Up-Sell
Leverage IncomeGenerating Assets
Retention
Cash/Asset
Management
Strengthen Pricing
Demand &
Supply
Management
Price
Optimization
Marketing &
Advertising
Improve
Improve
Customer Interaction
Corporate/Shared Services
Efficiency
Efficiency
Sales
Customer
Service &
Support
Order
Fulfillment &
Billing
IT, Telecom &
Networking
Real Estate
Human
Resources
Procurement
(Excluding Production
Materials &
Merchandise)
Improve
Supplier Rebate Recovery
Business
Management
Financial
Management
Chargeback &
Recovery
Ongoing Project or Initiative
Identify where on an operational level the distributor’s ongoing
projects are expected to contribute to improvement on the DVM.
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DRIVING GROWTH AND SHAREHOLDER VALUE
Improve
Improve
Improve
Improve
Improve
Improve
Network, Logistics & Retail
Income Tax
PP&E
Inventory
Receivables & Payables
Management & Governance
Efficiency
Efficiency
Efficiency
Efficiency
Efficiency
Effectiveness
Product &
Service
Management
Strategic Imperative
Understand key strategic imperatives and the DVM areas where the
distributor needs to perform well in order to deliver these strategies.
Key Business Issue
Identify the issues that currently worry top executives and can have
an impact on value-creation potential.
Improve
Product (Inventory) &
Service Offerings
Kitting &
Assembly
Logistics,
Distribution &
Transportation
Importing
Warehouse &
Branch
Management
Retail
Operations
Income Tax
Management
Real Estate &
Infrastructure
Equipment &
Systems
Finished
Goods
Accounts,
Notes &
Interest
Receivable
Accounts,
Notes &
Interest
Payable
Governance
Business
Planning
Program
Delivery
Improve
Execution Capabilities
Business
Performance
Management
Operational
Excellence
Partnership &
Collaboration
Relationship
Strength
Agility &
Flexibility
Strategic
Assets
Self-Assessment of Actual Performance:
Leading
Above Average
Average
Below Average
FIGURE 1-3
Distribution Value Map Revenue Growth Drill Down
high-discount customers had
little or no experience in selling the items being discounted. As a result, they did not
know the customers’ willingness to pay. This lack of experience and visibility to pricing
in other districts resulted in
lower margins and lost profits.
— The pricing managers realized
that higher-volume customers
in other markets were willing
to pay higher prices for these
items. While taking into consideration the differences in
customer base and demand in
geographies, ABC found that it
could raise prices across all districts for certain volumes. Even
if the company lost 50% of
these low-margin customers, it
would have overall higher mar-
gins, which would result in
increased revenues.
• Price analysis and consistency:
ABC found that it could use
technology to bridge the gap
between centralized and decentralized pricing policies. With
appropriate legal review of its
new pricing policies and the
ability to better understand
and analyze its prices in the
CHAPTER ONE—THE DVM IN ACTION
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marketplace, the company was
able to negotiate like opportunities more consistently. Again,
this all revolved around the
customers’ willingness to pay
for specific products or services.
In addition, ABC found that
with this price information, the
corporate and district pricing
managers had new confidence
and knowledge to defend prices.
This was a significant factor to
help increase margins.
Opportunity Areas
ABC identified and focused on these
three major opportunity areas to help
increase margins:
1. Accuracy:
• Offered a fair and reasonable
price at segmented levels.
• Implemented processes and
procedures for price setting and
maintenance to help determine
the correct segmented price.
2. Acceptance:
• Validated and defended system
prices at the time of the pricing
decision. This was impacted
directly by ABC’s confidence in
its pricing system.
• Provided pricing information
to districts and branches, so
they could more easily determine whether market prices
suggested by customers and
the salesforce were accurate and
consistent with what other like
customers were willing to pay.
3. Accountability:
• Provided pricing information
to all levels of the organization
(i.e., corporate, district, branch,
and sales rep), so that each
could help manage price performance and increase margins.
• Provided the tools to all levels of
the organization (i.e., corporate,
district, branch, and sales rep) to
help price opportunities, which
took into consideration factors,
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DRIVING GROWTH AND SHAREHOLDER VALUE
including the product, customer, and channel.
Results at 6 Months and Later
After 6 months, ABC was well on its
way to achieving the following capabilities:
• Microsegmentation: Using a pricing approach based on customer and market attributes
enabled ABC to group like
market opportunities together
as determined by its customers’
willingness to pay.
• Optimization of price guidelines:
ABC used price models and
rules to help achieve targeted
objectives, including revenue,
margin, and market share.
• Price setting and execution: ABC
began to create, assess, edit,
and publish price guidelines
for the organization.
• Analyzing data: ABC used hierarchical and segmentation techniques to manage its data.
ABC started realizing benefits. At the
start of the project, ABC set its strategic growth targets for the following
12 months:
• Revenue growth of 5-7%
• Gross margin rate of 24.5%
(current rate was 22.8%)
• $2 million in revenue growth
through improved margins.
Eleven months after the implementation of the new processes and pricing technology, ABC achieved the
following cumulative benefits:
• An increase in gross margin from
almost 23% to more than 24%
• An increase in gross margin dollars of more than $1.5 million
• Maintained or increased win rates
in all districts.
As a result, ABC viewed gross margin
and margin improvement much like
inventory. The company managed
them on a daily basis, and they were
measured and reported weekly,
monthly, quarterly, and annually. The
results were and continue to be positive, and ABC is now in the top quartile for profitability within its
industry sector.
How the DVM Helped ABC
Distribution
By using the DVM as a framework for
prioritizing its projects, ABC decided
to further evaluate whether to continue or launch the following top six
potential initiatives:
1. Conduct rapid diagnostic for
acquiring new customers and
retaining current customers (new).
2. Optimize pricing, including
addressing possible leakage of
rebates and incentives (new).
3. Increase emphasis on differentiated products and services (current).
4. Improve methods for managing
demand and supply performance
(current).
5. Enhance communication and
coordination across the supply
chain (current).
6. Improve supply chain and supply
network planning processes
(current).
While the DVM was not the source for
all of ABC’s business improvement initiatives, it was a source of creativity and
a framework for jump-starting and
structuring ABC’s planning decisions.
The DVM framework also helped the
management team evaluate expected
outcomes of potential projects as the
team considered project interdependencies and strategic business priorities.
ABC then assigned priorities to its
potential initiatives by considering the
following factors:
• Potential value to be realized (i.e.,
how the project would impact
drivers on the DVM)
• Project costs
• Implementation efforts and also
resource availability
• Risk and complexity to implement.
ABC prioritized its projects. This
helped to create a comprehensive
plan and initial business case for
its performance improvement initiatives. By focusing on the driver of
top priority—Revenue Growth—
ABC debated prioritization factors
for each initiative and reached the
conclusions for its top six potential
initiatives as illustrated in figure 1-4.
Step Four: Get It Done
ABC got the quick wins it was looking
for by increasing discipline around
pricing and controlling leakage of
rebates and incentives. The company
improved its gross margin by nearly
1.5%. Today, ABC is using the returns
from those investments to fund more
long-term projects.
Going forward, the company plans to
evaluate all initiatives—old and
new—against new baseline performance metrics and manage them within a project management organization.
The DVM framework is now an integral part of ABC’s planning and
budgeting processes.
CHAPTER ONE—THE DVM IN ACTION
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Next Steps
ABC applied the DVM framework to help plan
As you read the following chapters and put the
and execute improvements to its business
DVM into action at your organization, you might
performance. Other distributors have used the
consider how ABC’s approach could be
DVM in similar ways to help structure and
applicable to your situation.
prioritize their improvement initiatives.
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