OPTIMIZING CHANNEL
COMPENSATION
TEXAS A&M – NAW RESEARCH
CONSORTIUM
BEST PRACTICES IN DEMONSTRATING
VALUE AND CREATING FAIR
COMPENSATION FOR CHANNEL PARTNERS
Current Members of the Consortium
OCC Consortium Member Profiles
 14 members
 3 manufacturing members (5 firms)
 11 distributors (15 firms)
 9 Lines of Trade

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






Bearings, Seals, and Lubrication Systems
Building Materials
Chemical
Electrical
Electronics and Industrial
Fluid Power
HVAC
Process Control and Automation Solutions
PVF / Industrial
Optimizing Channel Compensation (OCC)
5. Channel
Compensation
4. Channel
Relationship
3. Channel
Alignment
2. Channel
Value
1. Channel
Focus
Channel Focus
 To who do we create value in the channel?
 Who is important to us in the channel?
 Equally important is, to who are we important?
Channel Focus
 The volume or spend is the typical criterion to decide
important suppliers (e.g. top suppliers who account for
80% of business)
 The volume or spend tells how important a supplier to
distributor’s business but not the distributor’s importance to
supplier
 Need to go beyond volume in order to understand to who
we are strategic
 Mutual importance is the prerequisite to optimize
channel compensation
Mutual importance – Criteria
 From Distributor Perspective
 Relative share of business
 What % of business from supplier X?
 What % of supplier X’s business is from distributor?
 Relative difference is key
 Supplier’s channel strategy
 For a given supplier, % of direct business vs. distribution
 Supplier’s distribution model
 Intensive
 Selective
 Limited or Exclusive
Example
 Distributor’s total business = $ 40 MM
Supplier A
Supplier B
Distributor business
from
$7 MM
$8 MM
% of distributor’s total
business
17.5 %
20%
% of supplier’s
(distribution) business
with this distributor
20%
9%
Relative share of
business (the
absolute gap)
2.5%
11%
Mutual importance
High &
Balanced
Low &
Unbalanced
Lower the
gap, higher
the mutual
importance
Example
Supplier A
Supplier B
Distributor business
$7 MM
$8 MM
Relative share of
business (the
absolute gap)
2.5%
11%
Mutual importance
High &
Balanced
Low &
Unbalanced
Channel strategy
75% direct
25% distribution
50% direct
50% distribution
Distribution model
Exclusive
Intensive
 Who is the strategic supplier for this distributor?
 To which supplier, is this distributor strategic?
Mutual importance is the prerequisite to optimize
channel compensation
Optimizing Channel Compensation
5. Channel
Compensation
4. Channel
Relationship
3. Channel
Alignment
2. Channel
Value
1. Channel
Focus
Channel Pressure
 End-customers call the shots on how distributors should
be compensated in certain trades
 Large customers go around distributors to direct negotiation
with suppliers
Operational Excellence
Sales & Marketing
Optimization
 Continuous pricing pressure
Evolving Channel Value Proposition
Business Process Framework
Key Performance Indicators
Supply Chain Planning
Supplier
Source
Stock
Support Services
Store
Sell
Ship
• Information Technology
• Human Resource Management
• Finance Management
Customer
Distributor Value Proposition
Source
Inventory
breadth
Stock
Inventory
depth
Store
Facilities
Sell
Sales force
Ship
Market
intelligence
Credit
Brand
(Experience &
Relationship)
Customer
service
Delivery
Supply Chain Planning
Support Services
Services
HR
Development
Market
coverage
(footprint)
IT resources
Supplier’s Value Proposition to
Distributors
Example – SKF
SKF Overview
 Established
1907
 Sales 2011
USD 9,960 million
 Employees
46,039
 SKF presence
over 130 countries with production sites in 32
15%
Operating margin, level
8%
Changes in sales in local
currency
27%
Return on capital
employed
Distributors essential to SKF
• Local Presence
• Flexibility to fulfil customer demands
• Multiplication of SKF presence in market
• Distributor sales people
Distributor sales people
• Maintain customer relations
• Improve SKF brand awareness
• Value sell SKF offering
• Close to the customer
• Understand the customers needs
Communication
• Develops trust
• Increases market intelligence
• Optimises resource allocation
Investment
• Local Inventories
• People selling our product
Areas to support distributor growth
•
Increased level of mutual engagement and joint
activities toward final customers
•
Equipping distributors' employees with arguments
to defend the SKF value proposition
Pro-Active Selling
Education
Supply Chain Optimisation
•
Cost savings in supply chain and inventory level
optimization
• Customer solution selling with the Certified
Differentiation
programs and Solution Factory
Pro Active Selling
• Development programs
• Structured follow up
• Collaboration
Education
• Development programs
• Structured follow up
• Collaboration
• Documented value tools
Supply Chain Optimisation
• Improving information flow
• Collaborative forecasting
• Maintain good service level
Differentiation
• Joint development of distributor services
• Knowledge sharing
• Utilising distributor reach for service
provision
Industrial Distribution Strategy

Build sustainable and profitable customer
relations in partnership with Distributors
Channel Value Creation
Goal
Value Creation
Channel Partners
Manufacturer
Source
Stock
Product
design
Sell
Inventory
breadth
Inventory
(FG and WIP)
Inventory
depth
Plant locations
Facilities
Product
training &
support
Marketing
Brand
Ship
Sales force
Delivery
Supply Chain Planning
Support Services
Manufacturing
capacity
Product
Volume
Product Mix
Store
Distributor
Lead time
Credit
HR
Development
Services
Customer
service
Delivery
Market
intelligence
Visibility
IT resources
Credit
Brand
(Experience &
Relationship)
HR
Development
Market
coverage
(footprint)
IT resources
Optimizing Channel Compensation
5. Channel
Compensation
4. Channel
Relationship
3. Channel
Alignment
2. Channel
Value
1. Channel
Focus
Alignment
Supplier
Business
Objectives
Distributor
Supplier
Distributor
Market
Share
Profitability
Supplier
Performance
Distributor
 Supplier performance
 Distributor performance
 Product performance
Revenue
Cash Flow
Product
driven
Market
driven
 Customer
performance
Supplier performance through stratification
Real-world Example
Supplier Stratification Framework
Supplier Profitability
• Low Profitability
• High Spend Volume
• Collaborative Relationship
• Hard to Do Business With
Strategic
Vendors
• High Profitability
• High Spend Volume
• Collaborative Relationship
• Easy to Do Business With
Transactional
Vendors
• Low Profitability
• Low Spend Volume
• Limited Relationship
• Hard to Do Business With
Emerging
Vendors
• High Profitability
• Low Spend Volume
• Limited Relationship
• Easy to Do Business With
Ease of Doing Business
Growth Potential
Supplier Loyalty
Custom
Vendors
Real World Example
Key Statistics
Data timeline
2011 (12 months)
# Total Vendors
117
Annual Spend $
$ 269 MM
# invoices
15,689
Supplier Stratification Model
SUPPLIER STRATIFICATION FACTORS WITH WEIGHTS
60%
GROWTH POTENTIAL
40% Purchase $
40%
LOYALTY
100%
SKU Penetration
30% Spend Growth %
15% New Items %
15% New Items $ Contribution
50%
SUPPLIER PROFITABILITY
50%
EASE OF DOING BUSINESS
15% Net Gross Margin %
20%
% C and D Items
35% Net Gross Margin $
20%
On-Time Deliveries %
15% New GMROII
20%
Average Lead Time
35% Inventory Turns
20%
Lead Time COV
20%
Factors Rating
Supplier Stratification – Real World Example
Strategic
100%
90%
117
Emerging
$36,715,939
Transactional
$49,849,602
Custom
$269,166,167
2M
789K
2M
20
61M
9M
80%
70%
33
6M
8M
1M
1M
60%
50%
40%
42M
30
178M
22M
30%
20%
35
10%
0%
No of Vendors
Average Inventory
Gross Margin $
COGS $
Distributor performance through
inventory & customer stratification
Real-world Example
Customer Stratification Model
Customer Loyalty (Life)




High Profitability
No Relationship
Low Cost to Serve
Low Volume
Core
Customers




Marginal
Customers




Low Profitability
No Relationship
High Cost to Serve
Low Volume
High Profitability
Sustained Relationship
Low Cost to Serve
High Volume
Service Drain
Customers




Low Profitability
Sustained Relationship
High Cost to Serve
High Volume
Customer Buying Power
Cost To Serve (CTS)
Customer Profitability
Opportunistic
Customers
Customer Stratification – Real World Example
Core
100%
90%
1,276
Marginal
Opportunistic
92,967
$83,502,436
17K
14M
4K
3M
72
90
80%
Service Drain
$14,507,073
1M
978K
12M
70%
3M
25K
60%
50%
969
40%
30%
53M
9M
Sales $
Gross Margin $
48K
20%
10%
145
0%
No. of Customers
Hits
GMROII
Inventory Stratification Model
Revenue & Hits
Inventory Stratification – Real World Example
4,334
65,222
$24,089,198
$4,283,061
2M
384K
4M
578K
$2,208,653
100%
9K
90%
80%
70%
661K
9K
D
3K
13K
60%
8M
C
1M
565K
50%
B
40%
574K
30%
718
34K
11M
20%
10%
2M
498
409K
303
0%
# of SKUs
Hits
Revenue ($)
Gross Margin ($)
Average Inventory ($)
A
ALIGNMENT
Supplier-Inventory-Customer Alignment
Supplier-Inventory-Customer Alignment
Real World Example
Supplier-Inventory-Customer Alignment
Real World Example
Supplier and Distributor
Performance Alignment
Example – L&W Supply
L&W SUPPLY: Overview
•Founded 1971
•142 Locations
•Largest Specialty
Dealer in North America
•Largest customer for
our suppliers
45
L&W’s History with TAMU

Consortia Member
• Sales & Marketing Optimization
• Optimizing Distributor Growth & Market Share
• Best Practices in Customer Service – Talent Incubator Lab
• Optimizing Channel Compensation
Capabilities assessment in 2009-10
 Implemented Inventory Stratification in 2011
 Received PAID “Award of Distinction” in 2012
 Currently implementing Customer Stratification

THE L&W TRANSFORMATION
Federation
2009
Branded Customer
Experience
Corporation
2010
2011
2012
2013
2014
2015
47
Distributor / Manufacturer: Inventory Management & Replenishment
Jan 2011 – Dec 2011

Inventory Stratification
• Supplier/L&W collaborated in the development of an Inventory Stratification process across
shared key product categories

Process Improvements
• Aligned processes with Supplier’s customer service center and L&W’s purchasing agents to
streamline replenishment and delivery processes
• Supplier /L&W instituted a 3PL tendering process to improve service to the branches
• Supplier/L&W evaluated order sizes and adjusted the shaping of purchase orders to
increase pool opportunities, thus increased frequency of deliveries to the branches

Increased Visibility to Demand and Availability of Product
• Supplier/L&W coordinated process to enable increased visibility to slow moving inventory
• Supplier/L&W coordinated process improvement and training of existing processes
unfamiliar to L&W enabling improved visibility to manufacturers product availability.
• L&W provides Supplier daily demand data for future demand projections in Supplier’s S&OP
planning process.
Distributor / Manufacturer: Inventory Management & Replenishment
Jan 2011 – Dec 2011

Shared Benefits
• Alignment of service level policies for A&B items improved product availability &
service lead times resulting in increased sales
• Supplier reports lower costs via better asset utilization, more efficient order
processing at CSC, fewer shipping errors and additional capacity utilization at
plants during increased demand cycles
• Re-investment of more A&B to Supplier came from substantial reduction of C&D.
C&D fell from 52% of inventory to 44% in 12 months. GMROII improves double
digit %.

Challenges
• L&W change management for full adoption of new replenishment process and tools
• L&W data challenges on fully capturing GMROII (Supplier acceptance)
• Supplier’s Sales Management questioning L&W’s commitment to inventory
• Supplier’s Supply Chain/Mfg. building consensus internally with sales leaders
Distributor / Manufacturer: Alignment for Growth
October 2012 - Present

Field Sales Alignment
• Competitive Market Pricing
• Participation in Regional Sales Meetings
• Product Knowledge events at vendor plants

Leveraging vendor expertise to collectively grow the market
• National training by vendors to educate L&W teams on best practice selling
• Customer webinars and training to educate the market on coming trends

Value Stream Mapping and Continuous Improvement events
• Collaborative efforts to identify waste/inefficiency in the process

Joint Marketing to create awareness and demand
• Developing processes for getting leads to the field
• Partnership with vendors on various national and local marketing efforts
• Identifying unique ways to engage customers together
Distributor / Manufacturer: Alignment for Growth
October 2012 - Present

Project Management
• Dedicated project management resources for key initiatives
• Common scorecards for measuring success
• Regularly scheduled leadership calls / meetings

Shared Benefits
• Commitment to joint sharing of the reduced costs through process
improvements
• Formalized pricing management process to keep focus on selling and not
negotiating
• Growth oriented program incentives

Challenges
• L&W Internal
• Supplier Internal
Alignment to Shareholder Value
Financial
Drivers
Supplier
Stratification
Customer
Stratification
(Strategic)
Inventory &
Value-add
stratification
(A items)
Days Payables
Outstanding
(DPO)
Days Of
Inventory
(DOI)
Days Sales
Outstanding
(DSO)
GMROII
Resource
Utilization
Cost to Serve
Gross Margin
RONA
Net Margin
Market Share
Market
Penetration
Spend
Percentage
(Core)
Optimal
Channel
Value
Proposition
Optimizing Channel Compensation
5. Channel
Compensation
4. Channel
Relationship
3. Channel
Alignment
2. Channel
Value
1. Channel
Focus
Relationship – Key ingredients
Communication
Technology
Process
People
Top
management
commitment
Balanced Scorecard
Financial
Sell
Support
Services
Customer
Vision and
Strategy
Value Proposition &
Customer Service
Internal
Business
Processes
Source
Stock
Store &
Ship
Supply
Chain
Planning
Learning &
Growth
Enable
Implement
People, Process,
Technology &
Metrics
Source: Adapted from Kaplan and
Norton’s Balanced Scorecard
Optimizing Channel Compensation
5. Channel
Compensation
4. Channel
Relationship
3. Channel
Alignment
2. Channel
Value
1. Channel
Focus
Compensation Drivers
Purchase-side
Sell-side
Joint Activities
Spend volume / $
Sales volume / $
Product lifecycle management
Product mix
Product mix
Advertising (co-op and promotion)
Time-bound promotions
Customer mix
Business development activities
Payment terms
Market segment mix
Exclusivity
Freight policies
Time-bound promotions
Training & Development
Inventory holding
Situation-specific special pricing (SPA)
Field support / joint-sales calls
Compensation Mechanisms
Rebate
Chargeback
Bid pricing
Ship-and-debit
Earned income
Sheltered income
Special pricing authorizations (SPA)
Effect of compensation on ROI
(Example – New Product Development)
with distribution as channel
partners
without distributors in the
process
 Return on Investment (ROI)
 Return on Investment (ROI)
(Revenue – COGS –
Distributor compensation –
Operating expenses)
-------------------------------------------(Net Assets)
(Revenue – COGS –
Direct expenses –
Operating expenses)
-------------------------------------------(Net Assets)
 Customer Service & Market
Reach
 Customer Service & Market
Reach
59
EXAMPLE
Channel compensation – Example
 Distributor’s value proposition
 Improve customer retention for a given supplier
 Distributor’s action plan
 Define retention metrics
 Measured the base line & set the targets
 Through focused sales effort, improved retention
Core Customer Retention Metrics
Retention
Year 2
Year 3
Year 4
50%
53%
55%
39%
35%
33%
11%
12%
12%
Internal Defection
External Defection
Year 1
OPPORTUNISTIC
CORE
63
323
MARGINAL
SERVICE DRAIN
3256
756
Customer conversion through focused sales effort
Year 1
OPPORTUNISTIC
CORE
63
323
MARGINAL
SERVICE DRAIN
Opportunistic to
Core
3256
756
6%
Year 2
Core
1%
Marginal
to Core
7%
Service Drain
to Core
Channel compensation – Example
 Channel compensation from supplier
 Changed distribution strategy from ‘intensive’ to ‘selective’
model
 Better payment terms
EXAMPLE
Generating Growth Framework
1
2
5
Growth Strategy
Growth Drivers
Metrics
3
Best Practices
4
Growth Mechanism
PRODUCT LIFE CYCLE
EXAMPLE
Quantifying Value (Supplier Performance) – Real World Example
 Distributor Profile
 Industry – Automotive components to dealers
 Revenue – $ 400 MM +
 # Locations – 17
 # SKUs – 2,500 +
 # Suppliers – 16
 Best Practice
 Quantify value addition in channel
 Determine % of additional safety stock due to supplier lead
time variation beyond agreed variation
Linking to shareholder value
Basic Input
Parameters
Additional
Revenue
EBITDA
Lead Time
LT Var.
Safety
Stock
Expected
Turns
P&L and
Bal. Sheet
% of reinvestment
RONA
GMROII
Turns
YES
Average
Inventory
Re-invest ?
NO
Results
Vendor
Number
50160
50055
50665
56755
61235
50805
136630
50125
61445
57340
63420
50105
50255
197650
59740
63675
International /
Domestic
Domestic
International
Domestic
International
International
Domestic
International
International
Domestic
Domestic
International
Domestic
Domestic
International
International
Domestic
Grand Total
Agreed Safety
Stock $
3,006,102
2,326,274
1,207,422
470,496
489,696
267,983
196,276
472,071
177,098
72,992
35,282
12,276
22,775
5,635
7,558
1,716
$ 8,771,650
Actual Safety Additional Safety
Stock $
Stock $
4,741,632
1,735,530
3,340,528
1,014,254
2,182,698
975,276
780,698
310,202
759,351
269,656
472,485
204,502
327,361
131,085
585,232
113,162
214,369
37,271
99,067
26,076
55,702
20,419
30,330
18,054
34,130
11,355
13,064
7,429
10,820
3,262
1,854
138
$ 13,649,321
$ 4,877,671
36%
Channel Compensation Benefits
 Channel Compensation
 COGS adjustment to compensate additional carrying cost
 Quantified performance information for annual negotiation –
leading to
 improved delivery performance hence customer service
 working capital
 Additional safety stock reduced to 13% in the following
quarter
Optimizing Channel Compensation
5. Channel
Compensation
4. Channel
Relationship
3. Channel
Alignment
2. Channel
Value
1. Channel
Focus
Questions and Discussion