How to Manage Big, Powerful Clients Profitably

by Professor Malcolm McDonald Emeritus Professor, Cranfield School of Management 27th October 2009

Agenda

Challenges Their expectations and demands

Why price is important to clients The impact of price on profits How powerful clients classify their suppliers The expectations and demands of powerful clients

How to respond as a supplier

How world-class suppliers classify powerful clients How to develop profitable strategies for powerful clients

Challenges

Market Maturity
Globalisation Customer/Client power

Challenges

Market maturity

Technology Production Sales Accountancy Fads Marketing

Professor Malcolm McDonald

Challenges

Globalisation

New global leaders

Leaders ? 2nd tier Guerrillas Embrionic markets Growing markets New guerrillas

Mature markets

Challenges

Client power

Double your money: cut spend on purchases

Other costs (44%)

Purchases
(50%) Profit (6%)

Other costs (44%)

Purchases (44%) Profit (11%)

Purchasing: adding value to your purchasing through effective supply management Institute of Directors, September 2003

Client power

Big clients are getting bigger

clients are rationalising their supplier base clients have become more sophisticated clients want tailor-made solutions The cost of serving clients is increasing

Suppliers and clients are developing new ways of working together

Increasing client concentration...

Sales to the top 5 clients as a % of total supplier sales over 25 years.
76 64 % of total supplier sales
24 16 14 18

44
39

Biscuit Manufacturer
From: Profitable Customers, Charles Wilson

Board/ Packaging

Speciality Adhesives

Metal Bearings

t-25

t.o

Client power

Big clients are getting bigger

clients are rationalising their supplier base clients have become more sophisticated clients want tailor-made solutions The cost of serving clients is increasing

Suppliers and clients are developing new ways of working together

Increasing costs of interfacing with clients

Costs of the frontline (Sales, service, trade promotions etc. over 15 years
140

Interface costs '000 per client (adj. for inflation)

60

15

t-15

t.0

t.-15

t.0

Top 10% of clients

Supplier to the print industry (turnover 200M)

Bottom 10% of clients

Source: Profitable clients, by Charles Wilson

What is a Key Client?

Percentage of our business

Turnover

Added Value
Potential

Desirable factors in suppliers

Criteria for partnership
Ease of doing business Quality (product) Quality (people factors) Volume related Added value/value for money Company culture

% of respondents
100 100 100 64 64 36

From Key Account Management Cranfield University School of Management, 1996

Suppliers are still interested principally in volume Whilst they are interested in the potential for added value, most still do not measure account profitability

From Key Account Management Cranfield University School of Management, 1996

The widening rift between profitable and unprofitable clients:

% of company profit by client decile (each decile = 10% of client base)
% of total company profits
17 16 15 22 13 12 10 20 26

t-15

% of total company profits

29

t.o

7 6 4

1 -3
1 2 Largest 10% of clients 3 4 5 6 7 8 9 10 Smallest 10% of clients 1 2 Largest 10% of clients 3 4 5 6 7 8

-3

-3

9 10 Smallest 10% of clients

client decile groups

client decile groups

Adapted from: Profitable clients by Charles Wilson

LOVE

HATE

High

Sales Potential

Low

How well do you know the real profitability of the top ten accounts?
38

32

27

23 22 21 20 19 19 19 19 18 16 15 13 12 11 10 9 8 6 5 4 3 2 1 1 1 6 6 6 6 6 5 4 3 6 9 10 10 13 15

2001 2002 2003 2004 2005

1
Not at all

9
Totally

Creating closer relationships with supply chain partners

D I R Marketing E C Operations T O Information R Systems S D I Marketing R E Operations C T Information O Systems R S

From

Sales

Purchasing

Supplier

client

Creating closer relationships with supply chain partners

Directors selling company

To

Directors buying company

Marketing Marketing Operations Operations

Key-Account Co-ordination
Supplier

Information Systems

Information Systems

Supplier Development
client

Strategic Purchasing
SUPPLIER PREFERENCE A T T R A C T I V E N E S S

Development
Nurture Client Expand Business Seek New Opportunities

Core
Cosset Client Defend Vigorously High Level of Service High Responsiveness

Nuisance
Give Low Attention Lose Without Pain

Exploitable
Drive Premium Price Seek Short Term Adv. Risk Losing client

VALUE OF BUSINESS
Source: PMMS Consulting Group

Supplier Relationships as a Source of Business Advantage

Type Type
10

Business Contribution Criteria

First mover advantage Channels to market Reverse revenue generation
Point-to-point solution Technology access Operational advantage Cost improvement Superior service levels Ease of transaction

Business Process Criteria

VP lead Business strategy driven A team on both sides Relationship manager Strategy from CatMan SLA scorecard Managed locally Performance monitored E-enabled

10 < 1% of suppliers
20 600 c. 20% of all suppliers 1, 350 3,000 c. 80% of all suppliers

Strategic Suppliers

Preferred Suppliers

Commodity Suppliers

Must Have Criteria Drive Hard and Soft Measures

1. Vision Sharing of long-term vision and orientation. Global focus and commitment with service & support capability. Defined but yet flexible boundaries. Similar or complementary values. Understanding of the process to deal with differences. Flexibility in approach since circumstances may change over time. An exit route needs to exist. Maximum economic and strategic leverage, i.e. product / market differentiation. Attainment of time to market, quality & productivity objectives. Shareholder value creation. Blending core competencies, leadership capabilities & complementary strengths (allowing outsourcing of non-core capability). Adding real productivity & value (significant cost savings & revenue potential). Globally focused, linkages to new business opportunities & capable of complementing the business focus. Attainment of high performance, low cost & strategic objectives (producing unique design, integration & marketing capabilities). Readiness to share ideas & information. Not overly locked into a competitor.

2. Culture

3. Impact

4. Intimacy

5. Balance

An element of demonstrated commitment from both sides. Readiness for risk taking and sharing of costs. Building trust and, thereby, moving to intimacy.

Preliminary selection of key accounts

Key account preliminary categorisation

A
B C

Top 15 (in volume/revenue generated)

Next 30

Next 55

Preliminary Selection of Key Accounts

Supplier Business Strength with client High High Strategic Star

Large

Account Attractiveness Status Low Streamline

Medium

Small

The relational development model

Integrated Strategic intent of seller Basic Exploratory Interdependent

Cooperative

Strategic intent of buyer

Adapted from a model developed by Millman, A.F. and Wilson, K.J. From Key Account Selling to Key Account Management (1994)

Selling company

Buying company

Key Customer Contact

Admin

Board

Admin

Board

KA Mgr

Ops

Ops

Exploratory
Selling company
Directors
Purchasing Manager & Key Account Manager Inbound logistics & Order processing/ client service?

Basic
Buying company
Directors

Production

Production

Co-operative
Accounts

Accounts

Marketing Service

Marketing Service

Selling Company

Operations Focus team

Buying Company

R&D Focus team Key Acct Mgr

Finance Focus team Main contact

Environment Focus team

Market research Focus team

Interdependent

Integrated

Joint Board Meetings

Relationships and the client profitability trap

m
160 140 120 100 80 60 40

Sales Total costs Cost of sale Attributable overheads Contribution

20
0 -20

Integrated KAM

Selling company
Operations Focus Team R&D Focus Team

Buying company

Key Account Mgr Environment

Focus Team

Finance Focus Team

Buyer
Market Research Focus Team

Marketing Focus Team

Cranfield University School of Management 1996

Support Activities Infrastructure Human Resource Management Product & Technology Development Procurement

- Legal, Accounting, Financial Management - Personnel, Pay, Recruitment, Training, Manpower Planning, etc - Product and Process Design, Production Engineering, Market Testing, R&D, etc - Supplier Management, Funding, Subcontracting, Specification OUTBOUND LOGISTICS eg. Finishing Goods Order Handling Despatch Delivery Invoicing etc Primary Activities SALES & MARKETING eg. client mgmt Order Taking Promotion Sales Analysis Market Research etc SERVICING eg. Warranty Maintenance Education / Training Upgrade etc

INBOUND OPERATIONS LOGISTICS eg. eg. Quality Control Manufacturing Packaging Receiving Production Raw Material Control Control Quality Control etc Maintenance etc

Value Added - Cost = Profit

Many activities cross the boundaries - especially information based activities such as: Sales Forecasting, Capacity Planning, Resource Scheduling, Pricing, etc

The key client portfolio

Supplier business strength with client
High High Low

Strategic investment

Selective investment

Key account attractiveness

Pro-active Management maintenance for cash

Low

K.A. Attractiveness Factors Volume/value Growth/potential % Profit potential% soft factors

10-7

6-4

3-0

X weight 15 30 40 15 100

Key Account Selection Matrix Tool - KA Selection Matrix Chart Display Spend: Display Group:
High
Spend with Us National Show Groups Redraw

http://www.TheMarketingProcessCo.com

______________
clients on Chart
ID Name
1 2 3 4 5 6 7 8 9 10 11 12

X
Maximum Spend

2 7
Account Attractiveness

12

10

Alexander Smith $14,000,000 Ash & Williams $13,000,000 College Group $12,000,000 Supplementary F T Group $9,900,000 Harpers Service Elements $7,600,000 Parker $9,400,000 Quality Insurers $16,200,000 Randsome $14,500,000 Royal & Co $6,400,000 Thompson Group $32,000,000 Tudor Rose $8,000,000 Woods $11,500,000

5 1 3 6 8
Low High

11 9
Low

Relationship Stage
Exploratory

X
Integrated

Supplementary Service Elements

Basic Interdependent

Relative client Satisfaction

Co-operative

client: College Group Relative client Satisfaction: 0.80 Account Attractiveness: 4.40 Spend

Selecting and categorising clients by potential

Supplier business strength with client
High
High

Low

Selective Strategic investment investment

Strategic Star

Account attractiveness Pro-active Management maintenance for cash

Status Low Streamline

Key measurements in KAM evaluation

Profitability

KAM
Cost reduction

Growth

Page 37

Setting expectations of account performance

P P

KAM high

Supplier business strength with customer

G
High High Low

KAM high/ medium

G

Strategic customers Strategic investment Status customers Pro-active maintenance

Star customers Selective investment Streamline customers Manage for cash

Account attractiveness
KAM medium
P

KAM low

Low

C
Page 38

Category Strategic clients

Description

Status clients

Star clients

Streamline clients

Very important clients, but the relationship has developed still further, to the level of partnership. The relationship is win-win; both sides have recognised the benefits they gain from working together. clients buy not on price but on the added value derived fro being in partnership with the supplier. The range of contacts is very broad and joint plans for the future are in place. Products and services are developed side-by-side with the client. Because of their large size and the level of resource which they absorb, only a few clients fall into this category. Very important clients (in terms of value). Commit to security of supply and offer products and services which are tailored to the clients particular needs. Price is less important in the clients choice of supplier. Both parties have some goals in common. The two organisations have made some form of commitment to each other. Invest as necessary in these clients in order to continue the business relationship for mutual advantage, but do not over invest. Price is still a major factor in the decision to buy but security of supply is very important and so is service. Spend more time with some of these clients and aim to develop a deeper relationship with them in time. These clients usually want a standard product, off the shelf. Price is the key factor in their decision to buy. The relationship is helpful and professional, but transactional. Do not invest large amounts of time in the business relationship at this stage.

Integrated Strategic intent of seller Basic Exploratory Interdependent

Cooperative

Strategic intent of buyer

Adapted from a model developed by Millman, A.F. and Wilson, K.J. From Key Account Selling to Key Account Management (1994)

Key Client Analysis

Business Partnership Process

1 2 3 4 5 6 7 8 9
Market / segment selection criteria Defining and selecting target key accounts Industry driving forces analysis For each key account Clients objectives analysis Clients annual report summary and financial analysis Clients internal value chain analysis Clients buying process and information needs analysis
Strategic High Potential

The Applications Portfolio Analysis

Clients Basic CSF Analysis Process

Key Operational Support

Gaining Advantage

Avoiding Disadvantage

Our objectives, strategies and plan for T + 3

Our sales history with the client

Competitive analysis

The application portfolio

Strategic
Creating Advantage

High Potential
Applications which may be critical in achieving future business strategy

Applications which are critical to achieving future business strategy

Applications upon which the organisation currently depends for success

Avoiding Disadvantage

Applications which are valuable but not critical to success

Key Operational
Adapted from Professor Chris Edwards, Cranfield School of Management

Support

The market understanding process

Marketing

Sales

Mfg.

IT

Finance & Accounting

HR

Logistics

R&D Etc.

The Marketing Director

KA A

KA B
KA C KA D Etc.

Blake and Mouton

9

1/9 The clients friend

9/9 The problem solver

Concern for client

5/5 Compromise Method approach 1/1 The order taker 1 Concern for making the sale 9/1 The pressure salesman 9

Significant differences

Buying companies valued...

integrity Trust

Selling companies valued

Selling skills

Negotiating skills

Developing key account professionals

Commercial awareness Interpreting business performance

Advanced marketing techniques

Business planning/strategy Finance Project management Interpersonal skills

Some key findings from KAM research

Key account management is a strategic activity KAM is fashionable, but difficult KAM can develop beyond partnership to synergy

There are mismatches between suppliers and clients

KAM does reduce costs and improve quality but these are rarely measured

A key account manager needs far more skills than a sales person
KAM needs a client-focused organisation

Appendix
KA Planning Process

Key Account Planning Process

The output of the key account planning process ie. The contents of the KA Strategic plan Mission statement Financial summary

Diagnostic tools/ techniques Mission statements

Phase 1
Goal setting

Phase 2
Situation review (i) For the customer

Key Account Overview

Suppliers trading history Buying process Definition of business STEEP analysis summary Market structure summary

Market research Market segmentation Gap analysis Product life cycle analysis Diffusion of innovation Ansoff matrix STEEP analysis Market mapping

Key account opportunities/threats Key account strengths & weaknesses Issues to be addressed Key account assumptions Key account portfolio Summary Key account objectives & strategies Key Account Strategies

by product by market overall by product by market overall

Critical success factors analysis

SWOT analyses Porters value chain analysis

Key Account Competitor Analysis

Downside risk assessment

by product by market overall Product Price Promotion Place

Porter matrix BCG matrix Directional policy matrix Ansoff matrix

Phase 3
Strategy Formulation

Supplier objectives Supplier strategies

Directional policy matrix Response elacities The marketing mix

Phase 4
Resource Allocation

Resource Requirements/budgets

Forecasting Budgeting