The Paper Trail Continues

Electrical distributors buy hard goods in bulk, break them into smaller quantities and add credit and customer service to generate value and profits. That's the way it's always been done. Many did not realize that they should invest in paper, too, because along with performing the core tasks of a wholesaler, they have distributed bales of paper, envelopes and postage stamps.

Smart distributors realized they needed to improve profitability and become more efficient. They invested in enterprise resource planning (ERP) software systems to track inventory, process orders and generate invoices. Although some companies achieved significant efficiencies, many electrical distributors inadvertently became further vested in the paper business because of all the paper invoices their ERP systems create. So much for the paperless society! Many customers of electrical distributors now want to migrate from the paper age, and they are looking for distributors to help.

Electrical distributors first entered the paper business to get an invoice into a customer's hands the day the product left the store. They told themselves, “If I invoice earlier, maybe I'll get paid earlier.” Distributors ordered pallets of preprinted forms and lots of ink toner. Some heeded legal advice to send duplicate copies of all invoices with monthly statements — doubling the investment in paper and increasing labor costs. Some send statements and invoices twice a month.

Some distributors have become more “efficient” by cutting back on the number of invoices mailed. According to a survey of electrical distributors by Allen Ray Associates, Arlington, Texas, and Channel Marketing Group, Raleigh, N.C., 47.2 percent of distributors fax some invoices, and 36.1 percent e-mail invoices to some customers. The survey revealed distributors use multiple dissemination processes, confirming that distributors need different systems for different customers.

Recent contractor research conducted by Allen Ray Associates revealed that electrical contractors and distributors are awakening to the amount of paper (invoices, submittals, statements, faxes, printed e-mails, etc.) generated and are seeking ways to reduce and streamline their businesses, adding dollars to the bottom line for both parties.

To provide a frame of reference, consider the paper trail of a $6 million electrical contractor that annually purchases between $1.5 million and $2 million in electrical products. A contractor of this size typically receives between 100 and 500 invoices (or variations of same) per month from distributors. This paper trail excludes bid quotes, product submittals, faxes, e-mails, proof of deliveries and other daily transactions.

Most of these contractors buy from between five and eight distributors and receive 60-plus invoices per distributor each month (depending upon volume and frequency of purchases). Even for a contractor of this size, the paper trail grows very quickly. These figures assume a 100 percent fill rate and no errors. The numbers get worse when factoring in data errors and the multiple callbacks or e-mails necessary to correct them. It's no wonder contractors and distributors are drowning in paper and that the average cost of servicing an account is high.

Over the past few years, more electrical contractors and distributors have partnered to establish contract pricing for commodity product groups or for a defined list of products. They hoped this would reduce paper, negotiating time and the amount of effort both parties spent managing errors. Distributors also hoped this new efficiency would increase orders. But wrong item shipments, wrong quantities, incorrect pricing and other errors continue to plague these relationships, albeit less frequently.

Leading distributors are offering contractors some e-connectivity alternatives. Some have password-protected areas in their Web sites where customers can pull down their invoices, packing and delivery slips, proof of deliveries and more. Although Web sites with protected, customer-specific data are a good first response, progressive contractors are requesting additional alternatives. At the top of their lists is the ability to receive electronic files that can link up or be imported into their accounting packages.

Bid Prices vs. Day-To-Day Prices

Our research showed that many contractors have adopted processes to manage and pay a significant number of invoices by using specific job/project pricing or contracted pricing for a defined time period. In some instances, these contractors have developed a trusting relationship with some of their distributors to enable them to manage their payables based on a predetermined tolerance level, or exception basis. This allows them to focus on major problems and streamline operations, generating increased employee productivity. For some contractors, the natural next step is to pay electronically using e-checks or, in rare instances, wire transfers. (For a complete overview of the research our companies did on contractor connectivity, refer to the Electrical Wholesaling article, “Paper Trail,” October 2006, page 26; or type “paper trail” into the search engine at www.ewweb.com.)

Don't Ask and Won't-Tell Philosophy

Surveying distributors about their electronic connectivity status proved to be a challenge. Many didn't want to tell anyone they do not provide contractors any e-invoicing service, and some didn't understand the topic or questions. Other distributors fully understood the topic but didn't want to share their successes. Perhaps most telling was the statement, “I don't see my customers asking me for this. Why should I make the investment?”

The responses we did receive came from across the United States and represented every range of sales volume. Responses from commercially oriented electrical distributors were most prevalent. Distributors were asked to comment on the challenges they had managing receivables and the state of their e-business relationships with customers. In considering their receivables status, as expected, distributors said their customers pay them based upon a need to free up credit or based upon a relationship they have with a certain salesperson at the distributorship.

Of those respondents who provided information on their receivables, 18.9 percent had receivables less than 41 days old, and 24.3 percent of distributors reported daily sales outstanding (DSO) of 41 to 45 days. Approximately 32.4 percent had receivables more than 57 days old. Interestingly, when asked why they were not paid as fast as some competitors, the answer was, “I don't know.” Unless these electrical distributors are receiving finance fees from late-paying accounts, they have a profit drain with receivables on the books for more than two months.

Respondents offering some type of electronic connectivity (including invoicing) admit that some of their contractor customers are more aware (read loyal), so the distributors were more willing to implement e-connectivity with those customers. One distributor said, “In some cases, our weekly ‘collection calls’ and threats to cut off deliveries are now met with early payment and more realistic care of their account. We are finding that our customer is bringing us into the design phase and is giving us a chance to order special-ordered items early without the rush-rush time constraints. The quality of the business relationship has matured to the point of mutual respect and problem solving, instead of always asking us for a lower price. The key for this relationship was that we examined their need for us being able to import seamlessly into their accounting package every night.”

For some distributors and their customers, a trust factor develops over time. This trust factor allows the distributor and the contractor to relax traditional barriers to a point where they can explore mutual opportunities to create electronic efficiencies. In addition to creating these efficiencies, distributors who are integrated with their customers reported revenue with “connected” contractors has increased. This results in more through-put and greater profitability.

E-connectivity also makes it easier for a distributor to review a customer's usage data, which helps reduce stock outs and the number of wrong items shipped. One respondent said his company now receives quarterly product forecasts from a few customers, and that he is passing this information upstream to selected manufacturers.

Another advantage of a bilateral electronic relationship is that many commercial issues can be addressed prior to connecting the companies. Because both companies benefit from the connection and have the same goal, they are more willing to address traditional operational challenges such as:

• Pricing for certain items and setting parameters for price changes.
• Defining the parameters for when and how product substitutions are acceptable.
• Proof of delivery.
• Agreement on payment terms.
• Electronic payment terms and penalties.
• Return goods policies for stock and project needs.
• Storeroom policy.
• Percent of stock-out allowed and charge-back penalties to the distributor.
• Backup of electronic documents.
• Product specification submittal and approval processes.
• Bid priority.
• Quoted project price assurance.

In researching e-invoicing, we found multiple definitions. For distributors, e-invoicing can range from providing Excel spreadsheet files to EDI, and from downloading invoices from their Web sites to providing ASCII files. In fact, the four most prominent distributor offerings, each offered by more than 43 percent of respondents, are:

• EDI.
• Excel file formatted for the customer.
• Ability to download and print files from Web site.
• ASCII, flat file or text format.

Distributors offering these services find that no “one size fits all” and that they must offer a variety of options. The chart above shows the percentage of customers utilizing each service. Notice the percentage of contractors downloading files in the Adobe PDF (portable document format) or electronic formats. National chains offer e-invoicing capabilities more frequently than do independent distributors. WESCO Distribution Inc., Pittsburgh, and Graybar Electric Co., St. Louis, were most frequently mentioned as distributors with e-invoicing capabilities.

However, electrical contractors define e-invoicing as being able to receive (via push or download) an electronic file that effortlessly integrates into their accounting packages (which in many instances is QuickBooks.) This is where the disconnect frequently occurs. Most distributors said they already do electronic invoicing, but they define it as either scanning an invoice into an Adobe PDF and e-mailing it as an attachment via Microsoft Outlook so the contractor can save and store it outside of their accounting package, or converting a contractor's ERP file output to an Excel file or PDF. These distributors then post it to their Web sites and provide the contractors with user names and passwords. The problem is that while contractors can print or save the file, they cannot import it into their accounting packages.

Seamless integration into the contractor's accounting system is where traction takes place. This connectivity is the key to reducing the paper flow and building operational trust with electrical contractors. To safeguard the system and eliminate system errors when providing this electronic access, it makes the most sense to use a common importable file format where content cannot be changed. This means neither party can question the integrity of the data as it moves from system to system (human entry creates the opportunity for errors) Only what was invoiced, charged and delivered is disputable.

Once inside their accounting packages, contractors can still dispute items, but they can also match them electronically against purchase orders and then decide how much to pay and when to pay. If the contractor runs a “tolerance” test on a sample of items to ascertain invoice accuracy at the line-item level, they replace the most labor-intensive functions in their back office and eliminate many steps along the paper trail (and trips to Staples or Office Depot). Most accounting packages have a function called “audit trail” that shows who has done what to anything in the program and can provide the necessary checks and balances.

The survey and interviews revealed younger contractors have a much higher “electronic confidence factor” and utilize more of the capabilities of their software packages. Larger electrical contractors tend to exhibit this same level of confidence, which goes hand-in-hand with their higher levels of computer literacy and operational sophistication.

Conclusions

Although numerous industry initiatives have tried to drive cost out of the channel, not much attention has been paid to the customer side of the business. There was a lot of noise about it during the dot-com era, but the timing was wrong. Some industry observers may say the data and price synchronization engineered by the Industry Data Exchange Association (IDEA), Arlington, Va., must occur before distributors can digitize communications with customers. The problem with this philosophy is that progressive contractors are already seeking a different invoice delivery system.

It may seem like a simple task to ask your customer what you can offer in the way of electronic connectivity to reduce their operational costs and better serve them, but it appears many distributors do not recognize the opportunity, especially with their larger customers. Electronic connectivity isn't necessarily the right delivery vehicle for all customers because they all have different electronic capabilities. Indeed, it may be years before smaller electrical contractors are ready to conduct business electronically.

Electronic connectivity can be mutually beneficial. Contractors increase productivity and enjoy an easier method to store and review their purchasing history. Benefits to electrical distributors include a simpler invoice delivery system, the potential to get paid sooner, fewer collection hassles and bank charges and increased customer loyalty. In short, electronic connectivity can improve distributors' profitability while also helping to retain and grow their market share.

Allen Ray is principal of Allen Ray Associates, Arlington, Texas. His firm helps companies improve profitability with effective pricing strategies and streamlining business processes through effective eBusiness utilization. Ray can be reached by phone at (817) 704-0068 or by e-mail at [email protected].

David Gordon is a principal of Channel Marketing Group, Raleigh, N.C. Channel Marketing Group develops growth strategies for manufacturers and distributors. He can be reached by phone at (919) 488-8635 or by e-mail at [email protected]. You can register for his monthly newsletter at www.channelmkt.com.

Percentage of Distributors' Customers Receiving Electronic Invoices

  0% 1-10% 11-25% 26-50% 51-75% Excel file formatted for the customer 43% 40% 3% 0% 13% Download PDFs from Web site and print 50% 27% 10% 3% 10% ASCII, flat file, or text format 50% 30% 7% 3% 10% EDI 27% 67% 3% 3% 0% QuickBooks format 60% 30% 10% 0% 0% Ability to download file to integrate into system 63% 37% 0% 0% 0% Source: Survey by Allen Ray & Associates and Channel Marketing Group

Eight Tips for more Effective E-Invoicing

If you want to move to e-invoicing with customers, these pointers will help you develop your strategy.

1. When scheduling a meeting with a customer to discuss electronic connectivity, don't think of the visit as just another sales call. For the dialog to be most effective, it will require in-depth conversations on how you and the customer can use e-invoicing to run your businesses more efficiently and profitably.

2. Get your pricing in order. For an electronic connection to your customer to work best, you must be able to provide accurate pricing. If you use matrix pricing, it must match the price that you gave the customer. If you don't use matrix pricing, whatever you consider your cost must be correct before you engage in an e-relationship. Before considering an e-invoicing relationship, you must commit to reviewing your costs at least every six months.

3. Be selective. If you have had a history of credit issues with a customer, don't rush into an e-relationship. How you evaluate your customer may very well determine a relationship's success. If a customer does not realize certain costs exist to doing business and thinks of all dealings with distributors as transactional price-driven relationships, it's difficult to create the type of value-based relationship that works best with e-relationships.

4. Carefully evaluate the long-term potential business impact before committing to e-invoicing with an account. There must be a certain level of existing business to justify the time investment or significant potential to grow the business.

5. Be realistic on the impact e-invoicing will have on price levels. The main advantage of this technology is to lower operating costs, not to reduce prices for customers. If your customer's main motivating factor to move to e-invoicing is just to get lower prices, it's not going to work. Your company will not always offer the lowest price. If it does, you are probably too low and are missing profit opportunities.

6. Don't assume once the system is in place that it's on auto-pilot. Like anything with an important customer, you must periodically review the system to ensure customer satisfaction.

7. Don't let a salesperson covering an account step into the middle of a discussion on electronic connectivity without understanding all of the business ramifications. If your salesperson is threatened by technology, consider other alternatives.

8. Once you have built several successful e-relationships, use this base of knowledge to offer e-invoicing options to other customers. The more customers that move to e-invoicing and other electronic means, the lower your accounting and office supply costs.