It is increasingly important for distributors to add value and differentiate themselves from the competition. Peter Neuberger, CEO of United Performance Metals, shared with DSG how to be intentional and disciplined about the value-added services you provide to optimize the benefit they have for your business.
Neuberger has a long resume of senior executive roles. His path into the distribution world started after he got out of graduate school and went to work for Norton Abrasives, where he was the director of marketing and distribution. From there he started Strategic Distribution, Inc. and launched into integrated supply. Then he worked inbuilding products and distribution, and he grew that company to be a large regional distributor of interior finished products. Following that he joined Industrial Distribution Group (IDG), took on the leadership role for their integrated supply business, and then became president of G&L Tube before assuming the role of CEO at UPM, a metal service center specializing in nickel alloys, cobalt alloys, titanium and stainless.
Distribution Strategy Group: You’ve been in a lot of high value-added distribution companies for a long time. B2B now has more opportunity to add value to customer relationships. Even customer segmentation has become more complex. You have to segment establishments and then the people within them and that creates a complex set of varying customer needs. How do you think about this sort of dilemma of disruption?
Neuberger: I agree with your fundamental premise. In the early 90s, I gave a speech to 800 distributors about how distribution was going to change radically. I was right, but I was 40 years too soon.
One of the things I did back then was train our distribution network on how to do activity-based cost analysis so that they could specifically look at the cost of serving different customers.
I also looked at the channel the same way, as a series of activities that each had cost and value, and tried to define a channel that said, “Well, who’s the most efficient provider of this step and how much can you afford to pay them to do that?” As a manufacturer, I looked at the margin my distributors earned as my payment to them for services provided. As distributors, we have the opportunity to do that at both ends, both with the customer and with the supplier, and determine what’s adding value. Ultimately that determines the economics of our business.
If your expertise is delivering packages, are you going to be better at that than UPS and FedEx? Probably not as you’re not going to have the scale. You have to find the things that are not susceptible to the efficiencies of the marketplace, and that’s where you can stake your ground and have a protected position.
DSG: What are your customer relationships like and what are the services you’re typically offering customers?
Neuberger: The customer relationships that we have are largely businesses on contract, and half of the transactional business is pseudo contracts. It’s repetitive orders with the same customers at agreed-upon pricing levels. Only about a quarter of our business is purely transactional, and that’s fundamentally based on the fact that we are providing services, as only about 15% of the metal we sell comes in and goes out in the same form. We’re either cutting along product to length, cutting sheet, sledding coil or cutting rough parts.
We have a service called first-step processing where we cut the rough shape of the product for the customer, moving one step further down their assembly line. That’s been a key to the fact that our margins typically run twice what the industry average for a steel service center runs at, because we’re providing more value, bringing that product further into the customer production stream. At the same time, it makes us very difficult to dislodge.
We focus on identifying what it is the customer does when they first get the metal and we look and see if we can do that more cost-effectively than they can. We have very high-level relationships, so when we put a program in place for a large aerospace engine manufacturer, for example, we’re talking at corporate vice president levels and not to a purchasing agent and a plant manager.
Fundamentally, we usually see purchasing trying to beat you down on price, and production to squeeze more value-added services out of you. Our approach has been to get to a higher level in the organization where we can discuss the total cost of ownership and have them settle that for us. Once they define the value-added services, we’re happy to be competitive with price. What we want to avoid is getting stuck in a purchasing agent debate about cost versus value.
DSG: Within the O’Neal Industries family, is UPM at the more value-added end of the spectrum?
Neuberger: O’Neal manufacturing is a pure contract manufacturing play. We are the most value-added distributor. O’Neal steel has grown faster than the market. They’ve used an ecommerce vehicle to dramatically accelerate their growth of commodity products. Whereas we have focused more on the value-added services for specific industries.
DSG: Do you see other sectors in your long experience with distribution where the value-added approach would be valuable?
Neuberger: I think I’ve seen it in every place I’ve been. They’re not going to be exactly analogous, but the two integrated supply companies I grew were not grown by calling on the MRO buyer. It was by calling on the CFO, and by showing them how you could bundle together. In the indirect material world, the big challenge for customers was that all their costs were part of separate little buckets. The real challenge was getting high enough in the organization that you could say,“ I can affect your costs in five different buckets.” It’s not just the part of the cutting tool. It’s the labor in the tool, it’s the recycling, it’s the energy, it’s the inventory. Any company needs to be very intentional about how they go about creating value-add.
In my experience, most of the companies I run into say, “Well, why are you doing that?” They reply, “Well, a customer asked us to,” or “We had to keep a customer happy. ”It was more reactive. I think you need to be aware and decide, what problem are you going to solve for your customer in the case of your food products? Is mixing an issue? Are there efficiency gains by doing that? If there are, great, if there’s not, then just because you can do it doesn’t mean it adds value.
You’ll see customers that will overpay for things in the short-term or underpay, but in the long run, you can only capture the value you create. We so often hear about eliminating the middleman and adding value to the customer, but we’re there because we add value and being in the middle means that we can add value either to our suppliers or to our customers, otherwise our suppliers would just sell directly to our customers. And that gives us some great advantages. Most vendors and customers are also between other steps in the channel. When you think about value creation, think about the entire supply chain for your product.
DSG: Could you take us through your process of how to derive what the value-added services might be?
Neuberger: While the specific value-added services that my company provides today aren’t really relevant to most people, the process of how we got to where we are might be:
We believe in relationship selling at high levels. We will often have a relationship with an account for two or three years before we start doing significant business with them. During that time, we’re just trying to understand what the customer’s pain points are. Once we understand those pain points, we start to identify, which ones do we think we can help them solve?
We do a model analysis to determine if we can do it for less than what they can. And then we’ll meet with the customer and say, “Hey, here’s how much you’re spending on this. We think we can do it for 40% less than that for you. Would that be valuable for you if we could do that?”
Then we identify the hurdles to implementing that step. Often for us, we’re going into the plant and seeing what they’re doing with the metal. While we can’t do everything, we can do a lot of things. We’ll say, “Instead of selling you bar to the ASTs, what if we precision grind it before we deliver to you? We see you take every bar we sell you and precision grind it before you feed it into your machines.”
We’re trying to move further into the assembly line. That’s where we add more value and where we get that stickiness. That’s where the value add we can get paid for resides.
- Identify the problem you are solving and who you are solving it for.
- Determine which problems you can solve more efficiently than the channel participant you are solving it for.
- Determine what impact you are driving for your company.
- Get buy-in from your customer about their current total cost before you deliver the solution, then measure the benefit you are delivering and report it back consistently.
DSG: How do you calculate the customer’s fully-loaded cost of doing something when they don’t have the data or are not willing to share it with you?
Neuberger: It’s extremely difficult if they don’t have it or have it and are unwilling to share it. That’s where the relationship sales piece comes in. You have to build trust to get the data. You have to have a very well thought-out plan to know what questions to ask whom in the organization to build those cost models. And you have to be willing to invest in the data collection. If your business strategy is to grow with big accounts, you’ve got to be willing to invest the money. And most of our competitors wouldn’t, and that gave us a huge advantage.
DSG: When you think about the impact that a distributor is driving for a customer, what are some of the categories of benefit or impact you’ve come across?
Neuberger: A key part of that relationship building upfront is understanding what the customer’s internal metrics are. If a customer is balance sheet-focused, look at return on capital. You can certainly reduce inventory and reduce their working capital. If a company is a PE-owned company and they’re focused on EBITDA, you’re going to try and drive cost reductions or margin enhancement for the customer at that end, and they’re not going to be as concerned with the balance sheet. It all comes down to the customer’s internal metrics. “What’s most important to you, Mr. Customer?” That’s the thing we’ll attack.