Eye on the future

Duncan Equipment Company discovered that distributors can make the transition to charging fees for services.

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It’s difficult to develop a vision for the future when you’re running at full speed to keep up with day-to-day needs of a business. But that’s exactly what Duncan Equipment Co., headquartered in Oklahoma City, is determined to do. This $60 million industrial distributor has begun a strategic planning process to develop a vision and a strategy for propelling the company into its next phase.

Still in the early stages of developing its long-term strategic vision, the company already knows that, in the future, a larger portion of its revenues will derive from service fees, not just from margin on product sales. It also realizes that such a change won’t come quickly or easily.

Duncan president David Ragland says that the business evolved from a single location supplier of industrial products and equipment in a narrow customer base into a multi-location regional distributor serving a diversified customer following.

Historically, like most distributors, Duncan classified its offerings by product. Over the years, however, it began to provide a growing list of “soft” services to customers such as information technology, financial services and managed inventory solutions.

“We have so many things in the works that the customer has brought to us, we need to organize those so we can successfully respond to them, rather than respond in a crisis mode,” says Ragland.

Without a focused approach, as customers demand more services, Duncan’s cost to provide those services could spiral out of control.

“In order to do more for more customers, we must find ways of controlling our costs. Charging for services will be part of that,” says sales manager Del Craig.

In simple terms, Duncan’s transition to a fee-based approach is three-pronged. First, identify the services customers value. Second, invent new services it could begin to offer. Finally, devise a long-range plan to begin to generate revenue for providing those services.

Identify services customers value
The first step was to identify services Duncan already offers customers. Rather than simply come up with a laundry list of services available to everyone, Duncan offers a menu of choices from which customers can choose.

As distributors are painfully aware, there’s not enough margin in some products to service a particular manufacturer’s products. Distributors must provide those services at a loss or risk losing the business. Duncan listens to customers to determine exactly what they require in order to avoid giving away services customers may not value.

“We attempt to make sure the customer knows the value-add that we provide,” says John Smith, vice president of financial services and integration operations. “Originally, we just came in and said, ‘We’re going to provide everything for you,’ and the customer came to expect it. Now, we ask, ‘What do you place a value on and what are you willing to pay for, not necessarily in a separate fee, but in additional markup for that service?’” 

Once you understand what the customer values, then you can begin to build lasting customer relationships.

Such a relationship exists between Duncan and the clutch division plant of Eaton Corporation in Oklahoma City. In addition to selling MRO items, office supplies and virtually every non-production supply consumed in the plant, Duncan manages Eaton’s tooling inventory, chemicals and lubrication products and even provides service and training for air tools.

“Duncan manages everything that comes in this building that’s not production related,” says Gerald Culp, plant manager. “It enabled us to reallocate one person in the office, plus I didn’t have to bring in anyone to manage the tool crib.”

Culp views Duncan not just as a supplier, but as a valued partner that helps him control his indirect costs.

When Duncan’s Brad Darby noticed that tool repairs were becoming more common, he suspected that Eaton employees were handling the tools improperly. So, he brought in a supplier rep to train Eaton production workers in proper tool handling techniques.

In another incident, onsite manager Karla Masilon checked inventory usage reports and realized that tooling costs were rising.

“She came to me one day and said, ‘You’ve got all of these new operators in here and I’ve noticed your tooling costs are going up. I’m not sure they’ve had the proper training.’  Not many suppliers will tell you your baby’s ugly. But she did,” Culp says.

Invent new services
The second step in Duncan’s process was to identify new services to offer customers. Some involved putting a new spin on a familiar service, such as preventive maintenance (PM). For example, instead of paying for parts and labor for repairs, customers now have the option to sign a PM contract and pay a monthly, quarterly or annual fee.

Another example of a new service is an air system audit. It includes a visual inspection of a customer’s air compressor system, hooking monitors to the system to measure air flow, pressure fluctuations and power consumption. Air audits also include searching for leaks throughout the compressed air system. When the audit is complete, Duncan provides a report demonstrating how the customer can achieve energy savings.

“It’s easier to charge for a new service than to charge for services you’ve traditionally given away for free,” says Randy Davis, air systems, pump equipment and services manager.

Davis hopes to take the service offering to the next level by leasing equipment and offering fee-based maintenance contracts to keep it running. Instead of owning compressors, customers will pay Duncan Equipment a flat fee to lease compressors in their plant.

“Companies don’t want to own air compressors and air systems,” Davis says. “What they want is the compressed air off of the system. We’re trying different ways to provide the customer what they’re looking for.”

In some cases, new service offerings took Duncan into areas it never expected to go. Duncan ExChange is an example.

In partnership with the Business and Industry Training Services program of the Oklahoma Department of Career and Technology Education, Duncan ExChange provides training in a number of areas. In addition to product training, the fee-based training includes courses in Windows, Excel, Word and PowerPoint.

How did an industrial distributor get involved in computer training?  To arm employees with the software skills they needed to perform their jobs, the company’s resource development group began offering classes in various software programs. Because the classes were so successful, and because the group recognized that customers needed similar training, it eventually evolved into an external training program.

Start generating revenue from service offerings
It’s difficult to attach a price to something you’ve traditionally offered free.

“Whether we go to customer segmentation and capture more margin on certain customers, or whether we implement fees as we move forward, is a big variable at this point,” says Davis. “In some cases, we’ll never be able to charge fees for certain services with existing customers.” 

Done properly, however, you can slowly begin to peel away individual services and get the customer to recognize their value.

Consigned inventory is an example. In integrated supply accounts, it’s common for Duncan to take over ownership of a customer’s inventory and eventually sell it back when needed. Sometimes, however, it might take months or even years to move the inventory. Duncan recently started charging a fee to customers for holding non-turning inventory.

“We’re moving to the point where we can get customers to agree that if we don’t turn an item in a particular period of time, they’ll pay us a fee to carry that inventory,” says Smith.

Duncan also recently began generating revenue from another tried-and-true service offering: delivery services. For a customer that transports products between two locations in Texas, Duncan put together a package to utilize Duncan’s truck and driver for a fee.

“What we’re trying to do is get them to look at an overall value of delivery services, not from the standpoint of getting it from point A to point B, but doing it in a package which reduces their overall costs,” Smith says.

Getting customers to pay for traditionally free services requires flexibility. For instance, two core services most distributors provide in managed inventory agreements are onsite inventory and customer inventory control software. Smith says customers differ over the value they place on those services, which requires Duncan to be flexible in how it prices the services. Some customers may be willing to pay for one but not the other.

“In one case, one customer agreed to pay a fee for the software, but we had to build into our overall margin the fee for the onsite inventory. You can’t do a flat, across-the-board fee for every single customer,” he says.

Step by step
Duncan recognizes that change occurs slowly. Everyone within the supply chain, from suppliers, to distributors to customers, must understand the role that each channel member fills and their unique value. It may require looking at the channel in a new way.

Distributor salespeople must change the way they approach customers and must broaden their audience. For example, they’ll continue to talk to a maintenance supervisor about specific products and applications, but they also must learn to talk to plant managers and front-office executives about reducing total cost using preventive maintenance packages, system audits and other services.

“We may have to work with a human resources person or someone in charge of training if we’re going to sell Duncan ExChange. It’s putting a different hat on and approaching a different customer,” says Clint Pitzer, vice president, information technology.

In some cases, customers aren’t the only ones reticent to change. Suppliers also have difficulty adapting to a new way of doing business. Duncan recently had an opportunity to bid on a new compressor for a long-time customer. It was a facility where Duncan service technicians routinely performed maintenance and upkeep.

But the facility required a larger compressor than Duncan was authorized by the manufacturer to sell. So, the compressor manufacturer sold the compressor to the customer direct. By doing so, Davis says the manufacturer missed out on margin opportunities by not proposing a total package that included the compressor and related system products, a rental compressor, plus a full maintenance and service agreement.

“This was a case where the manufacturer didn’t leverage our relationship with the customer, and didn’t see the value of what we do” Davis says. “As a result, they left a lot of money on the table.”

Davis believes that if you provide services and value, you deserve to reap the rewards.

“We don’t think the manufacturer did that. It’s disheartening to see the total project wasn’t leveraged to its fullest,” he says.

Manufacturers that start looking at the total solution and the ultimate goal of satisfying the customer will be the eventual winners, he adds. For that to happen, suppliers need to focus more on offering total solutions to end-users and less on products.

The final step in transitioning to a fee-based service model is to closely monitor the strengths and weaknesses of the competition. It may be difficult, if not impossible, to charge for services when competitors — with manufacturer support — continue to give them away.

When virtually every major carbide tooling manufacturer gives away services such as plant surveys and guarantee 20 percent cost savings to customers who agree to switch to their brand, distributors will have a hard time charging for those services. That kind of drastic change requires buy-in from manufacturers.

“The problem is, one manufacturer can’t charge for it when you have six others who will come in and do it for free,” says Craig. “We contend that there is a benefit to charging for those services, but it’s hard to do so without some support from the manufacturers. It’s a little bit of a Catch-22 situation.”

This article originally appeared in the May/June 2002 issue of Progressive Distributor. Copyright 2002.

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