NPTA Alliance White Paper
August 2004

Mid-Year Outlook With Accent on Distributor Financial Management Trends

The Management of Rising Product and Energy Costs; Best Practices in Financial Management

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Prepared for NPTA Alliance by Brent R. Grover, President, Evergreen Consulting, LLC

Introduction

In August 2004, NPTA Alliance distributor members were asked for their input on current financial management issues and their use of specific management tools in their businesses. They were asked to report how their company is managing two of the industry’s most critical current issues: rising product costs and dramatically higher energy costs. The survey also probed the industry’s best practices in the use of three popular distributor management tools: Activity-Based Costing (ABC), Customer Profitability Analysis (CPA) and Key Performance Indicators (KPI’s).

This NPTA Alliance White Paper gives you three critical insights:

• The business conditions distributors are experiencing now, and their expectations for the rest of the year;
• How distributors are managing the influx of product cost increases and the pressure of rising energy costs; and
• Best practices in the use of three popular distributor management tools.

NPTA Alliance continues its long tradition of identifying critical business information and bringing timely, actionable information to its distributor and supplier members.

Thanks go to the 120+ NPTA distributor members who entrusted us with their input and insights. The study includes 47 dual distributors, 34 printing paper distributors and 39 industrial paper, packaging and sanitary supplies distributors.

In terms of revenues:

• 32 of the participating companies have sales in excess of $500 million
• 26 have sales between $100 and $500 million
• 19 have sales between $50 and $100 million
• 29 have sales between $15 million and $50 million
• 14 have sales under $15 million

By job function:

• 41 of the respondents are CEO’s, presidents and/or owners
• 26 are senior managers in areas other than finance
• 23 are sales managers
• 16 are financial managers
• 14 manage other areas of their companies including operations, purchasing, human resources and marketing

Executive Summary

Product Cost Increases

Regardless of company size or product emphasis, over 90% of the NPTA distributors report success in passing along some or most of the recent product cost increases to their customers. Only 9% indicate that they have absorbed most of the increases.

Printing paper distributors report somewhat less customer resistance to price increases (59% indicate some resistance or a great deal of resistance), while industrial products distributors state that 77% of their customers offered resistance. Dual distributors report a combination of these results, as expected, due to their varied product mix.

Printing paper distributors appear to be more successful than industrial and dual distributors in passing along product cost increases to their customers. 34% of the printing paper distributors report loss of gross margin percentage, compared to 38% of dual distributors and 51% of industrial distributors.

See the sections on printing, industrial and dual distributors for specific data and analysis for each segment.

Energy Costs

Some NPTA distributors report success in passing along part of, or the entire, rising cost of energy through higher prices (36%), elevated freight charges (20%) or as a separate line item (8%). Some have used a combination of these tactics. 43% of the distributors in the study have chosen to simply absorb the jump in energy expenses as a cost of doing business.

Business Conditions

Printing paper distributors seem to be a fairly happy group at the moment. Only a few of the printing paper firms indicate that year-to-date business results aren’t favorable. At least some of this success can be attributed to pricing strength due to the allocation of some printing paper products.

Industrial products distributors are less pleased with their performance in the first seven months of 2004. Unlike printing paper, few of the industrial products (sanitary disposables, packaging supplies, food service disposables) are in short supply.

Dual distributor comments are mixed, reflecting their varied product emphasis.

The largest companies are doing well. Note that all 32 of the largest ($500 million+) companies in the survey are printing paper or dual distributors. The current success of the largest firms may have more to do with their emphasis on printing paper than the size of the companies.

The mid-size firms also report good results. Some of the smaller printing paper companies in the study are not doing as well as their larger competitors, in spite of their focus on printing paper.

Customer Profitability Analysis

CPA (Customer Profitability Analysis) has become a widely used tool by distributors generally, including NPTA Alliance members. According to the survey participants, some form of CPA is being used by two-thirds of the companies.

Ranking customers based on profitability is a primary application of CPA. 65% of the companies surveyed use this best practice to manage their customer base.

Another use of CPA information is segmentation of customers based on operating profits. 48% of the survey firms utilize this tool to identify their most profitable–and most promising– customer segments.

The use of CPA is somewhat heavier among the larger companies in the industry, although numerous smaller firms report an active interest in CPA.

I recently wrote a book about Customer Profitability Analysis for distributors, More to the Bottom Line. The book contains numerous examples from paper distribution. More to the Bottom Line was published by the Distribution Research & Education Foundation (DREF) and is available directly from NAW at www.nawpubs.org. NPTA Alliance members are entitled to a discount on all NAW and DREF publications.

Activity-Based Costing

Activity-Based Costing, or ABC, generated interest among distributors following the great popularity of ABC in the manufacturing sector. 28% of the companies in the NPTA study are currently utilizing ABC in some way.

Only 10% of the respondents in the NPTA study indicate that their companies undertook ABC projects in the past, and they are no longer actively using this tool. 20% are considering an ABC project in the future.

Another 28% of the firms have no plans to pursue ABC. 14% of the respondents are not sure about the status of ABC a their companies.

Key Performance Indicators

KPI’s, or Key Performance Indicators, have become recognized as an effective way to sort out and communicate complex business information. The survey respondents indicate that 73% use KPI’s to manage one or more areas of their businesses. 8% plan to develop KPI’s in the future. Only 18% of the companies surveyed have no plans to use KPI’s. Only 1% of the respondents aren’t sure about the use of KPI’s in their organizations.

The use of KPI’s is more widespread among the largest and medium-sized firms.

Business Outlook

Printing paper distributors are most optimistic about the balance of the year. Industrial products distributors are less enthusiastic. The dual distributors report a variety of sentiments. Printing paper distributors are worried about losing sales due to product allocations although their margins seem to be benefiting from the shortage of some products.

Among the feelings expressed by all distributor segments are concerns about controlling rising energy, freight and health care costs.

The larger and medium-sized firms are more bullish than their smaller counterparts. Some of the smallest distributors seem to feel at a competitive disadvantage.

Individual comments from each product emphasis segment appear in the three product sections of this report.

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