B EYOND S URVIVING O PTIMIZING P ROFITABILITY. © 2008 All Rights Reserved Texas A&M University Supply Chain Systems Lab M&A Activity in Wholesale.

BEYOND SURVIVINGOPTIMIZING PROFITABILITY

© 2008 All Rights Reserved Texas A&M University Supply Chain Systems Lab

M&A Activity in Wholesale Distribution

* Excludes transactions in the retail consumer markets

Source: Pembroke Consulting

28 22 21 25

55

112

2001 2002 2003 2004 2005 2006

# announced acquisitions in Wholesale Distribution: 2001 - 2006 *

2


Distribution Trends – EBITDA Multiples

Source: MDM, Vol38, No. 4, February 25, 2008

2004 2005 2006 2007

9.2x

9.8x

9.0x

9.7x

9.4x 9.4x 9.3x 9.3x

10.1x

9.1x

8.5x

8.9x

9.4x

10.0x

9.5x

8.6x

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

Distribution Median EBITDA Multiples(based on 30 publicly traded wholesale firms)

3


Top 10 Public Distribution Firms By ROIC%

30%

28%

24%23%

21%20%

18%

15% 15% 14%15%

18%

20%

8%

19%

13%

9%7% 8% 7%

Houston Wire & Cable

Company

Smith International

Inc.

Fastenal Co. Applied Industrial

Technologies Inc.

MSC Industrial Direct Co.

Inc.

WW Grainger Inc.

Genuine Parts Co.

Bunzl plc Pool Corp WESCO International

Inc.

ROIC (%) EBITDA Margin (%)

Source: MDM, Vol38, No. 4, February 25, 2008

4


The ROI Equation

Financial Statements “Balance Sheet” &“Income Statement” encapsulate the

results of the above activities

5


Distribution

Business Process Framework

6


Educational Session Deliverables

7


Business Process Framework

8


Business Process Groups – Summary

9


Financial

Framework

10


Financial Drivers

11


Optimizing

Distributor Profitability

Methodology

12


Optimizing Distributor Profitability – Methodology

13


Performance Assessment

14


Time

Per

form

ance

Common Practices

Common Practices

Good Practices

Good Practices

Best Practices

Best Practices

Best Practices Framework

15


Process Assessment

16


Custom Process Assessment Report – Sample

17


Process Assessment Workbook – Applications

■ Workbook can be used to

■ Assess other branches / regions, hence set company-wide process benchmarking

■ Assess acquisition targets’ process potential

■ Custom report identifies process and financial gaps

18


Cross-Channel

Financial Benchmarking

19


Cross-channel Financial Benchmarking Report

20



21


Connecting Processes and Shareholder Value

22

$hareholder Value


Distributor Profitability Framework – Concept

23


Distributor Profitability Framework

24



25


Source Group Analyzer – Schematic Diagram

26



27


Best Practices Roadmap – Sample

28


Best Practices Roadmap – Sample

29



30


Balanced Score Card (Kaplan & Norton)

31


Linking Implementation Components

32


Implementation – Complexity vs. Decision-making

33

High ROI

Centralized

Decision-Making

De-centralized

Decision-Making

Co

mp

lex

Mo

del

s

Sim

ple

Mo

del

s Low ROI Lack of Local

Knowledge

High ROI Need Training

Low ROI Low Level of

Acceptance

Everything should be made as simple as possible, but not one bit simpler - Albert Einstein

Everything should be made as simple as possible, but not one bit simpler - Albert Einstein

Majority of

distributors


IDENTIFY GAP

34

MAP SHAREHOLD

ER VALUE

ASSESS PROFITABILI

TY

UNDERSTAND BEST

PRACTICES

ENABLE & IMPLEMENT

ODP Methodology

Process Framework


Time

Per

form

ance

Common Practices

Common Practices

Purchase price varianceLanded costLacks segmentation framework

Segmentation based on COGS by supplierPareto framework (80%-20%)

Loyalty, Profitability, Services, PerformanceRisk/Exposure – supply availability, technical requirements, financial factors, technological factors and environmental issuesLanded Cost (TCO)Combination Methodology

Good Practices

Good Practices

Best Practices

Best Practices

Source – Supplier Management – Supplier Stratification

35


Supplier Stratification

36


IDENTIFY GAP

37

MAP SHAREHOLD

ER VALUE

ASSESS PROFITABILI

TY

UNDERSTAND BEST

PRACTICES

ENABLE & IMPLEMENT

ODP Methodology

Process Framework


Linking SOURCE Processes to Shareholder Value

Process Group Process Process MetricFinancial Elements

Financial Metrics

38


IDENTIFY GAP

39

MAP SHAREHOLD

ER VALUE

ASSESS PROFITABILI

TY

UNDERSTAND BEST

PRACTICES

ENABLE & IMPLEMENT

ODP Methodology

Process Framework


Source Analyzer – LT & LT Variability – Schematic Diagram

40

Basic Input Parameters

P&L andBal. Sheet

Lead Time LT Var

% of re-investment

Expected Turns

Additional Revenue

RONAGMROIITurns

EBITDA

Average Inventory

Safety Stock

Re-invest ?

YES

NO


Source Group Analyzer – On-Time Delivery

41

Decision Variable - On-Time DeliveryPotential Lead Time Variability Reduction 25%

% of Inventory Reduction Re-invested 75%

Expected Turns on Re-investment 8.00

Interest Expenses for additional capital 12%

Variables

Lead Time (Days) 30.0 days 30.0 days 0.00 days 0.0%Lead Time Variability (Days) 15 days 11 days 4 days 25.0%Average Inventory $17,470,663 $16,007,358 $1,463,305 8.4%Average Inventory (Days Of Supply) 57.5 DOS 52.7 DOS 4.8 DOSAverage Inventory after re-investment $17,104,836 $365,826 2.1%COGS $110,902,877 $119,682,708 $8,779,830 7.92%

Current Potential Change in Performance

71.366.0

Cash Conversion Cycle (days)

Current Potential

214%

236%

GMROI (%)

Current Potential

6.35

7.0

Inventory Turnover

Current Potential

23.57%

28.22%

RONA (%)

Current Potential

7.92%

Revenue Growth (%)

Potential


Potential Profitability – Olympic Distribution

25.08% 25.55%24.53%

26.00%

31.54% 31.79%

26.28%

36.73%

23.57%

29.03%28.22%

25.72%

28.50%

20%

30%

40%

Base Case Lead Time Lead Time Variability Completeness Index Payment Terms

Potential Profitability Curve - SOURCERONA % - MINIMUM RONA % - MAXIMUM RONA % - Typical Distributor

42



29.19%

36.86%

26.93%

40.86%

49.14%

31.77%

23.57%

39.19%

42.81%

29.38%

20%

30%

40%

50%

Base Case Forecasting Stratification Min-Stock Policy

Potential Profitability Curve - STOCKRONA % - MINIMUM RONA % - MAXIMUM RONA % - Typical Distributor

43



23.81%

25.64%

23.75%

27.20%

24.20%24.12%

26.81%

23.95%

28.05%

25.04%

23.57%

24.27%

29.33%

24.00%

28.62%

25.44%

20%

25%

30%

35%

Base Case Rec/Stag/Putaway Space Utilization Cycle Counting Transportation Pick & Delivery

Potential Profitability Curve - STORE & SHIPRONA Minimum % RONA - Typical Distributor RONA Maximum %

44

© 2008 All Rights Reserved Texas A&M University Supply Chain Systems Lab 45

IDENTIFY GAP

MAP SHAREHOLD

ER VALUE

ASSESS PROFITABILI

TY

UNDERSTAND BEST

PRACTICES

ENABLE & IMPLEMENT

ODP Methodology

Process Framework


Time

Per

form

ance

Common Practices

Common Practices

No customer stratificationCustomer groups based on – Market Type or Product LineTop customers based on revenue

Based on single factor – Sales, Gross Margin, Business Potential

Based on multiple factors – CTS, Business Potential, Relationship, Customer Lifetime Value, Net Profit, LoyaltyCombination methodology

Good Practices

Good Practices

Best Practices

Best Practices

Sell – Sales Management – Customer Stratification

46


Customer Relationships

47


Time

Per

form

ance

Common Practices

Common Practices

•Cost Plus Pricing•Cost Plus Driven Matrix Pricing•List Price or List-Less Pricing

•Value based pricing•Pricing matrix based on customer stratification and seller’s item visibility

•Pricing Optimization•Pricing matrix based – Customer Stratification, Seller’s Item Visibility, Buyer’s Item Visibility and Cost Levels & Margin Levels•Pricing Rules / Heuristics

Good Practices

Good Practices

Best Practices

Best Practices

Sell – Pricing Management – Pricing Methods

48


26.24%

29.72% 28.90%

32.54%

24.73% 24.91%

26.73%

43.77% 43.81%

37.84%

30.09%

25.57%

23.57%

26.45%

37.43%

32.99%34.23%

27.08%25.17%

10%

20%

30%

40%

50%

Base Case Customer Strat (Sales Force Redeploy)

Cost To Serve Customer Stratification

(Customer Reassign)

Pricing Optimization

Internal Sales Force Benchmarking

Customer Payment Terms

Potential Profitability Curve - SellRONA % - MINIMUM RONA % - MAXIMUM RONA % - Typical Distributor


49


SELL

Real World Example

50


Real World Implementation Results

51


Process Assessment Survey

Summary

52


Business Process Assessment Survey – Summary

50%

58%

45%

47%

91%

45%

34%

42%

53%

50%

9%

5%

4%

2%

3%

STORE (Warehouse MGMT)

SHIP

SELL

SOURCE

STOCK (Inventory MGMT)

Supply Chain Planning

Percentage of Processes

Distributor - Business Process Assessment Summary

COMMON GOOD BEST

53

62%


Potential Profitability

54


Potential Profitability (EBITDA) – Olympic Distribution

5.20%

9.32%7.17%

11.41%10.29%

11.52%

Base Case Source & Stock Store & Ship Sell Combined Best Practices - MIN

Combined Best Practices - MAX

Impact of SOURCE, STOCK, SELL, STORE & SHIP best practices on EBITDA % - Typical Distributor

55


Potential Profitability (RONA) – Olympic Distribution

56

23.6%

75.2%

33.4%

61.2% 67.7%85.0%

Base Case Source & Stock

Store & Ship Sell Combined Best Practices

- MIN

Combined Best Practices

- MAX

Impact of SOURCE, STOCK, SELL, STORE & SHIP best practices on RONA - Typical Distributor


Conclusion

Actionable Learnings

57



58


Conclusion

■ POTENTIAL for improving profitability exists

■ Process and financial performance can be MEASURED to assess potential

■ A ONE-to-ONE connection can always be established between business processes and shareholder value

■ This connection can be QUANTIFIED and PRIORITIZED

■ Best practices can be ACHIEVED

■ Education will ENABLE distributors to realize POTENTIAL profitability

59

B EYOND S URVIVING O PTIMIZING P ROFITABILITY. © 2008 All Rights Reserved Texas A&M University Supply Chain Systems Lab M&A Activity in Wholesale.

Documents

rights reserved texas

financial gaps

wholesale distribution

public distribution

potential custom report

retail consumer markets

implement educational

acquisition targets