SPAs- Are they Worth the Cost?

In a penny nickel business, every penny counts. Which is why SPAs can matter.

Increasing gross margins and, more importantly, net profitability, in today’s environment is extremely challenging.  Publicly-held national chains such as Rexel and WESCO report net profitability in the 4-4.5% range whereas the NAED PAR report typically proclaims a 2-4% net profitability for privately-held distributors.  Moving the needle is hard in light of:

• A slow / no growth market where distributors compete for every order
• Some distributors compete for business for cashflow reasons
• Pricing is more transparent than ever before
• Customers know how to “negotiate” (play distributors off versus each other)
• Rebates, which were originally developed to help ensure distributor profitability, have now leaked into the marketplace and are used as part of pricing strategies … or as “the sole profit”
• Increased technology investments
• Increased labor and healthcare costs
• Additional increased operational / warehouse management costs
• And more

Many distributors are seeking ways to improve productivity to enhance profitability while they know some investments will be continual.

The question then becomes, what levers can be pulled to improve profitability?

Better management of SPAs (special pricing allowances).

In September, Mo Baresma, former CFO of Revere Electric, wrote a column for ElectricalTrends titled “SPAs – Are We / They In Or Out of Control?” and also launched a survey to solicit readership feedback on SPAs.  Now she is sharing the results:

Recently, ElectricalTrends published an article, “Are your SPAs In or Out of Control?” Readers were asked to stay tuned for upcoming articles that will guide you down a contract world of quality, control and assurance for a more profitable SPA World.   

The SPA Process

First and foremost, THANK YOU to those who took time to respond to the SPA survey and share your thoughts.  Now, with nearly 130 respondents, it’s time to share the survey results.

Survey respondents were very open.  Comments such as

• “Never been informed how to handle the process in general.”
• “Consistency of process is an issue.”
• “It is a way the manufacturer to find out who your customer is so one day they can sell direct.”
• “SPAs are a way manufacturers to make extra money when distributors do not file claims.”
• “I’m convinced that manufacturers have no idea how much maintaining a SPA system costs them.”

were openly shared.

Only 10% of the respondents found their SPA sales to claim process to be a “piece of cake,” meaning they manage their contracts well and have it “all dialed-in.”  The remaining 90% claimed their processes could be better, 35% of the 90% felt they were lost and not handling their contract processes well. 

One of the issues with the process is that too many people are involved.  Let’s say we have to procure a SPA for 100 ACDC400’s (and we’ll assume this entire process is supported by EDI):

1. The distributor has to contact the manufacturer rep
2. The SPA request has to be reviewed and approved by the manufacturer
3. The distributor needs to be notified of the approval
4. The distributor and manufacturer business systems have to be updated with the SPA contract info
5. The distributor needs to request a SPA claim to the manufacturer after the product is delivered and invoiced
6. The manufacturer has to review and approve the claim request
7. Upon approval, the claim value is sent and the business systems are respectfully updated
8. If the claim value to claim credit issued does not match, then an inspection must occur to understand the difference
   1. The claim will either be adjusted on the manufacturer end or refiled by the distributor
   1. If the claim cannot be refiled, then the SPA claim value difference is written off by the distributor (i.e. lost profit!)

About a year later, an audit may be requested by the manufacturer

So, how many people were involved in all of this?  Most likely, at least 12 even though EDI supported the entire process (and think about what happens if EDI is not used! Consider the lost productivity of your people … their time involved in this process.)

It’s surprising we do anything right! And, how much did it cost to support this transaction?  Only 17% of the respondents are aware of how much their SPA process costs, while 83% really don’t know. 

On top of this, most respondents support anywhere from 10-30 SPA manufacturers, all with their proprietary processing platforms in which the distributor does their best to be compliant.

While we’re at it, 64% of the respondents claim 25% to 70%+ of their thru- stock sales are influenced by contracts, 14% were less than 25%, while a frightening 22% had no clue.  (Shouldn’t all who touch a SPA in your company have a clue?  How does a company even begin to make a harmonious environment around SPAs?)

Some distributors said they intentionally stay away from SPAs and look for non-SPA manufacturer product alternatives.  This is becoming more fashionable as the world becomes more competitive and more commoditized, solely basing the purchase of these alike items on price alone.  No longer is the brand supported, it’s the price tag.

So, one can assume some distributor-manufacturer SPA relationships are very efficient, while some are enormously labor intensive and broken.  That being said, how do you really know how much the SPA go-to-market model costs your company overall and specifically by manufacturer?  It is important someone in your company dig into this information, as the costs associated with your SPA world are real and draining your bottom line.  It is like these costs fall into a vortex of profit leaks that seep through the cracks unnoticed, unfaced and rarely discussed.  How much profit do you lose and never make-up?

One respondent said, “I have always wanted to know but haven’t made the time or the priority to investigate.”  Where can you make a difference in your margins when you are already so tight and have nowhere to move?  One survey respondent said, “The impact of contract sales in terms of gross profit is significant for us.” So, it only makes sense to say that someone needs to get-in deep and take control!  Truthfully, it is hard for me to understand why very, very few companies are dialed-in to this area of loss, especially when there is something you can do about it. I applaud those that are dialed-in and know where to positively impact their weaknesses surrounding their SPA world.  In my experience these distributors are more profitable and have better relationships with the SPA manufacturers they support.

So, where does one begin?  For starters, I would like to share a FREE tool with you that can help provide simple guidance – no obligation attached.  I believe in our industry and my goal is to give back.  It’s a free tool that will put you on a path of awareness and change management.  Just contact me here: mo@barsema.com and I’ll send to you    

This article only reflects responses from 4 of the 10 survey questions.  It is my hope that a few of the thoughts I shared will ignite an energy to implement analysis and change in your company.  There will be another article that shares survey responses to process and cash management, market share impact and overall thoughts to supporting the SPA model. 

Until that time, nothing measured, nothing gained.  Nothing discovered, nothing recovered. 

To SPA or Not to SPA? Is it Worth the Cost?

SPAs can be a source of improved profitability.  There are cashflow issues as well as collecting what is owed. It’s an area that many don’t want to address because it becomes complex … and can open a can of worms.  But with a significant percent of thru-stock sales impacted, don’t you owe it to yourself to proactively address?  Especially if you want to improve net profitability?

How important are SPAs to your sales success? To your profitability? Which supplier that you work with has the best SPA process? How could the process be improved?

Or, perhaps the question becomes … to SPA or to net price?  (And remember, both can have ramifications on the market and your profitability.)

In a penny business, more pennies from heaven could help every distributor (and yes, manufacturers could improve their processes, but their IT, and probably Finance, departments control their willingness to make more customer-friendly processes.)

Are they worth the cost to you? Most distributors don’t know.

Click here to see some resources from NAED on SPAs