HARVARD CASES Case 14 WESCO Distribution, Inc.

Synopsis In June 1997, Jim Piraino, VP of marketing for WESCO Distribution, Inc., is preparing for a yearly review meeting with WESCO CEO Roy Haley. Haley wants the firm to reach annual growth goals of 6% to 8% in revenues and 12% to 16% in profitability over the next five years. The centerpiece of this growth strategy is the National Accounts program, which WESCO has developed to serve its major industrial customers in response to recent changes they have made to their business processes. However, as of June 1997, the NA program has not delivered the expected increases in sales and profitability. Jim Piraino has to give Haley his recommendations for the future of the NA program, in particular, whether WESCO should continue to pursue NA business with the intensity it has in the past, or whether to assume a more reactive stance and offer the NA program only when it is requested by current customers. As well, he must account for how WESCO will achieve the desired increases in profitability and overall revenues when its current program already seems to be encountering difficulties in generating the desired numbers. Use Although the "customer" is at the heart of marketing strategy, "effective customer management" is still not a very well understood concept in industrial marketing practice. This case can be used to explore the difficulties encountered in developing and implementing new ways of customer management in mature industries such as component parts, industrial raw materials and consumables, 1 and other similar industries. These industries are characterized by an environment in which competitors are able to offer equivalent products at competitive prices and vendors/ distributors have to use service rather than product characteristics to create differentiation and add value to customers. In the 1990s, the standard response of these vendors has been for them to set up a National/Key/Major Accounts Program. While in principle these programs are a good idea, since t hey lock customers into long-term agreements with volume commitments, there are several factors that can derail this effort. Vendors are learning the hard way that not all of their customers are interested in getting into these agreements. Further, they are finding out that many of the customers who get into such agreements are only interested in getting lower prices in addition to more service from the vendor/distributor, 2 and are not willing (or not able) to work with the vendor in a mutually beneficial mode. As the case highlights, the true benefits from these programs come when both sides put in the effort and the investments to make it happen. By using WESCO's partially successful national accounts program as the foundation, this case analysis helps students develop a better understanding of how to develop, implement, and effectively manage a National or Key Account Program with major customers. The case is also rich on distribution and integrated supply management issues, and can serve as an effective recap of the distribution module if taught in a business marketing course. Finally, the case has a lot of information on trends in buyer-vendor relationships through the 1980s and '90s. Given the complexity of the situation and the information provided, the case is best taught in a second year MBA elective such as business marketing, service management, or distribution management. It also works very well with executives, since it deals with customer management-an issue that is very important to every sales and marketing executive who deals with customers in a business-to-business context.

For those who also use the Signode case (HBS case #9-586-059), these are the Low price - - Hi Cost-to-Serve customers.

At HBS, this case is taught as a transition between the "Managing Distribution" and "Managing Customer Relationships" modules in the second-year Business Marketing elective. Teaching Questions 1. What is your action plan? Do you recommend that WESCO be proactive in managing its NA program or would you prefer that WESCO adopt a passive approach? 2. Where and how does WESCO add value to its suppliers? Its customers? 3. Why did WESCO start the NA program? What are its benefits to WESCO? 4. Why do you think the NA program is not delivering on its promises? 5. What does case Exhibit 5 tell us? Is there something that we can learn about the 1. issues involved in implementing the NA program? 6. What about the NAM capacity issue? 7. Going ahead, what is going to happen? Can this NA program be sustained over time? What will happen if other competitors also develop NA programs? 8. How does all this attention being paid to the NA program affect WESCO's ability to serve its other customers? 9. What should WESCO do with the NA program? What are your recommendations? Analysis What is your action plan? Do you recommend that WESCO be proactive in managing its NA program or would you prefer that WESCO adopt a passive approach? The various comments supporting proactive and reactive positions are as follows:

Proactive vs. Reactive NA Strategies Pursue a Proactive Approach to the NA Program

Take a Reactive Stance in the NA Program

Haley's aggressive growth plans for WESCO depend upon substantially increased revenue from the NA program. Key NA customers can ramp up revenues very quickly. Key NA customers allow us the best margins when including costs to serve in the calculation (Exhibit 5). The NA program has a lot to offer customers in heavy process industries (Exhibit 13). Larger and more predictable orders are more economical for suppliers and allow WESCO to obtain better prices. Consolidation in the EES industry has made competition fiercer. We need to get as many customers as we can to sign on. Being proactive gives us more control over the profile of the customers we choose to work with. Actively pursuing customers improves our chances of becoming a first-tier supplier to our customers, which should, in turn, improve our margins. Taking a reactive stance could cause us to lose out on the business of potential key customers being pursued by our competition.

The NA program is only highly profitable when fully implemented. In the middle stages, the costs to serve are very high. The NA program is pitched to headquarters. Local branches uninterested in the corporate bottom line can sink implementation. Pushing the NA program could alienate contractor customers by ignoring them or even competing against them. If the prospecting and selling phases of the NA process could be cut substantially, NAMs would have more time to work on implementation and maintenance. The selling process could be directed at consultants in order to increase demand for the program. Including only those customers who demonstrate a strong interest in the NA program will improve the return on WESCOs investments in the early stages of the program. PirainoStrong individual partnerships have brought us to where we are now and they may even be able to keep us going for some time.

In addition to the issues listed above, students will also focus on numbers to justify their arguments for either a proactive approach or a reactive one. Roy Haley states his revenue and profitability goals for the company. By the year 2000, he wants revenues to have grown by $725 million and profitability by at least 60%. Extrapolating from the figures given in Exhibit 2, and assuming no seasonal differences in purchasing patterns, we find existing rates of growth of approximately 19% for key customers, 15% for focus, and a

decline of 1 % for other NA customers as follows: Key : 89*12/5 = 213.6 (213.6 -180)180 = 18.7% Focus : 25 * 12/5 = 60 (60 - 52)52 = 15.4% Other : 14*12/5 = 33.6 (33.6 - 34)34 = -1.2 % Under this scenario, assuming the average level of growth from the other segments (as shown in case Exhibit 5) amounting to $192 million, this leaves a need for $266.5 million through business acquisitions and $266.5 million in NA growth. This means that WESCO needs to double its current NA revenues in the next three years in order for Haley to meet his targets. Based on the current levels of growth, the NA program would reach the $476 million level by the year 2000, falling short of the goal by over $50 million. More importantly, if each type of customer continues to generate the current average revenues for their category, then this scenario means expanding the number of NA customers to 525 from 300. Using the current NAM customer loads, this means that WESCO must add 12 new NAMs to its team. Given the difficulty of finding suitable NAMS, this may be difficult. Further, the NAMs are already quite heavily committed, so the estimate must be considered conservative. The instructor might want to capture these numbers as they come. However, there is little value gained by getting into further discussions of the numbers at this time. It is better to come back to them at a later point in the discussion. Once some or all these points have been addressed in the discussion, the instructor can transition the case with the following comment: It looks like we need to have a better understanding of this business before we can make any judgments about what WESCO should do with its NA program. Why don't we take some time to understand the role that WESCO plays in this supply chain. What is it that WESCO provides its suppliers and its customers? Where and how does WESCO add value to its suppliers? Its customers? WESCO adds value to its suppliers both in general and in its specific initiatives. In general, as a distributor, WESCO allows EES suppliers to sell to customers too small to purchase directly from them. By offering customers products from numerous EES suppliers, WESCO increases the probability of a good product-customer fit by helping the customer to find the product that most exactly fits their requirements. In its specific initiatives, WESCO adds value to its suppliers by generating demand for their products. In the course of monitoring its relationships with its customers, WESCO obtains information about customer needs and translates that knowledge into explicit demand for vendor solutions by identifying problems and demonstrating the efficacy of solving them. (Case Exhibit 7 provides a schema for this process. 3) As with its suppliers, WESCO adds value to its customers both in general and in the particular features of the services it provides. As a distributor, WESCO can offer customers a one-stop solution to their EES needs that allows them to purchase the products they want from EES suppliers of their choice, in volumes appropriate to their size. Under the NA program, WESCO offers specific value added services aimed at trimming procurement costs. Without intervention, costs-to- acquire MRO products can exceed the costs of the products themselves. Inventory costs (summarized in case Exhibit 9) add to acquisition costs and bloat the total procurement cost for MRO products. In the interest of cutting these types of costs, WESCO offers inventory management and reduction initiatives that range from JIT systems to storeroom management to
3

The instructor might choose to use Exhibit 7 to run a short lecture on the role of distributors in the future when technology will reduce the costs for transferring information between customers and suppliers. Will this mean that WESCO's role in the supply chain is threatened in the long run? What can WESCO do to ensure its position and its margins? I have found executives to relate a lot to this set of questions.

inventory consignment (see case Exhibits 10-11). WESCO also monitors inventory to ferret out mechanical problems and inefficient energy usage, as well as providing detailed records indicating where and how initiatives for cost reduction can help customers. Finally, by offering standardized, year-long pricing regardless of volume at a particular site, WESCO offers customers the ability to make better estimates of their MRO costs during a particular year. At this point, the instructor can push the discussion along by asking students to explain why WESCO started the NA program and by highlighting its benefits to WESCO. Why did WESCO start the NA program? What are its benefits to WESCO? There are several reasons why WESCO initiated the NA program and ways in which the company is benefiting from it: 1. Large industrial customers are demanding it, and they are important to WESCO. Industrial customers currently account for nearly one half of WESCO's revenues and have ongoing and relatively predictable MRO needs. During the late 1980s, many large industrial customers demanded higher quality levels, which necessitated major investments on the part of distributors like WESCO. 2. It offers national distributors, like WESCO, an opportunity to create a unique and sustainable competitive advantage with its customers and suppliers. Customers: The NA program builds customer value and enhances cooperation. This can potentially lower the customer's price sensitivity and temptation to switch. By constructing the intricate networks between WESCO's sales and customers' purchasing staffs required for the NA implementation and maintenance processes, WESCO can build a high level of trust and cooperation with its customers. Because the NA program can document the value it adds to customers, particularly in its transaction cost reduction initiatives, customers are disincented from price sensitivity because haggling undermines their efficiency. Finally, the NA program builds in some switching costs. Particularly in the design of systems for inventory management, the NA program creates technical links that are far easier to continue to use than to dismantle and rebuild with a competing distributor. Suppliers: WESCO can also use the NA program to demonstrate the unique value they add to their suppliers' offerings. The NA program creates demand for its suppliers' products in the course of NA value creation activities for WESCO's customers. In the process of conducting energy audits and the like, WESCO gains access to information about the customer's needs that allows it to demonstrate the value of using vendor solutions (see case Exhibit 7 and the discussion of value added in the following question.) By engaging in these types of demand creation activities, WESCO can secure a position as a desirable distributor with which to work, overcoming some of the natural antagonism and conflict that can arise across the two levels in the channel. 3. Roy Haley sees it as an opportunity to increase the scope of WESCO's business with each of its major customers. NA customers can each generate up to $10 million or more apiece in yearly revenues. Their demand is relatively predictable and maintenance reasonable straightforward once the implementation phase of the national account management process is complete. Haley knows that certain types of inefficiencies pervade heavy process industries such as pulp and paper and petrochemicals, so once WESCO has its foot in the door, its value proposition should be compelling. If WESCO can push NA customers through toward tiered integrated supply agreements, the program holds even more potential. 4. WESCO needs it to meet Haley's ambitious growth plans.

Haley wants to increase revenues by 30% and profitability by over twice as much by the year 2000. The only customer segment that can generate the necessary revenues at the required levels of profitability are key NA customers. Having established the importance of the NA program to WESCO's overall growth strategy, the instructor can transition the class with the following question: "Well, the NA program is important. Also, going back to the beginning of this discussion, most of us feel that this program hasn't been very successful. Can we be more explicit about why we think this program has been a failure to date?" Why do you think the NA program is not delivering on its promises? The two main issues here are choosing the right customer to partner with and developing a proper implementation plan. Specifically, 1. WESCO needs to be more selective in choosing NA prospects. Currently, WESCO does not have a process for segmenting its customer base. It has tried to use a shotgun approach to select customers as partners in its NA program. 2. After having chosen the right customer, WESCO needs to ensure proper implementation. Implementation should be easier when customers are chosen in part on the basis of how easy or difficult it would be to implement an NA program with them. Nevertheless, the process needs to be streamlined and responsibility reapportioned. Using the results of the study done by Piraino, we can develop a list of factors that can ensure a high degree of success. These factors are as follows: 1. Being in the customer's procurement sweet spot . Customers are interested in value as opposed to price when the purchase is of sufficient magnitude. As Piraino points out, for most of WESCO's customers, over 70 percent of the annual procurement budget is accounted for by the top five to ten suppliers. It is with these suppliers/distributors that customers are usually interested in developing a relationship based on value more than price. The purchase dollar volume and effort involved in these relationships makes customers willing to go beyond transaction prices and focus on the total cost of ownership. For instance, in case Exhibit 14, imagine that the customer currently spends $12 to $15 million per year on EES needs and $100,000 on office supplies. Pursuing value over price in EES purchases could save the company upwards of $2.5 million per year, but spending time and energy on office supplies procurement will save only $20,000, an amount that is too small to attract the customer's attention, especially given the effort to achieve these savings. Senior management buy-in. This issue is especially important in a bottom-up sell. An individual customer plant may be extremely enthusiastic about the services WESCO is offering, but if senior management doesn't see the benefit to the company as a whole, then implementation over the usual two dozen or so customer sites will be an uphill fight. As Piraino points out, once there is a mandate from the top, pockets of resistance in the rest of the organization are relatively easy to overcome. It is interesting to note Piraino's comment that there can be an enormous difference between a VP of Purchasing championing WESCO's cause and the CEO spearheading the effort. The problem, of course, is that for a supplier of electrical components, it might be very difficult to get the CEO's attention. This is where the role of the consultant comes in. Role of consultants. One way that senior management tends to become interested in MRO procurement costs is through the work of consultants. Through the nineties, it has been quite common for large firms to hire high-powered consultants to conduct studies of how to re-engineer their organization toward greater efficiency in operations, manufacturing, and service. These consultants are more likely to see the implications of the 20% savings figure and be better able to convince senior management of the importance of cutting procurement costs than WESCO. They may also help the customer's organization become more conducive to change, aiding the implementation process.

2.

3.

4.

Relationship with the local customer. Purely top-down initiatives have the reverse problem of bottom-up initiatives. Local customer plants may have been doing business with a particular distributor for decades and not be interested or motivated to break off a relationship in which they are successful at getting good prices.

5. Uniformity of needs across customer plants. NA implementation is ultimately dependent upon each distributor's branch being able to meet the needs of each customer's plant. As Piraino points out, in several less successful NA relationships, unanticipated differences in procedures and purchases across customer sites have made implementation difficult. For example, when a local plant's bill of materials turns out to be very different from the list covered by the NA agreement, the local WESCO branch has to resolve all matters locally, often with no cooperation from the local customer. The customer's corporate staff accuses WESCO of not working hard enough. Their local purchasing and materials management staff will not cooperate because they would need to make major changes to their systems in order to do so. WESCO gets caught in the middle and its implementation team quickly loses interest in the face of implementation headaches and small potential sales volumes. Even the NAM shift focus to other accounts that might be easier to manage. 6. The customer has initiated NA programs with suppliers/distributors of other product categories. This point addresses both plant- and corporate level resistance. If the company has implemented previous NA programs, then management is usually interested in and prepared to work under such a structure, and individual plants are used to conform to top-down initiatives of this sort. The negative aspect of this factor is that the first movers might lock WESCO out of the customer site for good. Having identified these factors, the analysis can now shift to how WESCO can use this information to improve the performance of its NA program. The instructor can motivate this discussion by asking students two questions: "Are each of these factors within WESCO's control and, can WESCO use this information to select customers for its NA program?"

Factors

Controlled by WESCO? No Partly Yes Partly Yes Yes No No

Being in customer's procurement sweet spot Senior management buy-in Role of consultants Relationship with local customer Uniformity of needs across customer plants Customer has NA programs for other products

Can WESCO use it to Segment Customers? Yes Yes Yes Yes No Yes

WESCO cannot control a customer's purchase profile. However, this information can be used by WESCO to segment customers. WESCO should selectively pursue customers whose profile looks like that of the customer in case Exhibit 16. WESCO can work with the customer's senior management and convince them about the benefits of the NA program. The reality, however, is that CEOs might not be interested or have the time to get into looking at cost savings from light bulbs and switches. WESCO can develop good relationships with consultants and gain access to their customers. The issue here is that consultants, especially those that focus on re-engineering and supply chain management initiatives, might view WESCO as a competitor rather than as a collaborator. Relationships with local customers are a very critical piece of the NA puzzle. This point entails a chicken-andegg problem, however, insofar as WESCO needs the local relationships to make the NA program work, while needing the NA program to give an incentive to develop local relationships. As the case suggests, WESCO's successful NA programs have been those in which WESCO branch personnel had already established good working relationships with local customers. On the other hand, given limited resources, it remains a question whether WESCO has the time to pursue grass roots customer development. Before an NA agreement is signed, the branch personnel will tend to want to work with the customers who will make the largest purchases with the least effort. These customers are either potential NA customers or not. If not, it is unappealing to give them up to pursue a corporate goal. As the case suggests, this is an issue even after the NA agreement has been signed. Although uniformity of needs is very important, WESCO cannot control it. Further, the only way that WESCO can get access to this type of information is during the implementation stage, at which point it is too late. Otherwise, WESCO gets the information haphazardly, since it is almost never the case that WESCO branches working separately would happen to serve all of the branches of a potential NA customer. The presence of existing NA agreements is not controllable by WESCO and is an effective mechanism for segmenting customers. However, there is a downside here. If WESCO waits for the customer to initiate NA programs with other distributors, it runs the risk of the customer also asking the other distributors to manage WESCO as a second tier distributor.

Even after the discussion to this point, students may say that WESCO should get its customers to commit upfront. The instructor should push them at this point and ask them to justify their arguments by asking the following question: Why will industrial customers commit to investing in the relationship? The instructor can also ask students a question like, Are you suggesting that WESCO ask customers to invest in these relationships, and if they don't, do you recommend that WESCO drop these customers? Clearly, there need to be a lot of factors in place for customers to participate willingly in the program, make the investments, and work collaboratively with WESCO to achieve mutual gains. The reality is that customers get into these relationships in a gradual manner. At each stage, they are likely to look at the return on their current investments before they make any further investments in the relationship. Students will recommend that one way to accomplish this goal would be for WESCO to have the customer agree to collaborate on a few minor projects. The collaboration process represents an opportunity for WESCO to gather information about the customer that is useful in determining their suitability as a long-term partner. Producing concrete gains (and higher value) through collaborative endeavors can improve the chances of WESCO being selected as a national distributor and of the customer being fully committed to the relationship from day one. It is evident to the students by now that not only does WESCO need to be selective, they also need to have a very clear implementation plan after they have been selected. However, there is still an incomplete understanding of the patterns of relationship development. The instructor can therefore direct the students' attention to the case Exhibit 5. What does case Exhibit 5 tell us? implementing the NA program? Is there something that we can learn about the issues involved in

I find it useful to quickly get some students to provide the information from this exhibit as I draw a diagram like the one shown below. Having drawn the three curves on the board, I have the students interpret these curves. It also helps to ask students whether the three NA segments are, in fact, three stages in the process of relationship development. There is usually a lot of support for this line of reasoning. Students will relate to this issue by pointing out that if an implementation program is not executed properly, then WESCO ends up in a situation where it has made significant investments while the customer has probably not made any investments at all. In this situation, if the volume of sales are not realized, then WESCO is going to lose a lot of money. Another attribute of this analysis is that it proceeds through time based on current and past experience, and that it is therefore difficult for a customer to anticipate the dramatic nature of the change experienced in becoming a "key NA" customer unless they have already reached that stage. The Evolution of NA Relationships: Other NA customers and focus NA customers Prior to initiating the NA program, all customers have "other industrial customer" status. From the data, it is clear that WESCO's costs-to-serve "other NA" and 'focus NA" customers are significantly higher than for other industrial customers. This is because of the investments that WESCO makes in these relationships that it does not incur in its relationships with other industrial customers. From the point of view of the "other NA" and the "key NA" customer, the value of the NA contract lies almost entirely in the discount. Although standardizing prices across all plants would have the potential to cut costs involved in obtaining quotes and improving the accuracy of budget forecasts, local plants have probably not seen the situation this way. Purchasing agents are probably viewing the NA agreement as amounting to a discount of one telephone call. They usually get quotes from other distributors, using WESCO's price list as a benchmark from which to negotiate with WESCOs competitors.

A worse scenario: because purchasing agents tend to be evaluated on the basis of the discounts they can derive from distributors, standardized pricing might mean that they will be disincented from purchasing from WESCO, since their talents in negotiation will be irrelevant to such purchases. In summary, these customers do not see a significant increase in value, and whatever marginal increase they do see is because of lower prices that they are now getting. Many of them have possibly gotten into these agreements just to cherry-pick the best prices. These customers are not interested in going any farther. Unfortunately for WESCO, they have little or no power to take any legal action given the incompleteness of these agreements/contracts and the relative power imbalance in the customer's favor. 4 Key NA customers In the case of 'key NA" customers, the story is very different. WESCO's costs-to-serve these customers go down dramatically. This is probably because the joint activities and detailed implementation plans developed and executed with the customer are leading to better ordering patterns, reduced administration costs, etc. At the same time, the customer is beginning to see much greater value in this relationship. Prices have gone down slightly further. The main point here is that key NA customers not only benefit from the relationship, they are also collaborating with WESCO to continuously improve processes and systems. It is important for the instructor to bring the students' attention to case Exhibit 13. As this exhibit points out, 95% of the value derived in the NA program lies in areas other than price. However, the productivity improvement and transaction cost reductions that together account for 50% of NA savings cannot occur until the customer treats the NA agreement as being exclusive and actively participates in the relationship. Further, concrete savings through inventory reduction, SKU deletions, and product substitution, which together account for nearly 40% of value added through the NA program, require that the customer and WESCO undertake an inventory audit and jointly improve the process. Overall, WESCO is probably able to delight the "key NA" customers and do it in a way that is very profitable to WESCO. Both sides have a lot to gain from maintaining this relationship and stand to lose a lot if the relationship were to terminate. Since the value received by the customer has been achieved through the joint collaborative activities of the customer and WESCO, the competition is shut out. Unless the customer has the time or inclination to sit down with another supplier and recreate this process, they know that it will be difficult to get the same level of benefits from any other supplier.

Some students are likely to conduct the following analysis, which the instructor needs to manage carefully. They will calculate the dollar value of price discount for the other NA customers as follows. Case Exhibit 2 lists the mean annual purchases per other NA customer as $227,000. Case Exhibit 13 gives the breakdown of savings for a fully implemented "key NA" customer. From the case, we know that this customer purchases $1 million per month from WESCO. Case Exhibit 5 suggests that WESCO gives its best discounts to its largest NA customers, so it seems reasonable to assume that the customer profiled is receiving as good or better a discount than the average $3.6 million-per-year "key NA" customer. With this in mind, we know that the customer's annual savings exceeds 20% of $12 million for a savings of over $2.4 million annually. Of that, we know from case Exhibit 13 that five percent of the savings (~$120,000) derives from price improvement. Thus, the price discount works out to approximately one percent. From case Exhibit 5, we see in the price index that ten index points separate "key" prices from "other industrial" customer prices. Since "key" prices have a discount of around one percent and "other industrial" customer prices have no discount, we can estimate discounts for focus NA customers at 0.7% and for "other NA" customers at 0.5%. Thus, the discount offered by WESCO to "other NA" customers works out to about one half of one percent. The instructor should clarify that these are volume discounts of the list price as stated in the agreement. In all likelihood, these list prices would be negotiated by the two sides and would be significantly lower than list prices available to other non-NA customers.

This is a big learning point for students and the instructor might want to ensure that everybody is clear about the shift in the process as one moves from "other NA" and "focus NA" to "key NA" customers. In fact, the instructor should take a few minutes to summarize these issues in the following manner. 1. Price Line: See TN Exhibit 1 - Under the NA program, WESCO offers year-long, national pricing regardless of volume at any one customer site. For "focus NA" and "other NA" customers, WESCO pays for the lower prices by giving up margins. Once the customer reaches the "key NA" stage and the relationship is fully implemented, WESCO is able to get better prices through better planning, so prices for the customer can go down without hurting WESCO's margins, and WESCO maintains profitability. Cost Line: See TN Exhibit 2 - The early stages of the NA program involve substantial investments on WESCO's part in order to acquire the customer. In these stages, there is little or no involvement from the customer. However, once implementation has been successfully completed and the customer moves to the "key NA" stage, WESCO's costs plummet because the customer is now investing in the relationship. In addition, they are adapting their processes to match WESCO's capabilities and vice versa, reaping efficiency gains through relationship management. Customer Value Line: See TN Exhibit 3 - The instructor can point out that in the "focus NA" and "other NA" stages, the relationship is adversarial, insofar as the customer is extracting value at WESCO's expense. However, in the "key NA" customer stage, there is an explosion in customer value and this is achieved in a collaborative mode. At this point, it is vital to discuss the importance of the implementation program. As is highlighted in the case, the building of a successful NA program is not just about getting the right customer. It is also about developing an implementation plan that ensures buy-in from both sides at all levels. This is critical to the success of the relationship. The instructor can highlight this issue by drawing the hockey stick that captures the impact of acquiring and retaining customers. The instructor can use this hockey stick to show the fact that WESCO can make money only if the firm is able to execute the implementation and get the customer to invest in the relationship as well. If this is not done right, then WESCO can wind up in the shaded region and continue to lose money indefinitely in the relationship. The instructor should be very deliberate in this part of the discussion to avoid losing the students attention to this point. This can also serve as an ideal learning for the instructor to return to later in the discussion and ask the students whether it makes sense for WESCO to try to convert existing other NA and focus NA customers into key NA customers. At this point, the instructor may choose to segue into the issue of the organizational limitations of WESCOs NA program. One way to do this is to push the issue of WESCO being stuck with focus customers and ask a question in the vein of what it means for WESCO that the ranks of focus customers are swelling nearly as fast as those of key customers in the program: how many focus customers can eighteen NAMs convert to the next stage, that is, make into key NA customers? Is NAM capacity an issue here? WESCO currently has 18 NAMs managing an NA program that involves 50 key customers, 100 focus customers, and 150 other NA customers. This works out to an average of slightly under three key customers, 6 focus, and 8 other NA customers per NAM. NAMs responsibilities in the evolution of NA agreements work out as follows: Stage NAM commitment Prospecting Flexible Active Selling Implementation up to 50% Maintenance 15%+

2.

3.

30-40%

Timeframe

Varies

6-9 months

2-3 monthsIndefinite

Looking at the time the NAMs spend on the second through fourth stages, if a NAM is in stage two or three and is maintaining three key accounts, then there remains little or no time at all for prospecting. In addition, with the time and customer allocations, the NAMs will end up over-committed once their fifth key customers move into the implementation stage. This means that barring change, the maximum number of additional key customers is 32. Possible solutions to these problems are somewhat complicated. Hiring more NAMs is difficult because the process of professional development takes time and needs to be planned out far in advance. A second option involves minimizing NAMs responsibility by expanding the support service staff to take over much of the maintenance role. This plan could serve the double purpose of decreasing the NAMs commitments while creating a group of managers that could serve as a pool of candidates for NAM positions in the years to come. Going ahead, what is going to happen? Can this NA program be sustained over time? What will happen if other competitors also develop NA programs? The sustainability of the NA program is going to be affected by changes in supplier management approaches and competitive threats. WESCO developed the NA program in response to EES customers consolidating their supplier bases, implementing quality certification programs, and demanding low prices. Having reduced the procurement costs in relationships with the top 5 to 10 suppliers, these customers now find that procurement costs for other categories of MRO supplies equal or even exceed the costs of the supplies themselves, and have expanded to over 80% of total procurement costs. In order to reduce these procurement costs, these customers are already shifting to new procurement model modes: suppliers tiering or forming supplier alliances. In the case of supplier tiering, several important issues arise. The most important one is the issue of what business is WESCO in. Should WESCO take on supplying janitorial supplies to one customer, industrial gases to another, and so on? Can this affect WESCO in the long-run? Does WESCO have the competency to manage non-traditional lines of business? Those in support of this move will use the same logic as that used by Haley. According to Haley, WESCO should take on any new business as long as it is profitable and it ensures the continuity of WESCOs relationships with its important customers. This is part of Haleys Integrated Supply concept. Those who are against it will point to the face that this approach will work only as long as it is managed from Pittsburg. They will suggest that the approach can lead to a lot of chaos, confusion, and losses if the local branches are allowed to customize offerings to local customers. There is usually a lot of energy in this part of the discussion. It is important for the instructor to highlight the fact that there is always a chance that vendors can take customization to a point where each relationship unprofitable. As well, there is sometimes very little learning from one relationship that can be transferred to other relationships. Overall, there is consensus that this can be good for WESCO if done right. Students are less enthusiastic about the alliance option. Their reservations stem from the fact that WESCO will have to make further major investments in working with other MRO suppliers without the compensation that goes along with tiering. Overall, in either case, there is a larger peril as well. The NA program is designed to exploit efficiencies that arise form the predictable demand ensured by long-term contracts to the benefit of both customer and distributor alike. If, however, becoming a fully implemented key NA customer is not the end of the period of heavy investment but instead only a hiatus before the next ramp-up, then the economics of the program may be further skewed against WESCOs goals. This problem can be compounded if

customers want first to purchase through an NA agreement, then to have WESCO serve as a first -tier distributor in a supply tier, then to purchase from an alliance of distributors who will team up to provide a one-stop solution. Further, WESCOs competitors are pursuing similar customer management strategies to its own, so the threat posed by potential competitor NA programs is real. Students may point out that profits will not be sustained for several reasons. First, customers are migrating all the time. As described above, as soon as WESCO gets through one stage, customers begin to demand even more service and support from WESCO. Second, competitors will follow and develop their own NA programs. This is not as much of an issue. Especially if the customer and WESCO have collaborated and shared the huge gains in the relationship, it may be unlikely that the customer will walk away from the relationship or that competitors will be able to replicate the gains either in supplier learning or in the process of role definitions, goals and objectives setting, and continuous monitoring. At this time, the instructor can pose the following question to bring students back to the issues that Piraino is currently faced with: Clearly WESCO is short on NAM capacity. Further, WESCO has twice as many focus and three times as many other NA customers as it does key customers. What is your advice to Piraino? How does all this attention being paid to the NA program affect WESCOs ability to serve its other customers? Students usually lose sight of the fact that WESCO has other types of customers that it needs to serve as well. The case has details on customer, organization, and other issues that highlight the impact of the NA program on other customer types. For example, there is John Whitney's quote, where he says that NA customers demand a lot of service that is not commensurate with their sales volume-either current or potential. Whitney is referring to the fact that spending more time with NA customers comes at the expense of attention that he can pay to his traditional customers. Another example can be found in Larry Worthington's quote, where he says that his branch has been forced to change the way it does its business to an extent that it might not be in a position to serve its traditional customers, i.e., the contractors, any more. There is also information in the case on the sales approach required to serve the different types of customers. As Piraino points out, in order to manage NA accounts sales reps need to have a farmer mentality, and to manage contractors they need to be like hunters. The instructor needs to ensure that students are keeping this issue in mind as they make decisions on the NA program. The instructor might want to run a short lecture on the difficulties of organizing the sales and marketing effort to maintain and manage a portfolio of customers. For example, in order to do this successfully, WESCO needs to think through very carefully whether it should adopt a generalist approach where a salesperson sells to all types of customers, or a specialist approach where a salesperson sells to only a specific type of customers. This issue also exists at the level of the branch. Given the richness of issues with the NA program design, I have found that this is an area that gets passed over by the students in this case. Consequently, I take a few minutes in class to bring this to their attention. This works well for me since I get into issues in this area in greater detail in the WESCO case than I do in the session immediately following this one. What should WESCO do with the NA program? What are your recommendations? There are several areas that need to be covered here. The issue of NAM capacity means that, given the current number of NAMs and the difficulty of adding more than a very small number to that staff in the short term, it will be very difficult to add many customers to the NA program. One way to handle the NAM capacity issue is to hire executives to take over

some or all of the maintenance functions that the NAMs currently do. By cutting down on the time spent on maintenance, the NAMs would be freed up to do more prospecting, which, given a better customer segmentation process, has the potential to yield better results for WESCO. The problem of the evolution of profitability means that growth in the number of focus customers threatens the ambitious profitability goals set out by Haley. Thus, changing the growth profile of the NA program becomes a key factor in achieving success. In the most optimistic of scenarios, it is possible that WESCO could use a segmentation process to find a group of 28 new customers who come close to fitting the ideal profile for an NA customer and whose total EES purchases fall between $12 and $15 million per customer per year (and whose purchases from WESCO could reasonably reach the $10 million mark at the key level). If the existing NAMs could each develop one or two of these potential NA customers into such a "key NA" customer during the four-year period, then the sales goal could be met without increasing the ranks of the NAMs. Another approach would be to find a group of as many such customers from among the current focus NA and other NA customers. This would also help by reducing the number of other NA and focus NA customers, while also being slightly more realistic, as 28 new and perfect customers might be difficult to find (where were they, after all, when WESCO signed the first 300 customers?). Nevertheless, by sticking to customers with whom WESCO already has some acquaintance, the chances of finding ones who will be amenable to full NA implementation are somewhat improved. The problem that remains is that this approach requires WESCO to stick with customers collected through a less well-refined segmentation process than the one they now have. Although it might make it possible to reach revenue and profit goals in the short-term (even this is doubtful, as there is precious little space for mistakes), it may not be a good longterm strategy. I have found that at the end of this discussion, there is an even split between those who think that WESCO should use the NA program only in the reactive mode in the future and those who would like WESCO to be more proactive. Teaching Strategy In order to facilitate a proper analysis of the wealth of issues discussed in this case, the instructor might want to break the discussion into several themes. Theme 1: The best place to start this case is with an action plan. The central question here is whether WESCO should be proactive or reactive in managing its NA program. I have not had a student or executive who has recommended that WESCO scrap its NA program If I did get some sentiment in that direction, I would make sure that it was not squashed prematurely. Rather, I would try to get this student(s) to identify the sources for filling the gap left by the NA program. This part of the discussion should take around 15 minutes. Theme 2: The next part of the discussion focuses on the role of WESCO as a distributor, how WESCO adds value to its customers and suppliers, and how the NA program was initiated. This part of the discussion should take about 15 minutes as well. Theme 3: Here the discussion centers on the reasons why the NA program has not delivered on its promises to-date. This is a very important part of the case discussion and the instructor should allocate at least 30 minutes to it.

Theme 4: The instructor now needs to get students to recommend any changes that they would like to make to the NA program and the implications of these changes. It is also important to spend time on the impact of supplier tiering and the formation of supplier or distributor alliances/ consortiums on the NA program. This part of the discussion takes about 15 minutes, leaving the instructor with about 5 minutes to summarize the learning points in the case. Postscript WESCO refocused its efforts in managing the NA program. As far as Haley was concerned, the NA program was critical to his growth strategy. WESCO hired managers to take over the maintenance functions, thereby relieving the NAMs to focus on the development of new NA customers. In addition, after an extensive recruitment effort, WESCO was able to add several NAMs to its current teams. Piraino also conducted a thorough review of the existing "other NA" and "focus NA" customers to identify customers that were good prospects but with whom the implementation program had not been handled correctly. Piraino and his team then developed a comprehensive plan that focused on reimplementing the NA program with these customers. Current results suggest that this effort was very successful as well. WESCO continues to take on non-traditional lines of business requested by its large and important customers. However, the decisions are still made in Pittsburg on a case by case basis. There is no current plan to pass this responsibility on to the branch offices. Overall, based on numbers in the second half of1997, the NA program appeared to be back on track