A Case Study

Introduction: Pacific Electrical Distribution Company (PEDCO) distributes electric supplies and related items through 135 branch outlets located throughout the western United States. Typically these include wire, fuse boxes, switches, lighting fixtures, tools and other items used by electrical contractors and maintenance personnel.

Presenting Problem: PEDCO was purchased from its corporate parent by management and financed through a leveraged buy-out (LBO). Cash flow and earnings were erratic and this led to difficulties regarding timely payment of principal and interest on the loan. This naturally was unsettling to the bank and a remedy was mandated.

Initially management believed they could stabilize earnings and cash flow by imposing a standardized set of operating policies and systems on each branch. They believed that exerting more control at the branch level to ensure operational consistency would result in more predictable financial results.

Failed Solution: A pilot program involving 10 branches was initiated. The approach involved:

1. Determining the "best practices" for managing a branch; and
2. Installing the systems and management reporting that would make branch operations (and presumably financial performance) more uniform.
   

This strategy did not work. Not only did standardization fail to solve the problem of erratic financial performance, it had a decidedly negative effect on sales and earnings in some previously high-performing branches in the pilot group. At this point PEDCO's management decided to seek outside assistance to help them solve this problem and our consulting firm was hired.

What We Learned: One of the first things we learned was that PEDCO actually served three different markets (types of customers):

• Residential electric contractors (generally small companies and one-person shops)
• Commercial electrical contractors (generally larger firms involved in commercial and institutional construction projects)
• Institutional maintenance (maintenance for hospitals, factories, schools, and similar facilities)

We learned that each customer type had very different product needs and service requirements. For example, extending credit to small residential contractors was the most important factor in gaining a larger share of this market. Credit terms had virtually no impact on institutional sales where inventory variety and availability were paramount. In effect, PEDCO operated three different businesses when viewed from this perspective.

We also learned that these sources of demand were erratic. For example, a large commercial project may turn a nearby branch into a "star." However, when the project is completed, the star's fortunes may fall very rapidly. The same is true for residential construction which is not stable inasmuch as new housing starts are highly dependent upon interest rates and real estate prices. Branches with a high percentage of institutional sales were the most stable.

We learned that not all branches served all three markets. Some branches had no commercial construction business. Some branches enjoyed a large and growing institutional business while others had virtually none. Some branches were very active in residential construction while others were not.

We learned that consistently better performing branches adapted operations to suit their customer mix. Branch managers of these better performing branches employed different credit policies, modified inventory levels and mix, altered delivery routes and schedules, and generally found ways to serve their customers more effectively based on their particular set of needs. Often, branch managers had to find creative ways to offset corporate policies and directives that hindered their ability to tailor services to their customer base.

Once we understood these characteristics, it became clear why standardization failed. In fact, just the opposite-flexibility-was required. Standardization made it more difficult for branch managers to tailor services to suit their particular customer mix, and this made individual branches less valuable suppliers to these customers.

An Effective Solution: The solution that ultimately had the greatest impact on results was both operational and organizational.

Operationally, the "best practices" approach was modified to reflect the three market segments. "Best practices" for residential construction are not necessarily "best practices" for commercial construction or institutional maintenance. Branch managers were encouraged to learn as much as possible about their customer mix and trends in their local market, and then to use the best ideas and practices from other branches to serve their customers better.

Organizationally, the solution involved the introduction of a new paradigm: "Look at your organization in the context of its geographic scope," we said to management, "and recognize that your mission is to provide the best possible distribution 'coverage' throughout the western region with the resources you have at your disposal."

Management's Job Defined:

• Senior management is responsible for recognizing changing needs for service throughout the western region and reconfiguring the distribution system accordingly. This means changing the number and location of branch outlets quickly and efficiently as necessary. When an area "heats up" as the result of construction activity for example, management decides whether or not to set up a branch to serve that local market. When activity subsides in an area, management decides whether to aggressively pursue new business, downsize, or close the branch.
• Look to the future and monitor construction activity and trends. Develop an intelligence system (i.e., issuance of building permits, newspaper articles, and other information) so that you know where the action will be before your competitors move in.
• Use objective criteria (sales, earnings, inventory turns, return on investment, etc.) to evaluate branch managers' performance, not compliance to a rigid system.
• Senior management's job is not to "oversee" branch managers; rather it is to manage the overall configuration and optimization of the branch system by adding, moving, resizing, and closing branches as demand dictates. PEDCO was not in the real estate business as some executives believed.
• The branch manager's job is to understand the local customer base and deliver value-adding services accordingly.

Lessons Learned:

• Standardization is not always an effective means for increasing management control.
• The presenting problem is rarely the real problem. In this case the real problem was not erratic cash flow and earnings at the branch level; rather it was PEDCO's inability to meet the loan repayment schedule and the resulting breach of loan covenants. Once it was recognized that branch performance was inherently unstable, the solution strategy was reframed to focus on improving the performance and consistency of the total distribution system-a macro as opposed to a micro approach.
• A pilot program can be useful for testing hypotheses and avoiding big mistakes.
• Take the time to learn and understand the specific characteristics of a business.
• Don't be afraid to rethink the prevailing business theory or paradigm. "What business are you really in?" and "How does your company add value?" are useful questions and tools.
• If you are a consultant or operating from a consulting model, recognize that your position as a consultant enables you to look at the organization "from the outside in." This perspective can be very valuable for executives and managers who see their organization from the "inside out" and are generally bogged down in a morass of detail that defeats perspective. Use your "position perspective" to advantage and help management see the business in a new light when required.
• Clarify the organization's mission, business strategy, roles and responsibilities.

Note: Although no appreciable change was made in the structure, PEDCO can be looked upon as organization design work by virtue of the reframed perspective, conceptual changes, role clarifications, and new strategies introduced.

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