A Vertical Approach To Achieving Profitability

The information hit Matt Klein as hard as a heavyweight champion's right jab. Klein, senior vice president with FASCOR, Inc., was reviewing data from the Gartner Group, an information technology analyst and research advisory firm. The Gartner Group (Stamford, CT) recently forecast that more than half of the current 150 warehouse management system (WMS) vendors will be consolidated over the next several years. The reasons for the consolidations are several. According to Tom Ryan, a research director with the Gartner Group, many WMS vendors focus too heavily on developing their systems. Consequently, they typically don't place enough emphasis - or any at all - on the marketing and distribution of their systems.

Upon reading the Gartner Group's forecast, Klein knew that FASCOR, a WMS vendor and AIDC VAR, had to revamp its sales and marketing efforts. As a result, FASCOR (Cincinnati, OH), which has 50 employees and annual gross sales of nearly $10 million, abandoned its approach of selling to just any market. Six months ago, the company narrowed its market focus and now sells to three verticals: wholesale distributors; catalogue and mail order fulfillment companies; and end users of SAP systems.

Says Klein of FASCOR's transition, "We want to be one of the warehouse management system providers still standing in five years. We've grown 50% a year for the last several years, but we have to do better. We want to gain a competitive advantage by offering a higher level of expertise. And the only way was to adopt a more narrow (vertical) market focus."

In the following pages, Klein discusses the benefits of FASCOR's new approach. He also shares the company's criteria for choosing its target markets.

Establishing A Focus
Once FASCOR decided to narrow its vertical approach, the company had to decide which markets to focus on. According to Klein, the latter decision was just as important as the former. FASCOR used several criteria to determine which verticals offered the most potential:

• How the market views the warehouse - FASCOR wanted to target companies looking to lower their distribution costs through more efficient warehouse management practices. According to Klein, those companies are ideal candidates for warehouse management systems. (Historically, warehouses have manually recorded inventory and shipment information; this has proven time consuming and prone to error. WMSs, which include inventory management software and radio frequency handheld computers, allow warehouses to manage inventory and shipments more quickly and easily).
  
  Now, many companies are being forced to streamline their warehouse operations out of necessity. For example, large automotive manufacturers like General Motors (GM) used to produce parts internally, like brake pads and airbags. However, these manufacturers typically now purchase parts and materials from third-party suppliers. As a result, the manufacturers have more demanding inventory tracking and product distribution needs. Klein explains, "When you make parts and materials internally, their manufacture and movement, related to production schedules, are relatively easy. Contrast that with communicating with 300 different suppliers, placing orders with them and putting away their shipments, which includes recording items' storage locations. It's a whole different ball game, and many manufacturers don't have the technology to do it. That's why a warehouse management system and data collection technology can help."
  
  In addition, Klein adds that some manufacturers are now automating their warehouses for other reasons, Klein adds. "Many first tried to save money by automating their accounting systems," he says. "Then, they upgraded the systems used to manufacture their product. The warehouse is the last place many manufacturers have looked."
   
• The number of potential customers - FASCOR wanted to sell to markets with at least 200 companies. (Klein notes that some companies have multiple warehouses/distribution centers). "VARs have to look at the potential opportunities in order to decide whether an investment in that market is justified," Klein adds. Klein says there are number of research and consulting firms, including the Gartner Group, that VARs can turn to for market-related information. He says some manufacturers also supply their VARs with similar information.
   
• The VAR's strengths and weaknesses - Before deciding which market(s) to focus on, Klein says VARs have to evaluate where their most successful installations have been. "Next, they have to decide whether it's a viable market to be in. Then, it's a matter of establishing a presence by attending trade shows and building relationships."
   
• The costs of entry - Some markets, like electronic component manufacturers, demand a higher level of material handling technical sophistication from their VARs and integrators. (Because these manufacturers produce very minute items, they sometimes require unconventional bar-code labeling solutions). As a result, VARs may have to upgrade their technical staff to be successful in these markets. However, some VARs may discover that the necessary investments are too great. Says Klein, "It's better to know up front what type of financial commitment is going to be required."
  
  Narrow Focus Produces Several Benefits
  Previously, FASCOR had been a proverbial "jack of all trades (markets) and master of none," according to Klein. He explains, "Most verticals, like automotive, have developed their own unique terminology. VARs that don't focus on a specific market often have a difficult time learning its terminology and talking intelligently with the decision makers.
  
  "In addition, most markets have manufacturing- and inventory-related processes that are unique," Klein adds. "VARs have to understand those processes because their systems are designed around them. VARs with no focus generally have a more difficult time addressing a market's system requirements."
  
  Klein says FASCOR's new focus (wholesale distributors; catalogue and mail order fulfillment companies; and end users of SAP systems) offers other benefits: n Faster implementations - FASCOR now can install its WMS in about 90 days. According to Klein, many of FASCOR's competitors take up to a year. FASCOR's installation time is significantly shorter partially because its customers have similar system needs. As a result, FASCOR doesn't have to make major modifications to its system for different customers. And because FASCOR's customers have very similar environments, the VAR's installation process varies little from project to project.
  
  Conversely, many of FASCOR's competitors continually have to change their installation process, as well as their system, for different customers, Klein says.
  
  "Say we do an installation for a hardware wholesaler in Oklahoma this month and for a hardware wholesaler in Florida in three months. The actual installation and software configuration, for the most part, will be very similar because both customers have similar system needs. That enables us to finish projects in three months."
  
  Short installations give FASCOR an advantage: a less expensive system. "When everything else is equal (with a competitor), offering a lower price enables us to secure sales we otherwise wouldn't," Klein says. "In addition, we complete more installations over the course of a year because our drop-in time is shorter. And end users want VARs to finish quickly because the users have to work around the VARs while they install their systems. It's similar to the way people having their homes remodeled want the builders to finish the job quickly."
   
• Reference selling - VARs that focus on a vertical often develop more credibility in that market than VARs with a horizontal focus. "Many (principals of) wholesaler distributors, for example, are looking to lower their distribution costs or improve their customer service," Klein says. "Very often, these principals know each other and talk at their trade shows. Invariably, one will tell another how he or she cut costs with our WMS. Typically, their companies don't compete, so they don't mind sharing that information.
  
  "Those types of conversations often spark interest in our system. VARs can't put a price on customer referrals. Before you make a major purchase, how often do you ask someone where they'd buy the product? But when a VAR has customers in many different markets, those customers wouldn't talk, because they're not in the same business."
   
• More satisfied employees - Previously, FASCOR's employees weren't able to develop a thorough understanding of any one market. As a result, they were continually presented with unexpected obstacles during installations. "At one point or another, most of the staff had thrown up their hands in frustration," Klein adds.
  
  Because FASCOR now sells to similar types of customers, its employees are confronted with fewer unexpected hurdles. "FASCOR's transition is comparable to reproducing a videotape, as opposed to filming a movie for the first time," Klein says with respect to the improved morale. "The hard part is filming the movie - dubbing the original copy is the easy part."
  
  The Importance Of Discipline
  Klein concludes, "Many VARs have good ideas and good employees. But unless they define exactly what they want to do, they generally aren't as profitable as they could be. When VARs adopt a limited focus, that naturally means that they'll have to turn down sales opportunities. And that's never easy, especially if the VAR is struggling financially. But long term, it's the right thing to do. You can't worry about the ‘one (sale) that got away.' You have to concentrate on the potential opportunities that lie ahead."