Back in the good ‘ol days, distributors operated like grocery stores. Every distributor would stock and supply the full array of a product type (think about all the brands of coffee out there), including their own private label, so every buyer could purchase their preference.
But here’s the catch – it was really inefficient. When you sell a little bit of a lot of items it’s hard to run a warehouse smoothly. If the 80/20 rule applies, and it usually does, we can guess that 80% of the customers choose 20% of the brands, relegating quite a few products to the “slow mover” category.
With physical space at a premium, distributors looked around and decided to make a change. If Walmart could get away with a simplified category offering, why couldn’t they?
Typical Category Assortment & Category Management Assortment
Sysco was one of the first broadliners to tackle a Category Management (or CatMan) approach. They saw an opportunity to improve the supply chain while deepening partnerships with key suppliers. In a way, it sounds right. In reality, things often play out differently.
As a result, we often hear manufacturers bring up issues like:
“Sysco isn’t supposed to deduct on CatMan products.
I suspect they are (and that we’re paying it). What can I do?”
This article will cover the history of Sysco Category Management and how you can figure out if it’s a good deal for your organization. If it isn’t, let’s review your options.
How does the Sysco Category Management Process work anyway?
In a 2017 presentation, Sysco calls out some of the benefits of the Category Management process. To summarize what our manufacturers experience, the process for choosing a category captain starts with the RFP.
Sysco sends the RFP to top suppliers in a category (could be the soup category or ketchup, condiments & sauces, etc.). Brand finance and marketing teams often collaborate on sku lists and financials to respond to the RFP with their “best and lowest” price, hoping to win the position of category captain.
It usually takes a seriously competitive price point to win the RFP. Sysco is offering a lot of volume and in the best of situations a category captain can capture significant volume, so the expectation on price concession is high.
If you win, get crackin’ because the whole process starts over in 2-3 years with a new RFP and you may lose your spot or be forced to cut pricing further.
What’s in it for the manufacturer?
Prudent manufacturers look at the volume estimates and dive deeper into the street v. contract split to determine how profitable the Category Management deal could really be for their organization.
For example, if Sysco says a category captain will stand to win 90,000 street cases and the manufacturer only shows 10,000 street cases in their current portfolio, that nets out to a potential can gain of 80,000 cases if they win the RFP (again, this really only happens if things go perfectly). A manufacturer might be willing to take an additional OI hit of 10-15% to get those street cases.
Sometimes the bidder will win a few skus. Sometimes the entire category. And sometimes if suppliers can’t ensure all the volume associated with the RFP, a category gets split up among several captains.
Price for volume. Sounds like a decent compromise. What’s the catch?
Winning the RFP would be like crossing the finish line first at the Boston Marathon if not for a few factors:
- Volume doesn’t always actually come through
- Manufacturer counterstrikes interfere with category cases
- Overlapping deductions still get processed when they should not
Let’s review how and why these situations may not pan out as intended and how you can preempt problems.
- Volume Shortcomings:
Incremental cases drive value for the category captain. But do they really get what’s been promised? Sometimes manufacturers don’t see the volume come through (and there are many contributing factors – see point two below some examples). You can always choose to write your bid to enforce a minimum volume threshold.
For example, if you don’t see at least 50% of the expected volume, Sysco will have to repay. But remember, Sysco is totally cool with your business getting ALL of the volume, so it isn’t a ploy. They aren’t actively trying to suppress your category domination, but they may not always go out of their way to help convert either.
They will close code skus that don’t win the RFP, which means other skus won’t even show up as options during the ordering process. They are supposed to provide access to work with the distributor sales representative to get direct access to operators, door to door. They should be supplying lists of accounts to go after, so you can tackle and track that business. Sysco should also be pricing products in a way that encourages operators to switch to your category-winning lineup.
However, sometimes counterstrikes from competing manufacturers muddy the waters.
- Manufacturer Counterstrikes:
Here’s what we mean by “manufacturer counterstrike.” Let’s say that French-Fry-Mfg-A wins the category captain position, but French-Fry-Mfg-B did a ton of business through Sysco before A secured the new spot as top partner.
B is going to be pretty upset, right? So, logically, B will go around to all the other distributors and try to create exclusive deals with them. Goes something like this:
MFG B – “Hey, other distributor. You know that MFG A is the category captain over at Sysco, right? You can’t be getting their best price. Partner with me, forget about MFG A and we’ll go after all that business together. Wada ya say?”
Back at Sysco, the new captain – A – is trying to convert 10% of Sysco’s business at Aramark and 5% at Sodexo (big volume!), but those customers already locked in a sweet deal with French-Fry-Mfg-C (that’s right…this is our third fry supplier in the setup)…so Sysco has to stock the products from C to keep the business with Aramark and Sodexo.
Now we have borderline product warfare.
You can see how this whole dynamic quickly starts to unravel. The business A thought they would easily sweep up isn’t budging and other distributors may steal business away from Sysco entirely (reducing the potential for A) due to their different assortment. They may be no better off than they were before becoming the category captain.
It’s a thorny situation, as illustrated below:
- Overlapping Deductions:
This brings us to another painful issue. Let’s say you’ve won the position of category captain and the volume is coming through. That’s great! But here’s another catch. Sysco is probably deducting on some of those cases. And they shouldn’t be. The whole point of the category captain position is to give Sysco one best price for all the business. So how does it happen and why?
Even if Sysco gets the net price for lower than the contract price, they may still bill back.
- Mfg-A historically sells yummy food to Sysco for $40 a case.
- Sysco sells to Customer-A for $35 a case.
- Historically, Mfg-A would receive a claim or billback for the difference – $5. They owe Sysco the $5 to make them whole on that case. Sysco shouldn’t lose money. That makes sense.
- NOW, Mfg-A becomes the category captain and agrees to sell a case of yummy food to Sysco for $34 (instead of $40)…
- Mfg-A would owe nothing on the Customer-A contract because the price is now higher than what they sell the case to Sysco for, BUT they still see a claim and pay on both. So that’s an $11 loss.
- Mfg-A loses $6 by reducing their price to become the category captain and $5 when Sysco bills them for the difference between the original case rate and Aramark rate. Not fair, right?
The reason we’ve found is that corporate offices secure the category management allowance, but the local houses manage the local contracts and the systems aren’t connected. Errors pop up.
We have also seen situations where Sysco corporate sells the case to a local house for the original rate (in this case $40) instead of the category management price (here, $34), so the local house really does think they are owed the difference between the rate they paid for the case and the rate Customer-A paid.
This is messy right? But if it’s familiar, you know exactly what we’re talking about. Give us a ring, we could go on and on.
With innovative software solutions, like FORGE, you can set up automation to address these challenges, but then you still need to have tough conversations with Sysco when the local houses call up asking why there are no deductions.
Many manufacturers will keep detailed reporting of the discrepancies and send their executives to have conversations about big amounts that add up.
If you managed to read through this entire article, you probably really care about these discrepancies and want to do something about it. Give us a ring or contact us and we can start talking about tools and strategies that result in more predictable profits for your business.