Oil & Gas Equipment Distribution

Building Category-Level Profitability

A regional oil & gas equipment distributor operating across three provinces.

We rebuilt the distributor's margin reporting by category and moved capital toward the lines that earned it.

$2.4M

Working capital released from two exited categories for core lines

Situation

The distributor had grown one category at a time: commodities, then production equipment, then HSE supplies. Its sales footprint grew faster than its cost accounting. Warehousing, technical support and logistics costs were pooled at company level and spread by revenue, so every category reported much the same blended margin.

That method works for a narrow product range. It misprices categories that need heavy technical support or complicated delivery for the revenue they bring in. The board could see which categories were large. It could not see which ones were profitable.

What we did

We built an activity-based costing model, the approach Kaplan and Cooper developed to correct this kind of cross-subsidy. Each cost pool was assigned to a driver. Warehousing followed transactions handled, pre-sales support followed technical hours logged, delivery followed miles, and sales coverage followed account load.

We then placed each category on a two-axis matrix, in the manner of the GE/McKinsey nine-box. One axis was market growth. The other was the distributor's right to win, judged on supplier relationships, technical capability and logistics reach.

Category cluster	Margin after activity costing	Right to win	Verdict
Core production equipment	Highest of the three clusters	Strong: established supplier relationships	Invest: first call on released capital
HSE supplies	Above the blended average	Moderate: commoditized and price-competitive	Hold: maintain without new investment
Two underperforming categories	Below the blended average	Weak: little technical differentiation	Exit: phased wind-down over 18 months

Impact

The two categories that fell below the blended average once costs were assigned correctly are being wound down in phases across 18 months.
The exits release $2.4M of working capital that had been sustaining those lines. It is being redeployed into core equipment, where the matrix showed the strongest position.
Commercial incentives moved from revenue to gross margin contribution, so the sales team is paid on the same economics the new model reports.
A three-year capital roadmap replaced the one-off analysis. The board now reviews category margin, not blended margin, every quarter.

What made it work

Category managers saw it first

We tested the model with the category managers before the board saw it. A manager who has already checked the cost data against their own operation can explain an exit decision instead of contesting it.

The cost drivers also came from records the distributor already kept, such as delivery miles and technical hours. Nobody had to accept a consultant's estimate of their own costs.

Results

Two underperforming categories set on a phased exit over 18 months

$2.4M in working capital freed for the core equipment categories

Sales incentives now pay on gross margin contribution, with category margin reviewed by the board each quarter

Engagement facts

Sector: Oil & Gas Equipment Distribution
Practice area: Strategy & Growth
Client profile: Regional equipment distributor
Region: Three provinces
Services: Activity-based costing, portfolio review, incentive redesign
Key phases: 18-month phased exit; three-year capital roadmap

This case study is a composite drawn from multiple engagements. Client details have been changed and combined to protect confidentiality, and figures are representative rather than attributable to any single client.