IS THIS BOOK FOR YOU? WHAT WILL YOU LEARN?
STEPPING DOWN A PATH TO LINE-ITEM PROFITABILITY ANALYTICS
(All red-lettered terms will link to a Glossary by
Many distributors have experimented with estimating the net
profitability of every customer and then stopped. Discovering that some of your
biggest, best, even “prestigious” accounts are big losers is too shocking. And,
most executives don’t have ready, satisfactory answers for all of the new
questions and objections that arise about “losing” accounts both large and
Fewer distributors have pushed on with their curiosity to get an actual,
measured fix on what operational costs are truly: variable; semi-variable; and
longer-term fixed. Many distributors assume vaguely that: “all of our costs are
fixed (for at least today); and all gross margin dollars (GM$s) are good.” Most
distributors have, in fact, 80% variable costs that can be quite easily
redeployed with “LIPA” solutions.
Very few distributors (that I know of) have gone even further to invest in
calculating the net-profit for every line-item processed through the business
over the past two-plus years. This data enables net-profit ranking reports for
every: item, item category and supplier. But, big profit winners and losers are
only symptoms of what underlying root causes?
By cleverly cross-referencing both item and customer profitability
results, it is possible to do a supply-chain-math analysis of every buy-sell
relationship with both customers and suppliers. Using a losing customer’s own
statistical buying data, for example, hidden activity-costs that are hurting
both parties becomes visible. These pockets to buckets – full of hidden costs –
can then be transformed into win-win savings and productivity. Besides “the Price Game” (YouTube
video)(YT 1: 10) why
not – find, solve and share – the hidden waste too? Many customers will be so
pleased with these new, custom solutions that they will want to buy more-to-all
of their volume from you.
Besides transforming big lose-lose relationships to win-win (often with
more volume gain), what else have these few, brave explorers discovered? This
book will catalog all of the opportunities found in a transparent,
supply-chain-math world. This book will help any distributor:
Get past the initial tough hurdles
of doing “cost-to-serve models” to find unbelievable, big losing customers and
Answer all of the disbelief
Get on with finding the root
causes behind the big winners and losers...
And, then using LIPA Management to
get breakthrough, wining results for all stakeholders.
WHO WILL BENEFIT FROM THIS BOOK
This is a guide book for primarily distributor CEO’s and CFO’s who are
at any point along the LIPA Management path. For those who didn’t even know the
path existed, the first two chapters will be a bit abstract and challenging,
but things get very concrete and chronological starting in Chapter Three.
Sections of this book are, secondarily, for anyone in a distribution
channel who wants to be a surviving, thriving player in a particular channel
that is being increasingly besieged by electronic commerce and/or supply-chain,
buying-selling partnering by the biggest, most progressive customers. These
Manufacturing channel managers who worry about having too many slowly-dying
distributors. How do they use supply-chain-math to broaden the conversation and
win-win, partnering possibilities with the channel consolidators?
Master distributors with the same slowly-dying-distributors concern as manufacturers.
Distributor buying-group leaders who would like to have better, broader, win-win,
supply chain math relationships with both suppliers and key national/regional
All frontline distributor employees (although they may learn more from my 450+ YouTube
video clips that support this book.) To partner the biggest, best customers,
every employee must “engage” to become (custom) service-excellence providers in
a new “high-performance” culture. This new employment contract won’t be for
everyone. The good news will be big increases in pay, job security and growth,
pride and fun; but, there will be nowhere to hide for those who are only
steady, habitual performers or coasters. Higher privileges will come with
equally high responsibility to perform and continually improve and innovate.
And finally, perhaps some distributor customers trying to figure
out how to:
Better measure and manage “inter-business, buy-sell processes” with distributors
Move towards more effective “demand replenishment systems” (with less
people and paper cost intensity) to better compete with big, supply-chain-powered
WHAT’S THE UPSIDE FOR LIPA MANAGEMENT? THREE CASE STUDIES:
Three distributor success stories for applying LIPA Management are summarized in this article
(SI # 29). The firms
are in different channels: steel, Industrial-Paper/Jan-San, and Fluid Power.
The smallest of the three, (fluid power) started their LIPA journey with
one location doing $8MM in sales
with 22 employees. Their CEO had been working hard for 15 years to achieve only
mediocre success. Their 10-year, trailing average pre-tax return on total
assets (PT/ROTA) was 7%: a typical, mediocre distributor return. After
30 months along the LIPA path, their ROTA is now 22% with these additional
Sales have been growing at a 17% per
year rate (over twice the industry average). Suppliers love them!
Active accounts dropped from 1050
to 893 (some small losers left over price increases to become new losing
customers for other full-service competitors).
At the outset, only 20% of their customers
were profitable and generating 150% of the operating profit total. (The other
80% lost the extra 50 percentage points. The biggest losing 1% of the customers
consumed 20 of the 50, extra, profit-percentage points.)
After 30 months of LIPA
improvement plays, 90% of all customers were profitable.
The average, profit-per-account had
grown from $30 to $941. The sales share of each account has also grown
significantly as customers rewarded this distributor’s better supply-chain-math
Profit per employee grew from $1,590
The average “gain-sharing bonus” for all 22
employees went from Zero to $6,670.
They now have a “high-performance,
service culture” in which everyone is turned on.
The CEO is now a hero to all his “stakeholder
ii. Employees (all their friends and family want to be
iii. Most (all) best reps who made the transition (a few did
not want to change and are gone)
v. And, non-active, family shareholders.
He’s working less and making more.
Most of his time is now spent working ON the business not IN the business. And,
he’s looking forward to doing acquisitions in his channel. Why not buy
companies with their own internal peak profits using
LIPA turnaround plays?
For, another pictorial view of
a successful LIPA-Journey, check the following link to a 5-minute YouTube
video clip of mine. Using a year-over-year, “whale curve” graph, you can see how
an Industrial-Paper/Jan-San distributor increased profits 500% in 24 months. Link to YT 9:91YouTube
WHAT ARE THESE HEROES DOING THAT YOU AREN’T?
The three distributors above are all clients of Waypoint
LIPA Management web service. They are also frequent attendees of and
participants in “Advanced Profit Improvement
These are two big reasons for how and why they learned how to make LIPA
Management their own. What they are doing is what is covered in this book,
which includes the following and more. (NOTE:
if you are new to the LIPA Management path, the following two summary passes will
be dense reading. Skim through to the summary questions. Chapter 3 will be much
more concrete and comprehensible. Readers who have LIPA tools look for ideas
you have not been thinking about.)
The answers to all of the
objections that (your) previous (fizzled?) “customer-profit ranking”
experiments may have run into. Old beliefs are still partially true, they just
2. New ways to fine-tune your company’s financial past:
notably, increasing margin percentages on both ̶
underpriced customers and items ̶ in creative and
sustainable ways. (“Strategic Pricing”). And, the emphasis will be not on just
one-time, remedial fixes, but how to systematically prevent economic, selling
inefficiencies from creeping back in.
More effective ways to ̶ identify, re-service and dominate ̶ “niches” of
How to get good at selling “Supply-Chain-Math” (SCM) solutions for the (often big)
hidden inefficiencies that exist within the buy-sell processes between you and
your big customers (and some suppliers) for both you and them.
Just how big the cross-subsidies
are that exist amongst active SKU’s and what to do about both winners and
How all of these building block
concepts add up to “Value Exchange
Management” which allows a distributor to:
Determine why every customer and
item is profitable or not.
How to transform all losing
elements into winners to approach 100% of all customers being profitable with
many buying a lot more. Your future, financial profits will grow much higher
than today’s “internal peak profits” (the
sum of all of the winners before loser costs are subtracted away to yield
current financial profits).
Re-think the “service model” for chronically small customers with small orders.
Allocate more total-team sales and
service intensity to the few, biggest, “net-present-value”
(NPV) customers. The goal for these accounts is to use SCM solutions to
turn these accounts into 100%-share partners.
How to re-orient your sales force
to fill most progressive customer’s supply-chain-buying needs.
What is a sustainable, high-performance, service culture?
Why is it necessary for niche
service-excellence and heroic-extras for key accounts?
Why it is necessary and desirable
for sustainable success?
How can you use the windfall
profits from the LIPA-Journey to boot-strap your way to having a great culture
and becoming a star company like: Costco, FedEx, Southwest Airlines, Whole
Why your new “mission” may become:
To Deliver Premium, “All-Stakeholders-Win
Economics” (due to steady innovation with and by all groups)?
Why the LIPA-Journey is doable and
risk-free if it is taken one, small,
informed step at a time (Kaizen)
with good, LIPA-Management reporting allows you to do (v. jumping into
something too-new with both feet)?
OVERWHELMED? YOU CAN DO IT TOO WITH KAIZEN STEPS!
The Nine Points above, which are peppered with new
terms and concepts (for many readers), may seem overwhelming now. But, we have all done micro-to-macro journeys before. As
children, we start learning from the micro-events in front of our noses. We’re
fascinated with what is under the rocks under the trees. As adults, we are able
to piece together the micro lessons to see the macro picture: it’s a forest! It
is a dynamic ecosystem with both living and dying parts to it. Once we
understand the macro connections, we can make more sense and achieve more
efficiency and effectiveness with micro event decisions.
If you and/or key team members are initially confused by (and scared of
failing at) concepts like – “custom, supply-chain-math solutions” – have faith
and be patient. Get, instead, a rough idea of the big
picture possibilities and then just start one, small-as-needed, comfortable step
at a time at the micro level. For each step, there will be journey tools,
community practitioners to call and YouTube clips. The clips can be watched by
a would-be teacher as many times as necessary to then be prepared to lead a
training session. Who can trust, after all, what our leaders can’t explain with
confidence and enthusiasm?
The upside opportunities covered in this book will fuel big growth
(beyond what neophytes can imagine) in a distributor’s: employee-engagement, service
value, sales and profits. Financial profits –the last, down-stream, lagging
indicator – will increase because of innovative improvements in the upstream Key Performance Indicators
(KPIs) of more net-profit dollars per:
1) line-pick, 2) order, 3) customer, 4) sales-call, 5) customer-niche, 6) supplier
and 7) Full-Time Equivalent Employee
A MORE DETAILED OUTLINE OF OUR JOURNEY-MAP
Below are the stages and steps for the journey, which this book will
Stage One: Measure Both Customer
and Item Cross-Subsidies:
Sense that all customers and items are NOT equally profitable. Find out how big
the cross-subsidies are amongst your customers and items. And, find out what the causes are for the extreme profits and
losses which will, in turn, lead you to everyone-wins opportunities.
Staying curious and open-minded isn’t as easy as you might think. Who, after
all, wants to believe that some big, “best customers” are quite unprofitable?
And, not everyone is going to want to change their habitual ways of dealing
with customers even if it is in everyone’s interest including their own.
Design (with an outsourcing
specialist?) an “optimally
complex” Cost-To-Serve (CTS) MODEL to get “good-enough estimates” of at least each customer’s net profitability (“Customer Profitability Analytics” or CPA).
And, while more complicated,
consider a model that calculates the net-profit or loss on every line item
event (Line-Item Profitability Analytics
which will prove to be far more powerful.
LIPA is vital to identifying and
creating custom, service-value chain
solutions for big customers that will then lead to winning bigger share of
the customer’s spend and increase barriers for competitors.
Get the big (cross-subsidy)
pictures. Create profitability RANKING
REPORTS and “WHALE CURVES” for: customers, segments, territories;
items, suppliers, categories; etc.
Suspend dis-belief and start to steadily expand, update and renew organizational beliefs.
Continuous organizational learning from cross-subsidy discoveries can’t happen
if nit-picking criticisms and objections to continuing along a discovery path
win the day. Have faith that insights lie ahead that will improve our ability
Build customers’ bottom lines with...
Unique value propositions well
To earn bigger share of accounts
that will grow sales and win maximum supplier support…
And, improve profits multiple
STAGE TWO: FIND THE CAUSES,
INSIGHTS, SOLUTIONS, PRINCIPLES behind THE EXTREMES
Learn what deep-dive tools are
needed to determine the CAUSES behind
the extreme winners and losers. These tools will also be vital for proving to customers ̶ with their own activity math ̶ the need for
co-created Custom, Supply-Chain Solutions (CSCS).
that can be gleaned from the causal information.
Learn how to convert these
INSIGHTS into ACTIONABLE SOLUTIONS to
make the best customers/items even better and transform the big losers into big
tactics and case study experiences will emerge new management SUCCESS PRINCIPLES.
These principles work especially
well in mature, consolidating channels in which commodity brands are widely
These principles may seem to
conflict with traditional beliefs rooted in financial-management and promoting
products to increase sales volume for bigger-is-better, economies of scale.
Step #10 below will, however, help you to turn false-choices (old-ways or LIPA-new-way conflicts) into innovative
principles. Old-ways will still have specific, situational applications. But,
they will need to be updated and rounded out.
STAGE THREE: RE-TUNE THE CULTURE
Sustainable growth in profits must
be supported by the right LIPA Management
TRACKING AND FOCUS REPORTS” that demand
discipline and support for continuous improvement for the action solutions.
RE-EDUCATION, RE-SKILLING AND RE-COMPENSATING of ALL team members is necessary to fully achieve and
maintain the opportunities revealed by LIPA.
Instead of reps selling and
quoting prices on commodities, the team will be helping big customers to
pinpoint hidden pockets (or buckets) of buying inefficiencies that are costing
both partners and solving them.
changes will seem more challenging than they are. Repetitive case-study education about successful LIPA
distributor pioneers recounted in my 450+ YouTube-video-clips (average length: 4
minutes) will help. And, fast economic gains for EVERY stakeholder group will
eventually convince even the most stubborn (and scared-of-trying-something-new)
100% Engaged Alignment. Connect every employee’s – heart, mind and wallet – to
all-stakeholders win profit improvement development.
You will learn how “Nichonomics” +
Supply-Chain-Math (SCM) solutions add to a vision that every employee can:
understand, buy into and be rewarded by. LIPA Management solutions will support
total-team focus on customer-niche-centric objectives that will:
i. Capture 50 to 80% of the entire niche “profit pool”
ii. Maximize net profit per: pick-line; order; delivery;
customer; sales rep sales call; and Full-Time Equivalent Employee
iii. Achieve both economies of operational scale within a
focused niche and big barriers to entry for other competitors.
scenario will require ending rep incentives on “Gross Margin Dollars” (GM$) dollars and Gross Margin
Such incentives force reps to only look at a part of the total “Value Exchange
Management” relationship with customers. They aren’t paid to understand, sell
and install “Custom, Supply-Chain Solutions”
(CSCS). The how-to’s of
transitioning to net-profit-improvement, incentive plans will be covered.
And, Open Book Management (OBM) coupled
with everyone able to earn a net-profit-growth, gain-sharing bonus will work
well if you have a smart, one-niche-at-a-time, focused strategy.
CHAPTER SUMMARY QUESTIONS,THOUGHTS:
Do the three
distributor executives getting the great LIPA Management results seem
“accessible” to me and my team? Are they ordinary, ambitious distributor
principals looking for new answers like my team is? If they can do it, can we? (Persist
through the book and the answer will be YES!)
Do I agree with
Bruce’s philosophy that the longest, toughest journey only begins with the
smallest, most-manageable, no-fear-here steps? What other help
for this uncertain journey is available. (More on the extensive, community
support in Chapter Two)
On the other
hand, does this overview have enough new terms and ideas some of which (open
book management) are too overwhelming? Should you stop reading now? What is
possible (and the digestion pace) for our team to - Conceive, Believe and Achieve (CBA Hurdle)?
(Exhaustive Index of answers to all pushback concerns in Chapter four)
If this book is
free and so fantastically technical, what’s in it for Bruce? Why is he sharing all
of his career wisdom and turnaround secrets? The short answer is:
§ I get on-going consulting work from the most
successful LIPA Management users. So, I’m trying to grow that potential pool of
§ The book gives me some summary closure on a 41-year,
micro-to-macro journey of my own in doing distribution turnarounds and
transformations into High Performers. (Chapter 3 tells this story with credit
to others who made it possible.)
§ Helping any company to compress my 41 years of
learning into 12-24 months of learning and doing with great results is good
cause. Our economy needs all of the new, everyone-wins productivity we can
What else is going to help
you succeed on this amazing journey? Find out in Chapter Two!