Article 2.33

TAP INTO HIDDEN PROFIT SOURCES
(OR DIE SLOWLY?)

“Batten down the hatches and ride out the recessionary storm” worked for distributors during recessions in the US since WWII. But the “great recession of 2008-????” is the first de-leveraging / deflationary recession that we’ve had since the “Great Depression”. It follows a 25-year global credit bubble — the deleveraging process and consumer balance sheet repair (frugality is in) will take longer to unwind than many firms will be able to financially endure.    

A few rounds of cost reductions and halting all investments may be necessary for many firms, but not sufficient for survival or success. We must also analyze and act on the opportunities hiding within the extreme cross-subsidies that exist between the most profitable and unprofitable: customers, suppliers, products, profit-centers and sales territories. Conventional financial reporting can’t help with this, because the inherent logic averages winning and losing elements together, losing the fine detail needed to isolate them. Add to this somewhat-dated, traditional industry / management-team thinking about what constitutes “best practices”, and most of your competitors can’t get there.

To: measure hidden profit power opportunities; understand new profit improvement “plays”^[1]; and gain the courage to act in new ways to reinvent profits, we must pass through five steps:   

1.    (re)Perceive

2.    (re)Conceive

3.    Believe

4.    Reweave

5.    Achieve (continuously!)

How can we get this analytic capability fast, flexibly and affordably? Build our own, buy some “software solution” or rent a total web-based service. The last option, tuned to distributors and manufacturers’ distribution arms is only available in a new service: Waypoint Analytics.^[2]

FIVE STEPS TO RENEWED PROFIT POWER

1.    To re-Perceive our business, we must de-average the financial numbers and rank — customers, customer niches, suppliers, stock keeping units, direct orders and sales territories — all by their estimated Profit Before Interest & Taxes (PBIT) contributions. Such analytical reports will expose the quantum level of profit power and destruction.

2.    Conceiving that there are huge cross-subsidies within our business can sometimes be hard to accept. Most distribution channel executives are, for example, shocked that there is little-to-no correlation between the margin rates in a sales territory and the PBIT the territory generates. Many territories, in fact, yield net losses, even with “good” gross margins. Getting our head around these new profit insights is a bit like looking through Galileo’s telescope in 1520 at a star that turns out to be Jupiter with multiple moons which, in turn, leads to new terminology and solar system re-conceptualization.

3.    Believing intellectually the profit dynamics the reports show usually comes through testing the transaction cost models against the extreme losers on each ranking report. Waypoint can — through fast, flexible, no-cost, on-line meetings — dynamically modify cost-models with management to then instantly re-rank elements to show that the super-losers (and winners) are still there with only minor reshuffling effects. Fine-tuning cost models helps to show “hidden” and “fixed” costs as the visible, big and variable realities that they have always been.

Emotional belief and comfort does not immediately follow. Common concerns are:   

·    “No one else in our industry is doing this (or at least acting upon what the reports suggest we should do).”  

·    “The Sales force won’t stand for any big changes.”

·    “I don’t think I can explain and sell these new views and plays in a convincing way to the rest of the company.”

·    “My heart and ego are just not into changing away from practices that — now in new analytical light — seem counter-productive.”

·    Our biggest losing accounts are some big-name accounts that everyone else in the industry would die to have.”

In a changing business environment, traditional industry practices have become less effective. Adopting new practices is the innovative company’s upside opportunity.

4.    “Reweave” enough of the company fabric to bring new, profitable service models into play. Putting appropriate analytical systems, metrics and incentives in place speeds the profit deltas driven by the new profit improvement plays. Waypoint’s analytics, tracking and compensation reports along with DVD-based education modules will, again, help with this step.

5.    “Achieve” new levels of profitability? How quickly? How big are the gains? Results vary, but most clients will realize 3 to 10x their service subscription fees (which start as low $1K / month) within a few months depending upon how fast a firm can transition through the five, perceive-to-achieve steps. Firms are seeing potential annual profit improvements in the hundreds of thousands and beyond.

ALTERNATIVE SOLUTIONS?

Plenty of gurus are exhorting business leaders to: “shrink to grow” and “change or die”, but these are general abstractions. To heed these guidelines, don’t we need fresh, informational insights that are peculiar to our business and competitive context? A company cannot afford to drag along the chronic, profit-destroying sub-elements within its business activity portfolio. These profit eaters tie up working capital that has a real cost, especially if our bank gets more aggressive and expensive to deal with. And, these losers also drain all of our people energy that we need to refocus on and reinvent what is most profitable in our business.

Does the Waypoint total-solution sound too good to be true? Don’t believe this article. Have your entire brain-trust tune into a Waypoint webinar or request a personal on-line, demonstration for your company.

If you want to “do-it-yourself”, have your in-house IT staff take a shot. But why wait weeks or months for a usable home-brew solution and even longer for the subsequent profits? Cut to the chase and get new profits right away by adding WayPoint to your bag of tricks.

Contact me for your own personal look at WayPoint. Email: bruce@merrifield.com.

Live 70-minute Webinar on this Topic  (Friday July 10, 12:00 Noon EDT; 9AM PDT)
Register using this link:
https://www2.gotomeeting.com/register/652197250

 

©Merrifield Consulting Group, Inc. Article 2.33

July 8, 2009