Strategic Insights 14

HOW TO GET PAID FOR SERVICE VALUE (and cost)?

According to two, different- but-related surveys of distributors reported by “Modern Distribution Management” (7-25-11) :[1]

90% of distributors believe that they deliver more service value than their competitors for the same price. (my under linings)

88% “message” (the same) reasons to buy from them: “good assortment of products and professional staff to help.”

WHAT ARE THE QUESTIONS THAT WEREN’T ASKED?

Because the get-paid-for-service problem has existed for decades….

...Isn’t the “great recession” a catalyst for solving this problem?

Beyond “believe”, do the 90% have measurable, statistical evidence to know for sure that their service is a total-cost bargain at a higher price?

Is the “more service value” tuned to each target niche of customers? Being “good” in a common way for all types of customers means not having distinctive service for any niche.  

By meeting prices, sales reps are getting zero incremental credit for their “professional staff” value. But, if they are incented on gross margin dollars, then every saved order (even net-profit losers to the company) will yield them something. What if their incentive was based on the net-profit improvement for customers?[2]

Does “messaging” equally-excellent commodities sound a bit dated? Progressive customers have had “VPs of Supply Chain” (not “purchasing”) for more than a decade. Shouldn’t we be pitching services that help to co-create “supply chain solutions” that both lower “total procurement cost” and maximize “up-time economics” instead of pushing commodities for a price?

Who are the other 10% of the distributors? Some may be poor-service, price-shooters that drag the 90% down. Others are top financial performers that earn 2 - 4 times the average pre-tax return on assets (ROTA) that the bottom 90% earns. How? They’ve solved 2 service cost challenges.   

FIRST: THEY GET LAST-LOOK, PLUS ONE OR TWO MORE POINTS (or profitable partnerships), BECAUSE…

They measure service statistics focused at and tuned for target customer niches (one at a time). They have (re) engaged front-line employees to achieve distinctive service metrics by connecting improvements directly to net-profit-improvement gainsharing. And, when their reps measurably know how best service levels deliver a total-cost bargain at a higher nominal price, they sell it.[3]

SECOND: THEY’VE CURED THE INVISIBLE, STRUCTURAL, COST-TO-SERVE FLAWS.

Doing net-profit analytics for a wide range of distributors reveals the following service-cost flaws:

Many popular, small-dollar, line-item picks are losers in spite of being sold at “list price with a high markup”. A $2 gizmo with a 50% margin is a big loser when line item processing and picking costs average a magnitude of $5-10/pick. Increasing prices is only part of solving this item-category problem.[4]

Many small customers sold at list price have average-order, service costs that exceed the margin dollars in the order for losses. The cure is not just higher prices, but service model changes like: minimum orders; unbundled freight charges; and/or lower, proactive selling costs than sales reps.

About 20%+ of all big customers unknowingly kill both the distributor and themselves by ordering amazing amounts of small orders. Diplomatic negotiations can turn these lose-lose activity cost relationships into win-win ones with more volume too.

Many of the bigger customers that are more or less profitable could become outstandingly profitable with more volume wins at the same prices. But, they will need team audits to fine-tune all elements of the existing relationship to generate larger-order benefits for both parties as a happy by-product.  

Curing these four opportunities will increase a typical distributor’s profit line dramatically and free people time to focus on the more arduous, service-excellence journey in parallel.

DOUBLE-DIP ECONOMY ALTERNATIVES?

Shall we continue to meet prices set by the weakest competitors and try to keep cutting our people costs with margin erosion, or do some “cost-to-serve” and “service excellence” innovating? Both opportunities will require new quickly accessible and affordable analytics to:

·          Identify customer niches to target

·          Tune fill-rate economics for each niche

·          Solve structural cost-to-serve flaws with strategic pricing and precision supply chain solutions

·          And, re-engage every employee with net-profit improvement incentives (reps too)

Learn more about all of these opportunities and visit with distributors who have done these cures at the “Advanced Profit Management Conference” in Chicago on October 20-21. Link for the brochure/registration: http://www.quantumprofitmanagement.com/info/APIC.pdf

Merrifield Consulting Group LLC, Strategic Insights # 14

bruce@merrifield.com