Strategic Insights 17

 

GET “LINE-ITEM-PROFIT ANALYTICS” (LIPA) FOR BEST INSIGHTS

 

Does your company have its own, internally-developed, cost-to-serve model(s) to determine the net profit or loss for every line-item processed at every branch location? While “customer profitability analysis” (CPA) insights can be fruitful, here’s best “analytics” math:

 

CPA-Insights    X   Item/supplier, net-profitability Insights =  400%+ more opportunity!    

 

Because Line Item Profit Analysis (LIPA) model building is difficult to do in-house, I have suggested (since ’78) a simple, customer-profitability approach that works well. Some distributors have gotten good-enough, customer-profitability, ranking reports, but not acted on the insights. Others have acted to fix losing customer relationships and do a bit more with core customers, but then slipped back into old ways.

 

Successful, sustainable net-profit management results require a LIPA reporting system that allows diagnosing the intersections of most profitable (and unprofitable) customers and items. Every employee needs to constantly be able to monitor and (potentially) have incentives based on net-profit-improvement opportunities that a LIPA system: reveals, tracks and scores. LIPA systems are now available on an: outsourced, web-service, monthly-subscription basis. Every distributor can quickly and affordably be growing net profit in new ways.     

 

LIPA CASE STUDY: “ALL OF OUR PRODUCT PROMOTIONS HAD ZERO IMPACT IN 2011!”

 

A LIPA-capable distributor/client in a commodity line business (no valuable exclusive franchises):

1.     Ranked suppliers by the net-profit they generated for the year: big winners to losers.

2.     Calculated the year-over-year, net-profit change (or “delta”) for each supplier.

3.     Re-ranked suppliers from the biggest positive to negative deltas.

4.     Then, investigated what caused the big deltas by digging into:

a.     Specific customers’ big buying changes behind each big delta.

b.     SKU net-profit deltas (to what customers) for each supplier delta  

c.     How past-year promotions affected supplier deltas?   

 

THEIR CONCLUSIONS:

1.     NONE of the (supplier/product-centric) promotions in 2011 increased the net profit of the promoted suppliers materially.   

2.     One channel-loading promotion increased sales by 5% over the company’s average sales increase, but the net-profit on the line dropped in half after adding rebates back in.     

3.     Every big positive delta for a supplier was caused by an alternative set of customer-centric, programs. Specifically:

a.     Winning (more than losing) big chunks of business from 1 to 10 big accounts were the most common drivers for the biggest swings. The “5-5-5” team-selling and servicing program aimed at 5 – core, target, and big-losing – customers achieved big, net-profit gains. The suppliers of the key items for these growth accounts were passive beneficiaries.

b.     One most profitable supplier was up by another 50% in profits because of a planned beefing-up of inventory on 20 items in the total line. These items were already most popular and profitable for a profitable niche of 50 customers (out of roughly 1000).  

c.     The biggest “delta” swing story involved a supplier (of the equivalent of paperclips) that went from a ($40K) loss on $400k in sales in 2010 to a $50K profit on $600k in sales in FY ’11. The distributor had about 20 customers that applied just-in-time delivery to all of their needs including repetitive fifty-cent picks of paperclip-type items. The “precision supply chain solution” was to continue to deliver the decent-margin-dollar-per-pick items twice a week. The paperclips were, however, switched to a twice-a-year, top-off-the-pile system at the customers’ locations. Thousands of picks were consolidate 100-fold and emergency orders for stocked-out paperclip stopped. Activity costs for both parties and down-time costs for customers plunged. Pleased customers rewarded the distributor with a lot more share-of-account business. The paperclip supplier was – again – a passive beneficiary of a 50% increase in sales.

4.     For 2012, supplier/product centric promotions are being reduced. Marketing people are focusing most-profitable suppliers on helping with – bigger share of “right, best customers in best customer-niche” – programs.

 

RESEARCH LIPA SYSTEM WEB SERVICE(S)

 

Don’t reinvent the (LIPA) wheel from scratch. Outsource 90%+ of your LIPA reporting system – modeling, report design, database architecture and storage – to full-time, experts specializing in distributors. Then, fine-tune the models and incentives to every branch and sales rep.

 

The only web-service firm that can currently do this (that I know of) is Waypoint Analytics. They are already providing full-LIPA reporting system service to hundreds of distribution locations in over 30 different commodity channels. Even large distribution chains are subscribing with the options of eventually reproducing the service capability in-house or buying an in-house license using subscription fee credits. Why not request a go-to-meeting demo with Waypoint to see – at the least – what you should be thinking about and may have to compete against?