Strategic Insights # 8
THE OPPORTUNITY COSTS OF SELLING “ALL
TO ALL” IN A MAIN WAY
In our last
“Strategic Insights”, we recommended the book, Islands of Profit in a Sea of
Red Ink by Byrnes.
This must-read will inform your management team as to why most distributors
have big, profit-loss, cross-subsidies existing between both customers and
items. And, it will guide you in applying “precision supply solutions” to grow
customer value, lower “cost to serve” (CTS) and grow sustainable profits
enormously! The cross-subsidy opportunities are invisible for several reasons:
1.
1. Distributors
typically measure “profitability” of individual customers/items based only on
sales, margin dollars and margin percentage levels by default. Does your firm know the CTS for processing
every line item scenario to then subtract those costs from margin dollars to
determine the net-profit contribution for a specific customer or line item?
4.
2. If
CTS is unknown, then all sales, margin dollars and customers are “good”. They
help to cover “fixed costs” which are typically unmeasured and over-estimated.
4.
3. A
database of many different types of distributors using net-profit management
reporting reveals “fixed costs” to average about 20% of all costs; 80% are
variable.
“MORE: Sales, margin dollars, rebates” blinds us to asking where are the
“economies of scale”? There is no correlation between distribution-location
sales (or margin dollars) and pre-tax return on inventory and receivables?
4.
4. Most
companies have one main, historic way for going to market. If it is with
outside sales reps, then a mature, distribution location has usually
accumulated many, small, never-growing accounts. The standard-service-model CTS
for these “house accounts” will typically exceed the margin dollars per
transaction from the accounts for an average loss on every order. These
accounts need a new “service model”.
5.
5. At
the other extreme, the top 1%+ of the most-profitable accounts - which on a
lifetime, net-present-value basis generate over 20%+ of profits - are typically
underserved by an assigned rep. Will you
or a competitor be the first to focus a team effort on these (prospective)
profit giants to co-create a next-level, win-win, precision-supply-chain
solution with extra budget resources?
WHALE CURVE
PROFITABILITY REVELATIONS
Distributors who
have out-sourced the challenge of CTS modeling to Waypoint Analytics are
quickly and affordably getting profitability ranking reports (and 200+ other
tools) via the net. What is initially most informing? By studying the “peak
profits” on the whale curves for customers, items and suppliers you will see
that all three far exceed reported financial profits. For most distributors,
20% - 40% of all customers are profitable and generate about 150% of the
financially reported net profit total. The biggest-losing 1% will destroy 20%
of those peak profits. Item profitability is far more skewed: 5-20% of the
active (had 1 or more picks in the past year) items will generate between
200-800% of the financial profit line.
Deeper-analysis
tools for each section of these whale curves will then point to “precision
supply solution” tactics that will increase the profits of each section to
greatly surpass the “peak profit total” on the customer profitability curve
(about 150% of financial profits).
THE
OPPORTUNITY-COSTS OF SELLING “ALL-TO-ALL, One Way”?
Most distributors could at least double
sales by selling the right half of their current active accounts the right,
precision-supply-chain way and quadruple financial profits by using Waypoint profit-improvement
plays. These plays all have tracking reports which in turn tie into “net-profit
improvement reports” which allow every employee, including reps, to be incented
on net-profit (turbo-charge an ESOP!).
The plays achieve the following objectives:
1.
1. Selling
20%+ more sales to most profitable core customers to boost their profits by
40%! (?)
2.
2. Selling
20%+ more volume on most profitable items from most profitable suppliers for
another 40% net-profit-improvement, flow-through effect.
3.
3. Cracking
and partnering high, profit-growth target accounts.
4.
4. Changing
the service model and terms for small, growing-nowhere customers. Half may
leave to paralyze competitors, the rest buy twice as much on a profitable
basis.
5.
5. Turning
super-losing accounts into profitable ones that then buy 20%+ more for huge
profit swings.
6.
6. Defining
service metrics for a re-fined “service value equation” for each target niche
of customers and allowing every front-line employee to get engaged in
improving: service value, profits and their own, believable, measurable
gain-sharing bonuses.
Request a
go-to-meeting demo from Waypoint for your management team to at least benchmark
what you may not be doing in value/profit improvement analytics. And/or,
request an invitation to the Waypoint-sponsored “Advanced Profit Management”
conference this fall in Chicago.
Strategic Insights
# 8
©Merrifield
Consulting Group, LLC
bruce@merrifield.com
