On 12-1-08 it was officially announced that we have been in a recession, and it looks like the worst is yet to come. What are distributors planning to do in 2009? Surveys suggest all of the normal reflex actions: cut costs; layoffs; postpone investments; sell harder; push more products; etc. These are all sensible, but similar moves: do they provide any competitive value advantage? Will they be sufficient for distributors that have appreciable debt and/or high, wealth-creation ambition?
NEXT LEVEL PLAYS
Want some better ideas? If we look at our customer portfolio through the lens of profitability ranking reports that use sufficiently good activity-based costing models, we could then:
- Identify the ten most profitable customers in each niche for which we are the #1 or 2 most effective supplier. Sign up 3 to 5 of them to be “advisors” to help us (re)define exactly what our “service value equation” is. Put those metrics on the wall and get everyone contributing in new ways to dramatically improve and maintain those service levels, because it is in their best interests and what they do want in the personal lives as customers. (Case example: http://www.merrifield.com/exhibits/8elements.pdf
- Because fill-rates on warehouse orders is foundational to service excellence, why not rank the most popular items bought by the top 10 customers in a given niche and:
- Beef up inventory investment for some significant sub-set of those items to improve customer satisfaction and retention for all customers within the niche; and…
- Improve average order size, so that 50% of the incremental margin dollars past breakeven on transaction costs flows through to the profit line. (New mantra: sell more old items & complete fills to old customers on a larger average order size basis! Want to know more about five, specific old-2-old profit power plays and how to measure, track and execute them? Request the “Ultra-Plan one-day seminar narrative” from firstname.lastname@example.org.
- Who has time to do proactive stuff? We can’t do new, most-promising things, if we don’t first free up resource energy being invested in – ideally – our biggest, losing stuff. Isn’t that why we prune-to-grow our hedges and weed-to-feed our flower beds? Why not visit the super-loser accounts and create custom solutions, if necessary, to convert them to significantly profitable accounts. Specifically how? See http://www.merrifield.com/articles/4_10.asp. And, don’t forget to track each branch’s operating profit improvements for: 5 core accounts; 5 target accounts; and 5 super-losers-to-gold accounts! (http://www.merrifield.com/exhibits/Exhibit 44, The 555 Kit.)
- And, what about the 50% or more of our accounts that are small customers that give us small orders in which the margin dollars can not cover the costs of the standard wholesale services we are giving them? If we had very precise customer profitability ranking reports by – company, branch, sales territory, and several sub-strata – there are a number of tactics we could employ to: make them profitable or nudge them to weed-up our competitor’s garden. If we track daily transaction activity, we will know when we can lay-off fulfillment personnel costs that are two times or more the amount that we might lose in small account margin dollars. Will we suffer a little dip in sales to make more money and free up some receivables cash? Maybe. But, our bank would be pleased, and we could then redeploy our best, remaining people to focus more thoroughly on service value improvements for our core customers and niches to start growing 2-to-5 times faster than the industry average.
- How shall we please our best suppliers? Why don’t we rank our suppliers from high to low by their actual operating profit contribution? What should we do about the most profitable items in the most profitable lines versus the unprofitable items from redundant, unprofitable suppliers? Why not generate two hunting lists for the sales force:
- A list of customers that are buying unprofitable items which we are closing out. Offer these customers a close-out, load-up special price, AND change their habitual replenishment systems/habits so that they will eventually buy our most-profitable-substitute items when they run low on our close out deal.
- A list of most popular (profitable and/or from preferred suppliers we need to please) items for a given niche which a specific customer within that niche isn’t buying (a more, old-2-old-on-a-larger-order-size-basis play).
HOW TO GET PROFITABILITY RANKING REPORTS – FAST
“But Bruce, how do we generate these profitability ranking reports (for customers, sales territories and product lines) to then analyze, measure and track all of these plays? We can’t easily do the reports or the tracking you suggest with our current IT system.”
All IT systems are designed primarily to generate financial and asset management reports that comply with “generally accepted accounting principles” (GAAP) and support asset-backed lending requirements. GAAP numbers are generally lagging indicators of what service value moves we made (or didn’t) months to years earlier. We need GAAP numbers AND some supplementary, flexible way to analyze and track next-level, profit-power plays. A “business intelligence” module that is exclusively fed by a GAAP-driven, IT system won’t suffice either.
The only fast, affordable, flexible solution to this strategic business intelligence (SBI) problem that I could imagine was to partner with a company that could provide best activity-based costing models tuned to both distributors and my profit-power plays. If this service could be delivered on a monthly subscription basis over the internet – leveraging software as a service technology – that didn’t exist two years ago, we could:
- Install the service within a week or two.
- Guarantee an excellent, immediate payback (or stop monthly subscription payments!)
- Provide upgrades for a most progressive group of subscribers from all distribution channels instantly with (disguised) case stories to go with the upgrades.
- Provide on-demand minutes of coaching or programming as needed sitting at our remote desks looking at the same screen as the subscribing financial and IT managers.
- And, create new solutions that draw on both the IT and SBI service. If some or all of the SBI service contributions can eventually be taken in house, excellent. So, let’s get started!
For all of these reasons, I have – for the first time in 30 years of consulting – “partnered with” a “software solution provider”: www.ultra-plan.com.
As we look this into the jaws of the global credit-bubble, credit-crunch meltdown, what should we do if we are ambitious and/or leveraged wealth-builders? Strive to:
- Stay within bank-line covenants and even pay-down debt by…
- Strategically shrinking the asset-base of a distribution business while…
- Increasing profits 4-fold or more and …
- Have a growing-faster-than-the-industry story due to service value innovations aimed at right customers within the right customer niches (?)
The standard, fire-drill of cutting costs and trying harder in the same old ways is good, but not great. Strategically re-sculpting our business around profitability ranking report plays is worth at least a deeper look and most probably some inexpensive experimentation that has huge upside potential.
D. Bruce Merrifield, Jr.,
©Merrifield Consulting Group, Inc., Article 1.23
December 4, 2008