Lollapalooza Effect: (A Charlie Munger
term) When multiple cognitive biases reinforce one another within a group,
irrational beliefs will take over.
WITH SMALL CUSTOMERS WITH UNPROFITABLE, AVERAGE-ORDER SIZES
When distributors create a Cost-to-ServE (CTS) model to estimate
and rank customers by net-profitability, there are typically two, customer-group
Continue reading 134. The Small-Customer, Small-Order “Lollapalooza Effect”
The “Yellow Vest”
protests in Europe echo the “We are
the 99%” (Occupy Wall Street movement) – back in August ’11. Both are
symptoms of declining, discretionary income for the bottom 95%+ of households
(in first world economies). Buying homes and having kids in the US is
unaffordable for the average Millennial. And,
if you have any promising, young employees,
are they job shopping?
Continue reading 133. Your Reply to the 2020 “Crisis of Capitalism”
Charlie Munger, renowned investor, advises: “To become wise you’ve got to have a latticework of models in your head”.
WHY MULTIPLE MODELS?
Research proves our evolutionary brains are riddled with “cognitive biases”. Good for species survival, but bad for innovating service value.
We don’t know, what we don’t know. And, thanks to “confirmation bias”, we prefer to listen to people who share our data-free beliefs. Willful ignorance is common; we humans struggle to cope with too much math reality
Because models are simplifications of reality, they are flawed with blind spots. But, not as flawed as our thinking. And, multiple models can offset the others’ blind spots. Let’s look at some fill-rate models.
THE DOMINANT FINANCIAL LENS
- Inventory is your biggest asset, so turn it faster for a better ROI.
- Improve two related financial ratios:
GMROI= Warehouse Gross Margin Dollars (divided by) average Inventory Investment.
TURN X EARN (GM%)
- But, slimming inventory reduces fill-rates. What’s the optimal target fill-rate percentage that balances declining service-value to customers with increasing ROI?
- Graph inventory investment vs. fill-rates. Find the sharp bend in the graph where diminishing returns set in. In a classic, hardgoods-distributor case, at 92% fill-rates inventory would need to double to improve fill-rates to 95%? So, target all SKUs for 92%?
- And, fill-rates increase with: knowledgeable substitutions; inter-branch transfers; and back-ordering, non-urgently needed stock outs.
COST-TO-SERVE LENS AT THE LINE-ITEM/SKU LEVEL
- Completing orders with inter-branch transfers and back-orders creates significant operational activity expense. Fatter inventory improves: fill-rates; transactional costs for both distributor and customers; and productivity of your people. All positive trade-offs.
- About 5% of SKUs are super net-profitable. Why not target those for especially high fill-rates?
- Another 5% of SKUs are very: popular yet unprofitable small-dollar-picks. Target higher fill-rates, but also pursue a blend of other profit-improving moves for these SKUs.
HIGHER FILL-RATES FOR TARGET CUSTOMER NICHES
Having best fill-rates for all types of customers is tough. But, what if you have historically strong sales and fill-rates for a peculiar niche of customers? Or, do you want to target a specific niche? Then, model what the niche buys and beef up those SKUs.Best fill-rates will both retain and win more niche customers. Increased fill-rates also boosts average Gross-Margin-Dollars per order and employee which in turn cranks profit-dollars per employee.
Financial ratios for inventory don’t see any of my under-linings! Get a Cost-To-Serve model at the line/SKU model to win.
“What Is the Best Incentive
Plan For My Reps?”….
A question that always sparks heated debate amongst distributor
principals. The ancient “5% of all sales in a territory” (and its refinements)
has accumulating drawbacks. Now, with accelerating Omnichannel Cloud Commerce
targeting B2B channels, what other Sales-Force questions come first?
- Have you written down and ranked the drawbacks and injustices of your current plan?
- (Assuming no fears about losing best reps), What account reassignments should be done?
- Can any incentive plan magically cure:
- Weak reps whom you would not hire again?
- Veteran Reps coasting to retirement while harvesting their (and possibly your) best accounts?
- A weak, unfocused, me-too strategy?
- The many net-unprofitable customers and SKUs leeching your business? (Get a cost-to-serve model – at the line-item level – to identify and fix them!)
QUESTIONS TO ASK
- What accelerating trends will converge to make
2021 selling different, and stress traditional rep orthodoxy to possibly
- What are your suppliers envisioning for B2B,
Omnichannel, Cloud-Commerce in 2021?
- How do you plan to develop e-selling skills?
- How will you score current reps for their 2021
- In ’21, how will you segment your customers to then
- Different service-metrics’ benefits and terms?
- Customized supply-chain replenishment solutions?
- Factory Omnichannel scenarios involving both dis
- With what multiple selling-cost models?
- Are too many, too-small accounts currently assigned
- Are some huge accounts desiring supply-chain
solutions that require a team selling process still assigned to solo reps?
analytics will help answer these questions and guide action plans?
- Based on answers for 1-6: how will you “right-size
and upgrade” your reps to:
- Solve all historic problems?
- And, spark a big increase in sales and profits
from best accounts?
- Finally, what will be an incentive plan that
will be customer-centric and please your best reps
within a new e-selling era?
Help With Answers?
I could write an e-book on “B2B Distributor Sales Management
Opportunities: 2019 to 2024”. But, only if:
- I get lots of “do it” demand from regular
readers who in turn…
- Persuade others to vote “YES” and get trade or
buying groups to offer some sponsorship.
Interested? Email your thoughts to: email@example.com.
Otherwise, blogs will continue!
FINANCIAL TACTICS AND SERVICE METRICS TO WIN NET-PROFITABLE CUSTOMERS
Financial KPIs urge: “try harder, be cost efficient”. Good stuff. But, what are your analytics to achieve unique service-value capabilities which win and keep big, targeted, net-profitable accounts that average higher margin dollars per order than their average service-cost per order? And, do they keep and motivate best-service-ethic people to:
- Achieve the service-metric goals for the target accounts?
- Cure root causes for net-unprofitable customers and SKUs?
THEMES BEHIND MY BLOGS?
This note is one of 130 blogs posted at www.merrifieldact2.com. A big underlying theme for these postcards has been “inventing analytics to better measure and manage true causes of Profit-Power”.
I’ve rotated through sub-topics (or lenses) including:
- Finance. What are the dysfunctional financial-management assumptions and blind spots that plague many distributors?
- Profit-Equation Management (or order-size economics). You make money at the line, order and customer level when: Margin Dollars minus Cost-To-Serve Dollars equals Positive Profit Dollars. Most distributors vastly underestimate their losing customers, SKUs, and Sales Territories – all of which have losing Profit Equations. Building a cost-to-serve model is not hard. What is? Giving up old beliefs that all customers and gross-profit dollars are all equally good.
- Customer (and SKU) Profitability Ranking Reports. By creatively focusing on the top/best and bottom/worst 5% of these reports, huge profit improvements are possible.
- Field research to discern next-level, service metrics for most net-profitable customers and customer niches (“nichonomics”). Distributors who do this kill those who don’t.
- High-Performance, Service Cultures to attract, engage, and focus talent needed to turn insights (from topics 2-4) into better service-value and profits.
- Key, defining capabilities that customers reward and no other competitors have. Topics 1-5 create these capabilities which win profitable order-streams from best customers. Then, all financial numbers (which are downstream, aggregated, averaged-out symptoms) improve.
- Envisioning Omnichannel Cloud Commerce circa 2021. Do you have the analytics to inform and enable your digital transformation strategies? Topics 1-6 provide the profits, agility, and confidence to change to win in 2021.
AN E-BOOK OF MY BLOGS?
Would an E-book that re-sorts my blogs into sub-topics with additional comments and discussion questions be useful? If YES, let me know: firstname.lastname@example.org
The global, debt-fueled, everything-bubble is deflating. Will
the US economy go into recession? Accurately unforecastable and uncontrollable
by us! Why not, instead, make controllable changes that will out-perform possible
Continue reading 129. For Big Gains in 2019, Forgive to Change