“80/20 Rule” Upgrades1
For high “Return on Management Effort” (ROME), we focus on the “vital few” that can make the big difference. In 1906,Vilfredo Pareto, an Italian Economist, discovered that 20% of the population (cause) owned 80% of the land (effect). This “power law” observation was popularized as the “80/20 rule” by quality guru, Joseph Juran. Other “power laws” are: frequency of word usage (1/80); internet content contributors (1/90); size of earthquakes; etc.
How can we improve on 80/20 thinking? If 80/20 gets us into the right ball park, what rules will get us to the best, net-profit-improvement sections and then to the best, net-profit seat in the section? Don’t we want to pursue highest return, lowest-risk, lowest-investment opportunities first?
Net-Profit Contribution Power Laws:
Distributors that have cost-models for determining the net-profit contribution for each “line item” can roll up this “quantum profit data”2 to find the following relationships in increasingly useful order:
- 20% of the customers generate close to 80% of the sales (Pareto’s only application)
- 30% of the customers generate around 70% of the margin dollars (least extreme ratio)
- 20% of the customers generate 140% of the net-profits (top 10% => 100% & 1=>35)
- Bottom 1% customers lose (20%) of the 140% peak internal profit total (fix these ones!)
- 5% of the SKUs generate over 500% of the peak internal profits (Why? How? Sell more?)3
Amplify/Acutate Net Profit Rules With Additional, Leverage Factors:
- 4% of customers within mature industries are perpetual innovators that will generate 80% of the future growth in that industry. Much of this “growth” is not “new demand”, but stolen share from non-innovating, only-reactively-adapting competitors. Partner the profitable, “gazelle accounts” to grow profitable sales.
- Any distribution branch can offer “perfect service guaranteed” plus heroic extra efforts from all employees for aboutten, best, profit-growth-potential accounts. (Do it!)4
- The few, super-loser accounts can have good – sales, margin and margin percentage – stats, but kill us (and them) with excessive service/buying activity costs. These relationships can be transformed into win-win ones.5
- If management does “audits” of key accounts to insure that every aspect of the inter-business replenishment process and people are fine-tuned 10’s, guess what? There will be plenty of “tweaks” that will yield big results for both companies. No one has been responsible for optimizing the inter-business-process; be the first! Then, summarize the refinement opportunities for each customer and offer to make all upgrades happen at our expense along with a new “perfect service guarantee”?6
- The best 10% of your sales force can help new, upside things happen at key accounts (with management and total-team help) better than the bottom 50%. Don’t let coasters sit on key account potential and waste total-team efforts. What is the one most promising account renewal, reassignment opportunity you can find? Try it!
Net-Profit, Power-Law-Management Results:
A profit-center (branch) can:
- Turn big losers into winners and gain 20%+ more volume, because the customers would be so grateful for the big improvements in supply-chain savings and up-time effectiveness.
- Get 20% + more volume from best accounts “where we are getting all of the business”.
- Get bigger, average order sizes with best incremental margin flow-through to profits due to:
- Better-tuned replenished systems;
- More thorough penetration selling of core items for which..
- Fill-rates were increased for the most profitable SKUs
- Grow net profits 2X+ faster than sales which would grow 2X+ faster than current trends.
Stop everyone from “working harder” at reactive adaptions and fine-tuning whatever they have been doing. Focus instead on narrowly and intensively experimenting where net-profit growth can best happen.
“5-5-5 ROME” Program At Every Branch; Learn More:
For every location, identify and track the progress of the: 5 most profitable customers; 5 most profitable, future-growth gazelles; and 5 biggest losing accounts. Provide some training on how to take each category of customer to the next level7. To get really good at all of this, put a hold on October 20-21st for the “Advanced Profit- Improvement Conference” in Chicago. Learn more about power-law management tactics from both successful distributors and experts.
For more immediate enlightenment (and results), request a demo on Waypoint Analytics’ “quantum profit management service”.
- All previous “Strategic Insights” and footnotes are posted at www.merrifield.com under the “insights” tab. ↩
- See all at www.quantumprofitmanagment.com ↩
- For a detailed, how-to “script” for how to sell more, most profitable items see Ex. 61 at www.merrifield.com ↩
- For how-to script on “heroic acts by everyone for key accounts” see Ex. 63 at my site. ↩
- For how-to script on “super losing accounts into winners” see Ex. 62 at my site. ↩
- For management training manual on how to do “audits” etc. see Ex. 59 at my site. ↩
- Training kit on 5-5-5 selling is Ex. 44 at my site. ↩