The conceptual appeal of applying both “business intelligence” (BI) and “activity-based-costing” (ABC) to distribution businesses has been historically compelling, but I’ve come across few success stories. Some summary comments about these weak results from distributors are:
- “The software package(s) are too: expensive, complicated, generic, inflexible, etc.”
- “We got lots of interesting data, but nothing actionable.”
- “Using ABC modeling quickly became too complicated.”
- “We generated customer profitability reports, but no one wanted to believe the cost allocations and nothing happened.”
- “No one was going to listen to new ideas from a financial department staff guy.”
THE SOLUTION TO THESE PROBLEMS
If a new, distributor-specific, service could solve all five problems above, what would we call it? It would be bigger than and more comprehensive than “BI”, which has become an oxymoron for some. If we sat through a go-to-meeting-type demonstration of this service, would we have the new vocabulary and building-block ideas:
- To understand what we were seeing and looking for (not infoglut, but true actionable insights) and …
- To conclude that it is a low-risk, breakthrough solution with a high probability of delivering a big ROI?
The answer is Waypoint Analytics’ “Quantum Profit Management Service” (QPMS): a new name for a new type of capability. Waypoint has combined 5 key elements (the secret sauce) to create QPMS:
- On-demand software economics and flexibility with…
- Activity cost-modeling tuned specifically to and co-created with a wide variety of distributors (called “Quantum Profit Analysis” or QPA).
- Pre-programmed reports on drop-down menus that incorporate expert understanding about underlying distribution service economics and root-cause profit (and loss) growth causes;
- A series of both written and video-based, prescriptive profit-improvement plays that flow from and capitalize on the new informational results; all with…
- Change management support tools including: change management metrics; DVD education; and virtual, go-to-meeting-session coaching as needed.
- All for a low monthly subscription fee. (Stop subscribing if there is no quick payback; put the risk on the vendor to keep you satisfied. This isn’t an ERP-mission critical deal with big upfront checks and then “unanticipated” extra expense and time for implementation.)
- Let’s take a deeper look at each of these five elements to see how they combine to deliver a unique capability and a high, fast, risk-free ROI for distributor clients.
ON-PREMISE SOFTWARE ECONOMICS v. ON-DEMAND SOFTWARE SERVICES.
On-demand software users benefit from the plunging costs for both internet connectivity and off-premise computing. The “total cost” for on-demand software services are far less than and dropping in comparison to buying on-premise software. Why not buy the best-designed-for-you drink by the glass rather than having to buy the entire bar (upfront, no returns)? Then, add in the costs and challenges of having to fund and develop your own in-house expertise. For a small set-up fee, any distributor can be running QPMS within two to three weeks. Then, the modest subscription fee is a flat monthly rate regardless of how many employees securely interact with the service (for access to their data only). Clients who quickly put Waypoint insights to use are getting 3 to 10X payback within 3 to 6 months. Waypoint shoulders the big risk and can not make any money unless clients stay happy subscribers for a long time to more than cover the true, set-up and tuning costs incurred for each client.
Besides sharing the overhead and continuous-improvement development costs for QPMS with all clients, any subscriber also gets co-creative access to Waypoint personnel. Their executives serve – through go-to-meetings – as virtual VPs of business intelligence architecture and implementation. No one distribution chain can afford to duplicate the expertise Waypoint has accumulated by working with many different types of most-progressive distributors. Some chains have chosen, however, to blend QPMS with what they have been doing internally and then have a rent-to-buy credit for an on-premise use option.
Each distributor’s additional needs requests are, in turn, the fuel for a continuous stream of upgrades that are instantly available to all clients. And, there are already disguised case studies being posted on the web about how clients are turning insights into profits.1 Waypoint anticipates facilitating “user-group” forums in which each client’s preferences about how and with whom they share their insights and results will be honored.
QUANTUUM PROFIT ANALYSIS (QPA) COST MODELING v. ABC.
“Activity Based Costing” (ABC) was coined as a term in 1987, but it had been used – without the catchy name – in manufacturing settings since the ‘60s. With the arrival of PCs and spreadsheet software in the early ‘80s, a lot of experimental activity cost work started. In 1987, ABC was hailed as the “next big management tool”, but it never took off, especially within firms with less than 500 employees. ABC was just too complicated to deploy, and the finance/accounting department folks had trouble selling any new insights and implications to senior management. Changing traditional industry thinking is not easy.
What’s been missing – until now – is a cost modeling approach specifically tuned to distributors that allocates all operating costs (aka “cost to serve” or CTS) to the line-item level to get “good enough” estimations of the actual “Profit Before Interest and Taxes” (PBIT) for each line item pick. These increments of PBIT (or losses) at the “quantum level”(smallest indivisible unit) or line level can then be summed up to determine the PBIT in: a transaction; all of a customer’s transactions; all of the customers in a sales territory; all of the picks for a given item; and all picks for all items in a supplier’s line. Waypoint calls this bottom-up, profitability analysis and then ranking capability: “Quantum Profit Analysis” (QPA).
QPA continues to improve to an optimum level of complexity and accuracy for allocating CTS through three on-going practices:
- Re-tuning cost allocation assumptions iteratively against the extreme winners and losers on all profitability ranking reports in order to get stable results. Because we can never know “true costs” even for our tax returns, the goal is to be “close enough” for confident action.2
- During this tuning process every new QPMS client has improved Waypoint’s expertise while helping each client gain new CTS educational awareness and confidence in allocation assumptions and results.
- Assessing the degree of difficulty of doing updated allocations that are necessary because of changes in the economy and from business decisions. If cost-modeling is too simplistic, then the approximations for profitability are less trustworthy. If the model becomes too complex, then it becomes too inflexible to change for CTS allocation updates.
“META-KNOWLEDGE” TO (RE)-SHAPE ANALYTICS, REPORTS AND PLAYS.
What is meta-knowledge? In the “data-information-knowledge-wisdom”* model, which has been around since the early ‘90s (“google-images” those four words), Waypoint has inserted distribution-specific, meta-knowledge between “knowledge and wisdom”. Here are quick, rough definitions for all 5 terms:
Data are the pieces of operational measurables within your business (e.g. a line item).
Information is a part that is comprised of data pieces (an invoice to a customer).
Knowledge are parts that are added up to a whole (P&L statement).
Meta-Knowledge is abstractly “knowledge about knowledge”. It is knowing what questions to ask in order to design the right database to pursue the right calculations to get the right reports formatted to achieve better knowledge insights. There are multiple types and levels of meta-knowledge, which, when incorporated into an industry-specific analytic system, is something akin to “artificial intelligence” like we find in chess software which can beat 99.99% of all players.
Wisdom is not only “good perception and judgment” by a person, but what emerges from an analytic report that inter-relates “knowledge wholes” to reveal insights about the business model or system in which we are working to ultimately make better business decisions (e.g.: cash-flow forecast models).
How does good meta-knowledge help? We are, in a sense, limited in our actions and thinking by the information resources around us and the metrics that we use and pay people by. Don’t be surprised if, by example, a rep, who receives incentive pay based on gross margin dollars, is always pushing the company to do things to grow gross-margin dollars at the expense of company profitability and working capital debt: i.e., add inventory, loosen credit and add free-service cost capability to support even those customers that are already losing the company money. If reps had incentives, by contrast, on improving customer PBIT (net of both CTS and carrying charges for “special stock” and “excess receivables” along with appropriate tracking reports), we would all think and act in harmony at a higher level of wisdom!3
One way to judge the value of “meta-knowledge” is: how much does it improve the quality and quantity of informational insights that we are getting. “Insight” is actually one of four types of “sights”; there are also:current-sight, hind-sight and fore-sight. By illustration, most operational-financial-reporting software (ERP system) provides overwhelming amounts of current-sights and hind-sights, but little to no in-sights orfore-sights. If, for example, 40% of a distributor’s inventory is tied up in two cash-traps, overstock of some items and dead stock of others, these are good informational hind-sights. Ranking the cash-trap item investments by dollars and having lots of tricks to try to whittle down the totals is above-average operational efficiency.
But, we still do not have any insights as to why and how cash-traps creep into inventory on a continuous and/or structural basis. Nor do we know (fore-sight) what “asset productivity improvement play” to implement in an effective way. Or, how much the new play will reduce cash-trap investment (and bank debt) on a preventative and structurally permanent basis. Without compelling insights and foresights, how can we go fromremedial activity to high-return, opportunistically, anticipatory effectiveness? Most distributors can’t move to a more strategically effective and profitable level of business with the metrics that they are currently using.
Exactly what is the “meta-knowledge” that is built into and comes with the total bundled QPMS from Waypoint? The short answer is that most of the “how-would-we-measure-that idea” stuff that you will find at-www.merrifield.com and www.quantumprofitmanagement.com are already in QPMS or will be when clients are ready for it. (Most are still working on “5 x 5 Sales Force Dashboard Plays” and strategic tuning of core-item, fill-rate plays.) Waypoint is making strategic immeasurables measurable on a good-enough-accuracy basis to achieve breakthrough results.4
A second type of “meta-knowledge” that permeates Waypoint’s QPMS is the mindfulness about how tough it is for businesses to change. What good are breakthrough insights that beg for big company changes, if a company struggles with small changes aimed at fine-tuning the past? Many managers, for example, when first introduced to customer profitability ranking reports, just look at the same, indisputable, super-losing accounts at the bottom of their ranking reports for months and don’t act. Because change is tough to do, Waypoint is co-creating a “kinetic-chain, implementation-checklist-service” approach with its clients and certified consulting coaches.
WHAT’S THE KINETIC-CHAIN IMPLEMENTATION CHECKLIST?
In the early ‘80s, I “invented” my “kinetic-chain for sustainable profit power” from “corporate alignment” ideas that were floating by.5 Of the seven steps in the chain (1. leadership; 2. strategy; 3. systems; 4. people; 5. education; 6. tools; 7. incentives) a “software solution”, by example, is – in the narrowest sense – only “step 6”, “a tool”.
If something new is introduced at any specific step in the kinetic chain, it can cause permanent improvementsonly if all of the other steps of the chain are actively supportive and in consistent (re)alignment with the new element. Otherwise, the total corporate system will eventually reject the new element and continue doing what it has been doing.
How does Waypoint work with clients to bolster all 7 steps of the kinetic chain for any “profit improvement play” that flows from new informational insights?
- Starting with the assumption that we can’t know or manage well what we don’t measure, QPMS has built in metrics or metrics-tracking ability for the effectiveness of all seven steps. There is nothing like repetitive, in-our-face, new-insight metrics to start shifting our view on reality, albeit, at different personal rates.
- Big changes require new vocabulary and building block concepts to understand the new vision and plan. Waypoint already offer lots of written and DVD educational training materials to support its new insights and metrics.
- Waypoint is planning to create lots of one to five minute video clips that clients can access on a 24×7 just-in-time, learning-moment basis.
- Because many people who do change do so with good coaching and support groups, Waypoint is already providing go-to-meeting coaching sessions with clients. And, the plan is to have experienced distribution consultants as certified coaches in QPM who will also be available on a virtual, go-to-meeting-delivery basis.
- For support groups, Waypoint can already see the distinct possibility for power-users groups of most progressive distributors, with no competitive conflicts, forming to share ideas and motivational success stories by year end 2009.
- Waypoint QPMS has been conceived and built to take care of all of the drawbacks of previous attempts at achieving actionable, information insights.
- The capabilities that account for QPMS’s breakthrough value proposition are: software on-demand economics; Quantum Profit Analysis (cost modeling); and three types of distribution-specific meta-knowledge:
- distribution service economics metrics;
- recipe profit improvement plays; and
- kinetic-chain, change management support.
- Implementation is fast, affordable and flexible.
- From a meta-knowledge/informational-insights perspective, QPMS has created a new category of management capability for distributors. There is no other second best alternative, and QPMS is improving (with continual upgrades) by the week!
- Request a management team “demo” of Waypoint’s QPMS whenever you are ready!
©Merrifield Consulting Group, Inc., Article 1.25
- Check out case studies already posted at www.quantumprofitmanagement.com, and www.merrifield.com/quantum . ↩
- QPA numbers cross-check financial ERP numbers and find “busts”. The two sets of numbers will not match, however, due to the many adjustments made to financials, including final year-end ones, which can be huge. If a firm were to run two ERP systems and use two different CFOs and accounting firms all in parallel, those two sets of ERP/financial numbers and final taxes would not match and could vary significantly on year-end inventory valuation assumptions alone. ↩
- QPMS provides “net-PBIT compensation” reporting for sales reps’ compensation. ↩
- For a list of meta-knowledge-shaped “plays” see: Exhibits 56 and 57 at www.merrifield.com. ↩
- For more on the “kinetic chain” see: Exhibit 16 at merrifield.com; and module 5.10 in “High Performance Ideas for All” education kit. ↩