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”
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.
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: email@example.com
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
ERNST YOUNG (EY) SURVEY RESULTS
A recent EY survey (11-6-18) of bigger companies (than typical distributors) revealed that:
- 80% of firms see big upside potential with analytics, but can’t get results. There is a gap between insights and action not taken by employees.
- 56% said a culture of decision-making by intuition ruled. (Any intuitive account-call planning going on at your company?)
- 60% cited lack of budget and organizational commitment as the biggest pain point.
- 67% plan to hire more analytical talent
- But, 80% can’t find the talent they need.
Continue reading 126. Weak ROI on Analytics? Very Common! So?
Baseball’s Lessons For Distributors
Two books document the rise of game-changing analytics within major league baseball (MLB): Moneyball (’03) and the highly-recommended, Astroball (7/18)[i]. The 2018 MLB playoffs featured the best, most analytically-empowered teams (along with big-talent payrolls).
Studies on MLB analytics departments from ’03 to ’18 reveal that: Continue reading 125. Rent An Analytics Champ To Jumpstart a Renewal