Most distributors have naturally-occurring, High Gross Margin percentage (house) accounts and High Gross Margin percentage (small-dollar-pick) SKUs. These sales are surprisingly “Operating-Profit-Dollar” (Profit$s) losers.

The Gross Margin Dollars (GM$s) in these small-dollar picks and orders amount to less than the Cost-to-Serve Dollars (CTS$s) they consume, which means they cost your company more to fill than the Profit$s they generate for your company.

**By contrast, direct-ship orders with low Gross Margin percentage are often quite profitable.**

What matters at the line and order level, therefore, is not the Gross Margin percentage, but rather __this__ profit equation:

**GM$s** less **CTS$s ** equals **Profit$**

**Note that Gross Margin Percentage (GM%) is not in this equation! **

In fact, a higher Gross Margin Percentage will increase the Gross Margin Dollars, __but the even bigger Cost-to-Serve Dollars total for excessive lines, orders, customers and SKUs remains unmeasured, unknown and larger than believed__.

This “informational blindness” allows High Gross Margin percentage-losing sales activity to accumulate; and some profitable, Low Gross Margin percentage direct orders to be overbid and lost.

**Getting Rid of High-Gross Margin Percentage Blind-Spots**

A simulation game with financial statements tells us that both – Selling High and Buying Low – will improve Gross Margin percentage, Gross Margin dollars and the flow-through of the incremental Gross Margin Dollars to Profits.

So: higher Gross Margin percentage is GOOD everywhere and always (which doesn’t work on small dollar picks and orders!)

Of course, __don’t underprice an outstanding Service-Value if you have one__. If you can increase the prices on some items and to some customers and make them stick and not lose any business – then do it!

Otherwise, these blind-spots will hurt you as in the following examples:

- Buy-low, Sell-high is a zero-sum, win-lose goal. Your gains are your suppliers and customers’ losses. But, what are your unmeasured costs for: lost-trust and increased price-shopping and haggling costs? After years of haggling has profitability improved?
- Financial analysis assumes that all of the underlying transactions, variables and dynamics summed up from last year are static going forward. They aren’t.
- Do you think you can service a few more, incremental, small picks and orders without increasing expenses? Distributors that do Line-Item, Profit Analysis discover, on average, that 70% of all lines have losing profit-equations. And, 65% of all orders and 80% of all customers are losers. Therefore,
__losing “busi-ness” eats all change ideas__.

Learn and apply CTS Math to significantly improve these statistics and cure profit-losing equations. Watch both sales and profits soar by taking the following three simple steps:

- Watch the 3-minute excerpt below from our recently released “Cost-To-Serve Math” course.
- Check out waypointanalytics.net and request a demo.
- Attend the Advanced Profit Innovation Conference Feb. 29/March 1
^{st}in Phoenix. (apicconference.com)

Click here to get CTS-smarter in 2016 and prosper!