200. Customer Order-Size Rebates

Fixing A Cherry-Picking, Losing Account

ABC Supply uses a customer profitability service i . A big losing account, Bruiser Contracting, has these 12-month trailing stats: A real-life story.

  1. 250 invoices with an average of $20 in gross margin/invoice
  2. Average cost/invoice: $90.
  3. Loss/invoice ($70) x 250 invoices = annual loss of ($17,500).
  4. The rep for Bruiser earns 25% of the $5000 in total margin dollars for $1250
  5. Bruiser runs 40 vans. And, buys from three, family-related suppliers.
  6. The rep had insisted that ABC match the #1 supplier’s contract prices and terms including: no minimum order; free freight; and free returns.
  7. But, Bruiser is only buying odd, C and D items.

From the order-desk associates, we discover that the Bruiser buyer calls every day with a list of needed oddities. ABC typically has 1 or 2 for which they “win” an order.

What’s the value exchange? Bruiser cherry-picks ABC’s inventory to promptly take care of its customers’ needs and bill more hours. ABC loses $70 on every unique stock value. Not fair!

The Solution?

Bruiser was reassigned to the house. The rep was given a check for $1250 (a year’s commissions in advance) and refocused on smarter, target accounts.

The CEO visited Bruiser’s owner with three plans:

  1. Explain the losses ABC was incurring to see if Bruiser might help in some way.
  2. If Bruiser offered no concessions (which happened), then unilaterally dictate two new options. Bruiser would be a house account: no rep; list prices; strict minimum order; and an unbundled freight charge.
  3. But, if they wanted great prices, they could enter orders via the web-site. And, the bigger the order the bigger discounts. The first threshold earns free freight. The maximum level of $2000+ earns an 8% discount.
  4. Over $2000, they could also phone in for a quote.

ABC is sharing the savings from: no rep costs; electronic order entry; and consolidated shipping and paper-shuffling costs. 8% for all was a better discount (on an order basis) than the competitors’ plans and unmatchable. The competitors did not have the Cost-to-Serve math or web order-entry calculator.

What Happened?

Bruiser threatened to never buy from ABC again. But, the buyer quickly resumed calling for cherry oddities and then added commodities to meet the minimum order. And, they did place a few $2000+ big-job-need’s orders. The speed and prices beat the competitors.

Bruiser’s next-year totals: 60 orders for $31.2K in sales @ 25% margin for $1800 in profit (5.8% of sales) not including freight for most orders. Order-size averages: $520 in sales; $130 in GP$s; Cost/order $100; and profit/order $30.

Final Question:

How might any distributor use Order-Size incentives?

For more on this opportunity, be in touch: bruce@merrifield.com

i  Waypointanalytics.net (contact me for a demo)

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