Diamonds are the most concentrated source of wealth within the planet, and every distributor location with average or higher sales volume has a portion of its total sales that is similar to a diamond that we will call the “core”. The core is usually about 35-50% of total sales and involves sales of most profitable items (supplier lines) to most profitable customers. The importance of core identification, renewal and leveraging has been generally addressed by Chris Zook in three excellent management books. And, many research studies have concluded that better core management is the most powerful and primary strategic choice that a firm in a profitless, mature company and industry can do.
How big a profit opportunity is better core management for a distributor?
Companies that follow the how-to recipe in the next section below discover that:
- 5 to 10% of active accounts generate about 35 to 50% of total sales and about 100% of a firm’s profits. All profitable customers will generate about 150% of reported profits, because 50% is eaten by all of the chronically losing customers in the portfolio.
- Looking at the combined item purchases of these core customers reveals that somewhere between 2 and 20% of all active items are bought by two or more of the core customers. These popular items appear to be highly profitable, because the collective buying of the core customers allows the distributor to:
- Buy the items/line well and frequently.
- Frequent replenishment reduces both excess stocking and stock outs for those items/lines.
- Higher fill-rates of these items bought by customers in good quantities along with the other popular items niche customers all tend to buy generates both higher margin dollars and profits per order.
- The bottom line profits on core sales will be 2-to-4 times greater than the overall profit margin for the company. This is all free, cash-flow dollars from mature customers and products with market development costs long passed.
- Once the core-intersection elements are known, a number of optimization “plays” are possible which can quickly increase the profits from this cash-cow by 20 to 100% in one year. And, customer service satisfaction and retention will increase proportionately.
The first big problem, though, is: how to define and measure “the core”?
A distributor can do this by making a series of assumptions and using the right profitability measurement analytics. The assumptions are:
- A firm’s historic strategy is where it makes the most money.
- Not all customers – in spite of total gross margin dollars or margin percentages – are equally profitable or even profitable. Some customers have high margin dollars and low service-process activity costs that make them highly profitable. Others have cost-to-serve totals that can exceed twice what their margin dollars are to cause big losses.
- Not all items are – bought well; turn and earn well; and generate big volume – to be inherently profitable. Some are dead and certain annual, carrying cost losers.
- If a distributor does not have an exclusive supplier franchise for items that are pulled through the channel by the manufacturer, then items don’t sell/turn on their own to customers that have no choice on where to buy the goods. Enough good customers’ collective, voluntary buying from a given distributor is the pulling force that makes them so. Big, profitable customers drive commodity item profitability.
- With the right cost-to-serve analytics we can rank our customers by actual bottom-line profitability, then isolate the most profitable ones (even better by niches of similar customers with common buying needs).
- Within this select group of customers, we can then see which items are most frequently bought.
Once we know the core-intersection customers and products, what then?
We can launch several, high-leverage, very targeted programs:
- Beef up investment of core items to realize immediate increases in fill-rates, sales and average order size for core (and all other) customers.
- Note that incremental profitability from core customers goes up more than twice as much as incremental sales, because of the high, fixed costs of transactions.
- Print out reports for each core niche customer of core items that they are not buying, but statistically may be buying to then sell “more old items to the same old customers” to get the same incremental profit flow-through effect as in “b” above.
- Make sure that all employees know the top 5 most profitable customers at a branch (as well as the top 5 most important target accounts) and teach them to do proactive, “heroic service acts” for them on a regular basis.
- P.S’s: Who will be the “champion” who manages, measures and gets an incentive on these programs?
- “Our reps are already do this” is a delusion. None of them do this on a black belt Nth degree, measured basis. Don’t confuse the data-free intent with a measurable, disciplined reality.
Turn the 20/80 Principle into the 10/200 Strategic Profit One
Vilfredo Pareto, an Italian economist, observed in 1906 that 20% of the citizens had 80% of the wealth. Joseph Juran, the quality consultant, popularized this as the 80-20 principle when looking for the few causes that created the most quality defects. There are other more skewed relationships when popular sentiment is involved:
* 5% of the sites on the web get 75% of the traffic
* 1% of movies take in 80% of the ticket sales
* Less than 1% of the words in the English language account for 80% of conversational words (“OMG”).
And now, we know that when customers and products are analyzed and managed by net profit facts, we can get 10% of our business elements to generate 200% of our peak internal profits. In a similar manner, what about the bottom 1% of the customers on a customer profitability ranking report that are destroying 20% of the internal profits? With creative focus we can convert 80% of these relationships from “lose-lose” activity-cost relationships to win-win. But, that’s another story. See article 4.10 at www.merrifield.com.
How can a distributor get the analytic tools to do both core management and super-losers-to-winner, 10/200 plays?
A distributor can try to invent the right analytic capability from scratch or subscribe quickly and most affordably to a web-based, distributor-specific, business analytics service. The only one that exists, so far, is Waypoint Analytics’ “Quantum Profit Management Service”. It is an outsourced, shared-cost, turnkey, total-solution for achieving high performance results. The service can be up and running in about 3 weeks, and the monthly subscription cost will return 3 to 10 times the return to the bottom line on a sustainable basis with one to six months or the client can stop subscribing. The cost/benefit risk is shifted to Waypoint. For more information and to sign up for a webinar on the service visit www.quantumprofitmanagement.com.
©Merrifield Consulting Group, Inc., Article 2.35