2009 will be a tough-economy year in which real interest rates (the difference between the nominal interest rate and the deflation in inventory values) will be high (if bank debt remains available for leveraged distributors):
· What items should we proactively sell to which sub-sets of our customers to maximize profits and free cash flow?
· How should we engage our suppliers on strategically profitable growth opportunities instead of their less-focused agenda of selling all of their products to any of our theoretical customers?
· What are our economic assumptions for the four marketing plays below?
ROI’s FOR DIFFERENT, MARKETING PLAY OPTIONS?:
If we had four separate profit centers that each (hypothetically) pursued – with equal execution capability – one of the four different marketing “plays” below, could ROI outcomes vary as follows?
1. Sell more stocked items to existing customers that buy those items, but not from us.. .
Sell….more old items to old customers ROI 15x
2. Sell…. more, new items to old customers ROI 5x
3. Sell…. more old items to new customers ROI 2x
4. Sell…. more new items to new customers ROI 1x
What underlying economics would make #1 be so much more lucrative?
· Little to no incremental costs for: buying (new) items; stocking (new) inventory investment; product education; or extra sales calls in the field.
· Decent margins and service fill-rates on items that are already being bought well on a steady replenishment flow from existing (best) suppliers.
· Credibility with our customers for being a viable source for the new, old items
· Meeting a general, customer-need trend for reducing total procurement costs on commodity replenishment by consolidating out miscellaneous suppliers to fewer, major suppliers.
· High, incremental-margin-dollar, flow-through to the PBIT line (profit before interest & taxes). If the existing margin dollars in an average-sized order for a target customer already exceeds the average cost of the transaction (it’s profitable!) then flow-through rate for incremental margin dollars from more line items per order is about 50%!
The ROIs for the other plays drop way off, because they are missing some or all of the economic advantages of play #1. A big assumption for plays 3 and 4 are that: the up-front cost of cracking a new, worthwhile account on a profitable basis is greater than the cost of stocking and selling new items to old buddies.
So, why don’t we first, systematically, sell to exhaustion all of our “old-2-old” oversights opportunities before we pursue other plays? How measurably big (or not) is this potential sales opportunity anyway?
GENERATING THE “OLD-2-OLD” PROSPECT AND TRACKING REPORTS:
To execute the “old-2-old” play more effectively than in the past, imagine having a strategic intelligence reporting capability that would allow us to:
- Identify a list of all profitable customers within each niche of customers that we pursue, starting with our strongest, most profitable niche first. (Why?*)
- Do a popularity ranking report of all stock keeping units (SKUs) that 2 or more customers within the target niche have bought from us in the past 12 months. Other columns in this report would include, for each SKU:
- Number/percent of customers that had bought it;
- # of total picks by all customers (the sorting factor in descending order);
- $s of total sales from all customers;
- Average $s bought by each subscribing customer;
- Total margin $s per SKU;
- Total estimated PBIT $s earned per item;
- Average inventory $s currently invested in the item;
- Cumulative invested inventory $s for our entire, one-stop-shop offering from most highly picked to whatever lowest-picked-level SKU we wanted.
- Then, do split-out reports for each sales territory listing the target-niche accounts within the territory with all of the popular items that the account WAS NOT buying along with estimated consumption totals by account and by territory. (We might assume simplistically that each account might buy on average the “average” amount of that item that all other niche accounts had bought.)
Finally, run monthly reports, thereafter, to see how much old-2-old sales success each rep. was having.
OTHER OLD-2-OLD PROGRAM ENHANCEMENTS
We could help the old-2-old selling effort by:
- Selectively beefing up some of our most popular items for better fill-rate effectiveness.
- Isolating sub-lists of items from preferred suppliers to engage their marketing cooperation for getting higher niche penetration for their items/line.
- Identifying some items from redundant suppliers that we would like to close out and sub in items from a preferred supplier.
- Paying extra, team-focus efforts on selling: a) most popular/profitable items; b) to our most profitable customers; c) that have a growing future; d) along with improving the customers’ internal replenishment systems.
- Deciding how to proceed/negotiate with those niche customers that are heretofore unprofitable or marginal in volume and profitability.
- Pitching our customers on the importance of consolidating out miscellaneous trade-credit suppliers by switching both more old items to us and perhaps some new ones (play #2) that we might add (probably from master wholesalers) to round out our one-stop-shop assortment of items for the target niche.
- Help our customers, who are motivated, to improve their replenishment systems practices to achieve – fewer, larger average orders; lower total inventory investment; and yet higher on premise, uptime availability of products. This would improve our order size and incremental margin dollar flow-through to the PBIT line.
CRITICAL MASS: INVENTORY AND SALES BARRIERS & PROFITS
All of these measures would help us to better define and tune a customer-niche-focused, “critical-mass, inventory investment” of now-known, measured breadth and depth-investment of SKUs. If we achieve a dominant share of the customer-niche’s profitable, sales volume, then we can better-turn the biggest, best-fill-rate inventory investment in our competitive geography at a much higher ROI than competitors. If competitors should tire of losing customers that switch to our better fill-rate service value, they could then try to match our inventory investment. But, saying “Me too” without an additional switching-value proposition on top won’t win back share. They would then find that their investment would:
- Turn too slowly for lack of enough sales;
- Generate too many, small, fill-in, money-losing orders that would not have our flow-through margin dollar economics; and,
- Distract them from dominating their own best, historical niche(s) from which they are currently (unknowingly?) making 150% of their profits to cross-subsidize their below critical mass adventures.
Dominant-share of customer-niche sales volume and best, one-stop-shop, fill-rate-service inventory investment are two, inter-related barriers to competitive entry and sources of sustainable, profit power.
JUST ONE PROBLEM: HOW DO WE GET THE OLD-2-OLD REPORTS?
For old-2-old analysis and tracking reports, we will have to use two separate reporting systems: the in-house financial/operational system that interacts with the highly-flexible, internet-accessible, Ultra-Plan strategic intelligence system. Ultra-Plan’s distributor profit power reports:
- Are built on top of a breakthrough, software-as-a-service business intelligence platform;
- Have distributor-specific, activity-based-costing models built in;
- Have been further tuned to support a number of strategic, service value plays like the old-2-old recounted above.
- Are available over the ‘net after a one-week synchronization process with any in-house IT system.
- And, deliver 2 to 10 times the payback of the monthly service fee (or you can discontinue the monthly subscription).
For more on the rapidly increasing number of “strategic profit improvement plays” that Ultra-Plan supports, request the one-day seminar syllabus from email@example.com.
*Footnote from page 1: Within our strongest customer niche, we have presumably the most profitable and satisfied customers, because we have co-created with them the best, one-stop-shop/high, fill-rate inventory investment. This tuned stock profile then delivers the best service value to that type of customer and the largest average order size to us as a by-product. Selling more, old items is easiest to happiest customers that know, like, trust and are most open to us.
©Merrifield Consulting Group, Inc., Article 2.29
December 12, 2008