Before the 25-year (’82-’07) global credit bubble popped starting the “great recession”, 90% of distribution firms were not making a return on assets sufficient for long-term survival.1 Now, with excess channel capacity, even the top 10% are challenged. How can the best take their “competitive strategy” effectiveness – on a branch by branch basis – to the next level? How can any of the rest get the strategic focus needed to join the elite? New kinds of strategic-profit analysis and reporting needed by both groups is now easily and affordably available.
Business studies tell us that…
- Most companies don’t know the true profitability of the items or customers they sell. Everyone knows “sales”, “margins” and “margin percentages”, but between margin dollars and profit there is the “operating costs” black hole. Financial reporting averages hide the extreme profit and loss cross-subsidies that exist amongst customers, items and sales territories.
- In the absence of “quantum” profits or losses at the line item level, there is less management consensus about: what are the extreme winners and losers and what extra should be done about them? 2 Instead: “all customers are good”. But, without focusing on customer niches to tailor both service value equations and cost models, one general service approach fits all resulting in average service quality and cost effectiveness. We’re just price-takers in reverse auctions, instead of distinctively- valued price-makers.
- When companies do have cost-to-serve analytics, the peculiar, historic, profit-core for every branch location can be precisely defined. Typical parameters for a branch’s hidden core are: 150% of the financial profit line is generated by 20% or less of the customers that are heavy buyers of 10% of the most profitable items. The intersection of most profitable customers buying most profitable products is mutually interdependent. The customers’ collective demand pulls the items profitably through the location. But, the one-stop shop array of items well-enough stocked to provide highest, local, fill-rate service value is what attracts and keeps the customer demand. The profits and free cash-flow from the core is sadly consumed by the biggest losing customers and items which doesn’t have to be the case.
- Less than 5% of distributors go digging into the why and how questions behind their super winners and losers. They find ways to tweak – with micro-innovations – core activities to boost core volume by another 20 to 100% with profits growing even more. Selling deeper – for much great incremental profit and free cash-flow – instead of wider to too many customer niches is almost always an under-estimated opportunity.
- Study of super-losing customers and items also reveals micro-innovation opportunities that allow many lose-lose, activity-cost relationships with customers to be turned into win-win ones and capture more total volume .
- When companies rank pools of customers within common niches, they can better define and improve what the service value equation metrics for each customer niche should be. Tailoring service models to the available Gross Profit in each niche closes off losses and drives consistent profit performance.
- Once all front-line employees know – best niches, best customers within those niches and service metrics for those niches – service value levels improve significantly with daily service statistics tracking.
Three informational paths…
How fast, affordably and effectively can a distributor achieve the necessary strategic profit reporting along with next-level: tactical recipes, tracking reports, educational curriculum, change-management tricks and incentive systems based on net profit by customer? It depends upon the option chosen: build it from scratch; subscribe to a turnkey service; or, both.
To do all from scratch – assuming you know where you are going – will take a long time with big development costs and the proportional risks of falling short on tool and related skill development or unassisted implementation. A distributor could, alternatively, outsource the huge up-front investment to an already-existing, shared-cost software service that is tuned to distributors and supports all of the implementation steps above – on a virtual basis – for a monthly subscription fee renewed one quarter at a time. There is cur-
- Most footnotes are extensive in length and substance and may be found at www.merrifield.com/insights.
- More on “Quantum Profit Management”(QPM) at www.quantumprofitmanagement.com
Bruce Merrifield (Bruce@merrifield.com)