Customer-profitability ranking reports are the first step on a journey towards “Value-Exchange Management” (VEM) which is a separate, complimentary and better way of running a distribution business than by the financial numbers in a consolidating distribution channel.
THE BASIC VALUE EXCHANGE EQUATION IS….
(1) GM$’s (what the customer gives us due to our “service value”)
(2) Our Cost-To-Serve (CTS: two ways)
- Total activity costs allocated to serving the customer including sales comp that can vary widely amongst accounts.
- Total activity costs before sales comp (a more universally consistent profit number)
(3) Net Profit (two ways)
- NP: after sales comp and before interest and taxes.
- “NBC”: Net Before (sales) Comp and interest and taxes
VEM RATIOS EXPOSE “THE MINIMUM-GM%-REQUIRED DELUSION” AND MORE
What are the ranges for GM%, CTS% and NBC% -all as a percent of sales -for your 5 most profitable customers? And, the 5 most unprofitable customers? What can we infer from these ratios? By example, here are actual numbers for an industrial-paper/disposable-foodservice/jan-san distributor:
The 5, most-profitable customers had:
GM% averages ranging from 13.7 – 23.4%.
Less CTS% rates from 2.6 – 13.9.
For NBC’s ranging from 2.2 to 17.5%
The 5, biggest-losing customers had:
GM% from 7.7 to 46.6%
Less CTS% from 12.4 to 73.4%
For negative NBC’s ranging from (4.7) – (34.2) (any comp paid would make them bigger losers)
- There are so many variables in what and how customers buy and how we serve them, there is no – “minimum GM% we must have for profitability rule- that applies.
- Because distributors are flexible, service businesses, “Inter-Business, Process Relationships (IBPR’s) just evolve and vary widely, especially with large customers. Who is in charge of auditing the complete IBPR’s for overall, win-win effectiveness? Instead, people on both sides try to optimize often only one metric that they get measured, managed and paid on. How do we proactively start addressing this mutual-win opportunity?
- The GM – CTS = NBC percentages of sales are all “effects” of what deeper underlying “causes”? What deep-dive analytical tools do we need to get “cause” insights?
- Looking at the activity-cost story for each customer, it becomes apparent that each of our activity costs is roughly mirrored by the customer. How can we apply this “law of reciprocal channel-activity costs” in our win-win, cost saving re-negotiations (and with suppliers too)?
- Accounts with abnormally high and unprofitable CTS ratios will have hidden, higher costs for: buying, downtime, and “next customer” service dis-satisfaction.
- For big-losing customers, we find buying practices that are unknowingly disorganized and inefficient for us. And/or, we find customers who focus too obsessively on one element of “total cost”, so other, hidden costs for both parties increase.
- Most profitable customers are, by contrast, disciplined, total-system-cost buyers who (inadvertently/intentionally?) also lower our CTS. What can we learn about their best, replenishment practices that we can then share with inefficient-buying customers?
- When customers start playing the win-lose, price-shopping game, how do we expand the conversation to “price ANDthe win-win reduction of total supply chain costs? We have profitable accounts with both lower GM% and even lower CTS%, how can that model work for other customers?
- If we preach “increase GM%” without looking at the rest of the value exchange variables, not much happens. If we pay rep incentives based on GM$s and GM%, we reward them for getting high-CTS, unprofitable business too. And, we distract reps from seeing and managing lower total, supply-chain costs for the customers, which the best understand and want. How do we transition to incentives based on: lowering both sides’ total costs and improving NBC?
- If best customers have “VP’s of Supply Chain” (not “purchasing”), who is our “VP of Service-Value-Chain Solutions”?
- All of these VEM observations get richer if a distributor is able to understand and pursue “customer nichonomics” principles1. The basic VEM equation then improves to: “Best Service Value” wins: Highest GM$/customer (less) lowest CTS (equals) highest, sustainable, net profit.
- The keys to applying both VEM and Customer Nichonomics insights are:
- Having good line-item profit analytics (LIPA2) that feed into an array of journey tools.
- Understanding both VEM and Nichonomics to design those analytical tools
- Joining a community of distributors using LIPA to achieve VEM with which to share ideas and successes for blazing this new profit-growing trail.
VEM is difficult to do on your own. But, with a turnkey, web solution for the analytics journey-ware and the service’s client base help it’s achievable for any distributor. To learn more: request a go-to-meeting Waypoint demo and/or attend the March 29-30th “Advance Profit Management Conference” in Phoenix.