Distributors have mostly order-fulfillment people who do annual, average numbers of: sales calls; lines/orders; picks; deliveries; and invoices. They do their functional step at a steady rate and cost per step regardless of the averageGM$/Line in their step. If you grow average GM$/line without adding people, how much of the incremental margin-dollar will flow to the profit line? It’s big! So, what customers-win, you-win plays will grow this Key Performance Indicator (KPI)?
GM$s/LINE IS PART OF A BIGGER, KPI-CHAIN
In the following cause-effect chain of KPIs, GM$/Line is #2 after Root-Cause, Action Plays:
- Root-Cause Action Plays increase….
- GM$s/Line which increases….
- GM$’s/Full-Time Equivalent Employees (FTEEs) which increases….
- Profits/Customer and Profits/FTEE which increases…..
- Profit Gain-Sharing Bonus/FTEE…. and, Free Cash-Flow for paying: debt down; dividends to shareholders; and/or reinvesting to finance growth which increases…..
- After-Tax, Profits Reinvested/FTEE (Size foretells the brightness of every stakeholder’s future with this company! Best stakeholders will only stay and co-invest with growth-star companies!)
- PS: CEO’s Benefits? Hours Down. Comp Up. Praises Up from all: including family shareholders. Legacy and Exit/Valuation Options: Up.
GM$’s/LINE SPARKS WHAT QUESTIONS?
GM$s/Line relates the two halves of your general “Value Exchange Equation”, which is – by hypothetical example –
GM$s (25% of sales) less Cost-to-Serve (CTS: 22% of sales)
= Operating Profit (3% of sales).
What is the “exchange”? You give customers Service/Operational Costs (CTS). They then may favor you with more less GM$s depending upon the competitive quality of your service.
Since you already know the GM$s and GM% for every customer and SKU, you obsess to improve them. But, how do you manage the CTS for all-win betterment? You can take Aggregate-Cost reduction measures: pay folks less; pinch all pennies; etc. Or, you can ask: Is the CTS for every – line, order or customer – equal to the aggregate of 22%? NO! They vary radically.
By illustration, consider three orders each with one, line-item.
- A warehouse order with sales of $2000 at a down-n-dirty 18% margin rate.
- A $2 sale at a dreamy 70% GM.
- A direct order for $100,000 at scary-low 10%.
If the CTS for all three equaled the company aggregate of 22%, then the value equations for each would be:
1) $360-GM less $440-CTS equals ($80) – loss
2) $1.40-GM less 44 Cents equals 96 cents – profit
3) $10K-GM less 22K equals ($12K) – loss
Your intuition should shout: RIDICULOUS! But, how to get a grip on CTS-per-line? Start by calculating these reference point costs on annual, average-cost basis:
- Total Field-Sales Cost divided by estimated sales calls
- For each territory: GM$/account and GM$/ invoice
- The all-in-cost per line processed by the Inside Sales department
- All-warehouse costs divided by picks
- All-delivery costs divided by deliveries
- All related, back-office costs per transaction (invoices and credits)
NOW: TWO GROWTH SCENARIOS
Imagine you grew your Sales and GM$s by 20% two different ways:
- 20% more: accounts, lines, orders, deliveries. With GM$/line staying constant.
- The average –line, order, delivery, GM$s/account – all increase by 20%
The first scenario needs more fulfillment people and cost. The second requires none yielding: huge incremental GM$ flow through to the profit line; and big, improvement for every downstream, financial-KPI!
WHO HAS DONE THIS? CASES:
Three distributors that all have achieved incredible results (starring GM$/line improvement) are highlighted at the front end of Chapter One of my E-book at: http://merrifield.com/E%20Book%202013/ChapterOne_revised.asp.
One of the three distributors ($8 Million in sales; single location; MRO-Industrial goods) got the following results in 30 months:
- Sales grew 17% per year (over twice the channel rate) without adding people
- Active accounts dropped from 1050 to 893. Per account – Sales, GM$, GM/line – up 20%+
- Profits/Customer soared from $30 to $941
- Profits/FTEE leaped from $1,500 to $76,000.
- Gain-sharing, profit bonus per employee zoomed from ZERO to a $6670.
HOW DID THEY GROW GM$s/LINE BY 20%+?
The simple answer is find out which customers and SKUs have the most GM$s/Line and do more of that type of business while figuring out how to fix the customers and SKUs that have the lowest GM$/Line averages.
The best answer is to get Line Item Profit Analytics (LIPA) Tools and best-practice, educational support. The meteoric distributor installed Waypoint Analytics “LIPA Management” service in six days for a low, monthly fee and took full advantage of all educational support. (Or, work with Waypoint to reinvent their offering in-house.)
LAST HURDLE: OVERCOMING OLD-BELIEF OBJECTIONS
Revealing big winner and loser Customers and SKUs that are hiding within aggregated, averaged-out financial numbers upsets Traditionalists. Math-free objections/beliefs will flare. See 39 objections to anticipate with thorough answers in Chapter 5 of my E-book.
If ALL, top managers don’t see the FULL potential for LIPA Management and can’t get past Old Belief resistance, then the status quo will win. Will you continue to pretend that CTS is constant for each Line-Item Event or run LIPA-Plays to grow GM$/Line to be a rich, happy hero to all of your stakeholders?
Strategic Insights 32
Merrifield Consulting Group, LLC