We generally want needs taken care of sooner. But, not always. Distributors’ response times for customer needs can vary with each target customer niche.
Continue reading 143. Compete On Speed Within Profitable Customer NichesCategory Archives: Distribution Strategy
139. Better Mental-Models for Profit Power
Mental-Model Fuzziness?
We make decisions from a stew of emotions, beliefs, biases, and mental-model assumptions. Models approximate reality, so each has its blind-spots. But, a robust set of models can minimize oversights and help to make better business decisions.
As a management team exercise, try writing down your models. Then, test them further with analytics, stakeholder surveys, and team discussions. Some common, flawed beliefs follow to get you going.
Financial Model Beliefs
- Do you pursue greater sales to get economies for better buying and to spread fixed costs?
- Do you grow sales by maximizing selling pitches to more customers to get more margin dollars? (And, why not sneak up prices too? Buy low, sell high!)
- To control costs, do you pay “fair” wages, run lean, and keep everyone busy? Then, won’t a bit more of each incremental, margin-dollar flow to the profit line?
Financial discipline is good! But, the belief-questions above all have flaws and blind-spots. For example, does “make the numbers” work against investing in FedEx’s service-excellence model of: “People, Service, Profits”?
“Good Service” Beliefs
“Good service” is a commodity; it keeps you in the meet-the-price game. “Best service-value” – in the minds of targeted-customers – wins! But, what are your assumptions for choosing initial segment(s) of customers to target? Can’t service-value metrics vary subtly and importantly for each customer niche?
Target-Customer Beliefs
“Financial-Think” assumes bigger customers are better, and all are good. But, what if two customers are equal in both sales and margin dollars, but vary in average order size by 10X? Isn’t the small-order customer less profitable?
Cost-to-Serve analytics reveals that about 20% of big-margin-total accounts are typically net-profit losers. They have too many small-dollar picks and/or orders that cause big, unnecessary activity costs for both parties. Win-win fixes are possible!
People cannot process two orders at the same time. What is the opportunity cost of processing losing-orders from losing-customers? You can’t pursue, win, and process bigger orders from more net-profitable customers when consumed with losing Busy-Ness! So, what are your order-size-economic assumptions informed by Customer and SKU net-profit analytics?
Innovation Beliefs/Conclusion
Studies conclude that 60-80% of premium profits that star companies earn comes from innovations. Top 5% distributors grow faster and make 2-4X the ROI of the bottom 90% of distributors. The Stars are playing a better mental-model game! Why not upgrade your mental-models too?
For more mental-model testing, request my free: “Core Customer Renewal Roadmap” ([email protected]).
137. Amazon’s Channel-Model Innovation Challenge
LEVELS OF INNOVATION: INCREMENTAL, BUSINESS-MODEL, CHANNEL-MODEL
All businesses innovate. But, rearranging the deck furniture on the Titanic (an incremental innovation) is not as powerful as getting an iceberg-resistant ship or an ice-berg-free route.
Business-model innovation is when you rethink the system of how you organize your resources to create a breakthrough value for some target group of customers. You may also, simultaneously, eliminate wasteful or dying activities. Common phrasings: Weed to feed. Prune to grow. Downsize, Upgrade, Refocus and Revitalize. Do a “Blue Ocean Strategy”, etc.
Continue reading 137. Amazon’s Channel-Model Innovation Challenge136. SELL WIN-WIN, LOWER PRICING (?)
PRICING EFFICIENCY ISN’T PRICING EFFECTIVENESS
Practice good-pricing hygiene. Don’t underprice SKUs or customers if they will continue to (happily) buy from you at higher prices. But, consider also the positive trade-off of lower prices in exchange for larger average order-size buying. What are your general buying and selling incentives for increasing order size?
CASE STUDY ON ORDER-SIZE ECONOMIES
For 2018, a $100MM contractor-supply distributor had roughly 4000 active accounts. More facts:
Continue reading 136. SELL WIN-WIN, LOWER PRICING (?)133. Your Reply to the 2020 “Crisis of Capitalism”
FIRST-WORLD EMPLOYEES ARE RESTLESS
The “Yellow Vest” protests in Europe echo the “We are the 99%” (Occupy Wall Street movement) – back in August ’11. Both are symptoms of declining, discretionary income for the bottom 95%+ of households (in first world economies). Buying homes and having kids in the US is unaffordable for the average Millennial. And, if you have any promising, young employees, are they job shopping?
Continue reading 133. Your Reply to the 2020 “Crisis of Capitalism”132. Multiple Models for Fill-Rate Economics
Charlie Munger, renowned investor, advises: “To become wise you’ve got to have a latticework of models in your head”.
WHY MULTIPLE MODELS?
Research proves our evolutionary brains are riddled with “cognitive biases”. Good for species survival, but bad for innovating service value.
We don’t know, what we don’t know. And, thanks to “confirmation bias”, we prefer to listen to people who share our data-free beliefs. Willful ignorance is common; we humans struggle to cope with too much math reality
Because models are simplifications of reality, they are flawed with blind spots. But, not as flawed as our thinking. And, multiple models can offset the others’ blind spots. Let’s look at some fill-rate models.
THE DOMINANT FINANCIAL LENS
- Inventory is your biggest asset, so turn it faster for a better ROI.
- Improve two related financial ratios:
GMROI= Warehouse Gross Margin Dollars (divided by) average Inventory Investment.
TURN X EARN (GM%)
- But, slimming inventory reduces fill-rates. What’s the optimal target fill-rate percentage that balances declining service-value to customers with increasing ROI?
- Graph inventory investment vs. fill-rates. Find the sharp bend in the graph where diminishing returns set in. In a classic, hardgoods-distributor case, at 92% fill-rates inventory would need to double to improve fill-rates to 95%? So, target all SKUs for 92%?
- And, fill-rates increase with: knowledgeable substitutions; inter-branch transfers; and back-ordering, non-urgently needed stock outs.
COST-TO-SERVE LENS AT THE LINE-ITEM/SKU LEVEL
- Completing orders with inter-branch transfers and back-orders creates significant operational activity expense. Fatter inventory improves: fill-rates; transactional costs for both distributor and customers; and productivity of your people. All positive trade-offs.
- About 5% of SKUs are super net-profitable. Why not target those for especially high fill-rates?
- Another 5% of SKUs are very: popular yet unprofitable small-dollar-picks. Target higher fill-rates, but also pursue a blend of other profit-improving moves for these SKUs.
HIGHER FILL-RATES FOR TARGET CUSTOMER NICHES
Having best fill-rates for all types of customers is tough. But, what if you have historically strong sales and fill-rates for a peculiar niche of customers? Or, do you want to target a specific niche? Then, model what the niche buys and beef up those SKUs.Best fill-rates will both retain and win more niche customers. Increased fill-rates also boosts average Gross-Margin-Dollars per order and employee which in turn cranks profit-dollars per employee.
CONCLUSION
Financial ratios for inventory don’t see any of my under-linings! Get a Cost-To-Serve model at the line/SKU model to win.