Category Archives: Index

53. Best Practice: Focus and Measure the Service Profit Chain in Distribution

Distribution Strategy, Index

The Service Profit Chain 

Jim Heskett et al. first published the evolving Service Profit Chain in Distribution  (SPC) model in 1994.  Jim and I go back to the fall of 1972 when he taught my first case study class at Harvard Business School. Next, in 1978, Jim’s research group wrote a case study (on a turnaround I did) entitled, The Small Order Problem. During 1980, he turned me on to how FedEx’s People, Service, Profits model was delivering perfect service. And, then in 1982, I adapted FedEx practices to a successful distributor turnaround.

For more on how I’ve adapted the SPC model to distributors go to Google and search for “merrifield + service profit chain”.

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52. What Makes a Profitable Branch Profitable in Distribution?

Distribution Strategy, Index

A monster distribution chain CEO asked for ideas to include in a regression analysis. Then, they had hired a consulting firm for $500,000 to co-identify ninety-six financial factors to correlate with branch return on assets. What Makes a Profitable Branch Profitable in Distribution?

Thinking of some of the prioritized factors in my kinetic chain model, I asked whether they had:

  • One number to score the quality and years-in-place of the branch managers? (Management)
  • One number for share of the number one target customer segment? (Strategy)
  • The number of credits per thousand line items processed? (Systems)
  • The number for gross profit dollars per full time equivalent employee? (People)

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51. Warren Buffet’s Favorite Metrics

Distribution Strategy, Index, Profit Analytics

There are limits to financial analysis. Financial analysis measures what’s easy to see and count in the past, and “the numbers” are all symptomatic outcomes of your controllable input decisions. So, using financial reports to be cost, asset, and cash flow efficient is smart, but you can go one step further and uncover financial blind spots with your own invented models and metrics.

Would Warren Invest in You?

Warren Buffet places big investment bets.  He buys companies that have super-profitable niches, or moats, with a focused strategic effectiveness. These are companies that throw off free cash flow, have great management and a leadership that plans to protect, grow, and leverage the moats. They are also companies that have systems that will scale their moat’s strategy for growth.

How do you measure intangibles like effective strategy, management, and systems? Here’s how.

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50. Analytics in Distribution, Theories, Bias Inefficiencies and Courage

Cost-to-Serve Math, Distribution Strategy, Index

Analytics Without Upside Theories Fizzle

Don’t use analytics in distribution to grind existing information finer and faster. You will get interesting, but non-actionable data. Start instead with an improvement theory. Then, build an analytical model to validate an improvement theory for your distribution. You will find insights to exploit and can track subsequent change experiments with new metrics.

Distributors, for example, have a mix of very profitable and unprofitable items, picks, orders, and customers hiding within averaged-out, aggregate financial numbers. Instead, create a cost to serve (CTS) model to expose the big profit cross-subsidies and then pursue a new metric like: make 100% of customers profitable.

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49. Breaking Out of a Commodity-Hell Mindset

Distribution Strategy, Index, Profit Analytics

Data from the past 15 years of trade association PAR reports show 90% of distributors have averaged poor pre-tax returns on total assets (ROTA). Furthermore, the same top 5% distributors average 3-4 times the returns of the bottom 90%.  Probably,  same channel, same commodities, just much better results. This is a Commodity-Hell Mindset.

But, the bottom 90% aren’t slackers. We can assume these participants are:

  • Smart, conscientious, persistent and at least somewhat ambitious. Otherwise, why would they keep filling out the PAR surveys?
  • Best Practice seekers (at least from a financial-management perspective)
  • Members of the associations that sponsor the surveys, so presumably staying channel savvy
  • Members of a buying group (if channel appropriate) to remain efficient

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48. A Catalytic Financial Survey Ratio

Index, WayPoint Analytics

As I was doing prep work for a speech to the Health Industry Distributors Association (HIDA), I noticed something interesting in their Members’ Financial Survey. The survey showed a three-year trend for gross margin dollars per full-time equivalent employee (FTEE), or service value productivity per employee.

Though channels do vary, for HIDA distributors the average gross margin dollar figure per FTEE for the last three years has been about $135K/FTEE. However, in 2015 the best performer in each of three sub-groups showed 16%, 60% and 90% higher gross margin per FTEE than the average.

Imagine what your business could do if service productivity was 50% above the average. You might be able to provide premium job-pay, job security, career growth and you would have growth-capital profits to reinvest. The best stakeholders would besiege you.

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