“The 20/80 principle” roughly applies to most distributors’ largest customers and their respective sales.
It’s called the Pareto Principle, and it’s a “power law” generalization from Pareto’s 1896 discovery that 20% of the Italian population owned 80% of the land.
Customers and their respective profits are far more skewed than 20/80, actually. Instead, distributor / customer-profit analytics reveals these power-laws:
200 of your SKUs are hugely, net-profitable, but, another 200 are hugely unprofitable. Amazon knows SKU profitability and exploits traditional competitors’ informational blindness. Want to get smarter, too? Here’s how:
Amazon knows the following “profit equation” for every SKU (customer, etc.):
Continue reading 15. SKU-Profit Winners, Losers and Amazon Tactics
It’s in our DNA. Hyper-vigilance enabled mankind to survive while a small percentage of wackos generated the innovations that have cumulatively lifted all of us into today’s first-world economies.
Industry best-practices pursue efficient economic activity, which is not “innovative” economic activity that will grow sales, profits or all stakeholders’ benefits faster. Fine-tuning the past leads to fading financial returns and eventual death. Customers, suppliers and employees who are more ambitious and progressive will choose to work with more innovative, rewarding distributors. The innovative rich get richer.
If “innovation” sounds too abstract, big and scary, then relax. Innovation comes in many speeds, ranging from common adaptations done by everyone to disruptive supply-chain innovations like Wal-mart’s cross-docking, quick response or Amazon’s 2-Hour, Prime delivery.
Continue reading 12. Increase Innovation With A Curiosity Rule and Tool
Research proves that “Innovation” accounts for 80% of the premium profits and faster growth that the brave few get over the safety-seeking many who pursue “industry best practices”. Distributor association, financial-performance surveys support this.
90% of (the same) participants have been averaging a weak 7% pre-tax Return On Total Assets (ROTA) for 15+ years. But, the top 5% (also a constant group) averaged 20%+.
The top 5% will therefore get about 4-6 times greater after-tax, Return on Investment (ROI). That’s 75-92% more.
Innovation for distributors used to mean securing exclusive, best-factory franchise territories and then selling aggressively. In mature commodity channels, the players that now excel are doing customer-centric innovation starring: next level, service-value and/or supply-chain, process-cost improvements.
A big customer asks you to special stock some odd items which they currently purchase direct. You say “YES!” believing what??
All Gross-Margin dollars (GM$s) are good for both company and rep commissions. One-stop-shopping will add GM$s to orders and lock in the customer. The now-more-loyal customer won’t check prices regularly on commodity items. But, if they do, you will get last-look to meet prices on the commodities.
Consolidating suppliers consolidates “procurement costs”, including Purchase Order (PO) activity costs. The bottom 20% of POs (ranked by dollars) total about 1% of the spending. If a PO costs $80, then converting 100 POs to extra line-items from a distributor will save roughly $8,000.
Waypoint Analytics’ clients can run a report on “special stock” customers. The report totals the profitability of all items that only that customer bought (de facto special stock), then adds the profitability on items bought by more than one customer (the commodities) with a grand total.
Continue reading 9. Special Stocked Items Are Mostly Net-Profit Losers A Dream Request (?)
In the early ’70s, distribution trade associations started offering Financial Survey Reports to participating members. Back then, “financial management” was KING. You wanted to achieve the financial averages of the “Top Quartile” performers (even though those averages blended different strategy outcomes and the top 5% – true innovators – dragged up the average for the next 20%).
The reports evolved. New ratios like – GMROI, Turn-Earn, Personnel Productivity Ratio (PPR), etc. – all had their moments of fame. Analytics software packages started arriving in the ‘90s to slice, dice and graph “the numbers”. Because financial numbers and their derivatives are downstream symptoms of upstream, hidden, root causes for profitability, interesting data was not actionable for sustainable success.
Continue reading 8. Your Financial Management Style Needs More Clothes