How, during “the Great Recession of ’08 – ??”, do we grow profits (and perhaps sales too) when our customers are:
- buying less;
- shopping “price” more aggressively;
- often ordering in smaller-less-profitable quantities;
- and not willing to try anything “new” unless it: instantly saves them money; reduces asset/debt intensity; and requires no upfront-resource investment?
For consumers in the US (and 21 other countries with housing bubbles), frugality will be “in” to repair personal balance sheets, and this may last for some time. How do we adjust our own business thinking to deal with a global, balance-sheet recession?
Under-performing traditional practices that won’t work are:
- Managing with financial averages that mask the most profitable and unprofitable elements – customers, suppliers, territories – within the business.
- Trying to sell your way out of the problem by pushing all (especially “new”) products to any/all customers.
- Capturing new sales volume with more aggressive pricing in a declining, or downsized-and-flat-growth industry.
- Borrowing more to finance profitless growth bought with aggressive pricing.
- Slashing costs across the board, and eliminating investments that will help the company innovative for competitive advantage.
What will work?
- Measuring and managing the root causes of our true-profit generators and our true profit-eaters.
- Using new profit-power reports to intelligently adjust our service model so we can convert losing accounts into profitable ones and drive the chronic losers off to drain our competitors. As we consolidate or lose many, small unprofitable orders, we can then strategically shave down most of the new, slack, service-activity costs and redeploy some into delivering distinctive, next-level, service value to key target accounts for which there is upside, incremental profit-growth potential.
What Did “Distributor, Inc.” Discover and Then Do?
Wally West, CEO of Distributor, Inc. (a multi-location, MRO distributor), watched his sales volume drop 25% in Q4 ’08 and his company profits turn to monthly losses. With a hefty working capital loan and a newly aggressive bank, he had to try something new, fast and inexpensive. After having a one-hour, web-based WayPoint demo with his senior leadership team, he (with the bank’s encouragement) signed up.
In less than three weeks, two and a half years of Wally’s company data was up and running in Waypoint. Working with WayPoint, Wally’s team immediately saw dozens of previously hidden opportunities. With the new analytic and tracking tools, they found the following profit/loss, cross-subsidies:
- The top 1% of the customers yielded 39.4% of the Internal Profit1; the top 10% yielded 93.3%; and the top 25% yielded 99.9% of the company’s Internal Profit. The balance of the customer list destroyed more than 80% of the Internal Profit, the company had already earned, leaving only 18.3% of the Internal Profit it had made on it best customers.
- Out of 244 active suppliers: the top ten (4%) accounted for 57.3% of the Internal Profit; the top 25 generated 82.2%; and the top 75 supplied 93.3%. 50% of supplier lines lost money, and the worst ten lost 54.5% of the company’s Internal Profit. One hundred of the mid-range vendors were found to be inconsequential, contributing or losing less than $1,000 in the most recent year.
- Out of 38 rep territories: 22 were profitable totaling all of the Internal Profit, with the top six generating 74.2%. But, amongst the losing 16 territories, the worst 3 destroyed more than 70% of the company’s internal profit.
The management team didn’t believe, at first, that these extreme cross-subsidies could be “true”, especially for the sales reps that were all: “paying their own way on commission” (which was a percent of the gross margin).
After working with WayPoint, the management team saw huge, heretofore hidden, cross-subsidies amongst customers and supplier items. Wally likened this process to looking through Galileo’s telescope in 1610 to see the first 4 moons of Jupiter orbiting “another planet” (not a star) and realizing that a new way of thinking with a new vocabulary was necessary.
With increased pressure on the credit line, and a natural zeal to restore the company’s previous profitability, we used WayPoint to dig deeper into the reasons for the biggest losing elements: rep territories; customers; and products/product lines. We assumed that we might be able to either creatively transform most of the loser customers and suppliers into winners or kiss some goodbye – on a controlled, well-managed basis.
The overall strategy was to develop and implement a profitable service model for each segment of the business, and where that was impossible, cut off the losses by eliminating the associated activities.
Using the best RPIs (Radical Profit Improvement plays), Wally’s strategy was to make immediate policy changes to upgrade the business internals, measure and coach the sales force from a new perspective, and to selectively cut or redeploy certain staff to align with the new workload. Although some of the plays would result in certain sales being lost, this was acceptable if the cost reductions were shown to be, at minimum, twice the lost Gross Profit.
We theorized that there must be an overlapping intersection of: most unprofitable items; being sold to most unprofitable customers; within most unprofitable rep-territories – which turned out to be the case. One branch, for example, had a big contract with one customer for $2.5MM of warehouse volume at an 18% margin rate. The loss on this contract was – on the initial WayPoint report – $100K annually. Not believing this, an audit team looked at all of the variables in detail. The revised estimate loss was increased to $150K, because:
- nearly 100% of the inventory involved was special stock that was turning very slowly;
- and, the many small orders being delivered every day had to be delivered on company trucks to the customer’s complex that was over 60 miles from the branch – with free freight!
To make this big-lead-to-gold story short, transformational efforts got the contract re-negotiated with all of the same terms, but at a 28% margin rate which turned the annual loss of $150K into a profit of $100K. This delta (change in profits) did wonders for the profitability of: the account, the branch, the assigned rep’s territory and the supply lines/SKUs involved in the contract.
With new – tools, views, theories and experiments – over 80% of the super-loser customers were turned into winners as a “lead-to-gold, transformational process play” skill set emerged in the company. Some redundant supply lines were consolidated to other, more profitable ones. Some lines had internal cross-subsidies which stimulated, creative new solutions. And, in the biggest profit-improvement play of all, the sales force was cut in half. The best half of the force was reassigned to only “A” accounts that were producing (or could produce) an annual minimum of $4,800 in gross profit margin. (This play alone produced five new profit streams. 2)
The overall company became solidly profitable and started paying down debt within three months of “Let’s-Do-It Day”.
Beyond “Lead to Gold” Plays; Service Excellence
Transforming losers into winners was not the same thing as improving the service value equation for best customers. “Stage Two” of the turn-around focused on taking best profit-making elements – customers, products, territories – to the next level.
This program took WayPoint to nearly every key employee, taking advantage of WayPoint’s web-accessibility. Everyone got their own log-in security credentials that would allow them to see and interact with whatever service process data was appropriate for them to use.
The general goal was to measure employee engagement metrics that indicated that every employee’s mind, heart and wallet were wired into measuring and achieving distinctively great service metrics that were in turn tuned to one target niche of customers at a time. Every employee understood, believed in, and got excited about “service excellence”.
Top Five Management Team Conclusions
1) When things are getting worse, doing more of what we’re already doing isn’t going to cut it. What was working nicely in an expanding economy is likely not optimal when things are going the other way.
2) Volume is vanity, profit-power improvement is sanity. You need a unique and profitable service model for every nook and cranny of your business. You have to decide what to do with business that cannot be rehabilitated: whether to cut it off or wean it off, to best protect the profitable part of the business.
3) Growing margin dollars and assuming the bottom line will follow doesn’t work any more. There is no correlation between margin and the actual profitability of an account, rep or product. Measuring and managing Cost-to-Serve economics for every customer is vital; sales rep incentive plans must be aligned with this reality.
4) Most of your internal systems aren’t designed to deliver the kind of information you need for Radical Profit Improvement plays. Your accounting, ERP and CRM systems are optimized for their own purposes, and won’t give you the kind of detailed information you need to move quickly on service model adjustment. Leave them for what they are designed to do, and use WayPoint to get the exact information you need to attack the Cost-to-Serve and Service Model transformation tasks that are essential to fast profit generation.
5) See WayPoint for yourself by setting up a one-hour demonstration. You can do it in your own conference room, with just a phone and a PC. Your offsite team members can join in with their own PCs. Have your own transformational (Galilean) experience.
©Merrifield Consulting Group, Inc., Article 2.31
- Internal Profits – the total net profit of all the profitable elements of the business ↩
- For the “downsize, upgrade, refocus, recomp” the sales force play see article #4.11 (http://www.merrifield.com/articles/4_11.asp) and the spreadsheet for calculations at 4.11.1 at this link: http://www.merrifield.com/articles/4_11_1.asp ↩