Some of the answers that follow will be shorter if I can use links to video clips that have longer, deeper explanations. My hope is that the video-based teaching will be an alternative (and better) way for (most) people to learn. (Reading this book is the most difficult!)
CONCERNS 1-4: Operational-Cost, Financial Assumptions
Many small businesses start out thinking about getting enough margin dollars to beat their monthly expense nut (“all costs are fixed”) to make a profit. And, without any customers, they have to start prospecting like crazy. Any customer is a good customer and any GM$ contribution supports first employees who are underutilized.
How do these beliefs work for start-ups? Many small businesses fail quickly, and then 95% of the survivors don’t grow. By trying to have “good service” for any and all types of customers, a business is like a decathlete: good in lots of events (customer niches), but not best value at lowest cost at any one event. By example, the world’s best high jumper has a structure, fitness and technique that delivers the highest (value/output) with the least input effort (cost). Event/niche specialists win the gold from customers in the marketplace. “Good service” for “all customers” delivers less value at a higher cost for less to no profits.
“(1) All fixed costs today” (?) Do some homework to determine what your current variable, semi-variable, and fixed costs really are. The average, Waypoint-client distributor – across many distribution channels and sizes – arrives at an average of80% variable expense and only 20% fixed.
Don’t think incrementally: one more or less order. Think instead of 20% more business. If you had 20% more orders of the same average order size, how many more selling and order-processing folks would you have to add? 80% of a distributor’s operational expense is for keeping product flowing through the business and paying Reps to maintain the existing volume.
“(2) Our people are still here getting paid to do less”. This assumption assumes STATIC conditions in which we don’t have any competing alternative things to do. We have, for example, no:
Strategic-Priority To-Do Lists/Projects/Quotes that we would love to get to.
Target customers waiting (on hold) for us to get back to them with keep-and-grow-them solutions.
Instead of thinking of one “incremental new or lost GM$s”, what happens when we think of the CTS for different poolsof net-profitable and unprofitable accounts.
Big, most-profitable accounts will be about 10% of all accounts generating 50% of the GM$s and requiring only 40% of operating CTS expenses (variable and allocated fixed included) for an average, net-profit margin of 10%.
Big Losers might be 2% of the accounts generating 10% of the GM$s, but requiring 18% of CTS expenses for an average, net-loss of 8%.
And, growing-nowhere or dying-Minnows (in a mature consolidating industry) can be 50% of all active accounts generating only 2-5% of the GM$ on 50% or more of all transactions for a solid net profit loss margin.
We fool ourselves when we think about sneaking through one more Minnow order without assigning any fixed or variable costs to it. What if your Minnow pool is already occupying 40% of the variable, order-fulfilling costs? You could, in theory, fire 95% of the Minnows and lay off the full-time people who were processing 50% of the company transactions. In one turnaround case, a company laid off $2 of variable, fulfillment-people-and-truck cost for every $1 dollar of GM$ that they fired. Profits went up instantly and sustainably while the fewer, better remaining employees focused on better-serving the remaining customers who were profitable and had a future.
For most distributors, none of the customer groups or employees need to be “FIRED”. LIPA Management tools allow you to make both big-winning and big-losing customers (even more) profitable with greater sales volume too. Minnows can be turned into a profitable division that will slowly fade away IF you do not have a good cash-n-carry, warehouse location or chose to thoroughly pursue a “wholetail” service model (think Fastenal location and service model).
YT video clips that support these comments and address concerns #1-4 are:
- “Still blinded by economies of scale” YT 2: 6
- “Blind Spots for Break-Even Charts” YT 2: 7, YT 2: 8
- “Why Every Customer GM$ Counts” YT 2: 9
- “Aren’t All Costs Fixed For Today?” YT 2: 10
And, for dealing with the always-traumatic, Losing-Minnow challenge:
- Deal with Wholetail-Minnows FirstYT 9: 22
- Questions about “Our Minnows” YT 9: 23
- Case: Minnow-Math for Industrial Paper, Jan-San DistributorYT 9: 24
- Options for Minnows? Fire. Profitable harvesting. Spin out Wholetail. Turn into Cash-n-Carry Model, because all you have are MinnowsYT 9: 25
- Wholetail-Minnows and Small-Account Reps Opportunity YT 9: 26
- 5 Profit Streams that come from Minnow Division and Downsizing Reps YT 9: 27
- Articles on Re-thinking the Rep force #2.19; and # 4.11
- Other Minnow Division BenefitsYT 9: 28
- Hard-Ball Minnow Case Story SuccessYT 9: 29
- Hard-Ball Results 6 Months Later YT 9: 30
- Soft-Ball, Baby-Step Minnow Case YT 9: 31
- Soft-Ball Results: 3 months, 12 months, 3 years laterYT 9: 32<span< p=””>
CONCERNS 5-9:…How to Get More Customer GM$s
(5) “Any customer’s incremental GM$ is good”:This concern should be answered by the YT clips cited above for concerns 1-4. Analytical thinking should not be “incremental” (one more order) or “static” (slack resources will sit idle and not be redeployed dynamically). Think in terms of aggregate pools or niches of customers costs versus margin dollars as well as the cost/GM$ math for biggest losing SKUs. Then, structurally transform them.
How can we rethink our fear of having busy people idled due to any order activity and GM$s being driven away? A few different perspectives:
Pull your fist out of a bucket of water and the hole left behind doesn’t last. It is instantly filled by water. Are front-line service people as fluid in flowing to alternative things to do? YES!
The year-over-year, delta profit ranking report for customers shocks most managers. At the top are 10-20 customers with amazing increases in profits and often sales activity. Where did you get all of the idle, fulfillment capacity to handle the Big-Up Activity? Look at the bottom of the report! You will find another 10-20 accounts that have collapsed in activity. Most Reps and Branch Managers have no specific reasons as to why the most up and most down accounts are that way. Proactively achieving more Ups than Downs will be covered in a later chapter. For now, the customer-activity lost at the bottom of the report was dynamically redeployed to serve the tops.
Another example of dynamic activity-cost shifting: Assume you convince a big-losing customer to buy more effectively. Together you reduce mutual activity for the same spend by 20%. The customer appreciates the new, hidden cost savings and gives you 20% more sales volume. The 20% fulfillment slack you saved on consolidating small line and order activity is immediately needed to process 20% more (bigger) orders from the same customer. The same folks with the same costs have just improved their productivity by 20% by not working any harder; they just process 20% more GM$s per: line, order, truck stop. And, the Rep is getting 20% more GM$ per sales call.
These productivity opportunity insights are not visible when using just financial numbers that average out the Ups and Downs and Supply-Chain-solution productivity gains. LIPA Management solutions are, however, what caused the huge increases in net-profit per employee in Chapter One’s three case study highlights.
And, finally, what about achieving more, strategic-priority projects? If profits stink, the reflex is to get more busy-ness orders from any customer. Super-busy people who cost more than the GM$s they are handling will just put you in a deeper hole. And, the busy-ness with little GM$ content and higher CTS will leave no time for work on: improved/new skills; inter-department and inter-company service process improvement; or, heroic service for high-potential, net-profitable accounts that will pay off.
Are you over the all fixed costs, static and incremental thinking? If not, keep reading.
(6) Acorns into Oak trees? Acorns don’t statistically grow in mature forests or industries. For small businesses that do exist, research studies reveal that 95% of them are run by “self-employed” owners: not ambitious, innovative entrepreneurs. The “self-employed characteristically:
- Think small and act small. And, sometimes – more obnoxiously – think small, talk big and don’t act.
- Play not to lose. They fine-tune their past in reaction to environmental change. They only cut costs in downturns and hope for rising, economic tides to return. Hope is not a strategy.
- They do no articulated, focused, customer-centric, value-innovation pioneering. Any and all customers are good. Unprofitable busy-ness then crowds out strategic priorities.
Being “fair” with stakeholders means: negotiating zero-sum, I-win-you-lose extras out of them. Pay employees as little as possible and monitor their busy-ness. Reverse auctions amongst suppliers is the typical philosophy: not win-win, cooperative, buying-systems thinking.
What does the (diplomatic, charming?) chiseler offer in return: superficial friendship and promises to try harder? You will not hear: “Here is a specific, new idea that we can try together to expand value and/or savings (the pie) so we can both win.”
What about the 5% who are ambitious, innovating entrepreneurs? They will grow their purchases and pay their bills on time. What selection criteria will help you identify them for cultivation? The simplest criteria are: how fast have they been growing over the past 5 years? How ambitious, intense and focused is the CEO? Can the CEO explain clearly a focused customer-niche-centric strategy and explain specifically what and who they are not going to sell.
For more on selection criteria see:
Acorn Customers into Oaks? YT 2: 12
“Target Account Criteria” YT 4:39
Score a company’s: leadership, strategic focus, systems alignment, etc. with my “Kinetic Chain”.
Exhibit 16 at my site: http://merrifield.com/exhibits/Kinetic_Chain_Ex_16.pdf
And, YT 8:7
(7) “Tell big customers with a small-order problem that they need to change? They will leave.”
This is a generalized and awfulized statement. To get a grip on anxieties, sort your big losing customers into three piles:
Easy to Approach: Super-friendly; cooperative; open-minded; want us to do well too.
Aggressive Bullies: push suppliers to the wall; I-win-you-lose is THE GAME.
And, In-Betweeners: not in the first two piles, but in between Friendlies and Bullies.
Approach the super friendly ones first.
Invite them to help you make sense of your new, supply-chain math for their buying stats.
Here’s a sample introductory pitch:
“On first-take, we are definitely losing in this relationship due to high transactional activity costs. And, because we think our selling activity costs roughly mirror your buying costs, we think you could be losing too in ̶ until-now ̶ hidden, unmeasured ways.
There is no bad-guy or blame to assign in this discovery. It may be substantially our fault; we need your help to get the whole story. What we do know is that our shared Buy-Sell Activity just grew up over time with no one in either party trying to measure all of the out-of-sight activity costs.
The hope is to find some new insights that will lead to some simple experiments that will yield win-win benefits.
So, may we share with you the information on our biggest losing items and invoices that we think are hurting us both? “
What friendly customer is going to say “NO”? Don’t be surprised if a third or more of the friendlies quickly understand the math and want to make changes right away with more good ideas of their own. As you get more supply-chain-math, solution-savvy and confident, work your way into the ‘tweeners”. Your confidence will snowball to the point where you can’t wait to visit with the bullies.
For a training manual on selling changes in “Inter-business, Buy-Sell Processes” see:
Exhibit 59: Co-creating Buy-Sell Process Improvements (BSPIs) with Key Accounts.
For video clips on case studies for turning big friendly losers into winners plus more sales see:
Commercial Contractor. Too many rush orders to job sites YT 9: 62
Contractor’s vans/techs. Too many counter buys per day. YT 9: 63, 64
Contractor wanting separate invoice for picks for each job YT 9: 65
JIT EOM-Parts Kits to Manufacturing Cells. Small picks killing both. YT 9: 71
For inspirational cases in which a distributor dictated new terms to Bullies and Cherry-Pickers to achieve both more sales and big profits:
Contractor King calls you fourth for whatever others don’t have YT 9: 66
Interview questions for the Contractor King leading up to OUR NEW TERMS YT 9: 67
$2.5MM integrated MRO contract losing (150K) to making 100K YT 9: 68
Job-Shop Curmudgeon wants us to share his money-losing philosophy, but changes YT 9: 72
Don’t sell huge-losers to begin with. Bully changes and calls back to “partner” YT 9: 78
Buyer calls small orders in 1-2X/day as an excuse to talk to inside rep YT 9: 79
Other Crazy Stories at the Bottom of the Ranking Report YT 9: 39
(8 and 9) “Don’t want my competitor to get any extra business” (even my losers).
Brain chemistry research on “territorialism” confirms that humans have, in varying degrees, an impulse to assert not just. . “It’s mine”… but also “It is not yours” (assuming you want it).
For associates with intense territorial energy, redefine the territories. Talk about who is getting the best share of both the winning and losing profit pools.
“Why is our competitor getting net-profits from some of the best accounts in our number one niche? Shouldn’t we hyper-focus on those accounts to own them? And, why are we getting stuck with too much share of the net-unprofitable Minnow business? How can we trade chronic, losing, empty order activity to our competitor for their net-profitable business in our target niche(s)?
What action steps should we take to cure these territorial injustices? Why not re-price and re-service growing-nowhere Minnows to be profitable. The ones that stay will buy more and in larger order sizes to be profitable for us. The ones that leave for our competitor will take big CTS capacity from our competitor’s best accounts to lose on the small accounts. Our competitor’s service to key accounts will weaken while ours strengthens. This is a “fair” fight we can win. “
I’ve twice had the pleasure of hitting a competitor with Minnow activity while stealing their cream accounts. Both times, in different channels, I have put a long-standing competitor out of business with the: Hit-Them-Low-and-High Gambit.
10-19: DON’T MESS WITH REPS OR THEIR COMMISSIONS (THEY MIGHT LEAVE)
These 10 concerns are listed in a chronological, Old-Beliefs, grow-sales, train of logic. Most managers jump right to fear #18 and then #17. You may want to scroll down to those to start with.
(10) You get more accounts, sales and GM$ by hiring more reps (“more feet on the street”)
Yes, you do! But, assuming original Reps go after the biggest accounts first, when do the incremental, new accounts that incremental new Reps find start getting too small to provide enough GM$ to profitably cover the cost of both reps and the rest of your traditional service model?
Article 4.11 explains why a Rep account has to have a minimum of close to $5000 per year in GM$ to support the cost of the Rep Service Model.
If you are selling into a segment of customers in which there exists both innovative and acquisition consolidators that are putting the weakest 80% of the accounts out of business, then your full-service, viable-to-sell, account base is shrinking. Instead of pursuing quantity of moribund customers, how does the company team (not just the Rep on their own) figure out how to “partner” the quality consolidators profitably? As the video-rental-store industry transformed from scads of start-ups to a few consolidation giants like Blockbuster, do you think the video distributors let their Rep who had Blockbuster’s corporate HQs in their territory figure out “national contracts” by themselves and continued to pay them some X% commission? NO!
(11) If reps are on commission at X% of sales or Y% of GM$s, then they are – on average – profitable.
A big, unspoken, wrong assumption in this argument is that every customer has a CTS percentage ratio that is always lower than their GM%. No matter how distributors with Reps rank their customers by profitability, about 60-80% of active accounts are NOT profitable. Customers do not have the same quality of buying: objectives, methods and disciplined systems.
Rank Rep territories by Net-Profit. Discover that 30-70% of your Rep territories are net-unprofitable in aggregate, although each one will have one to a few profitable accounts. The small-account, Milk-Run Rep territories and House territories will have the highest GM% averages, but even higher CTS% to be losers. (More on this opportunity in notes for concerns 20-23 below.)
“Being on commission is certainly more net-profitable (or less of a loss) than a salary/draw which is a bigger percent of the GM$s than the commission check”: of course! Don’t shrink losses a bit and declare victory. Stop pursuing accounts that are or will be chronically too small to support the Rep-Service Model.
If Minnows are reassigned from Reps to a new Minnow Division, “(12) some (Minnows) won’t like less free services and higher prices. They will leave. All GM$s contribute to overhead and extra rebate dollars at year end.”…. (This belief then connects to “Concerns”: 1-4. In the discussion notes for 1-4, see all of the Youtube clips on handling the Unprofitable-Minnows-called-on-by-Reps problem.)
(13) If reps are on salary, then they will slack off if you don’t watch them. A commission plan makes them call on their customers on a regular basis. If they slack off on regular calls, then the other, more reliable order-taking competitor reps will start gaining share in those accounts”.
What are the unexamined assumptions behind this Milk-Run-Rep business paradigm?
First assumption: this traditional way of selling is still profitable for small, slowly-dying customers. It isn’t. This is why consumer-service people of all sorts have been replaced by Do-It-Ourselves for lower price savings.
With CTS information, determine the higher-prices and unbundled-services for fees you must use to make small customers’ orders profitable. Some customers will protest and then leave for the fewer remaining full-service for all competitors. Your CTS math will reassure you that this will cause competitors losses and weaken their service quality for best customers. You will make profits on the Minnows that stay.
If you are committed to going to market with Reps, then refocus your Best Reps on those customers big enough to support the rep’s cost.
Second assumption: Customers want to see Reps and will reward their loyal, regular calls with orders. Many, small, lonely, growing-nowhere customers love Rep company. Wouldn’t you be loyal to a Rep who gives you psychological maintenance and more service value than they are charging for? Big, ambitious, growing customers are not lonely. Too many reps try to call on them to often with no bottom-line building ideas. The Bigs are trying to “consolidate vendors” to then systematize and automate the relationship. So, don’t add to their Rep Pest problem, team-sell, design and install what they want.
Youtube clips on assumptions about what Reps should be selling are here: YT 2: 9-22
(14) We are Lean and Mean Around Here. Reps are Independent Agents
Every Defender of the Old Faith will have their one or two, “yeah but” objections to the Net-Profit paradigm. When you handle those, resistors will start to get more riled and offer more nonsensical “concerns” like #14. What do vague, pushback statements like this mean: often with a touch of angry dismissal? Who initially knows? Try to discern from what personal fears the bluster concerns come from. Within this concern does “lean and mean” suggest: “we don’t have the extra – profits, talent or time – to invest in anything new. I wish we did have extra resources, but we are working as hard as we can with no results. How frustrating and embarrassing it is to me (a manager) to work hard, achieve little and have someone call me on it. Of course I’m angry and defensive (?) “
A variation pushback is: “We are too busy doing what we are doing”, which is probably true. Any distributor that sells too many different types and sizes of customers with one standard service model will be 110% busy to deliver undifferentiated service for necessarily aggressive pricing with high CTS for small order customers yielding no profits at best.
“Reps are independent agents” falls into the same emotionally-charged category with: “don’t mess with reps’ accounts, comp, etc. because as free agents, they might leave and take their business with them”. When was the golden period for success stealing of Reps? Like cats burnt on a grill years ago, do we still think this is a big, present danger for ALL of our Reps? (More in 17 and 18 below).
The “Independent Agent” suggests that we don’t even call on a Reps account, because that would be questioning their competency and undermining their franchise. Do the accounts actually belong to the Rep or to the Company? Do biggest, best customers expect more service-value solutions than what the average rep alone can deliver: YES! Why are Reps entitled to not have to change with the customers’ needs and then harvest their territories as they age? If the big customer gets a better value proposition from a competitor’s total team, will they stay forgo bottom line savings to be loyal to your Rep? Will you let entitlement policies from a different era stop necessary change for survival of the company and all stakeholders?
(15) We pay reps a salary plus a bonus based on GM$s.
This is another vague, bluster stall I’ve heard as a back-up reason for not starting down the LIPA path. “Since we pay Reps a salary, ANY talk about Rep commission change doesn’t apply to us.” This is NOT logical. A similar, vague pushback statement is: “We do that already.” Really? To what level (1 to 10) and with what percent of all involved personnel? Are 100% of the Reps all “10”s at selling supply-chain-math solutions? Whoever says statements like #14 and #15 has not yet grasp the full promise of LIPA Management, and they don’t really want to. They are, in fairness, working harder at what they know to be true and have faith that at some point better profits will come. They are understandably defensive.
Give everyone forgiveness (yourself included) for Old Belief Management. Have faith that patient, repetitious LIPA education can melt away aggressive, defensive bluster
(16) We don’t have CTS data, nor do our competitors, it’s a fair fight.
Another non-logical stall (like 14 and 15) which are really pleas for the status quo. For all stalls, immediately ask what other good ideas they have to avoid defaulting back to the Status Quo (which is not an option). Assuming they don’t have a better, more comprehensive solution-set than this book, then keep on persisting.
(17) “If the CTS model is not perfectly precise, then the reps won’t trust it.”
There are five parts to answering this concern which will be addressed in the following order:
(1) Net Profit reports are not subject to accounting precision concerns. They just have to be good enough to be actionable.
(2) Why do Reps not trust any plan including the current one for which honest, commissionable GM$ is contentious? (But, the plan is the Devil they know v. a New Net-Profit-based one!)
(3) To grow Net-Profits will require some re-skilling which is both as scary and easy as riding a bike for the first time. Smart Reps will see the power of Supply-Chain-Math solutions and seize the opportunity.
(4) Don’t give all Reps their customer net-profit ranking reports without previous education and assurances (Plan A). They will panic if they see big commissionable accounts as big-losers given their historical mistrust of comp plan changes. Do Plan B instead. Sell the new paradigm to one Rep at a time starting with the best, most conceptual ones. Be prepared to offer them, sufficiently-good, upfront, income guarantees (no downside risk) and detailed steps for how their income will grow with the net-profits of both their revamped territory (only “big” accounts) and the company’s overall profits. (How to details in #18 below.)
(5) How confident is the leadership team that will master these points and sell Plan B?
Net-Profit estimates are far more accurate and strategically functional than GM$s and GM% that come from Financial Accounting/Reporting information. A GM$-based compensation assumes CTS is unimportant and presumably the same percent of sales for all customers: a huge blind spot! CTS is the missing half of the Net-Profit equation (GM$ less CTS equals Net-Profit). Because we have been blind to half of the net-profit story, we have over-endowed the importance of high GM%. (Notes for concerns 20-23 cover why there is no little correlation between GM% and Net-Profits).
Who is the biggest, natural CTS-model perfectionist? Usually the CFO! CFOs are often both CTS-model editors and part of the LIPA Management change team. Because they must endlessly pursue perfection for financial reporting to pay correct taxes on time, etc., their habit is to pursue the same Perfection Standards for strategic action tools. Why are CTS models that are 75%+ accurate good enough?
If the CTS model has the same all-in, operational costs as the bottom line from the financial statements, then theoretical, cost-imperfections at the account level will average out and even more so amongst accounts in a territory.
What about two contrasting types of territories? Imagine a direct-ship brokerage territory v. a Milk-Run, Small, Out-of-Warehouse, losing-account territory. The direct-ship territory has the lowest GM% of all territories and yet a good Net-Profit? The high-GM% territories (think also: house and cash-n-carry account groups) are losers? These math facts overturn Old Beliefs and make past programs such as “Win Counter Business” or “Don’t Let Little, New Competitors Get a Counter Foothold” look foolish.
What happens when we try to change the CTS-model allocations to make all of the Minnow losers look better? The costs that we allocate away from the losers to make their losses less must go to all other accounts to lower their profitability. We can’t wish variable, fulfillment-cost activity to vanish to make pet accounts look better; other accounts will get assigned the costs.
No matter how you retune your CTS model, the big losing and winning accounts won’t move from their subsets. So, why let perfection be the enemy of the good-enough and getting results sooner with LIPA Management plays. Tune your first CTS model a few times and get going. Then, re-tune the model once a quarter going forward.
By hanging on to old, unspoken, unchallenged assumptions (need for accounting model perfection and high GM% is always good, low GM% isn’t as good), we can’t see the dynamic upside opportunities of innovating at the extreme ends of whale curves. But, won’t Reps still panic when they first see their big commissionable, net-profit losing accounts?
Why are Managers afraid of the Reps being afraid of Net-Profit Results? Let’s unpack this double question with ahypothetical, chronological conscious/unconscious stream of Manager thought:
“Reps will challenge the net-unprofitable results for any big (commissioned) account. As a manager, I’m not (yet) confident that I can defend the idea that a – “good enough” or “roughly right” CTS – model is sufficient to implement and guide new actions. And, I don’t want to stampede the herd and then sound vague and uncertain in my explanations.
Why will Reps panic? Because they have in the past, whenever we have tweaked our GM$-based comp plan. There is a history of distrust about what is true commissionable GM$s. We use “standard” or “average” costing for inventory items, because commodity prices do fluctuate. In times of inflation, we use “replacement cost” which reps think short changes them and their customers. We get back-end deals from suppliers that we do not always pass 100% through.
Sheltering supplier deals reduces commissionable GM$s and sneaks up prices to customers. The reps and customers both get wind of these games and assume the shortchanging is bigger than it is. The fear of being chiseled keeps customers “checking prices” with competitors more often and more aggressively. And, reps think about the next-best competitor to work for to maximize income.
(Reps jumping to competitors? This is an – unmeasured, generalized, awfulized and not – updated-trend concern covered in detail in #18 below.)
All of us get unnerved by “New” and “Change”, especially when it can hit the wallet nerve. While our current comp plan has its flaws, it is the Devil-Comp-Plan we all know. Until we can overcome each person’s Conceive-Believe-Achieve hurdles (starting with my own), we will all nit-pick the New for imperfections as excuses to stay with the even more flawed status quo that we know.
The leadership team needs to review these notes and related videoclips until we are all convinced and confident about making the big switch from GM$-based incentives to Net-Profit-based ones.”
Summary: Accounting-derived GM$ comp plans are more flawed than CTS, Net-Profit ones. The key is to have a plan for selling all Best Reps on the Net Profit paradigm. If Reps have no risk of income dropping and great promise of their own value and their income rising, that’s a good start. Then, with some supply-chain-math-selling skills training (YT 1: 10-33and many case studies in Playlist 9) and total team support on taking their 5-5-5 accounts (YT 3:17,
YT 4: 15) to the next level, great results will follow.
(18) Reps will freak and jump to competitors.
DON’T DO PLAN (A) which is to give all Reps the net-profit, customer-ranking reports for their territories without pre-education and watch them panic. DO PLAN B below instead:
(a) Get your CTS model sufficiently tuned. (See # 17). Then:
(b) Find out the net-profitability for each sales territory. Sort Reps into three piles:
- Weakest/Wouldn’t Hire again; and
- Uncertain: In-betweeners.
- With the help of this article (http://merrifield.com/articles/4_11.asp.), determine your new sales force reconfiguration plan that will:
Reassign growing-nowhere Minnows to a new division.
Determine who are the obsolete, small-order-account Reps. They will have: losing territories with one to a few, OK winners that are under-penetrated. The few good accounts can be team-sold, retained and grown with a Best Rep reassigned to them. The weak Rep is not likely to become a “10” at supply-chain-math selling. And, today you wouldn’t hire this person again as a rep if given the chance.
Shift the Big Accounts from the weeded reps’ territories to Best Reps in exchange for Best-Rep Minnow accounts reassigned to the new Minnow Division.
If you have a Rep, who has just big accounts with a lot of direct-ship, net-profitable business, you may elect to change nothing; keep the same comp plan, etc. Consider, instead, giving them even more, key-account support. For video clips on do’s and don’ts for brokerage reps see:
Brokerage Gun-Slingers: YT 9: 73
(1) Now, visit with each rep individually from best to the least. Besides thoroughly defusing their concerns on an intellectual basis (the CBA process), provide upfront income guarantees to them – as needed ̶ for emotional security. Assure them that they will have no downside income-loss, only bigger upside gains based on a net-profit-improvement when they are ready. Why is the upside assured for these reps? Do 4-view analysis of as many of their big accounts as necessary to get them comfortable with Net Profit tools and analysis. (4-view analysis YT 9: 11 -12)
(2) They will only have bigger accounts. The Best Reps will trade their Minnows for the few, under-sold Big (potential) accounts from the small-order Ex-Rep territories. The new combined territory may have only half of the Best Rep’s former, account total, but still have 20-50% more Sales and GM$s. They will not get an instant increase in commissions for the bigger base of GM$s responsibility. They are on a transitional, guaranteed salary to which a net-profit growth incentive can be added when they are ready.
(3) The big accounts will all increase in net-profit due to: (a) The skills of the Better Reps serving their newly reassigned accounts. (b) The entire company focusing on their key accounts with service improvements. (Later-chapter topics: Niche focus plays. Service Excellence guarantees. Proactive, Heroic Acts). (c) Management will help to: find, sell and install new supply-chain-math solutions. (d) And, the general lift the company will get from these core-renewal strategies.
(4) To help each rep get a picture of the dynamic-upside watch/discuss:
5-5-5 LIPA, SC Apps Yield Year-over-year Results YT 9: 90
A Pictorial Case Study of a Distributor’s 24-Month Results YT 9: 91
Y-O-Y Case Results by the Numbers YT 9: 92
(5) Consider running a new, net-profit incentive plan in parallel to whatever guarantees you may make. Then, let the reps decide when they want to go from a guaranteed, fixed salary to the new plan. Best reps with no downside risk will become instantly net-profit focused.
A KEY EXECUTIVE WHO WON’T CHANGE?
What if one or more of the executive team wants to defend the Old Ways to the death? What educational exercises can you try to get them to come around? Each Diehard is a unique case.
A case story followed by some guidelines:
A distribution CEO (Hank) scheduled the eight members of his executive team to discuss three modules of one of my video training programs every Monday morning over 15 weeks. Team members watched the videos on their own and then both discuss and critiqued the material in the meetings.
After two meetings and six video-module discussions, Hank called me for Bully advice. Two of his eight team members were fighting new ideas each step of the way. (Contentious Topics: creating a Minnow Division; downsizing the sales force to fewer, better Reps; and Team focusing on Selling replenishment systems to Whale accounts.) The Bullies were making statements that were – general, fact-free, awfulizing – and in an angry tone. They wanted to stop this exercise immediately. Quotes: “That’s ridiculous!…Our suppliers will think we are crazy!..This guy Merrifield doesn’t know what he is talking about…Our type of distribution is different than what he is talking about…No one else in our industry is doing this.”
I recommended some guidelines like those at the beginning of these Discussion Notes with two big stoppers. (1) Hank could schedule a teleconference call with me to visit with the Bullies about their arguments in front of the group: both Bullies passed on that option. And, (2) if the Bullies did not have another alternative way for solving the general problems being identified and discussed, then they must be quiet, because the status quo was not an option going forward.
Both Bullies subsequently stopped talking all together and displayed instead negative body language. After 5 weeks and 15 modules one of the bullies quit, then the other one quit after 7 weeks.
Hank was at first panicked about how he was going to replace their veteran wisdom, but the rest of the team was relieved and elated. And, two younger employees were delighted to be promoted and embrace the new ideas. Because the LIPA Management, Net-Profit plays provided quick, big profit improvement results, the Bullies were not missed. Losing loyal, veterans is tough, but if they insist on obstructing progress for the rest of a company’s stakeholders, they must go.
Here are some educational references you may want to try to review with Diehard Defenders of the Old Faith, but some super-resistors are impervious to facts and present realities.
Previously cited YouTube clips on spinning off a Minnow Division: YT 9: 21-32
Why Downsizing, Upgrading, Refocusing, Re-skilling and Re-Comp’ing (DURRR) Reps is timely:
The Role of the Outside Sales Rep is Changing YT 4: 37
(Cracking target accounts YT 4: 38-42 )
Be a “10” YT 4: 43
Do the Sales Force D.U.R.R.R YT 4: 44 (Downsize, Upgrade, Refocus, Renew, Recompensate)
DURRR Case Study YT 4: 45 (My article version of YT 4: 45 is: # 2.19)
Rationalize Sales-Force Capacity Article 4.11
For more on why all distributor reps need to be able to talk and sell Supply-Chain-Math Solutions, I refer you again to these video clips:
- Key Dates for “Supply-Chain” Buying YT 2: 4
- Different Types of Innovation for Different Life-Cycle StagesYT 2: 5
And, both Management and Reps must get fluent with supply-chain-math, building-block talk. It’s not that tough! The chronological, building blocks are: (1) “Minimizing Total Procurement Costs” (TPC); (2) Maximizing Uptime People Productivity; (3) Maximizing the customer’s ability to do what they do with your stuff: Right, the first time and On-time; (4) which in turn, will maximize the next value-chain recipient’s satisfaction/retention economics. YT 1: 10 –32….(Supply-Chain-math selling skills)
The Full-Time Buyers that Reps typically call on at big accounts do not, unfortunately, get measured and rewarded on much else but PRICE. Even “expediting” is one of their core busy-ness jobs. They don’t see or measure the downstream costs of downtime and late-performance. Some executive high-enough up, will be concerned, though, with ALL of the building block economics. Find out who that person(s) is and get a honcho-to-honcho summit meeting scheduled.
The bigger historical, industry-life-cycle trend questions are covered in:
Key Dates for Supply-Chain Memes YT 2:4
Four Innovation Zones YT 2: 5
The Sales Force will Retaliate YT 2: 14
Your Channel’s Life-Cycle History YT 2: 15
Success Rules for: Growth Stage v. Consolidation Stage? Be in Synch or Die. YT 2: 16
Consolidating-Customer’s, Next-Level, Cost Reduction Necessities YT 2: 17
Evolution of Value-Added YT 2:18
Augmented Product and the Life Cycle YT 2: 19
Can Distributors Lead Supply-Chain Changes? (Yes!) YT 2: 21
(19-20) “Steal reps. ..rep relationships are our most customer-valued ingredient.” If we lose a rep to a competitor, they will switch all (universal and awful) of their business. If we could steal a rep from someone else, we would benefit similarly.”
Relationships are important, but they are not 100% of the total value delivered in many customers’ minds. And, after much industry consolidation, how many good switch opportunities are left for free-agent Reps and poaching distributors? How much Net-Profitable (non-Minnow customers) can a rep reliably deliver to another distributor? As an exercise, review the number of successful Rep steals that have occurred amongst you and your competitors in the last few years v back in the ‘80’s. Is this a fading trend, if so, why?
Instead of stealing Reps, I’d focus on dominating best customers in target niches with total-team-delivered value. Become the Service Secretariat for your target niches and none of your Rep-Jockeys will want to stop riding the best service value horse.
Because every Jockey wants to ride Secretariat, how will you assess any competitor Reps who come knocking on your door seeking a better mount? Use LIPA thinking to guesstimate what the actual net-profitability of their accounts are that they might deliver to you. After subtracting out – their Minnows; an account or two that may be more loyal to the distributor than to the Rep; and account conflicts with your own Reps – what’s really left? If they have a few loyal accounts that appear switchable, will the Rep work for you on straight commission from the outset and take a big pay cut? Can you afford to pay them a guarantee which is 2 to 3 times what they will really switch in net-profits?
This old story of stealing each other’s Reps for gain is fading in consolidating channels in which biggest, best customers are looking to partner the best distributor horse/team/supply chain solutions: not a rep relationship. Build value and profits through LIPA Management, not Rep poaching to get small, breakeven or net-profit losing business.
My previously referenced YT clips on industry life-cycle changes covers the role of the rep in the value-offering for each stage of the life-cycle in much greater depth. ( YT 2: 14 -22)
(21-23) HIGHER GM% MEANS HIGHER NET PROFITS
General Thoughts on the “Higher GM%” Obsession:
If you can raise prices on any items in general or to specific customers without – losing business or up-setting a customer into being a more aggressive price-shopper – do it. Don’t leave money on the table that can be justified and sustained by your superior, service-value proposition. (Key Test Question: You sneak prices up on blind items. A “good” customer subsequently discovers the higher prices which are also higher than a competitor’s list prices for the same items. He calls you on it. How do you turn this negative event into a positive win-win one? Ans: “Price Selling Judo” at the end of section 21-23.)
There are LIPA Management tools that will allow you to identify – items, customers and reps – that all need some pricing enhancement work. And, have other trend report tools to monitor how well your price-increase objectives are done and stick. (Waypoint Analytics and Evergreen Consulting have partnered to make these – tools, thinking and coaching – all possible.)
Because of the obvious benefits of raising prices with all other variables staying the same, we are blinded to other “high GM%-misconceptions” that LIPA tools reveal.
There is No Straightforward Correlation Between High-GM% and Net-Profitability!
Consider these data points:
(1) Distributors with LIPA Management tools can plot all of their line-item events on an X, Y graph with one axis being GM%, the other Net-Profit to find: THERE IS NO CORRELATION.
(2) You can do the same thing with customers GM% and Net-Profit%: again, no correlation.
(3) At a more macro level, Distribution-Chains can plot their branches on a GM% v. Net-Profit graph to find the same hit- or-miss, non-correlation.
(4) We have already discussed how naturally high GM% – SKUs, customers and sales territories – are more often, net-profit losers than winners. A high GM% on a small-dollar pick yields skimpy GM$s that don’t cover the cost of your old-world, service model. GM% is not the same as GM$s that are needed to exceed CTS$s to yield Net-Profit $s.
(5) Look at this “value-exchange equation (GM% -CTS% = Net Profit%) for your 10 most profitable and unprofitable customers. There will be a wide range of average GM% for customers at both extremes. The winners will always have a lower CTS% than their GM% to yield a profit. And, amongst the losers (even those with high GM%), they will always have a much higher CTS% than GM% for a loss. There is no minimum GM% you must average out of the warehouse for any given customer to begin doing well. The High GM% is good assumption pretends the CTS half of your operational story doesn’t exist.
(6) A corollary concept to #5: let the customer name the price they would like to pay for some key items as long as you get to name the supply-chain variables that will make the deal still profitable to you. (For a case study on this scenario see: YT 9: 36)
To get more comfortable and fluent with the “no specific GM% needed for warehouse customers”, watch these video clips:
YT 1: 24 Top and Bottom Four Accounts: GM$ – CTS = Net Profit.
YT 1: 25 & 26 Top/Bottom Account Observations
YT 1: 23 Concept of Value Exchange (Equation and Management).
Don’t seek more High-GM% Losers: solve them!
To solve highly-popular, small-pick, losing items, there are at least six options to consider. Benchmark how these six techniques are used by “wholetailers” who sell similar small items (Fastenal, Home Depot, etc.) then tune their tricks to fit your context.
- Bundle the item in packs (think of how AA batteries are displayed and priced).
- Consider pick-it-yourself merchandising in front of the counter.
- Be like Amazon which now sells small (grocery) items as an: “add-on item”. Bits and pieces can be added on to a paper/trade-credit invoice (of some minimum amount?).
- Find a scan-and-swipe-credit-card automation system for customers that plugs your ERP system. The labor involved in just entering $.20 line items (with a GM% of 50%) into some distributor ERP systems is laughable.
- An electrical-wholesale-chain, branch manager benchmarked his counter experience with buying two items at a Home Depot. At HD, in five minutes, he parked, picked two electrical items, self-scanned-and-swiped for a $7 purchase total and drove away. Assume both HD and the distributor get $3.50 in GM (a hot GM%!) against what CTS? His counter-person (who is not for free) takes longer than five minutes to pick and enter those two items in the company ERP. The customers can wait an hour at morning rush hour to get these two items. And, the paperwork costs for trade credit billing is not for free either.
- Do some honest time and cost benchmarking exercises to cut through the myths of: all of our costs are fixed; our folks can take care of one more small order (but, there are scads of them); any and all high GM% business is good.
- Design “custom spice racks” for the big-losing customers, who unknowingly, buy the same, little items, a teaspoon at a time, many times in a year. You can use “4-view analysis” to sell Big-Losers on the big hidden savings using their buying statistics that you have captured and re-formatted. (Recall the “custom spice rack” case studies cited earlier: YT 9: 11-13, 63–64).
- And then Raise prices to:
- Whatever the traffic will bear for your convenient location with your unique and best one-stop-in-stock-now, fill-rates for the target customer niches you pursue.
- Merchandise bundles of popular, small-items as “Up-Time Packs”. No one runs out for Q-tips, toilet paper or paper-clips just as they need them. The repetitive cost of buying such small quantities, especially when it interrupts up-time, job productivity and timely-job-completion economics.
Small-account reps and house/counter business are high-GM%, net-profit losers.
Other areas of “all high GM% is good” misperceptions are small-account/order reps and “house/counter” territories. Some distributors have sliding-scale commission rates to reward reps who have higher GM%.
(Straight commission also, in theory, rewards Reps for selling higher. If they could, they would, but in “last-look” opportunities they cave. The Reps are too scared of losing ALL of the business/commissions. Better to see last-look as an honor and concede, then make a stand and get an extra point for their unique value and the company’s better service value. See YT clips on “last-look + 2 points” and “Price Selling Judo” at the end of this section 21-23)
The hidden result of the sliding GM% scale, then, is to pay small-order reps for quoting “list price” to their customers when even list price doesn’t generate enough GM$s to cover the CTS for the small orders. The small-rep territory may be a net-profit loser without the sliding scale. Why pay the rep even more to both lose more on the territory and all new small-order accounts that Small-Account Reps might win. The economic model of the Rocket Roadster, Time-and-Territory-Management for small customers is economically obsolete. Find out exactly where the GM$/month and GM$/call boundary is for viable outside rep selling using LIPA Management tools. And, rethink your sales force to fit net-profit and big-customer, supply-chain-needs realities. (Again: article 4.11)
House account categories of customers including those “high margin” counter business customers are generally big losers. Standard service processes cost more for these customers than the GM$s that come from the List Prices you charge. (Again: video clips for Minnow-Division cases YT 9: 22-32, 62)
Low GM% is Often Good: Add Value to Most-Profitable Direct-Ship Business
If High GM% is good, then sentimentally it follows that low GM% business is concerning to simply bad. But, huge brokerage orders can be best tolerated for ego and math-free rebate hopes. Because distributors are so cautious about Low GM%, it turns out that most direct ship orders are generally more profitable than warehouse business. Brokerage reps often have very profitable territories for the company. If your business mix includes a lot of big, direct-ship bidding, then:
Rank your top 100+ most net-profitable, direct shipments for last year to see what type of orders they were involving what repeat products, suppliers and customers.
Brainstorm about: these top 100+ orders; the core suppliers and customers involved in them; and any other patterns you might see. What can you do to add value to these supply-chain scenarios? Include key suppliers and customers on the idea generation step if appropriate. Push the wheel of learning (YT 5: 40). Come up with ideas for improvement? Survey best, drop-ship customers to search for unfilled, “latent”, service and information needs.Youtube clips on how to do this and some next-level services are:
YT 4: 17…Customer Listening Guidelines
YT 4: 18…Service Varies By Niche
YT 4: 19…MRO Buyer Service Quirks
YT 4: 20…Service Quirks: Estimators’ Quote Speed Need
YT 9: 33…Re-Tune Core Hospital Replenishment System
YT 9: 34…Reduce Printer’s Job Quoting Response Time by 50-80%
YT 9: 85…Big Electrical Contractor Rewards: Supply-Chain Quote Speed +
Who, then, will be your Innovation Champion for improving the total-supply-chain value and economicsbetween the most frequently used suppliers and top 20+ customers? Most distributors have each step of the direct-bidding process in a different functional silo. No one is in charge of the entire process, which could make it more seamless, flexible, faster and more harmonious for all of the players, especially the customer. All of theyoutube cases above resulted in huge upside wins for the distributors involved. Could your firm use LIPA Management tools to win big too?
“Buy-Low, Sell-High” Creates Four-Party Tension; Blinds Us to All-Win, Supply-Chain Possibilities.
Since the beginning of civilization, buyers and sellers have fought to enrich themselves at the expense of the other. A concession won today is rationally, over-valued, because it is: measurable, in hand, and will impact this month’s profits. The vague, abstract, unmeasured, longer-term costs are under-weighted to non-existent to many people. This predictably irrational, cognitive bias has been scientifically proven and named: “Hyperbolic Discounting”.
What longer-term, hidden, buying costs are we under-valuing? Let’s look at: shopping costs; inconsistent-service costs; net-profit losses; goodwill synergy losses; and killer all-win supply-chain savings. There are no free concession wins today.
Shopping and negotiating over “PRICE” takes shopping/negotiating time (plus legal fees in bigger contractual cases). Who’s measuring the negotiation friction cost? Not most buyers; it is their paid-job metric to shop price! If you try to sell a full-time buyer on the cost of haggling, what are the spoken and unspoken pushbacks?
“It’s my job.” (In my silo, PRICE SAVINGS is a key metric and how I score brownie points with my boss. I don’t get measured or punished for down-time somewhere else for lack of necessary product at hand.)
“What else would I do with my time?” (Companies with strategic vision and ambition always have more important tasks to get to than price-haggling on repeat buys. Perhaps the buyer’s CEO can understand the – bigger, longer-term, supply-chain savings – pitch which will involve upgrading both Rep and Buyer job-value. Try a honcho-to-honcho sell as in the cases covered in: YT 9: 34, 62, 63–64, 85
(After you give a buyer some better-value things to do with their saved shopping time…) “But, Price-Savings are measurable, real and now. (I don’t understand or value the future abstractions that you are alluding too. And, I don’t want have to change unless my boss puts a gun to my head. Seeing future, system improvement upside and changing habits are not common human skills.)
“I’ll be honest, I enjoy haggling, it’s a sport.” (and as a small-time, owner/operator/buyer: “it is my time, money and choice.”) This – Think Small, Act Small – philosophy keeps customers small. Has this guy grown over the past 5 years? Statistically: NO! Will they grow in the next 5 years if they keep doing what they have been doing? NO! Are we wasting our time breaking-even or losing net-profit dollars negotiating with any customers like this? YES! The Rep on the account still makes money if we pay on GM$s, but the company is losing. Pay Reps on Net-Profits for high-powered alignment. Distributors in contractor-supply channels, have many such customers. Still, the bigger, ambitious contractors can be taught to co-create buy-sell relationships that maximize UPTIME, ONTIME, and POSITIVE CUSTOMER RETENTION ECONOMICS.
(See YT 9: 45-53)
As Future Sellers of best-total-economic-value solutions, how do we overcome: “I want Price Savings Now”? I refer you again to the “supply chain selling skills” youtube clips: YT 1: 10-30
In bids for big-contract, supply deals, if the buyer takes the lowest price does his firm measure and manage the hidden costs of poor service during the life of the contract? How often will the poor-service costs exceed the upfront price savings? Most distributors do not unilaterally, offer upfront, perfect service guarantees to make the cost of imperfect service visible, measurable and part of the written bid.
And, does the low-bid, winning distributor make any net-profit on the contract? Factory reps and distributor reps with incentives for sales or GM$s want to win every bid. They will get incremental, incentive-bucks even when the house gets a net-profit loss. Reps, being professional persuaders, will sell distributor principals on why un-measured, imagined economies-of-scale; year-end rebates; and getting all fill-in business at high margins will make the contract a net-winner. No net-profit analysis is ever done. What if Reps were paid on a net-profit incentive? Why not let CTS, net-profit simulations tell you where the breakeven price is and therefore when to pass on too low a bid?
One final, hidden, unmeasured future-cost is the value of lost trust and goodwill with today’s loser. If you extract a concession today, the other party may act happy, but aren’t they also thinking: “How am I going to get my concession back in some sneaky way? And, next-time, will I even waste my time trying to work with this guy, especially if I have other prospects with track records of win-win intent? These two potential partners will never see or move towards all-stakeholders-win, supply chain savings. In the long-run, there is no free concession today, and true supply-chain collaboration wins are superior.
When distributors try to shelter back-end deals from suppliers to reduce both commissionable GM$s and pass-through savings to customers, this is another form of lost goodwill. I’ve previously mentioned how these house-wins spur both customers and reps to be less trustful of distributor principals. And, how trusting are suppliers that their special-pricing, rebate deals for specific items for specific customers are being exploited?
If all 4 parties – Suppliers, Reps, the Distributor, and the Customers – obsess over PRICE and getting a bit more of the static GM$-pie, who is noticing and solving the transactional, activity waste within the flow of product from supplier to end-user?The shopping game reduces the trust needed for channel players to become waste-removal partners.
Price-Shopping,Judo- Selling Scenario
How do we turn a win-lose, PRICE request into a win-win initiative? Here is a vision-drama for all of your customer-facing people to aspire to:
CUSTOMER: I just noticed that your prices for widgets are higher than another supplier’s. Did you raise them without notifying me?
ANY OF OUR CUSTOMER-FACING PEOPLE:
“You can always find a lower price on any one, or several, of the items that we are selling you. And, we both know that Price-Savings are real, now and in-hand. But, we believe that all of our service-value benefits more than offset any random price-savings opportunities you might find? I’d be happy to review (again) with you how our total service-value offering gives you the best total supply-chain economics (TPC, Uptime, OnTime and Your Customer, Retention Economics).
Our goal is to NOT be the bargain-price, bargain-service supplier that causes you hidden costs will significantly exceed the measurable, upfront Price Savings. We want to grow your bottom line better than any other supplier.
Having defended our higher prices as the best total value, we may be able to also offer you the lowest prices too, IF we can rethink our buy-sell process costs together. First-time audits of buy-sell cost activity always reveal some hidden costs to save. Shall we look at our supply-chain math for your activity for the past 12+ months for opportunities?”
If the customer wants better prices, throw them in that direction. Make it possible with win-win, rethinking of the current buy-sell process activity.
To make this dream come true requires a journey takes work with a one-step-at-a-time philosophy. Start with quick improvements to service-value for a target niche of customers with spontaneous extra efforts by all employees for the key accounts. The distinctive service then permits money-where-your-mouth-is service guarantees. Money-backed guarantees: put a price value on service-value; support both higher prices in a last-look game; and qualify you to be a reliable supply-chain partner. What customer wants to put all of their eggs in one supplier’s mediocre service basket? Specific YT clips for this journey are:
Playlist 4 (“nichonomics”) covers: defining niches, picking best customers within those niches and defining what best service metrics are for the niche.
Playlist 5 goes deeply into how to: measure and achieve brilliant levels for service metrics. If everyone isn’t totally engaged about working together to make Service Excellence happen, it won’t.
And, Playlist 1 (10-32) covers how to sell service value as the basis for supply-chain-value solutions. All reps must be able to first, get last look plus an extra point for both their own value-added and the company’s exceptional service. Then, pivot into a broader conversation about supply-chain-math opportunities. Some specific how-to clips are:
YT 1: 19 Last-Look + 1 Point for the Rep
YT 1: 20 And Service Value Gets +1 point too
YT 1: 21 Are Higher Prices Really Possible
YT 5: 6 & 7 How 8 Service Metrics Improve a Customer’s Total Value
Reps on GM$-based Incentives CANNOT Sell Last-Look + 2 pts and Supply-Chain-Math Solutions!
Long-term results suggest Reps cannot be motivated to sustainably sell commodities at a higher price if their incentives are based on GM$s and GM%. Reps may say: “YES, I understand the complicated, sliding-scale, GM%-centric, less chargebacks plan.” But, off the record, how do they explain the plan?
“I look at my commission check as a percent of GM$s (and/or sales) to see if the percentage meets or exceeds what reps are getting paid at other key competitors. If it’s more, great: no problems. If it’s less, I’m going to start grumbling with my fellow reps and one or more of us will start to grumble to management. As for behavior, I just keep doing the best job I know how. I’m always: fighting for customer share, trying to be competitive without giving anything away and looking for ways to serve the customer.” (No metrics for continuous improvement in these habitual efforts.)
(Two Notes: 1) Why do Reps band together against management? It’s human game reality. See “Bottoms” or “Serfs” against the “Tops” or “Bosses”: YT 5: 75-78. 2) Reps do not typically consider the beneficial difference of riding a better service-horse. As a jockey, the going commission rate at the track is 10% of your winnings. Would you prefer a rich deal of making 30% of the winnings on a glue-factory nag that will never win; or, the poor deal of 5% of winnings on Secretariat who will win most of the time even with deadweight in the saddle? Strive to be the Service-Secretariat in your market and stress total, career security and income that comes with a best-service firm. Percentages of GM$s without looking at service-value retention economics is meaningless. It won’t stop Reps who are riding Secretariat from making noises about the 30% competitor. Have service strength; call their bluff; and tell them to get back to selling win-win supply-chain-math solutions.)
How do Reps report on their “last-look encounters”? With fog!
“Well, you have to be careful and work with the customer to see just what’s possible.”
Never have I heard a Rep exclaim: “I get offended when customers do that to me! I tell all of my customers: of course you are going to pay a higher price for me and my service horse, because it’s still the best total value for you.”
Why can’t Reps sell themselves and service? They don’t believe that they are true “10’s” who grow their customers profits and can demand a point for doing so. So, teach them to be “10’s” and build their case for future “last-look” moments. Here are some video clips that may help: YT 4: 37 – 45 (including “Be a 10” # 43)
Nor do the Reps believe that the company has measurably “10” best, service metrics/value for the customer. And, they are right, at least 95% of the time. It is impossible to have the best service value for every niche of customers that you sell. But, achieving in-your-face, best service-value for one niche a time is surprisingly easy. Skim through Playlist 4 on “Nichonomics” to learn how. Achieving Service Excellence is covered in Playlist 5.
If a Rep isn’t a “10”, and they don’t have a service-edge in the customer’s mind, then they will, on GM$-based comp plans, cave into “Loss Aversion”. They will meet the price to preserve some of their income versus the imagined fear of losing all of the business if they don’t match competitors’ prices.
Pre-Requisites for the Supply-Chain Judo Pivot
If Reps cannot get two extra points in a reverse auction, then they can’t pivot into the supply-chain-math partnership pitch. And, even if one Rep could get the plus-two-points, the broader economic discussion of supply-chain savings can’t happen, because:
The Distributor doesn’t have LIPA, supply-chain-math for each customer.
The Rep wouldn’t know what to do with the information if the Company did have it.
The Rep has a negative incentive to worry about customer CTS. They are currently motivated to give all services away for free to help get more GM$s whether it is net-profitable or not.
And, at larger accounts that can economically support a Rep ($4500-5000 in GM per year minimum/Article 4.11), both the Rep and a Honcho have to sell changes in the buy-sell process to a customer Honcho who can see and change the overall buying process and metrics. Otherwise, buyers in their silos just keep shopping PRICE.
For a several-part case study on selling a win-win solution to a big-losing, aggressive price-shopping (plumbing) contractor check out these clips:
YT 9: 11 The Four-View Analysis of a Customer
YT 9: 12 The Losing Contractors Big Losing SKUs
YT 9: 13 The Custom Spice-Rack for each Van Solution
YT 9: 63 – 64 Next Level Breakthrough Solution for the Contractor
What if your Reps were paid incentive dollars based on the “net profits” of the customer after subtracting out the CTS? If a breakeven or losing customer asks for a deal, both the Rep and the House would suffer even more with any more concessions. The Rep’s very different reaction would be:
We can’t give you any more concessions the way we are currently doing business together. Our CTS for you is too high which suggest that we both have some shared, excess activity costs within our buy-sell process. Why don’t we do an audit review to see what we might find?
Bottom Line: You can’t have win-win conversations with customers if you are in a zero-sum war starring:
The House trying to: shelter buying deals from commissionable GM$s or pass-throughs to customers while trying to Sneak Up the Prices for No Offsetting Value.
Reps who don’t trust the House GM$s and have a Play-Not-to-Lose Comp Plan that compels them to meet Last-Look with no believable service-value edge.
And, Suppliers that know that their end-customer-targeted concessions are gamed to some degree.
On Pricing: Practice the Lessons of Business History; Strive for Win-Win Price Reductions!
Tune your prices higher in a systematic, sustainable way, if you can. But, Buyers check prices far more often and thoroughly, than distributor Reps have the courage and GM$s incentives to try to raise them. You must have the best service value to resist margin erosion. In the long view, though, no supplier in history has succeeded by raising prices on shopped-commodities while continuing to offer the same total value offering.
The successful path has always been to lower prices as a by-product of more successful operational systems. Henry Ford’s assembly line (and total mines-to-markets supply chain) produced a more reliable working car for one third the price of the competitors. Wal-Mart’s “quick response” replenishment system provided every-day-lower prices with 99% in-store fill-rates. And, Dell’s JIT production system produced custom PCs faster and cheaper.
In channels in which some of the distributors have figured out how to be part of supply-chain solutions (contract foodservice, grocery, drug, hardware, hospital supply, MRO integrated supply), they have either dropped GM% significantly (and their CTS even more).Or, the innovators dramatically boosted value to: capture all of the best customers’ business. The Supply-Chain partners then ran many competitors out of business that had higher internal buy-sell activity costs.
(24) How Can High GMROI Supplier Lines Be Losers Instead of the Most Profitable?
Distributor trade associations have been offering financial-comparison report services since the early ‘70’s. “Financial Management for Distributor” courses are 40 years old. The DuPont Profit Model that is often included in those courses was invented in 1915. Looking at ultimate downstream symptoms called financial reporting ratios, we have been taught that:
More Inventory Turns are Better than Lower Ones. Higher Turns frees up cash investment and boosts Return on Investment, if nothing else changes, which is never the case! (Inventory turns doesn’t look at variations in: net-profit, fill-rate economics; increased replenishment activity costs; extra inter-branch transfer costs; etc.)
Higher GM% for a product or a Supplier Line is better than a lower one. (Duh!)
Inventory-Turns for a Supplier Line (X) Average GM% for the Line = “Turn-Earn”.
A higher, Turn-Earn for a Supplier-Line is better than a lower one (assuming fill-rates, etc. remain constant).
Divide Annual Gross Margin Dollars for a Line by the Average Inventory Investment in the Line to get: “GMROI” (“gim-roy”)
A higher GMROI is better than a Lower One. Better GMROIs or Turn-Earn ratios are upstream contributors to the ultimate downstream measure of financial productivity for asset dollars: Return on Total Assets (ROTA) which is calculated by Operating Profit (divided by) Total Assets
The drawbacks of managing your business by financial ratios are:
They are downstream symptoms. Improve them by improving the upstream root-causes for symptom levels.
Financial metrics blind us to achieving best service value for a niche of customers and then selling that service value to achieve net-profitable, partnerships with best customers.
Both GMROI and Turn-Earn are blind to variations amongst customers for CTS. With LIPA tools we find out that some high, TURN-EARN lines are comprised of small-dollar SKUs that can be highly popular. In spite of great GM%, the GM$s in each pick is much less than the cost of the pick.
Considering 40 years of industry brainwashing about the importance of GMROI and Turn-Earn, all Veteran Managers should forgive themselves for over-endowing the importance of these ratios and believing that all high Turn-Earn supplier lines were great winners. Let’s vow to use LIPA Management to make ROTA go through the roof by managing upstream root-cause, customer-value-centric variables.
(26-31) PLEASING AND MOTIVATING SUPPLIER ASSUMPTIONS
The general, underlying, Old-Belief assumptions behind these five concerns are: distributors who grow a supplier’s sales the best will get extra juice from suppliers starring special-pricing deals and growth rebate dollars. How then to grow sales best? Simple: do all (supplier-provided) product-pushing tactics better than competitors and get more/any/all customers to buy more.
If we drive away unprofitable customers to our competitors, the immediate, static-growth assumption is that less customers will result in less sales for us and more for our competitors who will also get more supplier juice. These math-free beliefs don’t see the account swapping math that will unfold. Competitor(s) “win” 20% of our accounts that generate 2-3% of our GM$s and eat 25% of our fulfillment people’s time. We instantly use free slack to do heroic service acts for 1% of all accounts that are big whale targets. Our wins there initially increase our GM$s by say 15%. This big volume will consume 7% of our fulfillment slack, so we continue to proactively invest the remaining free 18% slack in target account wins. Quick results: we start growing faster and more profitably than competitors with continued proactive investment going into target accounts. We win the supplier juice game too.
I have previously discussed the vision of: selling a lot more sales volume on a much more profitable basis to fewer customers. This key objective of LIPA Management can also be called “core niche reclamation and renewal”. Withnichonomics the average financially-driven distributor can double sales with half of the biggest accounts in a given niche and more than quadruple profits. This is exactly what was going on behind the improving financial numbers for the three case studies highlighted in Chapter One. Each distributor saw an initial erosion in the number of active customers while sales and profits grew dramatically.
(29) Best, Fastest Rollouts of Supplier Promotions. Early bird gets more worms.
In start-up industries with start-up category products, it is like the Oklahoma land-rush, whoever gets there sooner gets more, best, new territory. Once prospective customers have all been turned on to buying the True-new and become repeat buyers, the account-share war and price-shopping can start.
In mature, consolidating industries with savvy repeat buyers under economic pressure themselves, what do product promotions accomplish? Do they stimulate any more, annual demand from the customer base? If we buy two tubes of the toothpaste brand on sale for the price of one, will we use the extra toothpaste any faster? The retailer (at extra promotion planning and execution expense) has bribed us to shift future demand to the present. Customers are being educated to not be loyal to a BRAND and best fill-rates on their habitual purchases, but loyal to best PRICE DEALS. This is a dumb competitive strategy, because any lousy service provider can instantly copy and beat lower PRICEs. And, doing promotions disrupts inventory demand-forecasting and replenishment for best, every-day fill-rates. What will the retailer do when future sales drop due to loading up customers now? Run more and bigger promotions! Like any addiction, the sales high comes now, the hangover comes later and it takes ever bigger doses of the drug to keep sales “growing”.
Wal-Mart discovered by trying to have every-day, low-prices and consistently high fill-rates that channel-loading programs had net-negative economics for everyone in the channel. But, in the last quarter when we all want to make sales/profit goals for the year, every channel player can be seduced into loading up for PRICE SAVINGS or year-end rebates now, because of the cognitive bias of “Hyperbolic Discounting”. We don’t think about or heavily discount the hidden costs down the road.
But, product-pushing Reps (not supply-chain, customer-profit-growers) like promotions. They usually get extra spiffs, and it gives them something to talk about. Who wants to make expensive face-to-face calls with nothing really to talk about, because there is nothing new about the commodities being replenished? And, PRICE is the easiest thing to sell, IF you are the first distributor Rep of several who can sell the same supplier promotion.
Do you want to play a dumb, short-sighted game that all competitors can play too? Or, do you want to measure the hidden and long-term best total economics you and key customers can achieve together if at least one of you has the supply-chain-math for all of your historical buy-sell activity? Before LIPA Management insights and customer buying math, we didn’t know what else to do. Now you have a big choice.
How do we transition from Supplier Promotion Wars to Win-Win Partnerships?
- Tell the suppliers what they want to hear: “We are going to load up and blast this deal to every possible customer in our market.”
- Then, don’t promote the load up programs. Promote smooth, demand replenishment with no hidden costs. Keep doing LIPA plays that win bigger share of customer on win-win economics.
- If the customer tells you about the promotional discount that the competitor is offering, you can counter with a similar percent rebate on the purchases for that line down the road based on actual, steady purchasing flow. Stay focused on the value of the steady-flow, best supply-chain economics.
- Then, like the case study distributors in Chapter One, your sales will grow more than two times faster than the industry, because of customer-centric solution reasons.
- At year’s end, suppliers will extol how well you executed their promotions, because your sales will be up more than all of the other area competitors. Suppliers don’t need to know the engine for their growth was not promotions, but customer-centric, service-value-chains solutions.
Growing sales with product-centric, PRICE promotions as the engine can’t work in mature markets. You can win with every-day-lower prices IF you have a breakthrough operational-cost-reduction platform like Wal-Mart’s “Quick Response”. Amazon has more recently created a service model that can discount all of the super-profitable, retail items from many different types of specialty retailers. And, they can sell you the exotic items too with their “Fulfillment By Amazon”, third-party-logistics fees.
Most distributors are not ever going to be the low-cost-model operators. Only one competitor can theoretically win the low-cost, low-price game; the others must win on niche value. But, any distributor can be the first to co-create precision, customized, supply-chain solutions for the 20% of the customers that buy 80% of warehouse volume. You just need LIPA Management tools and skills.
(30 to 35) OUR REPS CAN’T/WON’T CHANGE
Most of these concerns have been covered in previous discussion notes. For a quick review, new learning seems more challenging than it really is. If other distributors with whom you can visit have mastered the new skills, then have faith; you can too.
As for concerns about not trusting or understanding the CTS-based reporting and incentive pay, these problems go away if the best reps are:
- Guaranteed their current income level through the transition.
- Given modified territories with fewer, but much larger, on average, accounts.
- Given renewed service value assistance for key accounts from the team plus supply-chain-math solutions.
- When the best reps realize they would be making more money on a new plan based on “delta net profit growth” and reinventing their value, then: Carpe Net Profits!
- This pay transition is about tweaking the old plan to cut Rep income by nickels. It is about pursuing a one-time breakthrough opportunity that will take all stakeholders (Reps too) to a much higher plateau of income with a better growth trajectory from there.
To any – “we can’t do this” – comments, you must ask: 1) “Well then, what other innovative ideas do you have? To keep doing the status quo is not a healthy option. And, 2) “Why are you entitled not to change? Are you prepared to tell the bottom 80% of the payroll that they should change to expand your income and make your selling easier while you do nothing?” Everyone in a service company is either part of the solution or they are part of the problem. The great majority of stakeholders will not cross-subsidize Fat Cats for long. The best ones will leave quickly for a better company horse in which to invest their talents.
(36-39) EXECUTIVE EGO CONCERNS
36: Feeling bad about exhorting the troops to do net-unprofitable initiatives. To let yourself and all other managers off the hook, re-read the “defusing fears” and “teaching guidelines” at the beginning of this discussion section.
37: I don’t want to sound like a fool when people raise all of the NEW questions and objections about LIPA Management plays…. Review this entire section (and related youtube clips) as many times as you need to. Participate yourself in the earliest calls on super-friendly customers to talk about supply-chain-math opportunities. The courage will come as you begin to get traction. And, don’t feel like you have to be the customary expert. Tell everyone that: “We will have to be learners together.” For more on being the head learner rather than the head expert see YT 5: 78.
38: Open-Book Management (OBM)? Open-Book Management (OBM) is necessary, but insufficient practice for high-performance service companies. Don’t share lousy profit numbers if you don’t have a new, compelling strategy that will definitely pay off for everyone. LIPA plays at the extremes of the ranking curves will give you, however, a one-time, pie-expanding windfall with which to re-engage all stakeholders. If you can get 100% of all employees in the same, net-profit development and improvement boat, the alignment power can be fantastic. Beyond achieving core-niche renewals for the benefit of all, aspire to retune your corporate culture into a perpetual, can-do, innovating one. For more on re-tuning your corporate culture see: Playlist 8. YT 8: 1-29.
39: Our track record at doing Big Changes is not good. What if we can’t pull this one off? What’s different about LIPA Management powered changes? You have: training resources like this one-step-at-a-time book & video-clips; the collective resources of the LIPA Management community; and I can arrange for consulting support to come in and help you make it happen. The fees can be based on a fraction of the incremental action, so where’s the downside risk?