Learning From and Expanding Upon Your “Islands of Profits”

Who’s getting big benefits from this pamphlet series and how?1 Here is one success story that is partially disguised to: “not wake up our competitors”.

Acme Metals is a $50MM “service center” that sells different kinds of metals – processed to specific sizes – to an array of customers within the heart of the “rust belt”. Acme’s smart methods have historically out-performed their regional economy and peer distributors. But, the 2008 downturn and the deflationary drop in raw metals inventory hit them hard and re-awakened an old, profit improvement quest.

In 2002, Acme knew that they had significant cross-subsidies between their most profitable – customers, processing and SKUs– and the most unprofitable ones. To measure and exploit this opportunity, they bought an activity-based-costing software “solution” to create their own cost-to-serve models. After “investing way too much” in software, hardware, consulting and staff time, it was shelved out of frustration. Inventing effective cost-models, in-house from scratch isn’t easy.

In 2010, key managers read together: Islands of Profit in a Sea of Red Ink by Jonathan Byrnes. (Read the reviews and download the e-version from Amazon!) The book explains why cross-subsidies exist and what to do about them for breakthrough results in a chronological-process way.

With fresh inspiration, Acme debated whether to revive their old investment or try a fast, cheap, low-risk, 3-month-trial experiment with Waypoint Analytics’ “quantum profit management service”. Waypoint was the answer, because they had evolved a robust, sophisticated, turnkey, journey-ware service by working with many different distributors. They had tools for each step of the journey: cost modeling, ranking reports, plays, tracking reports, net-profit incentive reports, plus “free” e-consulting.

Because tools don’t lead change, Acme promoted a high-powered, finance person to become the full-time “chief profit-improvement officer” in charge of the “Profit Improvement Program” (PIP). She – with the full backing of the senior management team – immediately:

  1. Assigned (eventually) every employee to a “profit improvement team” focused on one or more of the many new opportunities that Waypoint information revealed.
  2. Assigned many employees to reading groups to discuss the short chapters within “Islands of Profit” on a weekly basis.
  3. Started holding short, weekly project team meetings and once a month all-team meetings to keep everyone focused and informed about the startling number of success stories that were occurring from “smart experiments”2.

What were some six-month milestone results?

  • Margins had improved by 4 points (13% of the trailing 30% rate).
  • Customers that were breakeven or losing accounts had dropped from 80% of all customers to 40% with a goal of less than 5%.
  • The 3% of customers that were big losers are – on average – all profitable and most are buying more volume than before.
  • Internal processes that turned out to be losers have been re-designed and re-sold to become winners.
  • The sales force is on track to switch from an incentive plan based on margin dollars to “net profit improvement” within their account base.
  • Operating profits have improved, net of business cycle and product inflation effects, on a best-guess basis by 2% of sales ($1MM).
  • And, there are still plenty of visible, upside opportunities.

What are some of the surprise discoveries of the PIP?

  1. The “we/they” talk between hourly and salary groups and outside reps and everyone else has been replaced with just “WE” (who will all be getting net-profit, gain-sharing bonuses that can now be tracked monthly).
  2. Reps are excited about being supply-chain process catalysts rather than selling commodities for a price. Because of the “net-profit improvement” incentive pay reports being run in parallel with the old pay system, reps now routinely parry “price” requests with:
    1. “It depends on how we balance all of your total-cost-to-buy variables with our cost-to-serve ones”, let’s create a win-win deal instead of a you win, we lose one.”
    2. Or, “I appreciate last-look to meet the price, but I believe we deserve a bit extra for both my personal contributions and our measurably consistent service value metrics” (and getting it, because it is true!)
    3. By sharing cost-to-serve math with progressive supplier and customers, Acme is seeing higher-up people with whom win-win, process-change conversations are happening. Best potential channel partners are intrigued and impressed with what Acme knows that no other distributors do.

    How can you take a ride on this story? Read the “Islands” book. Check out www.waypointanalytics.com. Request a go-to-meeting demo from them. Apply to attend their “Profit Improvement” conference on March 23-24th, 2 in Phoenix that will include presentations by and schmooze time with: “Islands” author Jonathan Byrnes and other distribution management experts. And, feel free to contact me.



    *The first six Strategic Insights are posted at www.merrifield.com under the Insights tab.

  1. At www.merrifield.com find all previous “Insights” plus their footnotes under the “insight” button.
  2. See annotated “slide show” #22 at www.merrifield.com