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:
- Assigned (eventually) every employee to a “profit improvement team” focused on one or more of the many new opportunities that Waypoint information revealed.
- Assigned many employees to reading groups to discuss the short chapters within “Islands of Profit” on a weekly basis.
- 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?
- 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).
- 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:
- “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.”
- 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!)
- 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.