Quantum Profit Management” (QPM) For Distributors

“quantum (physics): the smallest amount of a physical quantity (unit) that can exist independently”

 When most distributors deliver an order, they don’t really know with much certainty how much “Profit Before Interest and Taxes” (PBIT) is in that order, or in each line item of the order. Wouldn’t “PBIT per line item” and “PBIT per SKU” be the quantum-level measurement units for a distributor? These quanta could then be rolled up to higher levels of profit measurement including:

  • Annual PBIT per customer
  • Annual PBIT for a group of customers within an industry / size-strata segment
  • Annual PBIT for an entire sales territory
  • Annual PBIT per SKU
  • Annual PBIT per supplier
  • Annual PBIT for different types of orders: direct, indirect, warehouse.

If we want to improve total profits, shouldn’t we manage the quantum level of where they are actually made and destroyed? How? What other thoughts and questions does this QPM vision-quest raise?

What Do We Already Know, Presume, And Readily Believe To Be True and Possible?

  1. We intuitively know that there are big PBIT cross-subsidies already going on between best and worst: customers, supply lines, SKUs, sales territories and even employees’ long-term-value contributions to the company.
  2. We know that our financial reporting system doesn’t give us very good PBIT-level information when it comes to the quanta of our business.
  3. We know that our reporting system is not geared towards measuring and allocating activity costs for handling every SKU and processing every category of order for every unique, cost-to-serve customer in order to identify the biggest profit generators and eaters.
  4. We assume that there is no – fast, easy, affordable, flexible, continuously-improving, highly informed (and ultimately credible?) – way to achieve QPM. But, thanks to technological and economic advances in the past two years for:
    1. software-as-a-service
    2. Collapsing costs for internet connectivity and data-storage costs; and…
    3. go-to-meeting, teleconferencing sessions for any number of people in different locations

QPM is now available to any distributor with access to their transactional data.

  1. We may have heard about case study numbers or even experimented internally with crude customer profitability ranking reports. But, do we really believe cross-subsidy statistics like: “the top 1% of the customers generate a magnitude of 35% of the “true profits” while the bottom 1% destroy about 20%.”?
  2. We have trouble believing that an activity cost model is reliable enough for our unique, dynamic business context to drive us to big strategic-thinking changes.

But, what if our QPM service worked with us to test allocation assumptions against the most-sensitive, top and bottom resultants on all of the profit ranking reports until we were satisfied with the level of reliability and comfortable enough with the reported cross-subsidies?

  1. If we got this far in the process, are we certain that we would we be able to:
    1. Keep asking “why” questions to get to the root cause of why elements are super profitable or unprofitable?
    2. Create new plays and skills for either keeping-and-growing the best or transforming-or-weeding the worst to achieve big positive changes in PBIT (“Delta PBIT” = positive difference/change in)?
    3. Be able to work through initial resistance from sales reps, customers and suppliers who are also presumably happy beneficiaries of the big losing elements in our business?
    4. Find the time, energy and resources to do new, forward-investing programs during this economic time of crisis in which we are just trying to cut costs and ride the prolonged storm through.

What if – thanks to go-to-meeting conferences – we had access-as-needed to the most knowledgeable experts on these issues to help?

  1. If none of our competitors practice QPM, then what is the worry? Aren’t we all playing by the same, less-informed rules? It’s a fair fight. (Who wants a fair fight?)
  2. How, on the other hand, are we going to profitably thrive instead of just hopefully surviving if we don’t change the rules to have some big, competitive advantages?
  3. What would happen if our biggest head-to-head competitor got QPM savvy first?

What We Find Hard To Believe If We Have Not Already Applied QPM?

  1. There are cross-subsidies within most distribution businesses (and manufacturers’ distribution arms) that range from 40 to 80% when looking through the different, profitability-ranking lenses for: customers, products / supply lines and sales territories.
  2. There is little-to-no correlation between the gross margin dollars or gross margin percentage within a distributor sales rep. territory and the actual PBIT that the territory delivers.
  3. Because reps. are typically motivated to get more sales or margin dollar volume (with target margin percentages), they have little concern, knowledge about, or skills to reshape the cost-to-serve relationships that currently exist between the company and the customer. Reps. are in a major, incentive misalignment for creating more profits to reinvest into strengthening and growing the business, which will hurt them too in the longer run.
  4. Ranking accounts by changes in PBIT from this year over last reveals big swings in many accounts which all get averaged out in financial numbers. If these swings were proactively managed to retain and grow best customers and transform or drive away losing customers, we could quickly achieve huge Delta PBIT gains.
  5. By focusing the entire service team on best 5% customers we can increase: service-value consistency and breakthrough heroics, inter-business-process efficiencies, retention rates, average order size, total sales volume and profitability.
  6. By doing the same for the biggest 1% of the losing accounts, we can convert 80% of them to solidly profitable accounts.
  7. Doing the plays for points 5 and 6 can increase the PBIT line by 2-5% points of sales within 3 to 6 months.

How Can We Learn More About QPM?

  1. Watch the webinars and read the articles at www.waypointanalytics.com.
  2. Request e-alerts about upcoming QPM application and case studies webinars and workshops.
  3. Request a free, fast, executive-team, go-to-meeting demonstration of the Waypoint service.

©Merrifield Consulting Group, Inc. Article 2.32