CHAPTER 5 PART II:
SPECIFIC ANSWERS TO THE 39+ CONCERNS
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 of 80% 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
“(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:
To-Do Lists/Projects/Quotes that we would love to get to.
customers waiting (on hold) for us to get back to them with keep-and-grow-them
Instead of thinking of one “incremental
new or lost GM$s”, what happens
when we think of the CTS for different
pools of net-profitable and unprofitable accounts.
most-profitable accounts will be about 10% of all accounts generating 50% of
the GM$s and requiring only 40% of operating CTS expenses (variable and
allocated fixed included) for an average, net-profit margin of 10%.
Losers might be 2% of the accounts generating 10% of the GM$s, but requiring
18% of CTS expenses for an average, net-loss of 8%.
growing-nowhere or dying-Minnows (in a mature consolidating industry) can be
50% of all active accounts generating only 2-5% of the GM$ 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
YT video clips that support
these comments and address concerns #1-4 are:
by economies of scale” YT
“Blind Spots for
Break-Even Charts” YT
2: 7, YT
Customer GM$ Counts” YT
Costs Fixed For Today?” YT
And, for dealing with the
always-traumatic, Losing-Minnow challenge:
Deal with Wholetail-Minnows First
“Our Minnows” YT
for Industrial Paper, Jan-San Distributor
Options for Minnows?
Fire. Profitable harvesting. Spin out Wholetail. Turn
into Cash-n-Carry Model, because all you have are Minnows YT
Wholetail-Minnows and Small-Account Reps Opportunity YT
5 Profit Streams
that come from Minnow Division and Downsizing Reps YT
Articles on Re-thinking the Rep force #2.19; and # 4.11
Division Benefits YT
Case Story Success YT
Results 6 Months Later YT
Baby-Step Minnow Case YT
Results: 3 months, 12 months, 3 years later
CONCERNS 5-9:…How to Get More Customer GM$s
“Any customer’s incremental GM$ 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
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.
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
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
They do no
articulated, focused, customer-centric, value-innovation pioneering. Any and
all customers are good. Unprofitable busy-ness then crowds out strategic
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.”
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
Acorn Customers into Oaks? YT
“Target Account Criteria” YT
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
“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
Invite them to help you make
sense of your new, supply-chain math for their
Here’s a sample introductory
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,
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.
hope is to find some new insights that will lead to some simple experiments
that will yield win-win benefits.
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:
Contractor. Too many rush orders to job sites
vans/techs. Too many counter buys per day. YT
9: 63, 64
wanting separate invoice for picks for each job YT
EOM-Parts Kits to Manufacturing Cells. Small picks killing both. YT
For inspirational cases in
which a distributor dictated new terms to Bullies and Cherry-Pickers to achieve
both more sales and big profits:
King calls you fourth for whatever others don’t have YT
questions for the Contractor King leading up to OUR NEW TERMS YT
integrated MRO contract losing (150K) to making 100K YT
Curmudgeon wants us to share his money-losing philosophy, but changes YT
sell huge-losers to begin with. Bully changes and calls back to “partner” YT
calls small orders in 1-2X/day as an excuse to talk to inside rep YT
Crazy Stories at the Bottom of the Ranking Report YT
(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.
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
10-19: DON’T MESS WITH REPS OR THEIR COMMISSIONS (THEY
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
(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%
(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
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
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
(14) We are Lean and Mean Around Here. Reps are
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
(15) We pay reps a salary plus a bonus based on
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:
Net Profit reports are not subject
to accounting precision concerns. They just have to be good enough to be
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!)
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
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.)
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?
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.
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.
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.
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
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 a hypothetical, 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
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$s and sneaks up prices to
customers. The reps and customers both get wind of these games and assume the
shortchanging is bigger than it is. The
fear of being chiseled keeps customers “checking prices” with competitors
more often and more aggressively. And, reps
think about the next-best competitor to work for to maximize income.
(Reps jumping to competitors? This
is an – unmeasured, generalized, awfulized and not – updated-trend
concern covered in detail in #18 below.)
of us get unnerved by “New” and “Change”, especially when it can hit the wallet
nerve. While our current comp plan has its flaws, it is the Devil-Comp-Plan we
all know. Until we can overcome each person’s Conceive-Believe-Achieve hurdles (starting
with my own), we will all nit-pick the
New for imperfections as excuses to stay with the even more flawed status quo
that we know.
leadership team needs to review these notes and related videoclips
until we are all convinced and confident about making the big switch from
GM$-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: 10-33 and 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.
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
Get your CTS
model sufficiently tuned. (See # 17). Then:
Find out the
net-profitability for each sales territory. Sort Reps into three piles:
Weakest/Wouldn’t Hire again; and
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.
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.
the Big Accounts from the weeded reps’ territories to Best Reps in exchange for
Best-Rep Minnow accounts reassigned to the new Minnow Division.
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
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
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)
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.
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.
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
A Pictorial Case Study of a
Distributor’s 24-Month Results YT
Y-O-Y Case Results by the
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
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
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
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
Why Downsizing, Upgrading,
Refocusing, Re-skilling and Re-Comp’ing (DURRR) Reps is
The Role of the Outside Sales Rep is Changing YT
target accounts YT
4: 38-42 )
Be a “10” YT
Do the Sales Force D.U.R.R.R YT 4:
Upgrade, Refocus, Renew, Recompensate)
DURRR Case Study YT
(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
of Innovation for Different Life-Cycle Stages
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:
Dates for Supply-Chain Memes YT
Four Innovation Zones
The Sales Force will Retaliate YT
Your Channel’s Life-Cycle History YT
Success Rules for: Growth Stage v. Consolidation Stage?
Be in Synch or Die. YT
Consolidating-Customer’s, Next-Level, Cost Reduction
Evolution of Value-Added
Augmented Product and the Life Cycle YT
Can Distributors Lead Supply-Chain Changes? (Yes!) YT
(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
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
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:
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
You can do the
same thing with customers GM% and Net-Profit%: again, no correlation.
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.
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 $s.
Look at this “value-exchange equation (GM% -CTS% = Net Profit%) for your 10
most profitable and unprofitable customers. There will be a wide range of average
GM% for customers at both extremes. The winners will always have a lower CTS%
than their GM% to yield a profit. And, amongst the losers (even those with high
GM%), they will always have a much higher CTS% than GM% for a loss. There is no minimum GM% you must average out
of the warehouse for any given customer to begin doing well. The High GM% is
good assumption pretends the CTS half of your operational story doesn’t exist.
A corollary concept to #5: let the customer name the price they would like to
pay for some key items as long as you get to name the supply-chain variables
that will make the deal still profitable to you. (For a case study on this
scenario see: YT
To get more comfortable and
fluent with the “no specific GM% needed for warehouse customers”, watch these
1: 24 Top and Bottom Four Accounts: GM$ - CTS = Net
1: 25 &
26 Top/Bottom Account Observations
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.
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?).
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.
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
9: 11-13, 63-64).
And then Raise prices to:
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.
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
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
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
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:
4: 18…Service Varies
4: 19…MRO Buyer
4: 20…Service Quirks:
Estimators’ Quote Speed Need
9: 33…Re-Tune Core
Hospital Replenishment System
Printer’s Job Quoting Response Time by 50-80%
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 economics between 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 the youtube
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
“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:
62, 63-64, 85
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.
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
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
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.
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:
I just noticed that your prices for widgets are higher than another supplier’s.
Did you raise them without notifying me?
OF OUR CUSTOMER-FACING PEOPLE:
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).
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:
4 (“nichonomics”) covers:
defining niches, picking best customers within those niches and defining what
best service metrics are for the niche.
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,
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:
1: 19 Last-Look
+ 1 Point for the Rep
1: 20 And
Service Value Gets +1 point too
1: 21 Are
Higher Prices Really Possible
5: 6 &
7 How 8 Service Metrics Improve a Customer’s Total
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$s and GM%. Reps may say: “YES, I understand the complicated, sliding-scale, GM%-centric, less
chargebacks plan.” But, off the record,
how do they explain the plan?
look at my commission check as a percent of GM$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.)
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$s without looking at service-value
retention economics is meaningless. It won’t stop Reps who are riding
Secretariat from making noises about the 30% competitor. Have service strength; call their bluff; and tell them to get back to
selling win-win supply-chain-math solutions.)
How do Reps report on their “last-look encounters”?
you have to be careful and work with the customer to see just what’s possible.”
Never have I heard a Rep
exclaim: “I get offended when customers do that to me! I tell all of my
customers: of course you are going to
pay a higher price for me and my service horse, because it’s still the best
total value for you.”
Why can’t Reps sell themselves and service? They don’t
believe that they are true “10’s”
who grow their customers profits and can demand a point for doing so. So, teach them to be “10’s” and build
their case for future “last-look” moments. Here are some video clips that may
4: 37 – 45 (including “Be
a 10” # 43)
Nor do the Reps believe that
the company has measurably “10” best,
service metrics/value for the customer. And, they are right, at least 95%
of the time. It is impossible to have the best service value for every niche of
customers that you sell. But, achieving in-your-face, best service-value for
one niche a time is surprisingly easy. Skim through Playlist
4 on “Nichonomics” to learn how. Achieving Service Excellence is
covered in Playlist
If a Rep isn’t a “10”, and
they don’t have a service-edge in the customer’s mind, then they will, on
GM$-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
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:
Distributor doesn’t have LIPA, supply-chain-math for each customer.
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.
at larger accounts that can economically support a Rep ($4500-5000 in GM per
4.11), both the Rep
and a Honcho have to sell changes in the buy-sell process to a customer Honcho who
can see and change the overall buying process and metrics. Otherwise, buyers in
their silos just keep shopping PRICE.
For a several-part case
study on selling a win-win solution to a big-losing, aggressive price-shopping
(plumbing) contractor check out these clips:
9: 11 The
Four-View Analysis of a Customer
9: 12 The
Losing Contractors Big Losing SKUs
9: 13 The
Custom Spice-Rack for each Van Solution
9: 63 –
Level Breakthrough Solution for the Contractor
What if your Reps were paid incentive dollars based
on the “net profits” of the customer
after subtracting out the CTS? If a breakeven or losing customer asks for a
deal, both the Rep and the House would suffer even more with any more
concessions. The Rep’s very different reaction would be:
We can’t give you any more concessions the way we
are currently doing business together. Our CTS for you is too high which
suggest that we both have some shared, excess activity costs within our
buy-sell process. Why don’t we do an audit review to see what we might find?
Bottom Line: You can’t have win-win conversations with
customers if you are in a zero-sum war starring:
House trying to: shelter buying deals from
commissionable GM$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$s and have a
Play-Not-to-Lose Comp Plan that compels them to meet Last-Look with no
believable service-value edge.
Suppliers that know that their end-customer-targeted concessions are
gamed to some degree.
On Pricing: Practice the
Lessons of Business History; Strive for Win-Win Price Reductions!
Tune your prices higher in a systematic,
sustainable way, if you can. But,
Buyers check prices far more often and thoroughly, than distributor Reps have
the courage and GM$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
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?
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:
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.)
GM% for a product or a Supplier Line is better than a lower one. (Duh!)
for a Supplier Line (X) Average GM%
for the Line = “Turn-Earn”.
higher, Turn-Earn for a Supplier-Line is better than a lower one (assuming
fill-rates, etc. remain constant).
Annual Gross Margin Dollars for a Line by the Average Inventory Investment in
the Line to get: “GMROI” (“gim-roy”)
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:
are downstream symptoms. Improve them by improving the upstream root-causes for
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
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”. With nichonomics
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?
suppliers what they want to hear: “We are going to load up and blast this deal
to every possible customer in our market.”
promote the load up programs. Promote smooth, demand replenishment with no
hidden costs. Keep doing LIPA plays that win bigger share of customer on
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,
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
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.
concerns about not trusting or understanding the CTS-based reporting and
incentive pay, these problems go away if the best reps are:
their current income level through the transition.
modified territories with fewer, but much larger, on average, accounts.
renewed service value assistance for key accounts from the team plus
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!
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
(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
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
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?