September 24, 2017


















Chapter 5

 

(I)            AN INDEX OF NET-PROFIT CONCERNS..and..

(II)         ANSWERS TO THEM

 

INTRODUCTION TO 39+ CONCERNS

 

Old beliefs instantly dismiss the idea that a customer with  ̶  Big Sales, GM$s and a decent GM%  ̶  can be a big loser. Gut-reactions scream out: 

·        Sales Reps with GM$-based, incentive pay will panic (and bolt to competitors).

·        Every extra dollar of GM helps with fixed overhead costs; don’t drive any away.

·        Losing any customer will shift more of the same total, fixed-costs to fewer remaining accounts. More accounts will then be losers. Repeat into a downward spiral.

·        Everyone in the company and the channel will think we are crazy.

 

Good answers to these real concerns (and others) await you in Part II. If you poke traditional (math and fact free) beliefs, then expect a broadside of inter-related objections to fight for the status quo.    

 

Can you answer the 39+ concerns below with unshakable confidence in the upside possibilities revealed by LIPA Management? If YES, then you can get enough stakeholders (reps too!) through their Conceive-Believe-Achieve (CBA) process to execute on wealth pie-expansion plays. Some diehards will defend the old beliefs to their necessary departure. You can’t let a vocal minority hold back progress for all other stakeholders and threaten the future of the company.

 

The concerns are organized in a chronological, building-block order. The objections will emerge in a different order. Most people will jump right to # 17 (the CTS model is untrustworthy) and 18 (Reps will rebel). The other most popular argument will be: the fixed-cost-all-GM$s-are-good (#s 1-4 in the index). The rest of the building blocks will emerge in defense of the status quo. Be prepared!     

 

Some concerns below will seem dated to folks in channels that have already flipped to supply-chain selling solutions (drug, hospital supply, OEM components/ingredients, MRO integrated supply, etc.) Many channels still have sales reps pushing products for prices within the context of a traditional, time-and-territory, call-schedule regime.  

 

Skim through the concerns to find the ones relevant to you. If you don’t find your specific concerns on the list or sufficiently helpful answers in the Discussion Notes, email the shortfalls in. We’ll add your input to this Index/Answers project.

 

This list does not have to be a secret tool for just Change Champions. Ask important, vocal doubters to go through the list to check off the points that concern them the most. All of these concerns will: calm emotions; hook rational thinking; and broaden conversations and curiosities about additional, hidden opportunities.

As you experiment with this Concerns Index, remember a key objective: convince everyone that the status quo is not a sustainable, winning-strategy in a changing world. If they want to fight LIPA Management innovations, then ask them to come up with another True-New solution to growing the pie for all stakeholders. Otherwise, let the net-profit journey begin, one, small, fearless step at a time. Courage and enthusiasm come after traction is achieved.

 

PART I: THE INDEX OF CONCERNS

(Operational-Cost, Financial Assumptions)

1.     In the moment, all of our costs are (or seem to be) fixed.

2.     If we drive away a dollar of customer margin, it will come 100% out of the bottom line, because all of our people will still be here getting paid the same to do less. And, our supplier rebates will be less too: another year-end hit to the bottom line.

3.     For incremental new business, we have fulfillment-capacity slack. We can take more orders without burning overtime. Any incremental margin dollars will mostly “flow-through” to the bottom line.  

4.     Every dollar of margin from any type of customer is, therefore, good.

(How, then, Do We Best Get More Customer GM$s? Assumptions:)

 

5.     All customers contribute incremental sales and GM$ that flow through to profits (see #3 above)

6.     Small Customers often (statistics-free) grow into big ones: acorns grow into oak trees! Be profit- tough with a Minnow today, and they will hold a grudge when they get bigger and we want them back. Our competitors, who welcome our alienated Minnows today, will invest in them and reap growing rewards in the future.   

7.     Tell big customers with many small-orders to change? They’ll get angry and leave. (Hits: #s 2-4)

8.     Drive big or small customer GM$s to a competitor, then they will benefit from #s 2-4 at our loss.

9.     There is no way that I want to give any competitor one GM$ of extra business. Why give them more opportunities  ̶  profit, hope, and bragging rights  ̶  to our common suppliers. (“Territorialism”:  it is mine and, as importantly, it is not yours. If you want it, than so do I, so you can’t have it.)  

 

(Don’t’ Mess With Reps On Commission)

 

10.   You get more accounts, sales and GM$ by hiring more reps (“more feet on the street”)

a.     Why downsize your sales force, even if some are calling mostly on Minnows?

11.   If reps are on commission at X% of sales or Y% of GM$s, then they are  ̶  on average  ̶  profitable.

a.     Aren’t they? What are our unspoken assumptions? Are they net-profit true?

b.     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. But, profit growth won’t come from: minimizing losses and hiring more unprofitable reps to get more unprofitable accounts.   

12.   If reps get commissions on small/net-profit-losing accounts, we’re still profitable on their territory if they are on commission.

a.     The good and bad accounts average out.

b.     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. (See #11; and #1-4)

c.     We don’t have enough big accounts to support all of our reps: why not have them cultivate the acorns that will grow into oak trees?

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 regular competitors will start gaining share in those accounts.

14.   We’re lean and mean around here. We eat what we kill. Sales reps are independent agents and masters of their territories. They sink or swim with how hard and smart they work. To mess with their accounts shows disrespect for their abilities. It has always been that way; don’t mess with Mother Nature.

15.   We pay reps a salary plus a bonus based on GM$s in some way (variation on #11)

16.   We can’t use an incentive based on “net profit growth” because we don’t know what the CTS is for every customer to then compute the net-profit for every customer. Our competitors don’t know this information either, we presume, so it’s a fair fight. (Why use automatic weapons when we both are fighting fair with bows and arrows?)

17.   Any CTS-allocation model can be proven to be imprecise (or at least second-guessed) as far as the true, exact CTS and Net Profit for a given customer. “If it isn’t perfectly precise, then it’s no good, because the sales force won’t trust it. They will assume that they will get less income and some may switch to competitors. This will slam sales volume concerns #-ed: 1-4. ”

a.     Big unspoken questions:  

                                                    a.     Is the current, financial-reporting-based model perfect?

                                                    b.     Is everyone in happy, trusting agreement as to what a perfect GM$ and GM% number for compensation is?

                                                    c.     If not, What is the real, root cause of rep mistrust about even the existing comp plan?)

b.     The Devil the Reps know is better than the one they don’t. Reps do, after all, understand the current game-terms of: sales, GM$s, GM%. They are adept at coping with the four-way (Rep, House, Customer and Suppliers’-special-pricing), zero-sum game over PRICE and GM%.

                                                    a.     The terms – “CTS, Net-Before-Compensation (NBC) and Net Profit” - are radically new and rest upon a can’t-be-perfect CTS model.

                                                    b.     The combination of the historical mistrust over real GM$s combined with the initial incomprehensibility of a Net-Profit world will push every reps’ income panic-button.

                                                    c.     The bigger the initial, comprehension gap, the bigger the fear of losing income.

18.   Steal good reps from competitors instead, if possible. (If your firm isn’t a Service Secretariat, will you only be able to steal mediocre competitors’ mediocre, net-unprofitable reps with obsolete value-added skills?)

19.   Rep relationships with the customer are, after all, what the customer values most.

 

(Higher GM% Means Higher Net Profits)

 

20.   We can get more margin dollars per order by sneaking up margins.

a.     This works best when we get general, supplier price-increases and then add a bit more on price increases to our customers.

b.     This pass-through-plus technique works especially well on “blind items” that customers don’t normally price-shop.

21.   Anything with higher GM%  ̶  items, orders, accounts, territories  ̶  is better than lower GM%. We have a sliding scale commission plan that pays more of the GM$s IF the GM% is higher. (Is it possible that a high GM% territory is due to a preponderance of small orders out of the warehouse to small customers for which the total CTS is still greater than the GM$s for a loss?)

22.   The LIPA-Management, item, profit-ranking report suggests that some  ̶  highly picked, small dollar-line-item SKUs   ̶   are unprofitable. But, some of these items are from suppliers for which the entire line has the best TURN x EARN product and GMROI ratio. Everyone knows from 30 years of industry financial studies and management that: if these financial metrics are high, this is good. No questions asked.

23.   In customer-profitability rankings, small, house accounts have the highest GM%. But, even without sales comp costs in their CTS, many of them are losers. We thought “House” and/or “Counter Business” was profitable and desirable. This net-unprofitable math offends our higher-GM%-business-is-always-best beliefs and constant management/marketing exhortations.

 

(Pleasing and Motivating Supplier Assumptions)

 

24.   Reps can sell more GM$ per account if we have more supplier lines and items to sell to customers. You can’t sell out of an empty wagon.

25.   Suppliers give maximum support (and rebates!) to those distributors who grow sales the fastest. (See # 25 & #27)

26.   If we drove away any customers/volume while trying to transform their unprofitably-high CTS, exclusive suppliers (if we had any) would be upset and threaten to pull the line. Non-exclusive ones would shift their discretionary help and deals to those competitors who are picking up our alienated customers and growing sales volume for the common suppliers.

27.   The best execution of product rollouts and promotions is vital to growth, because all of our competitors have access to the same lines and promotions. The early bird gets more worms.

28.   The more we grow with target suppliers the better are our growth rebate dollars.

a.     Are the rebate dollars added back into the GM$s – CTS = Net Profit equation for products in the supplier line to see if the line is truly net-profitable every month?

b.     Or, are “rebates” a math-free, hopeful net-profit benefit?

29.   We try not to count rebates as everyday GM$ that is commissionable or price cuts that should be passed on to the customers.

 

(Our Reps Can’t/Won’t Change. We Still Have an Independent-Agent Tradition.
See #17-19
)

 

30.   When our reps call on an account, they have to have something worthwhile to show or tell.

31.   Trying to get Reps to sell supply-chain-math, win-win solutions will require new skills and a different customer, time-allocation system. (They can’t, won’t do it and will leave instead: #17)

32.   When we look at a customer profitability ranking report and see big, “good” customers at the bottom for which reps are earning big commissions, we have to ask is the CTS model perfect and trustworthy? No! And, No!

33.   If we can prove that we can never know the exact, true, net-profit or loss of an account, isn’t that a good enough argument to go back to the status quo.

34.   Customer profitability ranking reports disrupt the logic of our universe and shake or break every one of these 39+ bricks.

35.   Do we have some losing customers and items? Sure, but you have to take the good with the bad.

a.     All of our competitors do.

b.     Our suppliers and customers expect it.

c.     On balance, it has always worked. It is the way things are done in this channel.

 

(EXECUTIVE EGO CONCERNS)

 

36.   I don’t want to believe that I’ve been paying incentives to my reps to go get unprofitable business.

37.   Supply-chain-math raises all kinds of “new” questions for which I don’t have ready answers.

a.     I want everyone to think that this company is led by someone who has ready, right answers due to lots of hard work over many years. I don’t want to be as clueless as everyone else in a new world.

b.     I don’t want to go from being the resident expert to the first among continual learners in a new paradigm.

c.     Some customers and supplier folks might even laugh at some of these New Paradigm ideas.

38.   In successful, case studies of LIPA Management, they mentioned going “open book”. This is just against our religion. What are my specific ego concerns about OBM?

a.     I want everyone to think that the company is bigger and more profitable than it is.

b.     My beliefs are the biggest reason that the company isn’t bigger and more profitable.

c.     If we went OBM, then there would be “new questions” for which, again, I don’t have ready answers for (I need to be the expert).

d.     And, historically, I didn’t have any innovative profit-growth ideas other than keep fine-tuning what we know and deluding ourselves that we are doing it harder.

                                                    a.     Are my reps trying harder or aging in place?

a.       Is the average age of the sales force past their peak energy and economic needs zone of 30 to 45?

b.       Can young, talented reps get access to the best accounts to sell them service-value-chain solutions?

                                                    b.     Is our fine-tuning guided by financial management conclusions which are zero-sum solutions like: cut total employment costs and try to work them harder. How motivating are zero-sum, negotiation tactics to all other stakeholders?

39.   Our track record at trying any big changes beyond find-tuning the past is not great. I’d feel vulnerable if I went to the mat for this Big, True-New and it fizzled like past ambitious plans.

a.     It’s always easier to stall off True New ideas with statements like: “We know what you are talking about. We could do it, but we choose not to, because…

                                                    a.     We are already doing well enough.

                                                    b.     We have too many other cooler things we are working on.”

b.     Who is going to guarantee me that LIPA Management is going to implement itself for sure?

c.     Who is going to take care of my honest implementation concerns?

40.   (Send in more pushback stumpers that you may encounter!)

       Chapter 5, Part II: Discussion Of The Concerns

       Chapter 5, Specific Answers To The 39+ Concerns