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GROW PROFITS NOT NECESSARILY VOLUME

 

            From 8000 BC until the last half of the 1970's, if a firm sold more volume, they almost always grew profits too. Now volume growth is just as likely to reduce profits, which raises some questions:

 

1.         Why did the volume rule work for so long and why did it stop working?

2.         Where then does “profit power” really come from?

3.         What are the steps that we must take to achieve sustainable profit growth?

 

            The answer to the first question is easier than the other two. For the first 10,000 years of civilization, the supply of all products was chronically less than a growing primary demand. This basic condition, which still exists in Communist and Third world Countries, permitted a set of secondary conditions:

1.         The power in the channels of distribution used to be the greatest with the producers of raw materials and the least with the final consumer. Manufacturers sought to secure their own raw material sources, and they appointed exclusive distributors because they didn't have enough capacity to sell more. Because of chronic tightness of supply, wholesale distributors (WDs) sold much of their volume at “book price” until the early 70's. And end‑users were loyal repeat customers to insure future allocations of product from the authorized sellers.

 

2.         All firms were far more “product‑driven” than they were "customer‑needs driven” , because getting more product to sell was the problem.

 

3.         “Service quality” was enough to get by, because the customer was delighted to get the product eventually.

 

4.         With primary demand booming, especially in the US since WWII, growth was assured, so everyone focused on controlling costs. Volume grew as fast as sales people and outlets could be added. With more volume at book price and costs under control, profits could grow as fast as volume.

 

            But, the underlying condition of supply and demand for the industrialized free world has changed in the last 15 years. Population growth has slowed to 1% in the US and below zero in Japan and Europe; basic needs have been heavily saturated; while supply of everything has continued to grow. Today there is a glut of most every product along with great excess capacity for distribution and retailing. What worked for 10,000 years, must be changed. Some new guidelines that now apply are:

 

1.         Become more customer‑needs focused. Define who is your primary segment of customer by at least the three dimensions listed below, and then restructure your marketing and service capability accordingly.

 

INDUSTRY TYPE    (x)      SIZE    (x)          SELLING MODE   (x)         BUYER MENTALITY

 

1.                                             A                      Outside sales                     Carriage Trade   

2.                                             B                      Telemarketing                    Value Buyers

3.                                             C                      Direct Mail                       ‑ aggressive

                                                                                                             ‑ passive         

4.                                             D                      Cash‑n‑Carry                    PURE PRICE

 

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This model suggests that for any target industry there are 12 potential marketing sub-segments (4 sizes (x) 3 mentalities). Each one may require a different mix of items for their one‑stop‑shop needs; a different mode of selling; and a different set of services. If a firm sells them all the same, then that firm is vulnerable to:

 

a.                   Providing standard services and prices to small order, small accounts at a loss.

 

b.                   Wasting time trying to sell pure‑price buyers costly service value which is bundled into the price.

 

c.                    Being stripped of service value by the aggressive value buyer who provides last look at a lower price from an unacceptable‑service supplier to get the service and the price.

 

d.                   Not having the resources to provide extra services or strokes to the “A” and “Carriage Trade” accounts, because they have been wasted on the first three situations.

 

                        e.         Losing business to competitors who focus more exactly on some of the sub-segments. Wholesale clubs, super‑stores, and catalog/telemarketing distributors have taken market share, for example, from the full‑service distributor and retailer channel.

 

            2.         Start to measure, however crudely, all accounts by estimated profit contribution, and rank them from most profitable to least. Most firms who do this find initially that the best 20‑40% of their accounts contribute 120‑150% of the profits to offset losing accounts.

 

            3.         Because of today's increasing competition, there is consolidation occurring in most industries and start-up companies are not as likely to survive or to grow to significant size. Firms should, therefore, reallocate energy from prospecting for new accounts with more salespeople to retaining and further penetrating the largest, most profitable accounts with consultative salespeople. Measure retention and penetration rates for core accounts.

 

            4.         After identifying most profitable core accounts, work hard on “perfect, distinctive service” in the customer's mind. This requires you to: define it; measure it; achieve and sustain it; sell and get paid for it. Because most competitors now have access to flawless quality commodities in excess supply, the service value that is added by your firm is the only edge.

 

            5.         Subordinate quantitative and financial management goals to qualitative goals. For too long, US managers have tried to: sell high; buy low; hire them cheap and work them hard; turn inventory; and collect early and pay late. These are simplistic financial‑analysis conclusions.

 

 

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            Instead, seek to:

 

                        a.         Sell better by getting paid for zero‑error, lower‑cost, higher‑value service. Focus on margin dollars minus transaction cost instead of margin percent which is misleading; a big percent on a small order is a loser.

 

                        b.         Buy better from those suppliers that offer the “lowest total procurement.”  If their prices are higher, then their service quality reduces other costs even further. If their “earn” is less, then their better total service value increases "turns" even more, so that the “turn x earn” is still higher.

 

                        c.          If you want to achieve perfect service, than you must hire “achievers” at higher wages, not lower. Achievers can save on hidden costs: they work harder, smarter and better, so you need fewer of them; you can strip out the costs of inspectors, supervisors, and mistake‑curing. Pay a lot and expect even more; for 120‑150% of the going wage you can achieve 165‑200% of the average output per employee. There is no other way.

 

                        d.         Higher inventory turns is desirable only after you have measured and achieved higher fill rates than your biggest head‑to‑head competitor. Having one‑stop‑shop in stock  is the keystone for good service.

 

            If a firm tried to pursue some or all of the recommendations above, they might well have to reweave the entire fabric of their business ‑ a tough challenge. Before starting transformations, it is best optimize all aspects of an existing business first. Don't carry or continue to grow inefficiencies when starting on a risky adventure.

 

            If a firm has been volume and product‑driven and currently has mediocre to fading profits, then there are usually “downsizing, upgrading” opportunities with the customer portfolio, inventory cash-traps, and employees. If a firm can correctly identify the winners and feed them while shaping‑up or out the definite losers, then:

 

            1.         Profits can double or triple;

 

            2.         Fire‑fighting significantly diminishes;

 

            3.         Morale, confidence and pro-activity will rise.

 

            These are the pre‑requisites for: moving a company to and along a more focused and appropriate strategic course; and building sustainable organizational strength and profit‑power. The weaker parts of some plants must be pruned so that limited resources can flow to the promising parts and allow them to flourish.

 

 

 

 

 

 

ÓMerrifield Consulting Group, Inc., Article 1.2