Article 1.23
2009’s Strategic
Plan: Customer Profitability Analysis Plays!
On 12-1-08
it was officially announced that we have been in a recession, and it looks like
the worst is yet to come. What are distributors planning to do in 2009?
Surveys suggest all of the normal reflex actions: cut costs; layoffs; postpone
investments; sell harder; push more products; etc. These are all sensible, but
similar moves: do they provide any competitive value advantage? Will they be sufficient
for distributors that have appreciable debt and/or high, wealth-creation
ambition?
NEXT LEVEL PLAYS
Want some
better ideas? If we look at our customer portfolio through the lens of
profitability ranking reports that use sufficiently good activity-based costing
models, we could then:
1.
Identify
the ten most profitable customers in each niche for which we are the #1 or 2
most effective supplier. Sign up 3 to 5 of them to be “advisors” to help us (re)define
exactly what our “service value equation” is. Put those metrics on the wall
and get everyone contributing in new ways to dramatically improve and maintain
those service levels, because it is in their best interests and what they do
want in the personal lives as customers. (Case example: http://www.merrifield.com/exhibits/8elements.pdf
2.
Because
fill-rates on warehouse orders is foundational to service excellence, why
not rank the most popular items bought by the top 10 customers in a given niche
and:
a.
Beef
up inventory investment for some significant sub-set of those items to improve
customer satisfaction and retention for all customers within the niche;
and…
b.
Improve
average order size, so that 50% of the incremental margin dollars past
breakeven on transaction costs flows through to the profit line. (New
mantra: sell more old items & complete fills to old customers
on a larger average order size basis! Want to know more about five, specific
old-2-old profit power plays and how to measure, track and execute them? Request
the “Ultra-Plan one-day seminar narrative” from bruce@merrifield.com.
3.
Who has time to do proactive stuff? We can’t do new, most-promising things, if we don’t
first free up resource energy being invested in – ideally – our biggest, losing
stuff. Isn’t that why we prune-to-grow our hedges and weed-to-feed our flower
beds? Why not visit the super-loser accounts and create custom solutions,
if necessary, to convert them to significantly profitable accounts.
Specifically how? See http://www.merrifield.com/articles/4_10.asp.
And, don’t forget to track each branch’s operating profit improvements for:
5 core accounts; 5 target accounts; and 5 super-losers-to-gold accounts! (http://www.merrifield.com/exhibits/Exhibit
44, The 555 Kit.)
4.
And,
what about the 50% or more of our accounts that are small customers that
give us small orders in which the margin dollars can not cover the costs of
the standard wholesale services we are giving them? If we had very precise
customer profitability ranking reports by – company, branch, sales territory,
and several sub-strata – there are a number of tactics we could employ to: make
them profitable or nudge them to weed-up our competitor’s garden. If we track
daily transaction activity, we will know when we can lay-off fulfillment
personnel costs that are two times or more the amount that we might lose in
small account margin dollars. Will we suffer a little dip in sales to make more
money and free up some receivables cash? Maybe. But, our bank would be pleased,
and we could then redeploy our best, remaining people to focus more thoroughly
on service value improvements for our core customers and niches to start
growing 2-to-5 times faster than the industry average.
5.
How
shall we please our best suppliers? Why don’t we rank our suppliers from
high to low by their actual operating profit contribution? What should we do
about the most profitable items in the most profitable lines versus the
unprofitable items from redundant, unprofitable suppliers? Why not generate two
hunting lists for the sales force:
a.
A
list of customers that are buying unprofitable items which we are closing out. Offer
these customers a close-out, load-up special price, AND change their habitual
replenishment systems/habits so that they will eventually buy our most-profitable-substitute
items when they run low on our close out deal.
b.
A
list of most popular (profitable and/or from preferred suppliers we need to
please) items for a given niche which a specific customer within that niche
isn’t buying (a more, old-2-old-on-a-larger-order-size-basis play).
HOW TO GET PROFITABILITY RANKING REPORTS - FAST
“But
Bruce, how do we generate these profitability ranking reports (for customers,
sales territories and product lines) to then analyze, measure and track all of
these plays? We can’t easily do the reports or the tracking you suggest with
our current IT system.”
All IT
systems are designed primarily to generate financial and asset management reports
that comply with “generally accepted accounting principles” (GAAP) and support
asset-backed lending requirements. GAAP numbers are generally lagging
indicators of what service value moves we made (or didn’t) months to years
earlier. We need GAAP numbers AND some supplementary, flexible way to analyze
and track next-level, profit-power plays. A “business intelligence” module that
is exclusively fed by a GAAP-driven, IT system won’t suffice either.
The only
fast, affordable, flexible solution to this strategic business intelligence
(SBI) problem that I could imagine was to partner with a company that could
provide best activity-based costing models tuned to both distributors and my
profit-power plays. If this service could be delivered on a monthly
subscription basis over the internet – leveraging software as a service
technology – that didn’t exist two years ago, we could:
·
Install
the service within a week or two.
·
Guarantee
an excellent, immediate payback (or stop monthly subscription payments!)
·
Provide
upgrades for a most progressive group of subscribers from all distribution
channels instantly with (disguised) case stories to go with the upgrades.
·
Provide
on-demand minutes of coaching or programming as needed sitting at our remote
desks looking at the same screen as the subscribing financial and IT managers.
·
And,
create new solutions that draw on both the IT and SBI service. If some or all
of the SBI service contributions can eventually be taken in house, excellent. So,
let’s get started!
For all of
these reasons, I have – for the first time in 30 years of consulting – “partnered
with” a “software solution provider”: www.ultra-plan.com.
CONCLUSIONS
As we look
this into the jaws of the global credit-bubble, credit-crunch meltdown, what
should we do if we are ambitious and/or leveraged wealth-builders? Strive to:
·
Stay
within bank-line covenants and even pay-down debt by…
·
Strategically
shrinking the asset-base of a distribution business while…
·
Increasing
profits 4-fold or more and …
·
Have
a growing-faster-than-the-industry story due to service value innovations aimed
at right customers within the right customer niches (?)
The
standard, fire-drill of cutting costs and trying harder in the same old ways is
good, but not great. Strategically re-sculpting our business around
profitability ranking report plays is worth at least a deeper look and most
probably some inexpensive experimentation that has huge upside potential.
D. Bruce
Merrifield, Jr.,
©Merrifield
Consulting Group, Inc., Article 1.23
December
4, 2008
