RE-THINKING DISTRIBUTOR PROFITABILITY - A CASE STUDY 1

Bakery
Case Study
May, 2002


I. Case study of ABC Bakery Supply Company.
A. Key conceptual themes to explore:
Volume is vanity; profit is sanity?
Small order opportunity?
Segment customers and serve differently?

B. Big picture data:

Annual sales
- C.O.G.S.
Gross Margin
- Operating Costs
PBIT
25,000,000 (18.05.%)
20,487,436
4,512,564
4,224,528
288,036 (1.15%)
13 outside sales territories assigned 1,144 active accounts
32,004 transactions for the year

C. Average transactional data:

Sales per transaction
Gross Margin $ per transaction
Cost per transaction
PBIT per transaction
$781
141
- 132
$ 9


D. If we ranked customers by "estimated PBIT" contribution using the following equation:

GM$ (for year) - [#trx/yr. x $132 cost/trx.] = PBIT
and we discovered:

1. Top 10% of customers
Top 20%
Top 40%
Bottom 60%
100%
95% PBIT
145% PBIT
155% PBIT
(55%) PBIT
100%


2. Bottom 40% of all transactions ranked by GM$/trx. totaled 5% of all gross margin dollars, but required at least 40% of all transactional activity costs. . .

So what?

II. Sales force actual data: (Page 4)

A. What correlation is there between GM% and "estimated PBIT" for a territory?

B. What's the only way to have the highest "profit factor" for a territory?
What might we infer about that rep and that territory?

C. What's the only way to have the lowest "profit factor"? Inferences?

D. Is sales compensation typically tied into the inherent profitability of an account or a territory? New schemes?

III. Segment customers and serve them differently?

A. Assumptions:
1. Average cost/call in the field?
2. Minimum # of calls per year to have a personal and professional rapport with the customer good enough to sell, install and maintain a "lowest total procurement cost" supply system?
3. Target of sales call cost to GM$/call ratio? (20 - 30%?)
4. Minimum amount of sales and gross margin $/month for an account to qualify for outside sales coverage?
5. Same process for telemarketing coverage; mail order?

B. ABC's first simulation for selling stratas.

Strata
A
B
C
D
Sales/year
24K+
12 - 24K
3 - 12K
0 - 3K
# of Accounts
256
187
501
200
How many outside sales people to cover 256 A accounts? 13?

C. What if:
1) 10% of the biggest customers ("A" accounts) produced 50% of a territory's margin and took 30% of a rep's total time?
2) "B" accounts: 40% customers - 40% GM$ - 40% time
3) "C" accounts: 50% customers - 10% GM$ - 50% time
  10-50-40 40-40-40 50-10-30    
  A Accounts B Accounts C Accounts D Accounts Total
Good Sales Rep # 1 10 40 50   100
OK Sales Rep # 2 10 40 50   100
Poor Sales Rep. # 3 10 40 50   100
  30 120 150   300
D. How could we:
1. Downsize, upgrade & re-focus outside sales coverage?
2. Create a new prospective telemarketing territory?

IV. Conclusions/Discussion Questions:

A. Are transactional costs important? Should we focus on PBIT/Customer versus assuming all volume, orders and customer activity is good?

B. How will you break the small order problem into different pieces to manage them in different ways? Here are four segments to consider:
1. Profitable account abusing small order privilege
2. Big, small order offender
3. Small customer, small orders that's wants traditional full, wholesale service
4. Small orders we create on our own internally

C. How will we downsize, upgrade, re-focus and re-invent our sales force?

D. Can you create a telemarketing territory with new prices, terms and minimum orders that will:
1. Increase volume with some accounts?
2. Drive losers to unknowing competitors?
3. Incent customers to routinize their purchases around when a truck is scheduled to role by their door?

E. Can you envision how some "D" customers will either come to pick up smaller orders or go to the wholesale club?

F. What are the psychological push-backs to this data and solutions? For - management, outside sales, inside sales?

1 2 3 4 5   6 7 8 9
Sales Rep # of Accts $ Sales Gross Margin GM % # of trxs. GM$/trx. Profit Factor PBIT PBIT/trx.
1 4 1437691.53 268761.28 18.693946 357 752.83 140.78 221637.28 620.83
2 80 1692797.60 291184.80 17.201395 1063 273.93 47.12 150868.80 141.93
3 61 1085723.29 211375.82 19.468664 663 318.82 62.17 123859.82 186.82
4 180 3387318.35 673083.27 19.870682 3032 140.52 27.96 40803.27 8.52
5 89 1552267.47 343176.52 22.108079 2346 146.28 27.65 33504.52 14.28
6 ? 1135571.02 229665.67 20.224686 1569 146.38 29.57 22557.67 14.38
7 3 2436.31 532.55 21.858877 7 76.08 16.66 -391.45 -55.92
8 48 98932.94 26554.22 26.840626 240 110.64 29.65 -5125.78 -21.36
9 41 630343.37 130948.39 20.774136 1067 122.73 25.53 -9895.61 -9.27
10 119 1209238.31 282505.31 23.362253 2502 112.91 26.42 -47758.69 -19.09
11 196 3233877.09 610556.85 18.880026 5175 117.98 22.30 -72543.15 -14.02
12 130 1403532.13 316240.10 22.531732 3032 104.30 23.47 -83983.90 -17.70
13 154 2805491.02 528093.09 18.823553 5003 105.56 19.85 -132302.91 -26.44
Totals 1105 19675220.43 3912677.87   26056     241229.87  
Column 8 = GM% x GM$/transaction
Column 9 = GM$ - [# of invoices x $132/invoice]

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1 To be emailed a copy of the 4 page case study request it from karen@merrifield.com
2 For the analysis technique see article #2.3 at www.merrifield.com or in Module #3.5 in the video, "High Performance Distribution Ideas for All."
3 More on "total procurement cost" at www.merrifield.com within article #4.2 and video Modules #4.11-13.