Article 2.31
Distributor, Inc.’s Profitability
Turn-Around
How, during “the Great
Recession of ’08 - ??”, do we grow profits (and perhaps sales too) when our customers
are:
§
buying
less;
§
shopping
“price” more aggressively;
§
often
ordering in smaller-less-profitable quantities;
§
and
not willing to try anything “new” unless it: instantly saves them money;
reduces asset/debt intensity; and requires no upfront-resource investment?
For
consumers in the US
(and 21 other countries with housing bubbles), frugality will be “in” to repair
personal balance sheets, and this may last for some time. How do we adjust our
own business thinking to deal with a global, balance-sheet recession?
Under-performing traditional
practices that won’t work are:
§
Managing
with financial averages that mask the most profitable and unprofitable elements
– customers, suppliers, territories – within the business.
§
Trying
to sell your way out of the problem by pushing all (especially “new”) products to
any/all customers.
§
Capturing
new sales volume with more aggressive pricing in a declining, or
downsized-and-flat-growth industry.
§
Borrowing
more to finance profitless growth bought with aggressive pricing.
§
Slashing
costs across the board, and eliminating investments that will help the company innovative
for competitive advantage.
What will work?
§
Measuring
and managing the root causes of our true-profit generators and our true profit-eaters.
§
Using
new profit-power reports to intelligently adjust our service model so we can
convert losing accounts into profitable ones and drive the chronic losers off
to drain our competitors. As we consolidate or lose many, small unprofitable
orders, we can then strategically shave down most of the new, slack,
service-activity costs and redeploy some into delivering distinctive,
next-level, service value to key target accounts for which there is upside,
incremental profit-growth potential.
What Did “Distributor,
Inc.” Discover and Then Do?
Wally
West, CEO of Distributor, Inc. (a multi-location, MRO distributor), watched his
sales volume drop 25% in Q4 ’08 and his company profits turn to monthly losses.
With a hefty working capital loan and a newly aggressive bank, he had to try
something new, fast and inexpensive. After
having a one-hour, web-based WayPoint demo with his senior leadership team, he
(with the bank’s encouragement) signed up.
In less
than three weeks, two and a half years of Wally’s company data was up and
running in Waypoint. Working with WayPoint, Wally’s team immediately saw dozens
of previously hidden opportunities. With the new analytic and tracking tools,
they found the following profit/loss, cross-subsidies:
§
The
top 1% of the customers yielded 39.4% of the Internal Profit;
the top 10% yielded 93.3%; and the top 25% yielded 99.9% of the company’s
Internal Profit. The balance of the customer list destroyed more than 80% of
the Internal Profit, the company had already earned, leaving only 18.3% of the
Internal Profit it had made on it best customers.
§
Out
of 244 active suppliers: the top ten (4%) accounted for 57.3% of the Internal
Profit; the top 25 generated 82.2%; and the top 75 supplied 93.3%. 50% of
supplier lines lost money, and the worst ten lost 54.5% of the company’s
Internal Profit. One hundred of the mid-range vendors were found to be
inconsequential, contributing or losing less than $1,000 in the most recent
year.
§
Out of 38 rep territories: 22 were profitable totaling
all of the Internal Profit, with the top six generating 74.2%. But, amongst the
losing 16 territories, the worst 3 destroyed more than 70% of the company’s
internal profit.
The
management team didn’t believe, at first, that these extreme cross-subsidies
could be “true”, especially for the sales reps that were all: “paying their own
way on commission” (which was a percent of the gross margin).
After working
with WayPoint, the management team saw huge, heretofore hidden, cross-subsidies
amongst customers and supplier items. Wally likened this process to looking
through Galileo’s telescope in 1610 to see the first 4 moons of Jupiter orbiting
“another planet” (not a star) and realizing that a new way of thinking with a new
vocabulary was necessary.
What Next?
With
increased pressure on the credit line, and a natural zeal to restore the
company’s previous profitability, we used WayPoint to dig deeper into the reasons
for the biggest losing elements: rep territories; customers; and
products/product lines. We assumed that we might be able to either creatively transform
most of the loser customers and suppliers into winners or kiss some goodbye –
on a controlled, well-managed basis.
The
overall strategy was to develop and implement a profitable service model for
each segment of the business, and where that was impossible, cut off the losses
by eliminating the associated activities.
Using the
best RPIs (Radical Profit Improvement plays), Wally’s strategy was to make
immediate policy changes to upgrade the business internals, measure and coach
the sales force from a new perspective, and to selectively cut or redeploy
certain staff to align with the new workload. Although some of the plays would
result in certain sales being lost, this was acceptable if the cost reductions
were shown to be, at minimum, twice the lost Gross Profit.
We theorized
that there must be an overlapping intersection of: most unprofitable items;
being sold to most unprofitable customers; within most unprofitable rep-territories
– which turned out to be the case. One branch, for example, had a big contract
with one customer for $2.5MM of warehouse volume at an 18% margin rate. The
loss on this contract was – on the initial WayPoint report – $100K annually. Not
believing this, an audit team looked at all of the variables in detail. The
revised estimate loss was increased to $150K, because:
§
nearly
100% of the inventory involved was special stock that was turning very slowly;
§
and,
the many small orders being delivered every day had to be delivered on company
trucks to the customer’s complex that was over 60 miles from the branch – with free freight!
To make this
big-lead-to-gold story short, transformational efforts got the contract
re-negotiated with all of the same terms, but at a 28% margin rate which turned
the annual loss of $150K into a profit of $100K. This delta (change in profits)
did wonders for the profitability of: the account, the branch, the assigned rep’s
territory and the supply lines/SKUs involved in the contract.
With new –
tools, views, theories and experiments – over 80% of the super-loser customers were
turned into winners as a “lead-to-gold, transformational process play” skill
set emerged in the company. Some redundant supply lines were consolidated to
other, more profitable ones. Some lines had internal cross-subsidies which
stimulated, creative new solutions. And, in the biggest profit-improvement play
of all, the sales force was cut in half. The best half of the force was
reassigned to only “A” accounts that were producing (or could produce) an
annual minimum of $4,800 in gross profit margin. (This play alone produced five
new profit streams.[2])
The overall
company became solidly profitable and started paying down debt within three
months of “Let’s-Do-It Day”.
Beyond “Lead to Gold”
Plays; Service Excellence
Transforming
losers into winners was not the same thing as improving the service value
equation for best customers. “Stage Two” of the turn-around focused on taking best
profit-making elements – customers, products, territories – to the next level.
This
program took WayPoint to nearly every key employee, taking advantage of WayPoint’s
web-accessibility. Everyone got their own log-in security credentials that
would allow them to see and interact with whatever service process data was
appropriate for them to use.
The
general goal was to measure employee engagement metrics that indicated that
every employee’s mind, heart and wallet were wired into measuring and achieving
distinctively great service metrics that were in turn tuned to one target niche
of customers at a time. Every employee understood, believed in, and got excited
about “service excellence”.
Top Five Management Team
Conclusions
1)
When
things are getting worse, doing more of what we’re already doing isn’t going to
cut it. What was working nicely in an expanding economy is likely not optimal
when things are going the other way.
2)
Volume
is vanity, profit-power improvement
is sanity. You need a unique and
profitable service model for every nook and cranny of your business. You have
to decide what to do with business that cannot be rehabilitated: whether to cut
it off or wean it off, to best protect the profitable part of the business.
3)
Growing
margin dollars and assuming the bottom line will follow doesn’t work any more. There
is no correlation between margin and the actual profitability of an account,
rep or product. Measuring and managing
Cost-to-Serve economics for every customer is vital; sales rep incentive plans
must be aligned with this reality.
4)
Most
of your internal systems aren’t designed to deliver the kind of information you
need for Radical Profit Improvement plays. Your accounting, ERP and CRM systems
are optimized for their own purposes, and won’t give you the kind of detailed
information you need to move quickly on service model adjustment. Leave them
for what they are designed to do, and use WayPoint to get the exact information
you need to attack the Cost-to-Serve and Service Model transformation tasks
that are essential to fast profit generation.
5)
See
WayPoint for yourself by setting up a one-hour demonstration. You can do it in
your own conference room, with just a phone and a PC. Your offsite team members
can join in with their own PCs. Have your own transformational (Galilean)
experience.
©Merrifield
Consulting Group, Inc., Article 2.31
