“quantum (physics): the smallest
amount of a physical quantity (unit) that can exist independently”
distributors deliver an order, they don’t really know with much certainty how
much “Profit Before Interest and Taxes” (PBIT) is in that order, or in each
line item of the order. Wouldn’t “PBIT per line item” and “PBIT per SKU” be the
quantum-level measurement units for a distributor? These quanta could then be
rolled up to higher levels of profit measurement including:
PBIT per customer
PBIT for a group of customers within an industry / size-strata segment
PBIT for an entire sales territory
PBIT per SKU
PBIT per supplier
PBIT for different types of orders: direct, indirect, warehouse.
If we want
to improve total profits, shouldn’t we manage the quantum level of where they
are actually made and destroyed? How? What other thoughts and questions does this
QPM vision-quest raise?
What Do We Already Know, Presume, And Readily Believe To
Be True and Possible?
intuitively know that there are big PBIT cross-subsidies already going on
between best and worst: customers, supply lines, SKUs, sales territories and
even employees’ long-term-value contributions to the company.
know that our financial reporting system doesn’t give us very good PBIT-level
information when it comes to the quanta of our business.
know that our reporting system is not geared towards measuring and allocating
activity costs for handling every SKU and processing every category of order
for every unique, cost-to-serve customer in order to identify the biggest
profit generators and eaters.
assume that there is no – fast, easy, affordable, flexible,
continuously-improving, highly informed (and ultimately credible?) – way to
achieve QPM. But, thanks to technological
and economic advances in the past two
Collapsing costs for internet connectivity
and data-storage costs; and…
go-to-meeting, teleconferencing sessions for
any number of people in different locations
QPM is now available to any
distributor with access to their transactional data.
may have heard about case study numbers or even experimented internally with
crude customer profitability ranking reports. But, do we really believe
cross-subsidy statistics like: “the top 1% of the customers generate a
magnitude of 35% of the “true profits” while the bottom 1% destroy about 20%.”?
have trouble believing that an activity cost model is reliable enough for our
unique, dynamic business context to drive us to big strategic-thinking changes.
But, what if our QPM service worked
with us to test allocation assumptions against the most-sensitive, top and
bottom resultants on all of the profit ranking reports until we were satisfied
with the level of reliability and comfortable enough with the reported cross-subsidies?
we got this far in the process, are we certain that we would we be able
a. Keep asking “why” questions to get
to the root cause of why elements are super profitable or unprofitable?
b. Create new plays and skills for either
keeping-and-growing the best or transforming-or-weeding the worst to achieve
big positive changes in PBIT (“Delta PBIT” = positive difference/change in)?
c. Be able to work through initial
resistance from sales reps, customers and suppliers who are also presumably
happy beneficiaries of the big losing elements in our business?
d. Find the time, energy and resources
to do new, forward-investing programs during this economic time of crisis in
which we are just trying to cut costs and ride the prolonged storm through.
What if – thanks to
go-to-meeting conferences – we had access-as-needed to the most knowledgeable
experts on these issues to help?
none of our competitors practice QPM, then what is the worry? Aren’t we all
playing by the same, less-informed rules? It’s a fair fight. (Who wants a fair
on the other hand, are we going to profitably thrive instead of just hopefully
surviving if we don’t change the rules to have some big, competitive
would happen if our biggest head-to-head competitor got QPM savvy first?
What We Find Hard To Believe If We Have Not Already Applied
are cross-subsidies within most distribution businesses (and manufacturers’
distribution arms) that range from 40 to 80% when looking through the different,
profitability-ranking lenses for: customers, products / supply lines and sales
is little-to-no correlation between the gross margin dollars or gross margin
percentage within a distributor sales rep. territory and the actual PBIT that
the territory delivers.
reps. are typically motivated to get more sales or margin dollar volume (with
target margin percentages), they have little concern, knowledge about, or
skills to reshape the cost-to-serve relationships that currently exist between
the company and the customer. Reps. are in a major, incentive misalignment for creating
more profits to reinvest into strengthening and growing the business, which
will hurt them too in the longer run.
accounts by changes in PBIT from this year over last reveals big swings in many
accounts which all get averaged out in financial numbers. If these swings were
proactively managed to retain and grow best customers and transform or drive
away losing customers, we could quickly achieve huge Delta PBIT gains.
focusing the entire service team on best 5% customers we can increase:
service-value consistency and breakthrough heroics, inter-business-process
efficiencies, retention rates, average order size, total sales volume and
doing the same for the biggest 1% of the losing accounts, we can convert 80% of
them to solidly profitable accounts.
the plays for points 5 and 6 can increase the PBIT line by 2-5% points of sales
within 3 to 6 months.
How Can We Learn More About QPM?
the webinar and read the articles at www.waypointanalytics.com.
e-alerts about upcoming QPM application and case studies webinars and
a free, fast, executive-team, go-to-meeting demonstration of the Waypoint service.
for the upcoming QPM Webinar on July 10 at 9AM PDT (11AM CDT, 12PM EDT): https://www2.gotomeeting.com/register/691831699
©Merrifield Consulting Group, Inc. Article 2.32