Define, Measure and Renew Your
Diamonds are the
most concentrated source of wealth within the planet, and every distributor
location with average or higher sales volume has a portion of its total sales
that is similar to a diamond that we will call the “core”. The core is usually
about 35-50% of total sales and involves sales of most profitable items
(supplier lines) to most profitable customers. The importance of core
identification, renewal and leveraging has been generally addressed by Chris
Zook in three excellent management books. And, many research studies have
concluded that better core management
is the most powerful and primary strategic choice that a firm in a profitless,
mature company and industry can do.
How big a profit opportunity is better core management for a
follow the how-to recipe in the next section below discover that:
1. 5 to 10% of active
accounts generate about 35 to 50% of total sales and about 100% of a firm’s
profits. All profitable customers will generate about 150% of reported profits,
because 50% is eaten by all of the chronically losing customers in the
2. Looking at the
combined item purchases of these core customers reveals that somewhere between
2 and 20% of all active items are bought by two or more of the core customers.
These popular items appear to be highly profitable, because the
collective buying of the core customers allows the distributor to:
a. Buy the items/line
well and frequently.
replenishment reduces both excess stocking and stock outs for those
c. Higher fill-rates
of these items bought by customers in good quantities along with the other
popular items niche customers all tend to buy generates both higher margin
dollars and profits per order.
3. The bottom line profits
on core sales will be 2-to-4 times greater than the overall profit margin for
the company. This is all free, cash-flow dollars from mature customers and
products with market development costs long passed.
4. Once the core-intersection
elements are known, a number of optimization “plays” are possible which can
quickly increase the profits from this cash-cow by 20 to 100% in one year. And,
customer service satisfaction and retention will increase proportionately.
The first big problem, though, is: how to define and
measure “the core”?
A distributor can
do this by making a series of assumptions and using the right profitability
measurement analytics. The assumptions are:
1. A firm’s historic
strategy is where it makes the most money.
2. Not all customers
– in spite of total gross margin dollars or margin percentages – are equally
profitable or even profitable. Some customers have high margin dollars and low
service-process activity costs that make them highly profitable. Others have
cost-to-serve totals that can exceed twice what their margin dollars are to
cause big losses.
3. Not all items are
– bought well; turn and earn well; and generate big volume – to be inherently
profitable. Some are dead and certain annual, carrying cost losers.
4. If a distributor
does not have an exclusive supplier franchise for items that are pulled through
the channel by the manufacturer, then items don’t sell/turn on their own to
customers that have no choice on where to buy the goods. Enough good customers’
collective, voluntary buying from a given distributor is the pulling force that
makes them so. Big, profitable customers drive commodity item profitability.
5. With the right
cost-to-serve analytics we can rank our customers by actual bottom-line profitability,
then isolate the most profitable ones (even better by niches of similar
customers with common buying needs).
6. Within this select
group of customers, we can then see which items are most frequently bought.
Once we know the core-intersection customers and products,
We can launch
several, high-leverage, very targeted programs:
Beef up investment of core items to realize immediate
increases in fill-rates, sales and average order size for core (and all other)
Note that incremental profitability from core customers goes
up more than twice as much as incremental sales, because of the high, fixed
costs of transactions.
Print out reports for each core niche customer of core items
that they are not buying, but statistically may be buying to then sell “more
old items to the same old customers” to get the same incremental profit
flow-through effect as in “b” above.
Make sure that all employees know the top 5 most profitable
customers at a branch (as well as the top 5 most important target accounts) and
teach them to do proactive, “heroic service acts” for them on a regular basis.
P.S’s: Who will be the “champion” who manages, measures and
gets an incentive on these programs?
“Our reps are already do this” is a delusion. None of them do
this on a black belt Nth degree, measured basis. Don’t confuse the data-free
intent with a measurable, disciplined reality.
Turn the 20/80 Principle into the 10/200 Strategic Profit One
an Italian economist, observed in 1906 that 20% of the citizens had 80% of the
wealth. Joseph Juran, the quality consultant, popularized this as the 80-20
principle when looking for the few causes that created the most quality defects.
There are other more skewed relationships when popular sentiment is involved:
* 5% of the sites on the web get 75% of the traffic
* 1% of movies take in 80% of the ticket sales
* Less than 1% of the words in the English language account
for 80% of conversational words (“OMG”).
And now, we know
that when customers and products are analyzed and managed by net profit facts,
we can get 10% of our business elements to generate 200% of our peak internal
profits. In a similar manner, what about the bottom 1% of the customers on a
customer profitability ranking report that are destroying 20% of the internal
profits? With creative focus we can convert 80% of these relationships from
“lose-lose” activity-cost relationships to win-win. But, that’s another story. See article 4.10 at www.merrifield.com.
How can a
distributor get the analytic tools to do both core management and super-losers-to-winner,
A distributor can
try to invent the right analytic capability from scratch or subscribe quickly
and most affordably to a web-based, distributor-specific, business analytics
service. The only one that exists, so far, is Waypoint Analytics’ “Quantum
Profit Management Service”. It is an outsourced, shared-cost, turnkey, total-solution
for achieving high performance results. The service can be up and running in
about 3 weeks, and the monthly subscription cost will return 3 to 10 times the
return to the bottom line on a sustainable basis with one to six months or the
client can stop subscribing. The cost/benefit risk is shifted to Waypoint. For
more information and to sign up for a webinar on the service visit www.quantumprofitmanagement.com.
Consulting Group, Inc., Article 2.35