June 29, 2017

Strategic Insights # 10


“Analytics solutions” for distributors first appeared in the late ‘90s. Ten to fifteen years later, many distributors are long on information and short on ROI. So are many big firms in many industries. Major league sports teams, for example, have been investing in statistical performance theories since the late ‘80s. The first ROI breakthroughs occurred in the NFL, then baseball (recounted in “Moneyball” in ‘03) and more recently the NBA.[1] What should we do differently to get serious results?


First, don’t believe the “solution” advertising; software is only a tool. Leaders have to: ask the right questions; pursue strategically-guided theories; find unique insights; execute good experiments well; and scale the winners.

(2) Make sure that you have at least five, pre-requisite factors that must exist within a company and be in supportive alignment with analytics tools to get great results.[2]

Analytics software, by itself, can only crunch easily available financial numbers. Because financial numbers are symptoms of underlying root causes for profitable and unprofitable line item activity, (3) crunching symptomatic data won’t lead to profitable insights.

What is insightful is to (4) explore your firm’s “historic strategy”, which I define as the intersection of most net-profitable items (not ones with high margin percent markups!) being bought by most net-profitable customers.[3]

To do this (5) a distributor must develop their own “cost-to-serve” model that yields “accurate-enough” net profit/loss increments for every line item processed and more. It’s easier than it sounds, especially with outsourced assistance.[4]    

(6) Doing root-cause analysis on the extremely profitable and unprofitable – customers, items, suppliers-hiding within your averaged-out financial numbers will provide powerful insights. But, then be prepared to (7) practice “change management” judo on four big cultural resistance barriers that all firms will have.  


Byrnes authored the must-read: “Islands of Profit in a Sea of Red Ink”. He has identified four barriers within companies that keep them from getting results with customer/item profitability insights. They are (with some of my comments):  

1.     Accounting Systems.  Accounting systems and financial management have nothing to do with inter-business, process: costs; service value effectiveness; and profitability. We must continue to use GAAP-based accounting to: pay taxes on time and get a clean audit to borrow money from banks. But, we must also create new, complimentary, parallel reporting for creating and selling “precision supply chain solutions” (Byrnes term) profitably.[5]

2.     Sales Compensation. If reps are paid to get any sales and/or margin dollar volume, they will get the unprofitable-to-serve volume too. (And, it is easiest to get!) They will also resist policies that make it harder to win more margin dollars like: prompt payment; fees for services; not stocking special items customers might buy; etc. If reps are switched to a competitive salary with an incentive based on net-profitability of customers after all costs-to-serve are included, they change quickly. Instead of “price”, they rapidly expand the negotiation to all buy-sell, supply chain activity savings on both sides, which is what a “VP of Supply Chain” wants. But, can both management and sales reps give up the 100-year old belief (now outdated) that more sales volume and margin will yield economies of scale profitability?

3.     Lack of Focus On the Profitable Core. If selling any product to any customer is rewarded regardless of cost-to-serve, then a firm will be distracted from:

a.     Getting a bigger share of their more profitable core.

b.     Not letting bottom 80% reps sit on key-account, net-profit potential.

c.     Seeing and transforming pockets of lose-lose channel costs to win-win relationships.

d.     (Typically) doubling their sales with fewer, better active accounts and quadrupling profits.[6]

4.     Inability to Measurably “Prove It”. The notions that a distributor can tweak processes with both existing super-profitable and unprofitable accounts and:

a.     Dramatically improve perceived service value in the customer’s mind;

b.     Capture another 20 (to 1500% in a personal case of mine) in sales volume;

c.     While lowering total cost to serve by 20% are…

d.     All not provable with historic data and mindsets until they are achieved.

Our borrow-and-spend, sugar-high recovery is over. Where are we going to find new profitable growth opportunities? For case studies on how distributors are mining these new sources of service value and profits with the right analytics and change management techniques, contact me about attending the October, Waypoint Analytics -sponsored, “Advanced Profit Improvement Conference” in Chicago.



[1] Read the wikipedia for Moneyball, and Google “the no-stats all-star” for Times article on Shane Battier. Fantastic article with guidelines for how to measure basketball (or business) differently.

[2] The 7 elements within the kinetic chain of profit power.

[4] For more on how to create a model and outsource the general challenge see “Insight #8”.

[5] See “Insight #6 on “4-D Information Reporting” http://www.merrifield.com/insights/