SI # 11
“80/20 Rule” Upgrades
“Return on Management Effort” (ROME), we focus on the “vital few” that can make
the big difference. In 1906, Vilfredo Pareto, an
Italian Economist, discovered that 20% of the population (cause) owned 80% of
the land (effect). This “power law” observation was popularized as the “80/20
rule” by quality guru, Joseph Juran. Other “power
laws” are: frequency of word usage (1/80); internet content contributors
(1/90); size of earthquakes; etc.
How can we
improve on 80/20 thinking? If 80/20 gets us into the right ball park,
what rules will get us to the best, net-profit-improvement sections and
then to the best, net-profit seat in the section? Don’t we want to
pursue highest return, lowest-risk, lowest-investment opportunities first?
Net-Profit Contribution Power Laws:
that have cost-models for determining the net-profit contribution for each
“line item” can roll up this “quantum profit data”
to find the following relationships in increasingly useful order:
20% of the
customers generate close to 80% of the sales (Pareto’s only application)
30% of the
customers generate around 70% of the margin dollars (least extreme ratio)
20% of the
customers generate 140% of the net-profits (top 10% => 100% & 1=>35)
customers lose (20%) of the 140% peak internal profit total (fix these ones!)
5% of the SKUs
generate over 500% of the peak internal profits (Why? How? Sell more?)
Amplify/Acutate Net Profit
Rules With Additional, Leverage Factors:
4% of customers
within mature industries are perpetual innovators that will generate 80% of the
future growth in that industry. Much of this “growth” is not “new demand”, but
stolen share from non-innovating, only-reactively-adapting competitors. Partner
the profitable, “gazelle accounts” to grow profitable sales.
branch can offer “perfect service guaranteed” plus heroic extra efforts from all
employees for about ten, best, profit-growth-potential accounts. (Do
super-loser accounts can have good – sales, margin and margin percentage –
stats, but kill us (and them) with excessive service/buying activity costs.
These relationships can be transformed into win-win ones.
does “audits” of key accounts to insure that every aspect of the inter-business
replenishment process and people are fine-tuned 10’s, guess what? There will be
plenty of “tweaks” that will yield big results for both companies. No one has
been responsible for optimizing the inter-business-process; be the first! Then,
summarize the refinement opportunities for each customer and offer to make all
upgrades happen at our expense along with a new “perfect service guarantee”?
The best 10% of
your sales force can help new, upside things happen at key accounts (with
management and total-team help) better than the bottom 50%. Don’t let coasters
sit on key account potential and waste total-team efforts. What is the one most
promising account renewal, reassignment opportunity you can find? Try it!
Net-Profit, Power-Law-Management Results:
profit-center (branch) can:
Turn big losers
into winners and gain 20%+ more volume, because the customers would be so
grateful for the big improvements in supply-chain savings and up-time
Get 20% + more
volume from best accounts “where we are getting all of the business”.
average order sizes with best incremental margin flow-through to profits due
ü Better-tuned replenished systems;
ü More thorough penetration selling of core items for
ü Fill-rates were increased for the most profitable
Grow net profits
2X+ faster than sales which would grow 2X+ faster than current trends.
everyone from “working harder” at reactive adaptions and fine-tuning whatever
they have been doing. Focus instead on narrowly and intensively experimenting
where net-profit growth can best happen.
“5-5-5 ROME” Program At Every Branch; Learn More:
location, identify and track the progress of the: 5 most profitable customers;
5 most profitable, future-growth gazelles; and 5 biggest losing accounts.
Provide some training on how to take each category of customer to the next
. To get really good at all of this, put a hold on October 20-21st
for the “Advanced Profit- Improvement Conference” in Chicago. Learn more about
power-law management tactics from both successful distributors and experts.
immediate enlightenment (and results), request a demo on Waypoint Analytics’
“quantum profit management service”.