June 29, 2017

Strategic Insights # 13



Have you checked out the reviews at Amazon.com for the must-read book: Islands of Profit in a Sea of Red Ink by Jonathan Byrnes? It will tell you how to measure net-profitability of your customers and products and what to do with the insights. For some sub-groups of customers and/or items, Byrnes recommends trying “Precision Supply Chain Solutions” (PSCSs). Although he wrote the book for all industries, he illustrates his PSCS recommendation with some notable distributor cases. [1]

And why not? Due to flexible service capabilities (and terms), distributors have lots of PSCSs. Besides the standard way of servicing “house” accounts, think of all of the exceptional operating procedures (and terms) your firm has invented to accommodate peculiar needs of (large) customers. Many dead items in the warehouse, for example, may have started as “special stock” for a customer that is no longer buying them. And, every “integrated supply” deal has similar overall objectives, but highly unique configurations.    

Your VP Of Customer-Centric PSCS’s

Assuming your firm has cost-to-serve model(s) that enable net-profit ranking reports for -customers, items and suppliers - what next? First, determine why the extreme winners and losers are that way. On the customer ranking report, for example, only large volume/activity accounts can be at the top and bottom and both sets have been granted exceptions to standard procedures and terms.

Next, who will be put in charge of both measuring and improving the overall economic effectiveness of these PSCSs for both parties? If big customers have their “VP of Supply Chain”, then who is our “VP of Supply-Chain, Value Improvement”? And, how do they get skilled at auditing the inter-business-processes that have evolved with our biggest accounts to then tweak them for big, win-win gains?[2]  

And, Most House Accounts That Get Standard Service Shouldn’t!

Distributors that go to market with outside sales reps tend to accumulate a lot of not-grown-for-years, small customers. Net profitability reports reveal that these accounts (in a sales rep, service model environment) are modest losers. But, hundreds add up to a big loss and a distraction from creating service value for the few, high-profit-growth impact customers. The activity costs of the standard service model exceed the margin dollars per transaction even with high-margin, list pricing. This group needs a new “Wholetail” service model that will either make them profitable or drive them to inhibit a clueless, standard-service competitor.


What do net-profit ranking reports for SKUs reveal? Most profitable items usually sell at below-average mark ups, but greatly offset the discounts with high: turns; average margin-dollars per pick or line; and margin-dollars per delivery cost. Biggest, losing items are highly-picked, doo-dads with “great margins”. But, an 80% margin in a $1 item is still a big loser if warehouse picking costs average $5-$10.

Many distributors with warehouse scale and procedures for handling bulky, high-volume goods also offer complimentary parts, pieces and accessories. A person (on a piece of equipment) cannot touch small margin-dollars per line item without costing money. What are the PSCSs for your: parts, pieces and miscellaneous accessories? Solutions already exist in other channels; why not borrow and adapt them?

In the middle of the SKU, net-profit-ranking report, there are thousands of items that are rarely picked. These are economic losers due to carrying-costs, picking-costs or both. And, finally special orders on “parts-n-pieces” dropped shipped (“direct”) to the customer from suppliers may have (again) great margin markups, but the margin dollars are much less than the activity costs of all of the channel people and paperwork. There are existing solutions to be borrowed for these loser categories too.     

Some supplier lines include all four sub-categories of items. If we sit down with supplier honchos and have a new conversation about the new net-profit-per-item math together, it isn’t too difficult to:

-- Tune fill-rate levels by not just picking activity, but by inherent profitability levels.[3]

-- Solve peculiar big-volume, big-losing end-user cases. (Every distributor has a few of these freaks of nature out of every 1000 active customers.)

-- And, adapt PSCS’s that have already been proven in other typically big-volume consumer channels before other channels attack our cross-subsidies. 

The Future Of Net-Profit Analysis And Winning With PSCS’s Is Here: SEIZE IT!

Thanks to the plunging costs of web service software, any sized distributor can quickly and affordably have the net-profit analytic tools and solutions to synergize with channel partners. Learn how distributors are doing this at the fall conference promoted in footnote #2 or request an on-line demo of the Waypoint Analytics service immediately.    

[1] Byrnes is scheduled to speak to NAW’s $1B+ distributor conference this fall. If you don’t qualify for this elephant bumping fest, then catch Byrnes at a two-day conference for ALL distributors in Chicago 10/20-21 sponsored by Waypoint Analytics. Contact me for an invitation.

[2] For a 25 page “training guide” for rookie VPs of PSCSs see Exhibit 59 at www.merrifield.com

[3] See Exhibit 61 at www.merrifield.com.