Strategic Insights 14
HOW TO GET PAID FOR SERVICE VALUE (and cost)?
According to two, different-
but-related surveys of distributors reported by “Modern Distribution Management”
90% of distributors believe that they deliver more
service value than their competitors for the same price. (my
88% “message” (the same)
reasons to buy from them: “good assortment of products and professional staff
WHAT ARE THE QUESTIONS THAT
get-paid-for-service problem has existed for decades….
...Isn’t the “great
recession” a catalyst for solving this problem?
Beyond “believe”, do the 90%
have measurable, statistical evidence to know for sure that their service
is a total-cost bargain at a higher price?
Is the “more service value” tuned
to each target niche of customers? Being “good” in a common way for all types
of customers means not having distinctive service for
By meeting prices, sales
reps are getting zero incremental credit for their “professional staff” value.
But, if they are incented on gross margin dollars, then every saved order (even
net-profit losers to the company) will yield them something. What if their incentive
was based on the net-profit improvement for customers?
Does “messaging” equally-excellent
commodities sound a bit dated? Progressive customers have had “VPs of Supply
Chain” (not “purchasing”) for more than a decade. Shouldn’t we be pitching
services that help to co-create “supply chain solutions” that both lower “total
procurement cost” and maximize “up-time economics” instead of pushing
commodities for a price?
Who are the other 10% of the
distributors? Some may be poor-service, price-shooters that drag the 90% down. Others
are top financial performers that earn 2 - 4 times the average pre-tax return
on assets (ROTA) that the bottom 90% earns. How? They’ve solved 2 service cost challenges.
FIRST: THEY GET LAST-LOOK, PLUS
ONE OR TWO MORE POINTS (or profitable partnerships), BECAUSE…
They measure service
statistics focused at and tuned for target customer niches (one
at a time). They have (re) engaged front-line employees to achieve distinctive
service metrics by connecting improvements directly to net-profit-improvement gainsharing. And, when their reps measurably know how best
service levels deliver a total-cost bargain at a higher nominal price, they
SECOND: THEY’VE CURED THE INVISIBLE,
STRUCTURAL, COST-TO-SERVE FLAWS.
Doing net-profit analytics
for a wide range of distributors reveals the following service-cost flaws:
Many popular, small-dollar, line-item picks are losers in spite of being
sold at “list price with a high markup”. A $2 gizmo with a 50% margin is a big
loser when line item processing and picking costs average a magnitude of $5-10/pick.
Increasing prices is only part of solving this item-category problem.
Many small customers sold at
list price have average-order, service costs that exceed the margin dollars in
the order for losses. The cure is not just higher prices, but service model
changes like: minimum orders; unbundled freight charges; and/or lower,
proactive selling costs than sales reps.
About 20%+ of all big
customers unknowingly kill both the distributor and themselves by ordering amazing
amounts of small orders. Diplomatic negotiations can turn these lose-lose
activity cost relationships into win-win ones with more volume too.
Many of the bigger customers
that are more or less profitable could become outstandingly profitable with
more volume wins at the same prices. But, they will need team audits to
fine-tune all elements of the existing relationship to generate larger-order benefits
for both parties as a happy by-product.
Curing these four opportunities
will increase a typical distributor’s profit line dramatically and free people
time to focus on the more arduous, service-excellence journey in parallel.
Shall we continue to meet prices set by the weakest
competitors and try to keep cutting our people costs with margin erosion, or do
some “cost-to-serve” and “service excellence” innovating? Both opportunities
will require new quickly accessible and affordable analytics to:
Identify customer niches to target
Tune fill-rate economics for each niche
Solve structural cost-to-serve flaws with strategic
pricing and precision supply chain solutions
every employee with net-profit improvement incentives (reps too)
Learn more about all of these opportunities and
visit with distributors who have done these cures at the “Advanced Profit
Management Conference” in Chicago on October 20-21. Link for the
Merrifield Consulting Group
LLC, Strategic Insights # 14