Strategic Insights # 15

 

“DOUBLE-DIP” STRATEGY? RE-TUNE BIG, BUY-SELL RELATIONSHIPS

 

If sales start to contract (or never rebounded), don’t get lured into quoting more aggressive prices and join. . .

 

. . . THE DOWNWARD SPIRAL GAME

 

1)    Hard pressed customers will shop a bit more, so ….

2)    …Your reps will get more chances to bid or last-looks to meet prices where you are #1.

3)    The weakest competitors set the declining floor price.

4)    If your reps have incentive comp tied to gross margin dollars, then…

a)    Their income is down, and they are anxious.

b)    Any new volume with any margin in it will earn them something.

c)     As #1 with last look, the rep will want to give up a bit of comp instead of risking losing it all by holding firm.

d)    The company loses money if the cost to serve (CTS) exceeds the declining margin dollars in the orders. 

e)    In tough times, too many new pieces of business are net-profit losers.

f)     The company finances incremental losses and increases in supporting inventory and receivables with more bank debt and cutting wages (again!?)

5)    If rep incentive is tied, however, to net-profit (improvement), then they think and act like management. They fight for last-look plus 1 to 2 points. With customer net-profit and cost-to-serve (CTS) information, a whole new game is possible…

6)    Reps (and the team) change the “better price” invitation to a conversation about “win-win, process re-tuning”.

7)    KEY FACT: a distributor’s CTS approximately equal to a customer’s total buying costs (TBC). Both CTS and TBC can often be lowered by more than 5% of the sales involved which is a big win for both partners.  

 

PRICE, TBC AND UPTIME ECONOMICS

 

Everyone understands price savings. Fewer understand how the hidden costs of poor service can more than offset upfront price savings. It’s better to pay a higher price for guaranteed perfect service (or a penalty fee) to get lower TBC AND get more, value-added workflow.

Consider how imperfect service can increase both customer downtime and next-customer service dis-satisfaction costs. Contractors, for example, who do service calls will pay technicians for 8 hours a day while typically billing about 4 hours of “labor” (50% uptime) and give 4-hour windows for calls due to weak planning and “unforeseen” product shortages.

If distributors and contractors measured uptime hours together, they could then tweak their buy-sell, inter-business process to approach 6 hours of uptime starting a positive chain reaction: 1) Wages and profits go up for the contractor. 2) Customers get smaller arrival windows with more fixes done on-time, quickly and right the first time. 3) Good service will bring them back again and spur them to tell friends to use the contractor: the most powerful form of (free) advertising. 4) The contractor will then grow faster and more profitably than his competitors. And, 5) they will buy more from you and be able to pay on time. This same uptime, on-time value-chain pattern exists with other types of customers too. Time to start tweaking!?

 

TWEAK BUY-SELL RELATIONSHIP PROCESSES LIKE HOUSES THAT WASTE ENERGY

 

Most households could cut energy bills by 20-50% if owners audited 5 to 15 factors that are readily found on the internet and quick-fixed them. The materials and skills needed to do these efficiency “tweaks” are not great. We aren’t re-constructing the house.

 

Buy-sell, inter-business processes are like houses, but with inefficient: assumptions, practices and habits. Who currently audits the entire buy-sell process activity for both you and a customer? The upfront resource investment for “tweaks” within the existing buy-sell architecture is trivial compared to the win-win CTS and TBC/Uptime benefits for both partners.

 

Go to school on “twin studies”. Scan within all customers with an annual CTS of $4000 or more, find two similar customers in sales with vastly different CTS levels. Compare, audit and learn from them. An industrial paper distributor, for example, picked twins each with about $100K in annual sales. The best one had $30K in margin, $17K in CTS and $13K in net profit. The bad twin had $20K in margin, $30K in CTS for a loss of ($10K).

 

The good twin already had smart, disciplined buying systems with some fine tuning opportunities. The team audit started new discussions, however, that led to $20K more in annual sales. The bad twin had scads of small orders due to poor planning and TBC blind-spots. Based on what the good twin taught the team about best practices, CTS at the bad twin was cut in half to achieve a 5% net. Although the 20% margin rate didn’t move up, the customer loved the improved TBC and uptime results and doubled their volume. 

 

Learn about a net-profit management, web-service and hear more CTS/TBC success stories at a conference in Chicago on October 20-21^st by following this link: http://www.quantumprofitmanagement.com/info/APIC.pdf.