Strategic Insights 17
GET “LINE-ITEM-PROFIT ANALYTICS”
(LIPA) FOR BEST INSIGHTS
Does your company have its own, internally-developed,
cost-to-serve model(s) to determine the net profit or loss for every
line-item processed at every branch location? While “customer
profitability analysis” (CPA) insights can be fruitful, here’s best “analytics”
Item/supplier, net-profitability Insights
= 400%+ more opportunity!
Because Line Item Profit Analysis (LIPA) model
building is difficult to do in-house, I have suggested (since ’78) a simple, customer-profitability
approach that works well. Some
distributors have gotten good-enough, customer-profitability, ranking reports, but
not acted on the insights. Others have acted to fix losing customer
relationships and do a bit more with core customers, but then slipped back into
Successful, sustainable net-profit management
results require a LIPA reporting system that allows diagnosing the
intersections of most profitable (and unprofitable) customers and items. Every
employee needs to constantly be able to monitor and (potentially) have
incentives based on net-profit-improvement opportunities that a LIPA system: reveals,
tracks and scores. LIPA systems are now available on an: outsourced,
web-service, monthly-subscription basis. Every distributor can quickly and affordably
be growing net profit in new ways.
LIPA CASE STUDY:
“ALL OF OUR PRODUCT PROMOTIONS HAD ZERO IMPACT IN 2011!”
A LIPA-capable distributor/client in a commodity
line business (no valuable exclusive franchises):
1. Ranked suppliers by the net-profit they generated
for the year: big winners to losers.
2. Calculated the year-over-year, net-profit change (or
“delta”) for each supplier.
3. Re-ranked suppliers from the biggest positive to
4. Then, investigated what caused the big deltas by
big buying changes behind each big delta.
deltas (to what customers) for each supplier delta
How past-year promotions
affected supplier deltas?
NONE of the (supplier/product-centric) promotions in 2011
increased the net profit of the promoted suppliers materially.
promotion increased sales by 5% over the company’s average sales increase, but the
net-profit on the line dropped in half after adding rebates back in.
Every big positive delta for a supplier was caused by
an alternative set of customer-centric, programs.
than losing) big chunks of business from 1 to 10 big accounts were the most
common drivers for the biggest swings. The “5-5-5” team-selling and servicing program
aimed at 5 – core, target, and big-losing – customers achieved big, net-profit
The suppliers of the key items for these growth accounts were passive beneficiaries.
profitable supplier was up by another 50% in profits because of a planned
beefing-up of inventory on 20 items in the total line. These items were already
most popular and profitable for a profitable niche of 50 customers (out of
“delta” swing story involved a supplier (of the equivalent of paperclips) that
went from a ($40K) loss on $400k in sales in 2010 to a $50K profit on $600k in
sales in FY ’11. The distributor had about 20 customers that applied just-in-time
delivery to all of their needs including repetitive fifty-cent picks of
paperclip-type items. The “precision supply chain solution” was to continue to
deliver the decent-margin-dollar-per-pick items twice a week. The paperclips were,
however, switched to a twice-a-year, top-off-the-pile system at the customers’ locations.
Thousands of picks were consolidate 100-fold and emergency orders for
stocked-out paperclip stopped. Activity costs for both parties and down-time
costs for customers plunged. Pleased customers rewarded the distributor with a
lot more share-of-account business. The paperclip supplier was – again – a
passive beneficiary of a 50% increase in sales.
supplier/product centric promotions are being reduced. Marketing people are
focusing most-profitable suppliers on helping with – bigger share of “right,
best customers in best customer-niche” – programs.
LIPA SYSTEM WEB SERVICE(S)
Don’t reinvent the (LIPA) wheel from scratch.
Outsource 90%+ of your LIPA reporting system – modeling, report design,
database architecture and storage – to full-time, experts specializing in
distributors. Then, fine-tune the models and incentives to every branch and
The only web-service firm that can currently do
this (that I know of) is Waypoint Analytics. They are already providing full-LIPA
reporting system service to hundreds of distribution locations in over 30
different commodity channels. Even large distribution chains are subscribing
with the options of eventually reproducing the service capability in-house or
buying an in-house license using subscription fee credits. Why not request a go-to-meeting
demo with Waypoint to see – at the least – what you should be thinking about
and may have to compete against?