VALUE-EXCHANGE MANAGEMENT (VEM)
ranking reports are the first step on a journey towards “Value-Exchange
Management” (VEM) which is a separate, complimentary and better way of running a
distribution business than by the financial numbers in a consolidating
BASIC VALUE EXCHANGE EQUATION IS….
(what the customer gives us due to our “service value”)
(CTS: two ways)
activity costs allocated to serving the customer including sales comp that can vary
widely amongst accounts.
activity costs before sales comp (a
more universally consistent profit number)
Profit (two ways)
sales comp and before interest and taxes.
“NBC”: Net Before (sales) Comp
and interest and taxes
VEM RATIOS EXPOSE “THE MINIMUM-GM%-REQUIRED
DELUSION” AND MORE
What are the
ranges for GM%, CTS% and NBC% -all as a percent of sales -for your 5 most
profitable customers? And, the 5 most unprofitable customers?
What can we infer from these ratios? By example, here are actual numbers for an
The 5, most-profitable
averages ranging from 13.7 – 23.4%.
CTS% rates from 2.6 – 13.9.
NBC’s ranging from 2.2 to 17.5%
biggest-losing customers had:
from 7.7 to 46.6%
CTS% from 12.4 to 73.4%
negative NBC’s ranging from (4.7) – (34.2) (any comp paid would make them
are so many variables in what and how customers buy and how we serve them,
there is no - “minimum GM% we must
have for profitability rule- that applies.
distributors are flexible, service businesses, “Inter-Business, Process
Relationships (IBPR’s) just evolve and vary widely, especially with large customers.
Who is in charge of auditing the complete IBPR’s for overall, win-win
effectiveness? Instead, people on both sides try to optimize often only one
metric that they get measured, managed and paid on. How do we proactively start
addressing this mutual-win opportunity?
– CTS = NBC percentages of sales are all “effects” of what deeper underlying “causes”?
What deep-dive analytical tools do we need to get “cause” insights?
at the activity-cost story for each customer, it becomes apparent that each of our
activity costs is roughly mirrored by the customer. How can we apply this “law of reciprocal channel-activity costs”
in our win-win, cost saving re-negotiations (and with suppliers too)?
with abnormally high and unprofitable CTS ratios will have hidden, higher costs
for: buying, downtime, and “next customer” service dis-satisfaction.
customers, we find buying practices that are unknowingly disorganized and
inefficient for us. And/or, we find customers who focus too obsessively on one
element of “total cost”, so other, hidden costs for both parties increase.
profitable customers are, by contrast, disciplined, total-system-cost buyers
who (inadvertently/intentionally?) also lower our CTS. What can we learn about their
best, replenishment practices that we can then share with inefficient-buying
customers start playing the win-lose, price-shopping game, how do we expand the
conversation to “price AND the
win-win reduction of total supply chain costs? We have profitable accounts with
both lower GM% and even lower CTS%, how can that model work for other
we preach “increase GM%” without looking at the rest of the value exchange
variables, not much happens. If we pay rep incentives based on GM$s and GM%, we
reward them for getting high-CTS, unprofitable business too. And, we distract
reps from seeing and managing lower total, supply-chain costs for the
customers, which the best understand and
want. How do we transition to incentives based on: lowering both sides’
total costs and improving NBC?
10. If best customers have “VP’s of Supply
Chain” (not “purchasing”), who is our “VP of Service-Value-Chain Solutions”?
11. All of these VEM observations get
richer if a distributor is able to understand and pursue “customer nichonomics” principles.
The basic VEM equation then improves to: “Best Service Value” wins: Highest GM$/customer
(less) lowest CTS (equals) highest, sustainable, net profit.
12. The keys to applying both VEM and
Customer Nichonomics insights are:
good line-item profit analytics (LIPA)
that feed into an array of journey tools.
both VEM and Nichonomics to design those analytical
a community of distributors using LIPA to achieve VEM with which to share ideas
and successes for blazing this new profit-growing trail.
VEM is difficult
to do on your own. But, with a turnkey, web solution for the analytics
journey-ware and the service’s client base help it’s achievable for any
distributor. To learn more: request a go-to-meeting Waypoint demo and/or attend
the March 29-30th “Advance Profit Management Conference” in Phoenix.