Strategic Insights 21

VALUE-EXCHANGE MANAGEMENT (VEM)

Customer-profitability 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 distribution channel.

THE BASIC VALUE EXCHANGE EQUATION IS….                                                       

(1)   GM$’s (what the customer gives us due to our “service value”)

Less

(2)   Our Cost-To-Serve (CTS: two ways)

a.     Total activity costs allocated to serving the customer including sales comp that can vary widely amongst accounts.

b.     Total activity costs before sales comp (a more universally consistent profit number)

Equals

(3)   Net Profit (two ways)

a.     NP: after sales comp and before interest and taxes.

b.     “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 industrial-paper/disposable-foodservice/jan-san distributor:

The 5, most-profitable customers had:

GM% averages ranging from 13.7 – 23.4%.

Less CTS% rates from 2.6 – 13.9.

For NBC’s ranging from 2.2 to 17.5%

The 5, biggest-losing customers had:

GM% from 7.7 to 46.6%

Less CTS% from 12.4 to 73.4%

For negative NBC’s ranging from (4.7) – (34.2) (any comp paid would make them bigger losers)

Observations:

1.     There 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.

2.     Because 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?

3.     The GM – 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?

4.     Looking 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)?  

5.     Accounts with abnormally high and unprofitable CTS ratios will have hidden, higher costs for: buying, downtime, and “next customer” service dis-satisfaction.

6.     For big-losing 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.

7.     Most 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?

8.     When 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 customers?

9.     If 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[1]. 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:

a.     Having good line-item profit analytics (LIPA[2]) that feed into an array of journey tools.

b.     Understanding both VEM and Nichonomics to design those analytical tools

c.     Joining a community of distributors using LIPA to achieve VEM with which to share ideas and successes for blazing this new profit-growing trail.

CONCLUSIONS

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 29-30^th “Advance Profit Management Conference” in Phoenix.   

bruce@merrifield.com