Strategic Insights 28

Turn Losing, Line-Item Activity Into Gold

Big success stories are happening for distributors who are using line-item, net-profit analytic-tools.[1] Knowing the profit or loss on every line item allows you to identify and fix lose-lose activity with customers into win-win savings. Why haggle over pennies when dollars of waste can be found, cured and shared?  Customers also benefit from less downtime due to the lack of the right item at the right place at the right time. With more uptime and more on time performance, your customers can better serve and retain their customers. Broaden the value conversation from “commodities for a price” to “total replenishment process savings”. Capture more share of a now more profitable and faster growing customer!

STEPS TO FINDING HIDDEN, SUPPLY-CHAIN GOLD 

Here are the steps that distributors with net-profit analytics are following:  

1.     Look at the accumulated profit “whale curves” for all: customers, SKU’s, Suppliers, and Line-Items. Typically a distributor will achieve peak, internal profits of about 12-20% of sales on about 25-40% of the line items that are all profitable. The rest of the losing lines increasingly eat the peak profits back down to residual financial profits.

2.     SKU profitability and popularity ranking reports reveal that distributors have 5-10% of their active SKUs make 500% of their peak profits while a few hundred popular, but small-dollar items eat up 400% of the peak profits.[2] The biggest losing item for a $50MM contractor-supply distributor, for example, shows that this happened in one year over 32,000 times by 4800 different customers. At list price, a one-unit-line had only $.25 in margin dollars with a cost/line-pick of $8 for their service-cost model. The annual loss on the item was ($216,000). They are turning this item into a profitable one as you read this.[3]  

3.     Next, get actionable information by looking at any customer’s activity through four lenses: the 4-View-Analysis. Imagine a 4-circle “Venn Diagram” in which the circles all have a small common overlapping area in the middle. These four circles/lenses are:

a.     A Profit and Loss statement for the customer, which will reveal any unusually large, activity-step costs (lines, orders, deliveries, etc).

b.     SKU profitability, popularity, ranking reports for each customer showing their entire pick profile.

c.     An invoice-profit, ranking report for each customer at the bottom of which will be too many (often rush) orders for small-dollar line items that intersect with their biggest losing SKUs.

d.     Local team knowledge of the customer and the informational fingerprints revealed in lenses: a-c. The structural and habitual inefficiencies that exist and solutions for them will quickly become apparent. 

COMMON BUYING INEFFICIENCIES:

There are common inefficient buy-sell patterns amongst big-losing customers. Some customers declare, for example, buying policies of 100%:  “zero-inventory”; or “just-in-time delivery”. Both policies just don’t work for small-dollar items. Just as cooks do not buy all of their spices by the pinch, dash or teaspoon, customers will kill both themselves and distributors buying $1 items as frequently needed. The costs escalate when, for lack of a pinch, there are rush-order activity costs for both parties and downtime costs. 

If you have a customer’s entire SKU pick story, the hidden costs to the customer can be proven and estimated mathematically. Co-creating custom, spice-racks for these customers’ shop-floor or vans will then generate huge ROI’s for three parties: you, your customers and your customers’ customers.  

A second category of inefficiency is when someone within your company decides to do their own peculiar, purchasing indulgence. Every distributor will statistically have some of these you-can’t-make-them-up stories within their portfolio of super-losing customers. The distributor’s supply chain math will again measurably reveal the mutual opportunity.

CONCLUSIONS

1.     All of a distributor’s customer-facing activity expenses approximate the customer’s reciprocal, supplier-facing activities. Where one party is getting unknowingly killed, both are likely to be killed.

2.     With the right analytic lenses distributors can identify even smaller pockets of buy-sell inefficiency within generally profitable customer activity. Supply chain math for one side of the buy-sell coin works for both parties.

3.     Distributors with line-item, net-profit analytics tools can change the value selling game. Turn losing customers and SKUs into profitable ones and win your bigger share of more grateful customers. 

4.     To hear many more of these success stories directly from the distributors using net-profit analytics sign up now for the Advance Profit Improvement Conference on March 19-20 in Scottsdale, AZ at this URL: www.apicconference.com.