Strategic Insights 32
A Catalytic Metric: Gross-Margin-Dollars/Line
have mostly order-fulfillment people who do annual, average numbers of: sales
calls; lines/orders; picks; deliveries; and invoices. They do their functional
step at a steady rate and cost per step regardless of the average GM$/Line in their step. If you grow
average GM$/line without adding people, how much of the incremental margin-dollar
will flow to the profit line? It’s big! So, what customers-win, you-win plays will
grow this Key Performance Indicator (KPI)?
GM$s/LINE IS PART OF A BIGGER, KPI-CHAIN
In the following cause-effect chain of KPIs, GM$/Line is #2 after Root-Cause,
1. Root-Cause Action Plays increase....
3. GM$’s/Full-Time Equivalent Employees (FTEEs) which increases….
4. Profits/Customer and Profits/FTEE which
5. Profit Gain-Sharing Bonus/FTEE…. and, Free Cash-Flow
for paying: debt down; dividends to shareholders; and/or reinvesting to finance
growth which increases…..
6. After-Tax, Profits Reinvested/FTEE (Size foretells the brightness of
every stakeholder’s future with this company! Best stakeholders will only stay
and co-invest with growth-star companies!)
7. PS: CEO’s Benefits? Hours Down. Comp Up. Praises Up from all: including
family shareholders. Legacy and Exit/Valuation Options: Up.
GM$’s/LINE SPARKS WHAT QUESTIONS?
GM$s/Line relates the two halves of your general “Value Exchange Equation”,
which is - by hypothetical example -
GM$s (25% of sales) less Cost-to-Serve (CTS: 22% of sales)
= Operating Profit (3% of sales).
What is the “exchange”? You give customers Service/Operational Costs (CTS).
They then may favor you with more less GM$s depending upon the competitive quality
of your service.
Since you already know the GM$s and GM% for every customer and SKU, you obsess
to improve them. But, how do you manage
the CTS for all-win betterment? You can take Aggregate-Cost reduction measures:
pay folks less; pinch
all pennies; etc. Or, you can ask: Is the CTS
for every - line, order or customer – equal to the aggregate of 22%? NO!
They vary radically.
By illustration, consider three orders each with one, line-item.
A warehouse order with sales of $2000
at a down-n-dirty 18% margin rate.
A $2 sale at a dreamy 70% GM.
A direct order for $100,000 at scary-low
If the CTS for all three equaled the company aggregate of 22%, then the value
equations for each would be:
$440-CTS equals ($80) - loss
44 Cents equals
96 cents - profit
($12K) - loss
Your intuition should shout: RIDICULOUS! But, how to
get a grip on CTS-per-line? Start by calculating these
reference point costs on annual,
Total Field-Sales Cost divided by estimated
For each territory: GM$/account and GM$/
The all-in-cost per line processed
by the Inside Sales department
All-warehouse costs divided by
All-delivery costs divided by
All related, back-office costs per
transaction (invoices and credits)
NOW: TWO GROWTH SCENARIOS
Imagine you grew your Sales and GM$s by 20% two different ways:
20% more: accounts, lines, orders,
deliveries. With GM$/line staying constant.
The average –line, order, delivery,
GM$s/account – all increase by 20%
The first scenario needs more fulfillment people and cost. The second
requires none yielding: huge incremental GM$ flow through to the profit line;
and big, improvement for every downstream, financial-KPI!
WHO HAS DONE THIS? CASES:
that all have achieved incredible results (starring GM$/line improvement) are
highlighted at the front end of Chapter One of my E-book at: http://merrifield.com/E%20Book%202013/ChapterOne_revised.asp.
One of the three distributors ($8 Million in sales; single location;
MRO-Industrial goods) got the following results in 30 months:
Sales grew 17% per year (over twice the channel
rate) without adding people
Active accounts dropped from 1050 to 893. Per
account – Sales, GM$, GM/line - up 20%+
Profits/Customer soared from $30 to $941
Profits/FTEE leaped from $1,500 to $76,000.
Gain-sharing, profit bonus per employee zoomed from
ZERO to a $6670.
HOW DID THEY GROW GM$s/LINE BY 20%+?
The simple answer is find out which customers and SKUs have the most
GM$s/Line and do more of that type of business while figuring out how to fix
the customers and SKUs that have the lowest GM$/Line averages.
The best answer is to get Line Item Profit Analytics (LIPA) Tools
and best-practice, educational support. The meteoric distributor installed Waypoint
Analytics “LIPA Management” service in six days for a low, monthly fee and took
full advantage of all educational support. (Or, work with Waypoint to reinvent their
LAST HURDLE: OVERCOMING OLD-BELIEF
Revealing big winner and loser Customers and SKUs that are hiding within
aggregated, averaged-out financial numbers upsets Traditionalists. Math-free
objections/beliefs will flare. See 39 objections to anticipate with thorough answers
in Chapter 5 of my E-book.
If ALL, top managers don’t
see the FULL potential for LIPA Management and can’t get past Old Belief
resistance, then the status quo will win. Will you continue to pretend that CTS
is constant for each Line-Item Event or run LIPA-Plays to grow GM$/Line to be a
rich, happy hero to all of your stakeholders?
Strategic Insights 32
Merrifield Consulting Group, LLC