Strategic
Insights # 6
FOUR-DIMENSIONAL, PROFIT MANAGEMENT
FOUR DIMENSIONS?
Tax laws, banks, and accounting firms make all businesses practice
“first-dimension”, top-down, financial management. Where,
however, are our numbers for measuring, creating and fairly pricing better
service value? And, without customer, net-profitability information how can we
tune: service models; service equations; and differentiated, heroic service
efforts for the highest net-present-value, net-profitable customers in our
local market(s)? Financial numbers fixate us on partial truths with hidden
traps like – for example - “buy low”. Should we pursue better
price and rebate deals from more redundant suppliers through tougher, we-win,
suppliers-lose negotiation skills? Real price savings and expanded margin
percentages can be more than wiped out by the cost of: lower turns; lower
fill-rate economics; and poor service costs. Much higher returns come from
better stocking programs with our most, net-profitable suppliers on their few,
most net-profitable items.
A second
dimension for profit improvement metrics is bottom-up
tracking of: error rates; fill-rates; on-time performance; cycle count
accuracy; learn-n-earn certification test scores; etc. These service quality
input numbers can then go into a “balanced”, database
scorecard.
This information will give every employee a line of sight from what they are
doing to how their profit gain-sharing increases. (Every ESOP-owned company
must have 4-D profit management!) And, more profits reinvested in company
growth will attract and retain best people in all stakeholder groups. While
“service excellence” and “lean” economics are good,
they need to be strategically focused and turbo-charged.
How do we measure strategic focus and effectiveness? Our core, historic
strategy is defined explicitly by where we make more than 150% of our operating
profits. This core is the intersection of sales to a typical
distributor’s 10% most net-profitable customers on 5% of the distributor’s
most net-profitable items.
This core activity then pays for all of the losing customers and items and may
still provide a residual, financial profit. We can’t zero in on the core
or super-losers and then delve into the root causes for those profits and
losses without a horizontal cost-to-process/service (CTP/CTS) reporting
system. This type of analysis and management allows us to measure
net-profit on every: item, supplier, order, customer, customer niche and sales
territory. This information, in turn, enables win-win, supply-chain
improvements in two directions: upstream (3rd dimension) to
suppliers; and downstream (4th dimension) to high-impact
customers.
THIRD AND FOURTH DIMENSION OPPORTUNITIES
Armed with inter-business, supply-chain costs for a given supplier or
customer, management will get audiences with higher level counter-parts who
will be impressed, intrigued and generally open to reshaping inter-business
processes. Where ever a distributor has a high-cost to process or serve with a
channel partner, the partner has more or less the same mirrored costs. Doing
in-depth analysis at big-losing customers reveals new opportunities to sell
more with a lower replenishment cost solution. With key suppliers, standard
replenishment processes can be sub-divided to fit the different economics of
different sub-sets of products. Little tweaks can often save both parties costs
that had been mutual blind spots.
(For a well-written, all-industry-opportunity book on identifying,
measuring and exploiting the cross-subsidies hiding within your customer and
item/supplier sales, read Islands of Profit in a Sea of Red Ink by
Jonathan Byrnes. It has racked up great reviews, including mine, since being
released in mid-October. I hope you will rate my review as most helpful J.)
SUPPLY-CHAIN VALUE CREATION AND SELLING
Progressive, big customers for distributors long ago changed the title
and key performance metrics for their “VPs of Purchasing” to
“VP Supply Chain”. Did all of our reps get the memo and get fluent
with supply chain: thinking, economics and value improvement opportunities?
Sales reps educated with and eventually incentivized on CTP/CTS reporting can
turn “price” – even from old school buyers – into a
conversation about all of the supply chain variables and a range of service
solutions to both lower total costs and increase up-time economics. Reps can
become bottom-line-growing consultants instead of price-quoters on commodities
in a reverse auction environment.
Who will be the first distributor in your competitive arena to seize 4-D
opportunities at the eventual expense of others? Are you content to have weak
profits and low corporate agility, because of big, embedded losers hiding
within averaged-out financial numbers? Will you invent and master a 4-D
informational system on your own? Rent a comprehensive, turnkey-for-distributor
solution quickly and affordably from Waypoint Analytics? Or, like some
large-chain clients, do both? Request a demo and decide, and inquire about an
invitation to the Waypoint Spring Conference in Phoenix in March.