August 19, 2017


















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.[1]      

     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.[2] 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.[3] 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.

 



[1] How-to? See: http://merrifield.com/articles/ISSAnotesNov2010.pdf

[2] How? See: http://merrifield.com/articles/ABalancedScorecard.pdf (skim, esp. slides: 26, 41,43,48,54-55,57)

[3] See: http://www.merrifield.com/quantum/2_35.asp