Strategic
Insights # 7
Learning From and Expanding Upon Your “Islands of
Profits”
Who’s getting big benefits from this pamphlet
series and how?
Here is one success story that is partially disguised to: “not wake up our
competitors”.
Acme Metals is a $50MM “service center” that sells
different kinds of metals - processed to specific sizes - to an array of
customers within the heart of the “rust belt”. Acme’s smart methods have
historically out-performed their regional economy and peer distributors. But,
the 2008 downturn and the deflationary drop in raw metals inventory hit them
hard and re-awakened an old, profit improvement quest.
In 2002, Acme knew that they had significant
cross-subsidies between their most profitable – customers, processing and SKUs–
and the most unprofitable ones. To measure and exploit this opportunity, they
bought an activity-based-costing software “solution” to create their own
cost-to-serve models. After “investing way too much” in software, hardware,
consulting and staff time, it was shelved out of frustration. Inventing
effective cost-models, in-house from scratch isn’t easy.
In 2010, key managers read together: Islands of
Profit in a Sea of Red Ink by Jonathan Byrnes. (Read the reviews and
download the e-version from Amazon!) The book explains why cross-subsidies
exist and what to do about them for breakthrough results in a
chronological-process way.
With fresh inspiration, Acme debated whether to
revive their old investment or try a fast, cheap, low-risk, 3-month-trial
experiment with Waypoint Analytics’ “quantum profit management service”. Waypoint
was the answer, because they had evolved a robust, sophisticated, turnkey,
journey-ware service by working with many different distributors. They had
tools for each step of the journey: cost modeling, ranking reports, plays,
tracking reports, net-profit incentive reports, plus “free” e-consulting.
Because tools don’t lead change, Acme promoted a
high-powered, finance person to become the full-time “chief profit-improvement
officer” in charge of the “Profit Improvement Program” (PIP). She – with the
full backing of the senior management team – immediately:
1.
Assigned
(eventually) every employee to a “profit improvement team” focused on one or
more of the many new opportunities that Waypoint information revealed.
2.
Assigned many
employees to reading groups to discuss the short chapters within “Islands of
Profit” on a weekly basis.
3.
Started holding
short, weekly project team meetings and once a month all-team meetings to keep
everyone focused and informed about the startling number of success stories
that were occurring from “smart experiments”.
What were some six-month milestone results?
·
Margins had
improved by 4 points (13% of the trailing 30% rate).
·
Customers that
were breakeven or losing accounts had dropped from 80% of all customers to 40%
with a goal of less than 5%.
·
The 3% of
customers that were big losers are – on average – all profitable and most are
buying more volume than before.
·
Internal
processes that turned out to be losers have been re-designed and re-sold to
become winners.
·
The sales force is on track to switch from an
incentive plan based on margin dollars to “net profit improvement” within their
account base.
·
Operating profits have improved, net of
business cycle and product inflation effects, on a best-guess basis by 2% of
sales ($1MM).
·
And, there are
still plenty of visible, upside opportunities.
What are some of the surprise discoveries of the
PIP?
1.
The “we/they” talk between hourly and salary
groups and outside reps and everyone else has been replaced with just “WE” (who
will all be getting net-profit, gain-sharing bonuses that can now be tracked
monthly).
2.
Reps are excited
about being supply-chain process catalysts rather than selling commodities for
a price. Because of the “net-profit improvement” incentive pay reports being
run in parallel with the old pay system, reps now routinely parry “price”
requests with:
a.
“It depends on
how we balance all of your total-cost-to-buy variables with our cost-to-serve
ones”, let’s create a win-win deal instead of a you win, we lose one.”
b.
Or, “I
appreciate last-look to meet the price, but I believe we deserve a bit extra
for both my personal contributions and our measurably consistent service value
metrics” (and getting it, because it is true!)
3.
By sharing
cost-to-serve math with progressive supplier and customers, Acme is seeing
higher-up people with whom win-win, process-change conversations are happening.
Best potential channel partners are intrigued and impressed with what Acme
knows that no other distributors do.
How can you take a ride on this story? Read the
“Islands” book. Check out www.waypointanalytics.com. Request a go-to-meeting
demo from them. Apply to attend their “Profit Improvement” conference on March
23-24th, 2 in Phoenix that will include presentations by and
schmooze time with: “Islands” author Jonathan Byrnes and other distribution
management experts. And, feel free to contact me.
bruce@merrifield.com
www.waypointanalytics.com
*The first six Strategic Insights are posted at
www.merrifield.com under the Insights tab.
