As a consultant, I often hear from distributors who ask, “Don't you have any ‘one-minute manager stuff’ that can help us improve our profits?“
They don't want to hear that magic management bullets don't exist. Still, managers who read this turn-around recipe and take it to heart can dramatically improve their profit line.
According to industry data, most distributors are working too hard to make survival profits. The average distributor's weak profits are not sufficient to finance enough growth and adaptation, let alone innovation, to attract and keep even average quality stakeholders — suppliers, customers, employees, investors — working for and with them for the longer term.
The first step to improving profitability is to pinpoint exactly where your business makes its best profits. Because the average distributor may now be getting 80 percent to 90 percent of sales on commodity products, getting last look to meet the dumbest competitor's lowest price on equally excellent or perhaps same-brand products isn't a competitive advantage. Therefore, in mature commodity product channels, distributors must be making profits (and losses) based on the quality of their customers.
It's important to first identify your most profitable customers, and then find the biggest losers.
A typical distributor (and manufacturer) will find that the top 20 percent of their accounts will generate about 150 percent of the profits; the middle 60 percent of accounts are all close to breaking even; and the bottom 20 percent are destroying 50 percent of the profits.
Two sub-groups of accounts will demand some immediate management-led initiatives: the top 5- to 10-percent most-profitable-accounts per location and the bottom 5 percent.
For instructions on how to rank all customers by estimated profit before interest and tax (PBIT) contribution, go to www.merrifield.com and skim through the first three chapters of my forthcoming book, “Re-Inventing Distributor Profitability.” The chapters are posted for free, and they will help you rank your customers.
The top 5 percent of the potential customers in a mature industry will generate about 80 percent of the profitable growth for some supplier(s) over the next five years. We'll call these core customers “gazelles.“
If you can total-team sell and partner with these accounts, they will grow you company. Ask yourself where these customers are on the profit-ranking report. Are they in the same customer niche as three or more of your top-10-most-profitable accounts? If so, do you have many of the one-stop-shop items (and related support skills) to sell them?
If distributors are selling into a mature industry of customers, are these companies suffering from their own excess-capacity, margin-eroding pressures that force them to buy commodity products at the lowest “total procurement cost (TPC)? These customers may have different, unarticulated definitions for TPC, but most are receptive to being sold a distributor-developed replenishment system that will measurably reduce TPC.
You should also ask yourself these two important questions: Can you define what TPC is for each niche of customers and fill this need on a tailored basis better than anyone else?
Are your sales reps fluent and skilled at selling and installing TPC solutions?
As important as some outside sales reps may be in maintaining many account relationships, they generally can't take core accounts, target accounts or big losing accounts to the “next level” of an economic, win-win, systematically reinforced relationship. Your top management and the key salesperson should call on these key accounts.
Create a one-page PBIT report for all location managers, who should hopefully have incentives tied into improving PBIT. This report should list approximately 15 key accounts spread over the three subgroups: biggest current PBIT generators; gazelle targets; and biggest current losers. Publish both the latest month and year-to-date versus last-year-to-date PBIT numbers for these accounts.
Ask your managers to ask themselves, “What are we doing right now to:
- Keep and grow best account PBIT;
- Crack and partner gazelle accounts;
- Turn loser lead accounts into profitable gold ones?
Allocating your company's time and resources toward these accounts will make a big PBIT-growth impact.
Many managers will look at these reports and seemingly do nothing for several months, but they will start to notice and think about things that will eventually motivate them to act.
Because you can't become a high- performance company that delivers best total service/TPC value for one niche of target customers without the help of all employees, consider and discuss how all employees, including commissioned outside sales reps, can be tied into PBIT-improving gain-sharing incentives.
If you want to make big, sustainable gains in profit improvement for your business, you must rethink your business in significantly new ways. Tinkering with details around the edges and focusing on the same old strategies will only give you more of what you've been getting.
Because profits come from customers in mature commodity-goods-selling industries, distributors need to redefine their strategy around the profitability of current and target customers.
Big change isn't easy. Challenging and changing old rules is always a slow transitional process.
If you give people a new North Star in the form of a “key account PBIT improvement report” for guidance, new ideas for servicing key accounts, and the right incentives, the commitment to taking new, next-level measures for these accounts will begin to gradually shift. Don't rush the process.
Bruce Merrifield is the president of Merrifield Consulting Group Inc. Chapel Hill, N.C. He can be reached at (919) 933-7474.