A strategic, time-management assignment

by D. Bruce Merrifield

“I don’t have time to read a book or watch a video, Bruce. Ever since we cut back on personnel to get back to break even, all of us (management) have been swamped. Don’t you have any one-minute manager stuff that can help us to improve our profits?”

What could I say to this durable goods distributor executive? He didn’t want to hear right then that the Tooth Fairy and simple, magic management bullets don’t really exist. Because he is a hard-working, conscientious, deadly serious and operationally smart fellow, I thought that I could get him to at least read a 1,000-word turnaround recipe for dramatically improving his profit line. If he could then create a new, one-page report on just 15 accounts from three different profit-enhancement groups, then his team would gradually shift their precious time toward activities aimed at the heart of where the company has secretly been making, losing and growing profits.

If you feel time pressed and are frustrated with your profitability, you might want to start by skimming through the following recipe:

Assumption one: According to industry data, I think that 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 long term. Who wants to ride a slowly dying horse?

Assumption two: The first step to improving profitability is to pinpoint exactly where in our business we make our 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, if not same brand products, isn’t a competitive advantage. In mature commodity product channels, we must therefore be making our profits (and losses) from our customers. Who are the most profitable ones and who are the biggest losers?

Action step one: Skim through the first three chapters of my forthcoming book, “Re-Inventing Distributor Profitability”, which are posted for free, easy access at www.merrifield.com. They will instruct you on why it is important, as well as how to simply rank all customers by estimated profit before interest and tax (“PBIT”) contribution.

A typical distributor (and manufacturer) will find:
•  the top 20 percent of the accounts will generate about 150 percent of the profits;
• the next 60 percent are all close to break even; and, 
• the bottom 20 percent are destroying 50 percent of the profits.

Two sub-groups of accounts – the top five to 10 most profitable accounts per location that are the core of the business and the bottom five most serious, true losers – will demand some immediate management-led initiatives.

Assumption three: About 5 percent of the potential customers in a mature industry, “Gazelles”, will generate about 80 percent of the profitable growth for some supplier(s) over the next five years. If we can total-team sell, crack and partner these accounts, they will grow us.

Where are these customers on the profit ranking report? Are they in the same customer niche as three or more of our top 10 most profitable accounts? If so, do we have a lot of the one-stop-shop, basket of items (and related support skills) to sell them?

Assumption four: If we are selling into a mature industry of customers, are they suffering from their own excess-capacity, margin-eroding pressures that necessitate their buying commodity supply goods at the lowest “total procurement cost”(TPC)? 

They may all have different, unarticulated definitions for TPC, but most are receptive to being sold on a replenishment system that will measurably reduce TPC. Can we define what TPC is for each niche of customers and fill this need on a tailored basis better than anyone else? Are our sales reps fluent and skilled at selling and installing TPC solutions?

Assumption five: As important as some outside sales reps may be in maintaining many account relationships, they generally are not able to take core accounts, target accounts or big losing accounts to a systematically reinforced relationship. Top management along with other selling visits will be necessary to call on counterpart people within the key accounts.

Action step two: Create a new one-page report for all managers at all locations who should hopefully have incentives tied into improving PBIT. This report should list about 15 key accounts spread over the three sub-groups of biggest, current PBIT generators; gazelle targets; and biggest, current losers.

Publish both the last month and year-to-date vs. last year-to-date PBIT numbers for these accounts. At the bottom of the report, write: “What are we doing right now to: keep and grow best account PBIT; crack and partner Gazelles; and turn loser lead accounts into profitable gold ones? There is nothing else we can do with our time and resources that will make as big a PBIT-growth impact than making progress with these accounts.”

Assumption six: Many managers will look at these reports and seemingly do nothing for up to five to seven months, but they will start to notice things and think about things that will eventually motivate them to act.

Action step three: If and when anyone does act with success or initial favor, use these case studies to instruct and motivate all others.

Action step four: Because we 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.

Action step five: Read article 2.19 at www.merrifield.com and run PBIT ranking and summary reports for each branch and each sales territory. Then, go back to Action step four.

If we want to make big, sustainable gains in profit improvement for our business, we must rethink our business in significantly new ways. Tinkering with details around the edges and doing the past harder will only give us more of what we have been getting.

Because profits come from customers in mature commodity goods selling industries, we need to redefine our strategy around the profitability of our current and target customers by following the action steps listed above.

Big change isn’t easy. We need to look at new assumptions and hard data that will surface old unspoken rules that aren’t working so well, but are still emotionally dear to who we have been. Challenging and changing old rules is always a difficult and slow transitional process.

But, if we give people a new north star in the form of a "Key account PBIT improvement report," some new ideas for how to do next level moves for key accounts, and the right incentives, then the collective perception and commitment to taking new, next level measures for these accounts will gradually shift as fast as it can. Don’t rush the process.

Bruce Merrifield is a well-known authority on high-performance distribution service management. Find out more about his newest video and accompanying implementation guide by visiting his Web site, www.merrifield.com.

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