The Financial Blind Spot of Most Distributors
What do line-item profit analytics reveal?
Waypoint Analytics is a cloud-service firm that offers distributors an array of tools based on a line-item, cost-to-serve (CTS) model, and a calculation engine. The firm has, over its 10-year existence, created CTS models for more than 100 distributors in more than 50 different channels. The aggregate stats for this pool of progressive distributors are startling:
Total Sales $39.7 billion
Op Profits $2.19 billion (5.5 percent of sales)
Losing Invoices 59 percent (down from a typical starting level of 65-80 percent)
Losing Customers ($4.13 billion)*
Losing SKUs ($4.52 billion)*
(*The losses on SKUs and customers include much double-counting overlap.)
Waypoints’ deep-dive tools uncover the root causes for profits or losses for both customers and SKUs as well as the insights to fix unnecessary, small transaction activity for win-win savings. Why, though, do most distributors choose to not believe in and then fix the losses hiding within their aggregated and averaged-out financial numbers?
Two Blind-spot Bubbles: Financial Beliefs and Supplier-product-push Incentives
Factories create and incentivize distributors to get their lines of products to markets.
“Grow sales” for operational “economies of scale” is the blended goal. Some sub-themes in this:
- Hire more reps to get more accounts to get more sales. Yet, many rep territories are net-profit losers with too many small-order, losing customers.
- Incentivize reps on margin dollars regardless of order size and cost-to-serve. So, reps give away services to grow and retain margin dollars. All margin dollars are good regardless of CTS.
- “We can always process one more (incremental) order for free; keep folks busy!” But, 70 percent of the average distributor’s line-picks are losers. Losing busyness is eating all proactive intentions.
- More volume gets more supplier rebates: an increasing percent of profits. Plan B: Fix big customers’ unnecessary small-dollar transactions; save both parties costs; earn more share of account; and grow sales, profits, and rebates – faster.
“More sales” works better for the cost models of factories and rep agencies, but distributors (with variable order-processing costs) lose on increasing small-dollar picks and orders.
Financials are necessary to pass audits, pay taxes, and borrow from banks, but they are blind to customer and SKU profitability. Have both. Become more customer-centric and value-effective for big accounts to then grow faster and more profitably. All stakeholders will win: customers, suppliers, rep agencies, employees receiving bonuses, and shareholders.
Publication date: 10/30/18