Bruce Merrifield, President — Merrifield Consulting
•QPM •Quantum Profit Management (QPM) •business math for distribution •cost-to-serve math •LIPA •line-item profit analytics in distribution
Wednesday, April 04, 2018—Most distributors have naturally occurring, high gross margin percentage (house) accounts and high gross margin percentage (small dollar pick) SKUs. Surprisingly, many of these are operating profit losers.
In reality, the gross margin dollars in these small dollar picks and orders amount to less than the cost to serve dollars they consume. This means they actually cost more money to fill than they generate in profit. In contrast, direct ship orders with low gross margin percentage are often quite profitable.
What matters at the line and order level, therefore, is not the gross margin percentage, but rather this profit equation:
Gross Margin Dollars – Cost to Serve Dollars = Profit Dollars
Note that gross margin percentage is not part of the equation!
In fact, a higher gross margin percentage will increase the gross margin dollars, but the even bigger cost to serve dollar total for excessive lines, orders, customers, and SKUs remains unmeasured, unknown, and larger than believed.
This informational blindness allows high gross margin percentage, losing sales activity to accumulate, and some low gross margin percentage, profitable direct orders to be overbid and lost.
Getting Rid of High Gross Margin Percentage Blind Spots
A simulation game with financial statements tells us that both selling high and buying low will improve gross margin percentage, gross margin dollars, and the flow-through of the incremental gross margin dollars to profits. So, we believe that higher gross margin percentage is good everywhere and always, which doesn't work on small dollar picks and orders!
Of course, don't underprice an outstanding service value if you have one. If you can increase the prices on some items and to some customers—and make them stick and not lose any business—then do it. Otherwise, these blind spots will hurt you as in the following examples.
The Buy Low, Sell High Myth
Buy low, sell high is a zero-sum, win-lose goal. Your gains are your suppliers' and customers' losses. But, what are your unmeasured costs for lost trust and increased price shopping and haggling costs? After years of haggling has profitability improved?
Financial analysis assumes that all the underlying transactions, variables, and dynamics summed up from last year are static going forward. They aren't.
Do you think you can service a few more incremental small picks and orders without increasing expenses? Distributors that do line item profit analysis discover, on average, that 70% of all lines have losing profit equations. And, 65% of all orders and 80% of all customers are losers.
Therefore, losing business eats all change ideas.
Learn and apply cost to serve (CTS) Math to significantly improve these statistics and cure profit losing equations. You can watch both sales and profits soar by taking the following three simple steps:
Watch this 3-minute video excerpt from our recently released Cost To Serve Math course.
Check out WayPoint Analytics and request a demo.
Attend the Advanced Profit Innovation Conference April 20th and 21st, 2017 in beautiful Scottsdale Arizona.
For more information about Bruce Merrifield, visit: www.merrifieldact2.com
The 3rd of 3 lists defining the markers of Distribution companies outpacing their peers.
Bruce Merrifield and Randy MacLean discuss the handful of key customers in your business, and how to keep them happy and loyal.
Randy MacLean explains the differences in business intelligence systems, and how to know what you're getting with each kind.
See how implementing LIPA can give you the bandwidth to be more accommodating to your customers with analytics-based service excellence
Randy MacLean and Bruce Merrifield of WayPoint Analytics discuss different levels of cost analysis, and why deeper analytics can bring much greater benefits.
Companies are developing more and more sophisticated approaches to sales compensation and here Bruce Merrifield and Randy MacLean examine the trends.
Waypoint Analytics uses line item profit analytics to dig deep into the numbers, and Waypoint users learn both bad news and good news about their customers.
Managing Product Line Profits shows how operations can have a significant impact on net profit and examines Peak Internal Profit, accumulated profit and more
A discussion of the benefits of segmentation and how this approach can help distributors achieve far greater levels of profitability.
Top companies like Amazon can leverage big data to predict consumer buying habits. Bruce Merrifield discusses how you can do this too!
Most distributors have naturally occurring, high gross margin percentage accounts and high gross margin percentage (small dollar pick) SKUs.
Here is a case study in which the lowest gross margin percentage niche was the most profitable and the highest gross margin percentage was the loser.
Continuance of the Enterprise Account Selling Model video series. Refers to a preceding video. Drawn from Bruce's presentation at APIC on March 1, 2016.
A continuation of the discussion between Bruce Merrifield and Randy MacLean over Bruce's Enterprise Account Selling Model (part 2).
Bruce Merrifield and Randy MacLean discuss Bruce's Enterprise Account Selling Model, as presented at APIC on March 1, 2016.
Using the negotiation process to achieve CTS savings, allowing you to offer your customers lower prices while leaving the table with a larger profit.
This video by Bruce Merrifield and Randy MacLean describes why you can't rely solely on gross margin to determine profitability.
An in-depth look at some historical limitations to sales compensation, and why those factors no longer apply with the availability of LIPA.
A fixation on gross margin – without looking at cost-to-serve (CTS) – has blinded countless distributors and limited their ability to achieve profitability.
See why your most profitable 200+ items are typically popular commodities with lots of picks for lots of customers with a high average sales dollar per pick.
Learn how this distributor was able to massively ramp up its profitability even as it lost many of its customers.
Learn why distributors can't simply rely on gross margin when determining whether a sale will add to the bottom line.
Randy MacLean talks about the emergence of a new sales strategy.
A discussion on how little extras can sometimes add up to a lot of infrastructure cost in wholesale distribution companies.
Learn how to boost your company innovation IQ by adopting the Anti-Nitpick Rule and the Wheel of Learning Tool.
Randy MacLean discusses key profitability metrics for QPM.
A discussion of the perils of a cookie cutter approach when it comes to sales and service in the wholesale distribution industry.
Bruce Merrifield of WayPoint Analytics teaches the importance of customer segmentation and the insights it can offer your distribution company.
Randy MacLean introduces the core principles of QPM and illustrates how it's the most effective way to run a business.
Have you had trouble conveying the importance of CTS to your team? Learn how this course provides an affordable and convenient educational solution.
Bruce Merrifield and Randy MacLean discuss profit strategies for wholesale distributors that will raise their cost-to-serve and profits.
Webinar: Quantum Sales Compensation Plan Part 2
Webinar: Quantum Sales Compensation: Designing Your Plan
Webinar: Quantum Sales Compensation for the Wholesale Distribution Industry: Launching Your Plan