Bruce Merrifield, President — Merrifield Consulting
•profit analytics •profit strategy •Wholesale Distribution Industry •LIPA •line-item profit analytics in distribution
In this video interview, Randy MacLean and Bruce Merrifield discuss how many distributors' beliefs may be limiting their ability to be profitable. Some of these beliefs may get in the way of recognizing the importance of managing cost-to-serve (CTS).
"There were certain things that I was taught when I first got started in sales – as I'm sure many of you were as well – that I've carried forward with me for a good many years," Randy said. "Unfortunately, many of these things that I considered as an absolute truth at the time are now either irrelevant or wrong."
Some of the most dangerous myths will often bear their ugly head when you try to make your business more cost efficient.
"When you start to look at CTS math and line item profit analytics (LIPA), somebody in your organization may argue that those things don't matter because costs are fixed," Randy explained. "The argument goes that if you make one account more profitable by reducing the number of deliveries then the other deliveries in the company get more expensive because the costs shift off, they haven't actually gone anywhere."
"That would be true in a closed system where you have the same number of deliveries no matter what," Randy continued. "However, in reality it means you're freeing up slack so you can make delivers to other people. This allows you to accommodate growth without having to add to your headcount or add another truck."
"This idea ties into another set of mistaken beliefs," Bruce added. "If we lose any customer or margin dollar, that's automatically going to come out of the bottom line. That thinking tends to overlook that the customer or sale could have been unprofitable given the CTS."
"Secondly, if you lose some business, that means you have idle workers," Bruce continued. "Managers like to keep their workers busy at all times and it's caused them to engage in unprofitable behaviors – like scheduling additional deliveries – just to keep employees doing something."
"The temptation to use infrastructure just because it's already there has led many a distributor to chase a lot of unproductive, unprofitable business where full-time employees do nothing but taking care of losing line items," Bruce said.
"Your focus should instead be on increasing productivity," Bruce said. "Salespeople can only make a certain number of calls in a day so they'd be more productive if they were able to make a little extra on each sale. In the same way, a warehouse pick on a $500 order is going to be more productive than one for a $50 or a 50 cent order."
The idea that costs are fixed is a complete myth that's dangerous to any distributor that still believes in it. Even if you're carrying the same infrastructure, you can greatly increase your profitability by leveraging your cost structure more efficiently.
Because so many of your operating costs are people costs – which account for 65% of the costs on the average distributor's P&L – your priority should be on finding ways to grow your gross margin while keeping those infrastructure costs the same rather than just keeping your infrastructure busy for the sake of being busy.
Audio file: merrifield3-05.mp3