Bruce Merrifield, President — Merrifield Consulting
•competitive strategy •order fullfilment •profit analytics •distribution management best practices •big data •profit strategy •management strategies •business math for distribution •money-losing activities •strategy for CEO •strategy for CFO •delivery costs
Wednesday, July 26, 2017—What's the harm in making a small extra delivery if you already have a truck in the neighborhood? In this video interview, Randy MacLean sits down with Bruce Merrifield to discuss how little extras can sometimes add up to a lot of infrastructure cost.
It's important to keep in mind that a sale's profitability is determined by the gross profit minus the cost-to-service (CTS). CTS is driven by transaction counts which require writing invoices, warehouse picks, deliveries, and additional headcount.
"Because most distributors run their business on financial numbers, there usually isn't a cost-to-serve model," Bruce explained. "If I'm in sales, I might say margin dollars are margin dollars. Since salespeople don't see the CTS, they think it's free. They could also rationalize it by thinking that if a truck is out there anyway, why don't we just deliver one more order?"
"The problem is that an extra delivery is rarely a one-time thing," Bruce continued. "You might be making that extra delivery on a weekly basis, and therefore it's an added infrastructure cost. I knew one electrical supplier whose customer wanted them to switch from delivering to a central location to delivering to his 15 different job sites."
Suddenly instead of having 1 delivery, the supplier now had 15. The margin dollar hadn't changed, but the CTS drastically increased. What do you think happened to the profitability on those sales?
Salespeople are often quick to agree to customer demands just to make that sale or keep a client happy. All too often they either overlook or ignore the cost-to-serve on any given sale and those extra costs can easily turn a profitable sale unprofitable.
"There are two major problems when it comes to these extras," Bruce added. "First, when you focus on these activities, it takes time away from more profitable activities. Second, it might be fine if it actually was a one-time delivery, but we're usually talking about hundreds of extra trips over the year. This means you might need to lease more trucks, hire more drivers, and have full-time workers who take care of nothing but losing orders."
This also ties into the mistaken belief that every sale is a good sale. Every sale should have enough gross profit to cover the CTS, which is why your company should have things like minimum orders.
"One of our WayPoint clients found that 50% of its active accounts were generating only 8% of its margin dollars," Bruce said. "The distributor decided to change its terms. If a customer wanted delivery, they had to meet a minimum order. However, if they didn't meet that minimum, they could come pick things up themselves."
"Thanks to the changes, 30 or 40 customers came to pick up their orders each day," Bruce continued. "This allowed our client to get rid of a few extra trucks and let go of a few employees whose jobs were no longer necessary. Within a month of making these changes, the client's profitability improved threefold."
A company that wants to drastically improve its profitability needs to reduce its number of transactions. As you make these changes, you free up infrastructure. You can redeploy that infrastructure and employees into growth, such as focusing it on things you wanted to do but lacked the manpower, or you might find that your company really doesn't need it any more.
For more information about Bruce Merrifield, visit: www.merrifieldact2.com
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