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Home » Operations » Distributor Profitability Is So Much More than Gross Margin

Date

  • Published on: September 11, 2024

Author

  • Picture of Ian Heller Ian Heller

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Operations

Distributor Profitability Is So Much More than Gross Margin

Gross Margin: The Great But Dangerous Obsession

Join us at the upcoming Profit & Productivity Summit Nov. 11-13 in Chicago.  

We humans have a tendency to reduce complex ideas to a single number:  

  • I have a sporty car → How quick is it from 0-60? 
  • I have a good job → How much money do you make? 
  • I lift weights → How much do you bench press? 
  • I thrived in college →  What was your GPA? 
  • I’m on social media → How many followers do you have? 
  • I like to travel → How many countries have you been to? 

In each case, a complex statement quickly gets boiled down to a single metric, and someone may pass judgment on your claim based on your answer. Which is ridiculous.  

For example, earning a bachelor’s degree in history is easier than earning one in electrical engineering – and I know this because I was getting my BA in History while serving as an R.A. in an engineering dorm. My residents and I barely spoke the same language, but I know their coursework was harder than mine; can you really compare our GPAs? 

For most distributors, gross margin becomes the easy-to-measure number that feels like the perfect proxy for profitability. Which is really, really bad. Focusing solely on gross margin is like training for a marathon by carb-loading on pasta: You’re reducing a complex exercise to the part that can get very unhealthy – fast.  

Meanwhile, your more sophisticated competitors are whipping their organizations into lean, mean, automated and intelligent profit-generating machines, and they’re going to zoom right past you while you’re huffing and puffing at mile two. 

Yes, gross margin matters, but it’s just the starting point. So, stop holding it up as the scoreboard for profitability. It’s important but you should also focus on other areas that can collectively drive much bigger gains to your bottom line without running the risks of overpricing yourself in the marketplace.  

Profit Boosters Worthy of Obsession

1. Maximizing Supplier Rebates and Marketing Co-op  

My wife loves to put $5 bills in birthday cards. Her reasoning? “It’s so fun when you open a card and there’s money inside!”  That’s true: We all love free money! So why do so many distributors ignore free money available from their suppliers? Few distributors have tried-and-true processes and technologies for ensuring they get every rebate dollar to which they’re entitled.  

Huge amounts of their purchases go to non-preferred suppliers or are done outside of purchasing agreements or just aren’t properly documented. Think about this: Most of your suppliers know exactly how much you bought from them this year, but your numbers are probably understated on all of them because you aren’t tracking it properly. How do you think that affects your rebates – and who has the advantage when you negotiate costs? 

Marketing co-op is even worse. For most distributors, the term “rebates and co-op” is actually pronounced “rebates” because they view co-op as such a small and inconsequential opportunity. Drives me nuts, because I’ve raised many millions of co-op dollars in my career while my competitors were leaving it on suppliers’ tables (for me to grab).  

When I talk to manufacturers about co-op or MDF (marketing development funds), they just shake their heads. They want to give it to you. They want to put it in a gift card as a nice surprise. But you have to ask for it and you have to earn it – do you even know what percentage of total available co-op you’re getting each year? How much effort do you put into collaborative marketing planning with your suppliers to earn as much funding as possible? 

2. Working Capital Management: Take Stock of Your Stock and Assess Your AR 

Your warehouse is probably holding onto more obsolete assets than a Dancing with the Stars reunion. That inventory you reserved for that one customer for that one deal for that sales rep who used to work for you is just the start. You probably have the same product cleverly disguised by several different part numbers many times over and are reordering products into one location while selling them at clearance rates in another.  

Most distributors have huge sums of cash tied up in inventory and are battling 2024 challenges (and competitors) with 2004 tools. Emerging technologies allow you to boost service levels and increase inventory turns better than ever but you have to put in the effort to find the ones that are right for you. 

AR is another area of profit opportunity. How often do you have customers refuse to pay a $25,000 invoice because someone didn’t properly process a $100 item that was returned? And do you have AI analyzing your AR to recommend which customers are likely to pay if you simply email or call them vs. the ones that are more concerning?  

3. Cost to Serve: The Hidden Profit Killer 

Some of your customers are currently costing you more profits than they’re generating.  For example, they’re placing frequent, small orders, making special delivery requests and asking you to protect inventory. Some behaviors that drive up costs for you also drive up costs for customers – meaning you can work together to reduce service costs – assuming you know what they are.  

You should definitely know your profitability by customer and that very often does not correlate with gross margin dollars which can be swamped by high costs to service an account.  

4. Strategic Purchasing: Bringing Professionalism and Profit to Procurement 

If you have decentralized purchasing that allows your customer service people to make spot buys, it means the nicest people in your company are negotiating with your suppliers. Not to mention many of these purchases aren’t done under strategic buying agreements – which you should have in place with nearly all of your suppliers.  

And have you added up your sales that could have been supported by co-op or market development funds but weren’t due to process or documentation gaps? Getting a team in place that fixes these issues while also conducting line reviews, exploring private brand alternatives and experienced negotiations experts can transform your profitability while maintaining or decreasing prices.  

5. Quote and Order Automation: A Whole New Productivity Opportunity Emerging 

Remember the days of dedicating thousands of hours a year to deciphering quotes scribbled on the back of a napkin or wading through spreadsheets with more SKUs than you thought humanly possible? If you’re still wasting time with these activities, you’re behind the state of technology and some of your competitors, too.  

Quote and order automation tools can infer the correct SKUs from handwritten or vague descriptions and give you the control to review quotes before sending them out. Orders and quotes that took days or weeks to process can be done in minutes with AI-enabled software. No more manual data entry marathons. Just fast, accurate, and highly productive automated quotes and orders. 

6. Sales Productivity: Time to Shake Things Up 

The traditional distribution sales model was losing effectiveness and then the pandemic came along and dramatically accelerated the rate of change. Sales reps were forced to work more over the phone, in part because of COVID restrictions and in part because their customers were working remotely and you can’t make sales calls on people at their homes.  

Four years later, remote work has become a permanent thing and the percentage of customers who have become proficient and comfortable with virtual meeting technologies has skyrocketed. The hybrid sales model is now a way of life and if you’re still managing your sales force the old-fashioned way, you’re gradually but consistently losing sales productivity vs. competitors. Cutting sales costs while increasing sales effectiveness is a great result – does that describe your company?  

The Bottom Line: Are You Ready to Unlock Your Full Profit Potential? 

If your company hasn’t mastered all these profit and productivity principles then I suggest you send your team to our upcoming Profit & Productivity Conference Nov. 11-13 in Chicago. You’ll learn state-of-the-art strategies that will turn your company into a profit-generating dynamo. 

Gross margin is just the start. It’s time to unlock everything else. 

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Ian Heller
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Ian Heller is the Founder and Chief Strategist for Distribution Strategy Group. He has more than 30 years of experience executing marketing and e-business strategy in the wholesale distribution industry, starting as a truck unloader at a Grainger branch while in college. He’s since held executive roles at GE Capital, Corporate Express, Newark Electronics and HD Supply. Ian has written and spoken extensively on the impact of digital disruption on distributors, and would love to start that conversation with you, your team or group. Reach out today at iheller@distributionstrategy.com.

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