Join us for the upcoming Profit and Productivity Summit for Distributors Nov. 11-13 in Chicago.
One of the advantages of aging is the joy of sharing what you’ve learned with people who are earlier in their careers. One of the challenges, of course, is that sometimes those people don’t listen to their elders any more closely than I did at their age!
However, if your goal is to drive more profits, here are a few tips I have learned along the way. If this isn’t your goal, then don’t tell your boss because you’re doing it wrong!
Lesson 1: Profitability is Complicated
When I was a young branch manager – at a tender 24 years of age – Grainger didn’t show us cost or profitability. We just had pricing tiers and rules about how to apply them. That reinforced the belief that driving profits was about NOT DISCOUNTING. If my branch team and I resisted the urge to mark down prices, then we’d be profitable enough not to earn an angry visit from my District Manager.
When I began working for other distributors, I began to see that better purchasing practices could make a big difference in our profitability. Rogue buying in branches drove up costs while putting Strategic Buying Agreements in place resulted in higher margins for us, as well as better rebates and marketing co-op.
Later, I attended a workshop led by Randy MacLean, who is speaking at our upcoming conference in November, and had one of those lightning-strike moments in my brain when I realized that some accounts were extremely expensive to service while others cost us relatively little. Reducing cost-to-serve could transform a company with ordinary profits into one with extraordinary profits without touching pricing at all – or even changing our sales. This had even more impact on account profitability than gross margins!
When I worked at White Cap, the construction supplies distributor, I saw the incredible impact on profitability when we put in place extensive training and education programs for our employees to help them understand exactly where profits came from and their role in growing them. Part of this involved helping the team understand the mechanics of profitability but an equally important breakthrough was changing their mindset so they understood that we deserved the margin we earned.
And there’s more: From proper category management to managing delivery costs, driving efficiency in returns processing to lowering operating costs, distributors have opportunities to optimize profitability across the enterprise. Controlling discounting is important – and just one small step towards driving profits for a distributor.
Lesson 2: You Need a Profitability Leader
Why do most companies have a vice president of sales and almost none have a vice president of profits? The distance between the sales line and the income line on your P&L is filled with all of your company’s COGS and expenses and the drop is probably 70% to 95%. Why is the top line important enough to justify a dedicated executive but the bottom line is not?
And don’t tell me it’s your CFO. With responsibilities including treasury, financial accounting, audit, managing debt, bank covenants, insurance, working capital, assets, board duties and more, CFOs don’t have time to take the lead in maximizing profits, too.
It’s also not your Director of Pricing. This is an important role since pricing drives a significant part of your profits, but what about the areas I identified in Lesson 1? Who’s managing cost to serve, driving purchasing optimization, checking in on rebates and co-op opportunities and leading the never-ending efforts to educate the entire company on how to drive up profitability?
It’s VERY COMPLEX to optimize profits and it takes a long-term implementation of best practices, training, measurements, reporting and accountability. Sure, everyone is involved in improving profits, but everyone is involved in growing sales, too, right? Why provide specialized leadership for one and not the other?
Lesson 3: Margin Equals Value
This one took me the longest to internalize. The reason you can sell products for more than you paid for them is that you add value to them. The challenge is that there are hundreds of things you can do to add value but every customer values different things. Consider:
- For a large manufacturing customer, you assemble kits of products for certain subassemblies and for their MRO needs you refill their tool crib bins and also place industrial vending machines on the shop floor. Additionally, they use eprocurement to buy from you, so you’ve built a custom catalog for them and, for a specified set of 200 products, you guarantee availability and delivery within four hours because they’re essential to the operation of the plant. You also offer 24×7 emergency service – gratis.
- For a small manufacturing customer, you simply sell plant maintenance supplies and miscellaneous products, and they send a driver on a milk run every day to pick up will calls from you and other distributors.
- For a contractor customer, you offer counter service for their technicians who need electric motors, controls, ventilation products and other components and parts necessary to restore systems at commercial establishments so they can reopen after a mechanical failure. It’s extremely difficult to forecast the products they need or when they’ll need them.
If you and I sat in front of a whiteboard, we could probably put together 25 more customer needs profiles in an hour. For every customer, the distributor’s role in the supply chain is essential – you need a mix of products from many manufacturers, as well as the ability to forecast and stock inventory and deliver it quickly to meet demand. But how do you price thousands of products for thousands of customers in countless scenarios? No wonder distributors’ pricing systems are so much more complex than retailers’!
I’ve seen situations in which executives – out of a failure to appreciate this complexity or from sheer frustration – try to force simple pricing structures onto an organization: “We’re going to simplify our pricing system! I want three-tiered pricing with business rules about how to apply them and the sales force is going to have to slot their customers into this matrix based on annual volume!”
This works for about as long as it takes you to read this sentence. First, you see creeping concessions for especially large customers … then the discount tiers change by product category … next thing you know the new “simple” system has so many exceptions that it’s harder to understand than the old system.
A much smarter approach (listen up – I learned the hard way), is to understand how you add value for certain kinds of customers and then price based on the value you add. Even that isn’t simple though because you have to discount in exchange for large purchase volumes and in the context of what competitors are charging. But starting with the premise that you will segment customers by need, add up how you add value to each segment, and then price accordingly to at least make sense of how you earn the markup you place on products.
Optimizing Profitability is Difficult, Essential and Hard Work
In your organization, who understands these issues so well they can sit with your executive team and facilitate an in-depth discussion about how to take advantage of all these opportunities, understanding the nuances and trade-offs?
Do you have a profit optimization plan that considers best practices, sources of data and emerging technologies that can grow your bottom line over the next several years, or do you just make assumptions about how you’ll improve with some vague platitudes about what you’ll do to get there?
If you can answer those questions authoritatively – congratulations; you are the unicorn of distributor profitability! For everyone else, be sure to send someone to our upcoming conference, The Profit and Productivity Summit for Distributors on Nov. 11-13 in Chicago.
I’ll be moderating a panel of experts on the same topic as this article, “What I Wish I Knew About Driving Profits 20 Years Ago,” and we’ll deep dive on these issues and others. Plus, you’ll meet with the world’s leading technology providers of profit-driving technologies for distributors and network with other executives grappling with the same problems you’re trying to solve.
Given the incredible opportunities you have to improve your profitability and the complexity of the challenge, how can you skip the industry’s only dedicated conference on distributor profitability?
Join us for the upcoming Profit and Productivity Summit for Distributors Nov. 11-13 in Chicago.
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.