Profit IdeasEmerging Trends in Distribution Industry Analytics
Dr. Albert Bates, President — Profit Planning Group
• competitive strategy • profit analytics • WayPoint Analytics • profit strategy • management strategies • distribution industry trends • Profit Planning Group • Randy MacLean • distribution analytics • cost to serve analytics • wholesale distribution • strategy for CEO • strategy for CFO
I recently sat down with Al Bates from the Profit Planning Group to discuss the most prominent emerging trends in how companies are looking at their numbers.
"A major trend is to look at operating economics," Al began, "particularly each transaction. Fifteen or twenty years ago, the average order was okay. Since then we've started to see distributors recognize that customers with higher average orders and higher average order lines make a lot more money than the typical customer. A lot of that involves looking at the expense side of the business with greater scrutiny which, of course, means a reliance on metrics. Companies are beginning to get a lot more sophisticated when it comes to identifying potential profits and losses."
That makes a lot of sense to me, of course, as a numbers guy. There have always been two sides of the economics on wholesale distribution: the gross profit production and the cost structure to support it. Companies have had tools that were really good at managing inventory and receivables and gave us a little bit of financial information, but they never really had a good measure on the cost side. Since distributors haven't always had good metrics, my theory is that companies haven't spent a lot of time focused on the drivers of the cost. It's very hard to cut costs intelligently when you don't realize that those costs are closely coupled with transaction counts.
"This point is crucial", Al noted, "I have a number of companies that still say that they don't know what their average transaction is." They're beginning, for the first time, to put in place the systems and procedures that compare orders between their salespeople and orders between their customers. When those companies first realize that they can look at their information by salesperson, by customer, and by SKU, they're absolutely amazed by how wide the variations are within these groups. Many companies don't like to talk about expenses, but understanding and controlling expenses is necessary for profitability.
The thing that a lot of companies don't understand is that controlling expenses can also be a win-win situation. Customers who place a lot of small orders aren't merely placing a burden on your systems, for instance, but that inefficiency is also eating up a lot of time on their end. By looking at metrics, companies can really target these little kinds of inefficiencies and subsequently help their clients become more profitable while keeping their own costs down.
For more information about Dr. Albert Bates, visit: www.profitplanninggroup.com