Profit IdeasUsing the Whale Curve to Manage Your Inventory
Bruce Merrifield, President — Merrifield Consulting
• order fullfilment • profit analytics • WayPoint Analytics • whale curves • sales practices • big data • product Line • profit strategy • Wholesale Distribution Industry • supply chain issues • business math for distribution
How do you manage your most popular items? In this video interview, I sit down with Bruce Merrifield to discuss how the whale curve can be used to more effectively manage your stockroom and even how you sell items.
Whale curves are usually associated with ranking customers. However, just like you can rank customers, you can also use a whale report to rank your items. This becomes a valuable tool when it comes to stock-keeping and you can achieve tremendous results when working at both extremes of the whale curve.
"Most of your operating profit probably comes from a few hundred different items," Bruce explained. "Once you've identified these products, you should make keeping them in-stock a priority. This means beefing up their fill rates so you don't need to ship them from a different location or put them on back-order."
In the video, we highlight the example of a real WayPoint client that carried over 20,000 items. Of those over 20,000 items, 166% of the company's peak internal profit was made on just 200 items. These were very popular items with a good margin dollar.
It's important to look at margin dollars rather than margin percent because even if you have an incredible markup on an item that you sell for a dollar or two, your cost-to-serve will still greatly exceed any profit that you could make on the sale. This brings us to the other extreme, very popular items with a low margin dollar.
"It's like buying AA batteries one at a time," Bruce explained. "There's a reason why nobody sells AA batteries one at a time. The amount of labor that goes into doing a warehouse pick, printing up an invoice, and delivering the item will always be far more than what you could make on the sale."
In the case of the client, the distributor may have been making 270% of his peak internal profit on the best parts of the business. However, the company was losing 111% of that peak internal profit on the bottom 200 items which all had low margin dollars.
"Amazon recognizes the benefit of managing both ends of the whale curve," Bruce said. "They'll sell the really good margin dollar items a bit cheaper than the competition. However, on the low margin dollar items they'll usually charge more, bundle them together, or sell them as an add-on. This helps to ensure that they don't lose money on the orders."
"While every distributor's case is a little different, you need to focus on either product-centric or customer-centric solutions for these low margin dollar items," Bruce continued. "If you have a counter sales operation, you should consider keeping many of these low margin dollars out front so the customers can pick them out themselves. Otherwise you might sell them in a bundle or a kit. If the item is cheap enough, you may even consider giving it away free with an order so you don't have to do any extra paperwork."
"On the customer side, you may find that your big money-losing customers are unprofitable because they're ordering paperclips 200 times a year," Bruce said. "In those cases, you could point out the problem and explain that the practice is causing unnecessary extra activity for both parties."
By ensuring that you always have your highest demand, best margin dollar items in stock, you can maintain a higher level of customer service while cutting down on additional transaction costs. Likewise, managing your low margin, popular items is an important part of cutting your losses so you can keep as much of your peak internal profit as possible. Combining these tactics will ensure a far greater level of profitability in your business.
For more information about Bruce Merrifield, visit: www.merrifieldact2.com