Breaking out of the commodity mindset
Data from the past 15 years of trade association PAR reports show 90 percent of distributors have averaged poor pre-tax returns on total assets (ROTA). The same top 5 percent of distributors average 3-4 times the returns of the bottom 90 percent. Same channel, same commodities, just much better results.
But, the bottom 90 percent aren’t slackers. We can assume these participants are:
- Smart, conscientious, persistent and at least somewhat ambitious. Otherwise, why would they keep filling out the PAR surveys?
- Best practice seekers (at least from a financial-management perspective)
- Members of the associations that sponsor the surveys, so presumably staying channel savvy
- Members of a buying group (if channel appropriate) to remain efficient
Conclusion? Being persistently financially efficient and keeping with the industry herd isn’t enough. What’s missing is innovative effectiveness. Effectiveness is doing the right things for your strategic context and doing them better.
In a commodity-glut world, pushing products for price is a dead end. Based on analytical facts and customer survey information, you are best served by achieving high returns via service value logic.
Who buys into service value logic?
Several of you already know all about my data-based approach that I picked up from distribution guru Bruce Merrifield. In past seminars, you may have heard me talk about the new tools to move forward in the heavy-duty parts and service business:
- Use customer profitability analytics
- Vary service definition metrics by customer(s) or niche(s)
- Apply different service (cost) models for different size customers
- Create a high-performance environment to engage employees to execute
- Execute team-selling of key accounts on total buying cost reductions
This has been a proven approach in many industrial distribution markets. If these techniques seem too far out—what are the alternative plans, and are their data-free mantras locking them into bottom 90 percent returns? The frustration is that I have seen this work time-and-time again.
Stress test your beliefs against the facts. There is a trend in the industry toward learning how to deal with our cognitive biases or predictable irrationalities. But, what good is another set of best practices within the strategic vacuum? Using data, you can stress test your beliefs against new facts about your core strategy.
For example, do you (and more importantly your team) know these basic facts about your business?
- Who are your 5 to 10 percent most net-profitable customers? Are they those that you over-price, under-serve and could lose easily?
- Who are your biggest super-losing accounts, and the specific SKUs that they are buying too often in small-dollar amounts, boosting unnecessary activity costs for both parties?
- What is your most profitable niche of customers? And, their next-level service metrics?
It’s a long journey, but using customer profitability ranking reports built on and potentiated by line item profit equations puts you a few steps ahead of the competition.
To learn how to test your beliefs against the factual realities of this journey, let me know. Bruce Merrifield and I will be happy to get this new to heavy-duty parts and service program going for you.
Bill Wade is a partner at Wade & Partners and a heavy-duty aftermarket veteran. He is the author of Aftermarket Innovations. He can be reached at [email protected].
