Issue link: https://www.e-digitaleditions.com/i/480616
10 FEDA News & Views J ason Bader has a theory. Many distributors don't have a process in place to calculate their true cost to serve because they're fixated on gross margin dollars. Metrics skewed by returns, order size, slow pay and carrying costs? Not so much. And then there's the obvious: it's time-consuming, taxing, and the opposite of fun. "What were the owners of most distribution firms prior to starting their own business?" says Bader, a principal in the Portland-based consulting firm The Distribution Team. "They started in sales. Salespeople are not cost accountants and they don't want to drill down into the details. It's more fun to say I sold it for more than I paid for it than to look at the harsh reality that, in many cases, you didn't make any money on a sale." No surprises there if you've earned your stripes in distribution. According to the FEDA Profit Report, prepared annually by the Profit Planning Group, the last few years signal an irksome trend. The gap between sales and profits is growing. "Distributors in every line of trade are facing the reality that sales growth is simply not translating into profit growth," says Dr. Al Bates, the president of the Profit Planning Group. "There's been a very modest increase in dollar profits within the last few years but profit growth has lagged well behind sales growth. It's a pattern that repeats itself every time a sluggish economy gives way to sales growth." Based on the latest profit survey (for fiscal 2013), a typical FEDA firm produced a little more than $17 million in sales, operated on a gross margin percentage of 22.6 percent of sales and generated a pre-tax profit of $325,000 or 1.9 percent. Pick a culprit: inflated payroll costs, margin pressures, a dispropor- tionate number of small orders, poor pricing on slow-moving items, a lazy eye toward reining in expenses—all have a hand in chipping away at profits, says Bates. But if there's one over- arching theme echoed in white papers and seminars, alike, it's that distributors tend to deal with too many unprofitable customers. Hence the movement toward ranking customers and calculating the cost to serve. (See Jason Bader's article on page 11.) "The cost to serve is one of the hottest topics in distribu- tion right now," says Bates. "A lot of firms are finding that the economic revival is not leading to a profit revival. This has led them to look at their business differently and an important part of that process has been to look at the various costs in their businesses in different ways. The ultimate goal being to know how much profit is generated from each item stocked and each customer served." The concept caught fire in the early 1990's, when manufac- turing, and then distribution, became enamoured with total quality management—and figured out "that quality wasn't about product, it was about process," says Mike Workman, Professor Emeritus of Industrial Distribution at Texas A&M University, and longtime advisor in the world of distribution via his consulting firm Michael E. Workman and Associates. "As we became involved in analyzing our processes, determining best practices, and analyzing what we needed to be doing for whom," he says, "the first thing that we learned was that most distributors/dealers over serve. They offered a whole lot more than customers wanted or needed and their cost to serve kept escalating, while the return on those costs kept dwindling at a high rate of speed." Start with Your Paradigm It's a conundrum. That's how TRX Integration Inc.'s Glen Juliano sees the cur- rent landscape of E&S through the eyes of many of the smaller dealers he encounters while touting the benefits of TRX Enterprise, an integrated suite of software he developed to help manage all of the moving parts that drive operations. Smaller, being relative, but accurate compared to the Top 10. Consider the layers wedged in any number of dealerships: sales, retail, service, construction, e-commerce, used equip- ment refurbishing. "That's six businesses to manage and if you don't have each of those set up as their own profit center, and you're not managing what you're doing and how you're doing it, you're probably throwing a lot of money out of the window," says Juliano. "The problem is the smaller the company, the less time they have to think about the cost to serve because in an all-hands-on-deck company, it's all about serving the customer and making that customer happy. That's what gets you the business." But he's not giving anyone a pass. If you're not looking at THE CO$T TO $ERVE Insights on the Realities of Distribution and Capturing What You Don't Know By Stacy Ward, Managing Editor fedastacy@verizon.net Some people don't know because they're terrified by the thought of what they might find. The way I look at it, it's ultimately about opportunity. Our job is to figure out what we can do to have a profitable relationship with our customers. –Distribution Coach Jason Bader