The Profit Triad is an Engine. An Engine that Produces High Profitability.
"The top two competitors in a market space typically make more than 75% of the profits."
Your business system reports aren’t configured to view things The Profit Triad way. If you ask, IT might even ignore you if you request that they start pre-configuring reports this way. After all, nobody else is doing things this way, right? Your industry peers and associates might shrug at it. But don’t back off from it. You are only 5% of the population or less if you think this way, and those are the people that make most of the money. The top two competitors in any market space typically make 75% or more of the PROFITS.
Take a look on the chart on this page. It is your end to end business process.Marketing Strategy blends with Operations Strategy in the Profit Triad Business Model. Rather than think through what each component of an organization should do, like most methods, it ignores the organization structure at first and thinks of WHAT needs to be done: Density, Productivity, and GP$ per order. Strategy starts with WHAT you need to accomplish.
- This is 100% about how to maximize both the “R” and the “I” in ROI. Hence, everything will be measured in terms of the output for the input at all main points of the triad. Train your mind to think of what each department produces and the inputs that produce it. In every corner of your business.
- Delivering better relative value to customers in a core segment builds market share, assuming your marketing message reaches enough people enough times with enough impact and your sales people follow through to close business, grow, and maintain share.
- Market share in a territory creates density per square mile. You should measure this for a radius that delivers 80% of your revenues.
- Density per square mile is a natural productivity advantage by itself. You now have more revenue per driver hour, truck hour, salesperson hour, truck operating expense dollar, and so forth. Your trucks and people are engaged in creating revenue by dropping off orders more than they are driving between stops. Your inventory is serving more people, and is naturally more productive. Your sales people make more GROSS PROFIT PER HOUR. You inside sales people drive for additional line items per order and more deliveries on each route, yielding more GP$ per order as a result.
- Density only gives you the OPPORTUNITY to create economy of scale. It allows you to invest in more productive systems like Central Distribution Centers, which leverage your inventory investment while increasing availability, and automate your business so you don't have to add human resources as much as you grow. Your assets work harder. The higher revenues inherent in density can also pay for system investments that can help you automate back room functions and flatten out your variable cost curve.
So, when you grow, you don’t need to add accounts payable people, accounts receivable people, purchasing people, pricing people, and SPA claims people, because you have automated these functions and only need to handle exception transactions manually. When you grow, your gross profit line exceeds your variable cost line at a wider angle on the break-even chart. The more you grow the wider it gets. Profits go up at an increasing rate until you max out on your current business model’s capacity. Then it’s time for a geographic adjacency! You should be so fortunate, right?
- Leadership Productivity Takes Full Advantage Of Density To Create A Scalable Business.
- Scalability is created when a business fully leverages the opportunity created by business density to create economy of scale: You produce at a lower cost with higher volume. It takes the natural advantage created by density even further by increasing the physical velocity and cost efficiency of the back room, front room, and working capital in the business: inventory & receivables.
- It invests the gross margin generated by increased market share and density into increasing physical productivity and flattening the variable cost curve in the break-even model by reengineering work processes and automating tasks. So, as you grow, since you substituted fixed technology cost for adding people, the rate of profit goes up as a result.
- It applies in the Back Room (Purchasing, Warehouse, Accounting), Front Room (Outside Sales, Inside Sales, Counter, Web Orders, EDI Orders), and Assets.
- Productivity Should be Measured Two Ways
Cost per input (i.e. cost per line item delivered), and Output per person per period (i.e. Line items per person per period or GP$ / Expense Dollars per salesperson).
- Gross Profit Dollars Per Order, Not Gross Profit Percent, Drives Profitability on the “Sell” Side. Neil has performed extensive customer profitability studies with activity based costing. We knew the cost of every activity and the allocated cost to every order. We knew the profitability of every segment of the business. We could see it by account, salesperson, and branch. When you can do that, you know what you need to do with pricing, policies, promotion and mix.We did a simple regression analysis and discovered that most of the variance in profitability was caused by the average gross profit dollars earned per order for the account. Not the percent gross profit. The total gross profit dollars per order.Why? Let’s assume a large account is all stock business. Let’s also assume customers always order through the inside sales person. Let’s say customers always have it delivered as well.We calculated that the activity based costs of purchasing, order taking, order picking, delivery, billing, collecting, and returns were about $75.00 per order. General overhead was another $25.00. So, to be profitable, you need greater than $100.00 per order GP. To contribute to overhead incrementally, you needed more than $75.00 Gross Profit.In reality, we calculated exact total activity costs for each customer based on specific activities performed for the customer wherever possible, like order entry, picking, delivery. Other costs for which we could not isolate activities on a customer were allocated on a formula.The point is this: GP Dollars per order is the goal that drives profitability on the sell side. You need to drive certain behaviors to make this happen. We’ll talk about them in Chapter 7.
- Gross Profit Per Order is Influenced Most Heavily by Product Mix at Each Customer.
- The traditional “find the holes” report is fine, but it does not quickly flag accounts with potential. Like you, I started out doing that way back in the 80’s. You have to work too hard looking at each account’s mix. The solution? A single measure to make you look at the accounts with the “holes”.
- I arrived at the number of product lines bought that are 5% or more of the total purchases at the account. Compute an overall average for this measure and index customers to that average. Roden created their averages by market segment as well to make this more accurate. Make sure you measure it for accounts with a minimum sales amount, like $20,000, or you’ll get skewed results from the erratic behavior of small accounts.
- Product mix per customer is most heavily influenced by joint conversion efforts by manufacturer’s reps and your own reps. You can also drive it with tie-in sales training for inside sales and counter sales coupled with incentives for certain products or simple incentives to raise the average line items per order. It can also be influenced by marketing programs that sense mix imbalances at accounts that probably should be buying products they are not, and sends automated marketing impressions to buyers. You can also drive it with job trailers, onsite branches for large projects, clam-shell carts and other rolling job carts, systems contracts, storeroom management, other forms of VMI and integrated supply alliances.
Take a look at the process map again. It’s a roadmap for optimizing your productivity. It will cause you to look in every corner of your business and apply your business system to help you automate things, catch exceptions, fix them, and create a scalable business. Every distributor can improve by using this tool.
The extended profit Triad Model contains key metrics for maximum profitability. You might look at some of these measures and wonder how to benchmark them to other distributors if the “PAR” report doesn’t cover them.
So benchmark these metrics branch-to-branch. Or, collaborate with other distributors. Or just use your common sense. When you see a warehouse picker who is picking only 30 line items an hour and your average per picker is 60 in the same basic job, you know you have a problem. When you call your buddies in the marketing group and ask them to measure the same things and your average is below theirs, you’ll probably consider putting in that wireless scanning system.
Here’s the way to consider the measurements in the extended Profit Triad Diagram.
- Are you measuring it?
- How well are you doing? How well is each branch doing? Each performer?
- What’s wrong? (Or right?) and where in the process is it breaking down? Why?