Wholesale Diamond
Profit Increase: 4 Steps to an Instant Profit Increase in Large Wholesale / Distribution Businesses by David Diamond
Have we forgotten how to make a profit? The small businessman considers every sale to ensure a profit is made. Large organisations have bought powerful ERP Inventory Control systems to manage their massive numbers of sales transactions. However these systems have no emotion and are happy to sell at low profit margins. The more complex the systems – the more places there are for profit to hide. A large wholesale or distribution company could have 400 thousand products and 30 thousand customers. That gives a possible 12 billion selling combinations. Of these maybe only 100 million combinations actually sell. Is the profit margin maximised on all of these sales?
We aim to show how clever management of your commercial data can identify the under achieving sales and implement instant and substantial profit increases.
Customer Segmentation
Firstly we need to get back to basics and understand our customers. Different customers have different needs, wants and expectations. We therefore need to segment the customer base into different types and sizes. However, we need to be careful that we don’t stereotype a customer based on what they buy and how much they buy. If a customer was a large corporation and only bought one type of product, we may fail to identify their potential spending power. Don’t however get hung up on getting the classification perfect. Often the account owner has a gut feel about the type and potential size of a customer. We can revisit this later.
Product Discount Groups
We now need to classify the products. The wholesale industry often works from Trade Price lists published by the manufacturers. These Trade Price lists are usually set very high, which allows the wholesaler to offer a substantial discount. However, different manufacturers have different definitions of ‘high’ and there is often little consistency within a single manufacturer’s range. Products are usually grouped into product ranges so that a single group discount can be applied. We would suggest concentrating on the groupings that support say 80% of customer spend. This may result in several hundred groupings. Be careful however that applying a single discount to all parts in these groups doesn’t result in some extreme margins. (This will be the subject of a future article)
Identify Low Achieving Sales
Now break down the sales history into the customer and product combinations using a process we call ‘micro-segmentation’. This results in millions of Customer / Product micro-segments. By grouping the like combinations together, we can identify the under achieving sales. That is not necessarily ‘low margin’ sales, as we need to compare the sale with the margin that is achieved by the rest of the customers in that segment. Therefore a 20% margin for one segment may be good, but a 20% margin on another segment could be terrible. Compare the margin that would be generated from the system held discount with the actual margin. This needs to be done because price overriding is commonplace and sometimes the very low achieving sales are overridden. The beauty of this is that most of the time these are not high profile product groups and the customer is not even aware of the great deal that they have been getting.
Watch the profit increase – instantly!
Each individual low achieving sale may only be under achieving by a few pounds, but add say 300,000 of these together and the resulting figure can be enormous. The majority of these sales are driven from the system held data – therefore fix these high discounts and watch the profit margin step up – instantly! A review with one wholesaler identified a seven figure profit opportunity on this initiative alone!
This is just one of many initiatives offered by ‘Maximise Your Data Ltd’ – ‘Unlock the Profit Potential in Your Commercial Data’. Visit us at http://www.maximiseyourdata.co.uk to learn more.
About the Author
David Diamond has spent 25 years managing data in Companies ranging from Blue Chip Aerospace Manufacturing, through Automotive Component Manufacturing & Distribution, to Business to Business Wholesale. During this time it has become increasingly clear that most businesses do not exploit their existing Commercial Data to maximum benefit.
Maximise Your Data Ltd has been set up to help complex organisations exploit the power in their Commercial Data.
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January 12, 2012 1:05 am
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