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10 Steps to a More Profitable Supply Chain
Understanding customer profitability provides a foundation for better serving your best, and most lucrative, clients
Richard Davis with Grant Thornton
By Richard Davis
Does this story sound familiar? It's 7:00 p.m., your warehouse team has just finished their final picks for the evening, your fleet has been loaded based on standard routing calculations, and you're ready to pack up shop. Then that dreaded moment happens — a member of your sales team calls down to the warehouse: "Our best customer needs more 'x' by tomorrow or they'll go somewhere else."
It turns out, however, that the customer that made your people jump through hoops is, in reality, an underperformer from both a gross margin and gross profit perspective. In fact, unknown to the sales force or anyone else, this "best customer" has been in the bottom quartile of your customer portfolio for several years. Worse, that "critical" sale just cost you more money to process than it produced in profit.
If your distribution business serves a wide variety of accounts across a range of industries, then the question likely is not if this problem is happening, but how often.
The solution to this problem starts with a deeper understanding of customer profitability. It then requires that every team work hand-in-glove to not only execute core tasks — receiving, storage and shipping inventory — but more importantly know how to better manage the intricate network of vendors and customers, as well as each nuance associated with these relationships. Our experience working with midsize wholesale distribution businesses ($50 million to $500 million in revenues) has proved that balancing profitable growth is achieved when you put in place a logical, methodical and well-planned approach to optimizing your supply chain.
Below are 10 practical steps to help get you on the path to profitable growth.
1. Analyze historical trends
Historical transaction analysis can yield tremendous insight into how you have been interacting with your customers. This is your organization's demand profile — the series of indicators that your team can begin to analyze to determine strategies to improve customer profitability at the individual account or aggregate organizational level.
Regardless of your current technology platform, you might be surprised at how much data you actually maintain regarding the history of your relationships on both customer and vendor sides of the supply chain equation. Analyzing sales history is critical: It tells you what your customers buy, while analyzing purchase order histories reveals buying histories from vendors to meet your customer's demand.
This relationship is at the core of your purchasing and sales ROI strategy and shapes the buying behavior of both your procurement function and your sales department's behavior when interacting with your customers. Historical information, although not perfect, is almost always one of the best predictors for future activity.
2. Rank your customers and suppliers on gross margin
Rank both your customers and vendors based upon a straightforward top-to-bottom gross profit analysis of quartiles, then determine which groups account for the greatest percentages of margin. This step has many advantages, as it provides a structure to manage both your procurement and sales function activity in the future and can lead to improved processes that hold your teams accountable regarding customer and supplier performance. Further, posting these quartiles in a visible place in your organization creates transparency so that there is no ambiguity regarding which customers and suppliers have been profitable over time — and which have not, period.
Does this story sound familiar? It's 7:00 p.m., your warehouse team has just finished their final picks for the evening, your fleet has been loaded based on standard routing calculations, and you're ready to pack up shop. Then that dreaded moment happens — a member of your sales team calls down to the warehouse: "Our best customer needs more 'x' by tomorrow or they'll go somewhere else."
It turns out, however, that the customer that made your people jump through hoops is, in reality, an underperformer from both a gross margin and gross profit perspective. In fact, unknown to the sales force or anyone else, this "best customer" has been in the bottom quartile of your customer portfolio for several years. Worse, that "critical" sale just cost you more money to process than it produced in profit.
If your distribution business serves a wide variety of accounts across a range of industries, then the question likely is not if this problem is happening, but how often.
The solution to this problem starts with a deeper understanding of customer profitability. It then requires that every team work hand-in-glove to not only execute core tasks — receiving, storage and shipping inventory — but more importantly know how to better manage the intricate network of vendors and customers, as well as each nuance associated with these relationships. Our experience working with midsize wholesale distribution businesses ($50 million to $500 million in revenues) has proved that balancing profitable growth is achieved when you put in place a logical, methodical and well-planned approach to optimizing your supply chain.
Below are 10 practical steps to help get you on the path to profitable growth.
1. Analyze historical trends
Historical transaction analysis can yield tremendous insight into how you have been interacting with your customers. This is your organization's demand profile — the series of indicators that your team can begin to analyze to determine strategies to improve customer profitability at the individual account or aggregate organizational level.
Regardless of your current technology platform, you might be surprised at how much data you actually maintain regarding the history of your relationships on both customer and vendor sides of the supply chain equation. Analyzing sales history is critical: It tells you what your customers buy, while analyzing purchase order histories reveals buying histories from vendors to meet your customer's demand.
This relationship is at the core of your purchasing and sales ROI strategy and shapes the buying behavior of both your procurement function and your sales department's behavior when interacting with your customers. Historical information, although not perfect, is almost always one of the best predictors for future activity.
2. Rank your customers and suppliers on gross margin
Rank both your customers and vendors based upon a straightforward top-to-bottom gross profit analysis of quartiles, then determine which groups account for the greatest percentages of margin. This step has many advantages, as it provides a structure to manage both your procurement and sales function activity in the future and can lead to improved processes that hold your teams accountable regarding customer and supplier performance. Further, posting these quartiles in a visible place in your organization creates transparency so that there is no ambiguity regarding which customers and suppliers have been profitable over time — and which have not, period.
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