Brent Grover: Cutting Big Data Down to Size

Managing information overload.

What do you think about the “big data” that we keeping hearing and reading about?

1. Big data is a hoax, just another way to get businesses to buy more computer power.
2. Our company is looking for a software tool to help us get to the data we really need.
3. I give up! There is so much information and not enough time to understand it.

Colin Powell said,“Don’t be buffaloed by experts …who often possess more data than judgment.” One of the acclaimed military leaders of our time, General Powell, also stated that leaders are great simplifiers who can “cut through argument, debate and doubt, to offer a solution everybody can understand.”

What kind of leader is running your distribution company? Is your management team debating the value of customer profitability information? Do you accept that understanding your cost to serve can lead to higher profits without hurting service to customers? Are you arguing the pros and cons of adjusting sales compensation to reflect operating profit rather than gross margin dollars? Are you looking at how to apply strategic pricing in different ways depending on customer profitability?

Like other business leaders, distributor CEOs and other managers are overloaded with “big data.” An endless stream of purveyors offers new ways to obtain and “drill down” into more and more data. Various vendors offer tools to create colorful charts to present complex information. Software products may be able to help clean up the data mess, but there is no magic wand to provide the keen judgment to know what information to ask for. No software tools exist to empower leaders to quiet the data noise and come up with solutions that will really work to solve these distributor problems:

1. Pricing — Prevent rogue pricing where customers are quoted below-market prices.
2. Order size — Avoid orders that generate less margin dollars than the cost of processing.
3. Cost to serve — Provide only the services that customers value and are willing to pay for.

This article describes some ways you can simplify your data and make better decisions about  (1) Customers (2) Sales territories and (3) Customer groups.

1. Customers
The bewilderment of having so much customer information needs to be simplified:

• Use a simple CPA (customer profitability analysis) method to show you which customers are profitable and which ones aren’t.
• Figure out how much it costs you to process an order (cost to serve) for warehouse orders, direct shipments and counter sales.
• Get a handle on how much money you make, or lose, on various sizes of orders.
• Learn where you can reduce operating costs for certain customers (sales expense, credit card fees, freight cost) without making the customer unhappy.
• Do a strategic pricing analysis to find rogue discounting and bring those outliers up to market levels.

We have so much data about our customers that we don’t know where to start. What you need to know is which customers are profitable, which ones aren’t, and what to do about it.

2. Sales Territories
The crush of information we have about our sales territories does not readily explain why some sales reps generate so much profit and others don’t:

• Use a simple customer profitability analysis (CPA) to show you which customers and sales territories are making money for you.
• Using your cost to serve information, adjust your sales compensation plan to pay commissions only for profitable orders.
• Explore ways you can provide extra incentives to the sales reps whose territories are growing profitability.
• Make sure your sales team has market pricing guidelines and tools to increase order size and reduce operating costs for specific customers.

Many distributors delegate so much decision-making to their sales reps, but give them too little information, that the results are often disappointing. What you need to know is which territories are profitable, which ones aren’t, and what you can do about it.

3. Customer Groups
Managers can personally work with the sales force on only a handful of large customers. You need to work on the profitability of smaller customers as groups based on their profitability:

• Divide your customers into four groups. There will be two groups of large customers, profitable and unprofitable. There will also be two groups of small customers, profitable and unprofitable.
• Managers need to partner with the sales reps to work on large customers. The main objective for the large profitable accounts is to protect them. The goal for large unprofitable customers is to turn them around.
• The two groups of small accounts, profitable and unprofitable, must be managed by smart sales policies (including sales compensation) designed to make a profit while satisfying customers.
• Successful use of sales policies requires holding people accountable for following the company’s rules, rewarding them for good results and helping those who don’t achieve what’s needed.

Change your sales policies (sales assignments, minimums, commissions, freight allowances, etc.) for smaller customers to encourage profitable orders.

Distributor computer systems generate so many facts about the business that new software industries have sprung up to sell business intelligence (BI) systems and customer relationship management (CRM) products to help keep track of the data.

It’s nice to have all of this information at our fingertips but how do you know what to do with it? For distributors it’s all about building and keeping profitable customers. Apply your good judgment to your customer profitability data — and act with confidence! CS

Brent R. Grover is a nationally recognized distribution industry consultant, speaker and writer. He is an NAW Institute Fellow and has written eight books including Strategic Pricing for Distributors. Brent founded Evergreen Consulting, LLC in 2001 exclusively to advise companies in the distribution channel.

In Search of the Perfect Customer: Cost to Serve for Distributors was published by NAW in 2011.

His newest book, The Little Black Book of Strategic Planning for Distributors was published by MDM in 2012. Brent can be reached at brent@evergreen-consulting.com or 216-360-4600.

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