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Here’s Why Your Profitability Improvement Plan is Going Nowhere

Here’s Why Your Profitability Improvement Plan is Going Nowhere

August 8, 2018

Editor’s note: Hear more on this topic from Bates as he delivers a kickoff speech, “Benchmarking Profitability: The Analytics That Really Matter,” at MDM’s upcoming conference, MDM Analytics Summit 2018 on Wed. Sept. 19 in Denver.

In 35 years of working with distributors, I have seen the same unfortunate activity take place over and over. Firms genuinely want to improve their profitability. They are ready, willing and able to do better. However, they continue to work on things that do not actually have an impact on results. As a result, their diligent work goes nowhere in terms of higher profit.

Why would firms focus their attention on things that are unimportant from a profit perspective? The answer is straight forward: There is absolutely no agreement as to what the real significant drivers of profitability actually are.

Consider, for example, a typical industry meeting. It always starts with a firebrand motivational speaker. Typically, this is somebody who climbed Mount Everest on roller skates despite have a fear of heights. Everybody is pumped. After that, the attendees adjourn, kicking and screaming, to their appropriate breakout sessions.

The sales types hear a session that suggests sales is the true silver bullet for success. The inventory control folks learn that only lowering inventory can save the company from doom. Numerous other sessions follow a similar format.

Everybody returns from the meeting fired up. Alas, they are fired up about five different things. The spirit to improve is wonderful. Also, sales, inventory and the like are always important factors. The challenge is that the factors that drive higher profit are never put in context of “got to do, ought to do and nice to do.”

Everything remains the most important thing in the world to somebody.

A wounded ox?Here's Why Your Profitability (Aug 8, 2018)

Getting around this challenge without killing the underlying spirit for improvement is incredibly difficult. It requires:

  1. prioritizing the critical profit variables and,
  2. expanding the analytical base to outside information.

Prioritizing seems like it should be easy. It is simply a matter of placing the firm’s emphasis on what is truly important. However, setting such priorities inevitably results in somebody’s favorite ox being gored. Not a fatal goring, but a genuine wounding.

For example, it might be necessary to reduce inventory turnover to enhance sales performance. This is not a hypothetical situation, but a reality in many firms. The sales folks are enthusiastic, but the inventory control people feel like their job has less relevance or meaning.

When I was a young know-it-all — as opposed to the sophisticated lion in winter that I am now — I taught a session on profit improvement at a well-known distributor. I talked about the need to manage sales and gross margin. I suggested that inventory in this particular firm was an unimportant factor.

A charming young lady who was in charge of inventory management literally burst into tears. She felt I had just suggested she type her resume neatly. Since I was young and inexperienced, I announced we would take a break while I checked to see if I could get an earlier flight home.

This was an extreme situation. But suggesting that some things are of lesser importance will never be easy. A total firm context is essential.

Expanding the analytical base means looking at industry benchmarks to see how the most successful firms perform. In essence, it means an admission that all of the answers are not contained inside the firm.

Firms that can set priorities and use outside information have the potential to greatly improve their performance. It is something worth undertaking.

© 2019 Gale Media, Inc.

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