Many distribution businesses typically operate in a range of 3-5 percent net profitability, and tend to be pretty happy about it. But in the economic conditions today, that may not be enough to manage economic volatility (i.e. energy costs, inflation).

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Some distributors are quietly operating in the 10-15 percent net profitability range because they have changed the mindset and processes in the company to get there. When a downturn reduces profitability by two points, it has a significantly different impact on the higher profit-level company.

Last week I participated in a two-day conference focused on profit improvement, with presentations by Brent Grover of Evergreen Consulting, Bruce Merrifield of Merrifield Consulting, Jonathan Byrnes of MIT, Mike Emerson of Indian River Consulting, Margaret Reynolds of Breakthrough Masters Unlimited, and Randy MacLean of WayPoint Analytics.

This is an all-star cast when it comes to addressing process improvement in wholesale distribution companies (and most are long-time valued contributors to MDM’s content)! The two common threads from all the presentations and the panel I moderated were:

• Managing beyond traditional product-focused and sales-driven financial metrics is critical in post-recession markets. A key differentiator today is the ability to implement process improvement – in sales, marketing, pricing, profitability.
• Cost-to-serve has largely been either ignored, rejected or too complex (i.e. activity-based costing), but is critical to understand at customer, product and vendor levels.

The conference highlighted a mix of process shifts and software tools that are pretty straightforward, but very different than the conventional business models that define virtually every sector of distribution. Once you digest the core findings of Jonathan Byrnes’s decades of research into profitability – that nearly 40 percent of the average company is unprofitable, and 20 to 30 percent is so profitable that it provides all the earnings and subsidizes the losses – then it becomes easier to see how to get past historical assumptions and start shifting resources to make a large bottom-line difference.