Quality of Sales - The Key to the Profitability of a Wholesale Distributor

A lot of wholesale distributors I've worked with over the years have had a common business plan. They wake up in the morning, buy something, warehouse something, sell something, ship something, hope they get paid, and wake up the next morning to do it all again. There are certainly better ways to plan and secure the financial future of their companies. Let's discuss one of them, the quality of sales.

If you can picture a P&L statement, we start with sales. From sales we subtract our cost of goods. What's left is gross margin or, if your prefer, gross profit dollars. Then we start looking at expenses. Sales, warehousing, delivery and general administration expenses are detailed first. When subtracted from the gross profit dollars, we have the operating income line, or EBIT.

If we're part of a larger organization, we then render unto Caesar what is Caesar's, through a line on the P&L called corporate allocation. We also track interest expense, and a few things only accountants would understand. Subtracting these expense areas, we end up with pretax income.

There are four ways we can enhance pretax. One of the ways is to reduce operating expenses. Any manager worth his salt, continually looks at ways of saving money in the organization. Any savings, assuming the rest of the P&L stays the same, will fall to the pretax line. My experience has been that overall, companies are pretty good at controlling expenses - to the quality of their sales.

There is, however, a strong caveat to expense reduction as a way of enhancing profitability. If we go too far, we erode our goods and services package to the point where customers no longer want to do business with us.

The second way that we can enhance pretax, is to charge more for our products. Any increase in margin dollars, minus any commissions we would be most happy to pay, would immediately fall to the bottom line. Again, we're assuming that nothing else changes in the P&L.

Though selective price increases on non-velocity items can help, the long-term answer to increasing margin is selling our full line of products. The value added along with the commodity items. Teaching the territory sales force through quality product knowledge training and solid territory management practices, the importance of adding profitable invoice lines, will dramatically increase the drop size, the gross profit dollars per stop, and in most cases, the gross margin percentage. (See the "client profitability numbers" link from the homepage.)

Again however, there is another strong caveat. There's only so far you can go in solving your profitability issues by raising prices. The competitive nature of the marketplace will control pricing on each individual item. Again, the key is selling the full line.

The third way you can enhance pretax is to buy better. It's why many distributors belong to buying and/or marketing groups, and have a purchasing staff, whose mission is to stock a breadth of line and product mix which will satisfy the segments of the market they choose to service. Those items will be the best combination of value, brand recognition, quality, price and manufacturing support.

One of the key components of strategic planning for distributors is to create a perpetual motion machine between our product mix and our customer base. Stocking what we can sell, and selling what we stock.

Again, there is another caveat to relying too much on buying better as our salvation to profitability stress on the company. I find this as a common theme with "distressed" distributors. They will buy a truckload of individually quick frozen kumquats, because they are $10.00 a case off, and there's a $5.00 spiff to the sale rep. Then they find out that they don't have any customers that will buy them.

Therein lies a potentially serious problem with purchasing and inventory management. Highly distressed distributors will end up with an inordinate amount of their assets tied up in product they think they can sell, instead of items they know they can sell. Eventually, they have so much money tied up in dead and slow moving inventory, they don't have capital to restock items that do sell. The result is, that their service levels drop to a point, where they no longer can compete effectively in the marketplace, and their future is very precarious indeed. But, everything else being equal in the P&L statement, buying better is one of the three ways we can enhance pretax.

Finally, the last way is to sell more. Right? Wrong, if we don't look carefully at the quality of those sales. Economics 101 tells us that gross sales volume is not an indicator of the profitability of a company. Only the size of the company.

Manufacturers, who are companies that basically make something from nothing, have margins that distributors will never see. Gross sale drives these companies, and the distribution of the products to their customers is just another expense line on their P&L. We do not enjoy that luxury. We simply buy finished products in great big trucks, warehouse it for the shortest period of time we can, and then ship it out in little trucks to someone who uses the product up. Completely different businesses.

If we as distributors chase sales at all costs, we will stop a truck 200 miles from the building to deliver one case of widgets. The net result is that we'll generate a little bit of gross profit dollars, but we will drive the operating expenses through the roof to deliver them. Another observed problem with highly distressed distributors is their willingness to chase gross sales volume, figuring the bigger they are, the more profitable they'll be. Or that someday, the increase in volume will magically cover the losses. The strong caveat here, is that it isn't necessarily so. It is quite possible to sell yourself into oblivion.

To work on the quality of your sales, here's a little exercise. Take last year's income statement, and add up all of your expenses. Then divide those expenses by the number of deliveries you made last year.

What you'll come up with is an internal benchmark of what it costs you to make a delivery in total operating expenses. I call this the "line in the sand". Then look at the gross profit dollars per stop on each individual account, and see where they fit against that line. They will either be above or below the line. Be sure to use your common sense when you analyze. Some examples:

• New accounts need some time to mature, but should be put on an aggressive penetration plan. (See the "Distributor Selling Skills" course outline link from the homepage.)

• In some industries customers get two deliveries per week. A large order at the beginning of the week, with a fill in at the end of the week. Average these out.

• If you have a national account relationship, there always seems to be one location that's too small to service independently. But, as part of an average of all the locations, it works.

• If Joe's too small, but his nephew George is a whale, and if you say goodbye to Joe, George will leave too... As I said, use your common sense.

It's like filling a glass of water. The glass is the cost of making the delivery in total operating expenses. The water in the glass represents gross profit dollars on that stop. Our problem as distributors is that we're simply delivering too many half full glasses of water.

Dedicate time and effort to teaching the sales reps and sales managers how the business works. Help the reps to organize and manage their territories to gain productive selling time, and teach them to sell the full line of products to fill the glasses of water. Get your manufacturers and brokers intimately involved in the process, and share your strategic marketing plans on product management with them. The easiest account we have to sell is the one we already have, and much of our sales effort should be spent in maturing the drop size and gross profit dollars per stop in our existing customer base.

By the way, once you fill the glass, but continue to sell the account, water starts flowing over the edge of the glass. Thinking back to the P&L, since all of the expenses have been covered, the water flowing over the edge of the glass falls directly to the pretax line.

Enlightened 21st century distributors are now looking carefully at the quality of their sales, by tracking the "direct contribution to pretax by average order size" as a key method of monitoring and enhancing the profitability of their companies.

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Management consulting, time and territory management training, territory sales training, sales management training, purchasing and marketing training, and broker and sales agent training, in the wholesale distribution, foodservice distribution, and manufacturing communities