Lean principles state that to eliminate waste and optimally use resources, we should spend more time on customer-value-add (CVA) activities rather than business-value-add (BVA) and non-value-add (NVA) activities.
Based on the Lean logic, we can call CVA the excellent business we must stretch and protect, or the “business we want to do.”
Customer relationships that are important but less profitable, which we must examine and develop, can be the BVA, or the “business we have to do.”
Finally, the unprofitable business with less or no potential that we must elevate is the NVA, or “business we don’t want to do.”
As distributors seek profitable growth, the SPEED (stretch, protect, examine, elevate and develop) tool kit will be handy. Let us explore each of the five tactics in depth.
STRETCH: Increase existing business with your top 50 key customers.
A gap analysis will help you identify account penetration opportunities. A gap analysis looks at what an existing customer is currently not buying from you and identifies new opportunities with them. You can perform this at a product category level (customer is buying only three of the seven product lines offered), geography level (the same customer buys the product in Houston and Dallas but not in Austin and San Antonio), and so on.
The salesforce must understand what they can do to gain more business from your top 50 existing customers. Mostly, this means adding dedicated additional resources for large, high-value customers. However, you should answer these questions before investing additional resources:
- Do the customers value and use the additional resources?
- Will additional services convert this customer into a less profitable customer in the long run?
PROTECT: Core customers (those that are high in volume and profitability) should be protected and provided high service levels.
Often, when customers get beyond a specific sales volume, we tend to give them better pricing and additional services. We can provide them better pricing as long as we do not discount value. Ensure the current business is secure and appropriately priced, and do not let competition take over. A customized loyalty program is one way to tighten the relationship.
Here is an example of how a distributor created a loyalty program to protect customer profitability and service value:
EXAMINE: Unprofitable customers should be studied to understand why they are high cost to serve and a drain on profitability.
Re-evaluate these existing business relationships. Potential actions include:
- Raise prices, especially on slow-moving, not-so-profitable items.
- Educate customers on the cost to serve through creative communication.
For example, an industrial distributor used a “Documented Cost Savings” approach to reduce costs in the transaction process with customers. A particular group of customers placed two to three orders each week. The distributor documented and quantified all the costs involved for the customer – ordering cost, product receiving costs, inspection and put-away costs. The distributor presented the document with the cost savings to the customers and educated them on higher costs incurred when placing an increased number of low-volume orders. This cost-driven conversation made their customers’ ordering process more efficient. The customers now placed one to three orders each month. This creative process reduced costs for both the customers and the distributor.
- Examine customers’ overall profitability against individual product line-level profitability to understand improvement opportunities. For instance, if a customer buys one product line in high volume, you may want to discuss with the supplier some potential targeted rebates based on volume and cost to serve. In this case, the customer is more important to the supplier than the distributor.
ELEVATE: Reexamine the relationship with customers that buy at low prices and access all the services they can.
Distributors often understand these customers and price them high to make them profitable or eliminate them. Appropriate strategies to address such customer relationships include:
- Increase prices to make these customers more profitable or move them to lower-cost-to-serve business models.
- Reassign customers to ecommerce, inside sales or house accounts.
- Review items purchased by customers and move them to alternate products
- Move items that you stock for these customers to a non-stock or an order-as-needed status
DEVELOP: With certain customers, your sales force should spend more time to understand why they are not buying more.
They should also devise mechanisms to drive down the cost-to-serve. Your sales force must establish a better tracking and follow-up system, such as a sales pipeline or customer relationship management program, with these customers to better understand their motives or interests. These customers are often high volume, low margin and high cost-to-serve. Customize the value proposition accordingly while meeting company revenue and profitability goals.
Learn more about customer stratification in the NAW book, Customer Stratification: Best Practices for Boosting Profitability.
Taking a targeted approach using the SPEED strategies will help you get to your profitability and sales goals faster.