Torrington Supply Co. knows. Thanks to the inquisitive mind of Chairman and CEO Joel Becker and Chief Financial Officer David Petitti, they can run numbers that pinpoint to the dollar what percentage of gross margin on the average sale is profit - or loss - for any given customer. And they are able to use those numbers to improve profitability for both Torrington and the customer.
"I have a strong sense of order. I have to understand why things are happening," Becker says. "It's not enough to know that a customer does business with us. I want to know what it is about us that the customer likes."
Becker confesses to spending what he considers "an inordinate amount of time" putting together a comprehensive profitability-analysis system. His interest in tracking this kind of information was piqued by a panel discussion at an American Supply Association convention. He and Petitti subsequently read several books on activity-based costing. Petitti adapted the techniques described in a National Association of Wholesaler-Distributors publication to develop the formulas that would ultimately determine how much money Torrington would make customer by customer.
Becker is convinced that the key to successful distribution is knowing where the profit comes from and, by extension, where Torrington should concentrate its efforts. "With some customers you make money; with some you lose money. Knowing which is which is the name of this game."
Becker compares this approach to that used by many credit-card companies. If a cardholder uses his credit card often and makes timely payments, the company issuing the card will be very happy with him. And should he miss a payment by a few days and get slapped with a late charge, his chances of getting that charge waived are much better than if he rarely used the card or often paid late.
"The credit-card customer-service reps can immediately see how profitable you are to them," Becker says. "Then they either say, 'Forget about it,' or 'You have to pay that fee.'"
Real-time reality checkBecker realized that kind of real-time information about a customer's net profitability would be very helpful to Torrington's inside-sales staff as they took orders. He and Petitti worked with Eclipse to develop a way to deliver the data with a single keystroke. But once they had it, they were shocked to discover that some of the company's "best" customers were also among its biggest profit drains.
Becker points to a sample report on one customer (see figure 1). This contractor was buying more than $200,000 in materials from Torrington every year and paying in less than 29 days. And Torrington was earning a gross profit of almost 20% on these orders. "Yet we were losing a fortune on him!" Becker says.
The problem was that Torrington was making less than $3 a line - $21 an order - on this customer. "There is a fixed cost associated with every single order," Becker says. "What matters is the gross profit per order, not the individual gross profit per line item. We actually make the lowest gross profit percent on our most profitable customers. The secret is the size of the order."
Becker decided that the best approach to take with such a delicate situation was the direct route. Armed with the profitability report, he called on the owner and the operations manager of the customer company. "I told them, 'You're a great customer,'" he recalls. "'You've been doing business with us for a long time, and we love you. But we need you to do something if we're going to continue to do business. We need you to help us reduce our transaction costs.' And I specifically listed what I thought they could do."
The customers themselves were surprised. They realized that placing so many orders was undoubtedly costing them money, as well. They were happy to work with Torrington to reduce their shared business costs.
"They now place all their orders electronically," Becker says. "Most customers are surprised at the activity levels their business requires of us. It's a real win-win."
So far Becker has these conversations only with customers with significant opportunity for improvement. "I review the details of their activity with us over the last 52 weeks: how much business they've done; the gross profit we earned; the number of lines, invoices, returns, deliveries, counter pickups, direct shipments, everything. They forget about our costs for what they require of us. But when they see all this, they respond very well."
Fred Cohen, vice president/sales and marketing, is an avid proponent of such analysis. It helps his staff decide where their efforts are best spent. Some customers are primarily concerned about getting the lowest price. Others need problems solved or help in meeting deadlines.
"We try to determine what they want so we're not giving them something they don't want," Cohen says. "And we're not spending time with customers that we can't help."
Reading off the same pageThe new system also allows all Torrington's inside sales reps to treat all customers in the same manner.
"We could have a customer talking to two different sales reps and getting two different answers to the same question," Becker says. "I tell everyone that consistency is our friend. Anything we do for a customer must be done the same way every time."
These days, all Torrington salespeople can view customer information at a keystroke in a user-friendly format. (See figures 2 and 3.) The screen provides all the data on that customer. With these numbers and the sales negotiating and pricing guidelines on the screen, the rep knows how large a commitment of services or how liberal a discount he can offer the customer on the phone.
For example, the customer described in figure 3 really gets the red-carpet treatment, Becker says. "He's great; he's paying the freight. We don't charge him restocking fees, and we make delivery exceptions for him all the time. We'll call back a truck to make an emergency delivery for this guy; the other guy [see figure 2] will have to wait until tomorrow."
Torrington President Fred Stein concurs. "All this has helped our salespeople gain a heightened awareness of how they should spread their efforts around, where they should spend their effort and whether they're wasting their time with a particular customer."
As the sales staff has become more comfortable with the system, it has become more valuable to them and the company.
"You hear a lot of companies say, 'Our biggest asset is our people,'" Becker points out. "But our biggest assets are the systems that help our people do their best work. Good systems make ordinary people superstars."