On May 1, in co-operation with the Pacific-Western region, we completed our second "Essentials of Profitable PHCP Distribution" workshop. This one in Palm Springs was our largest class ever and included an eclectic mix of 46 principals, executives, branch managers and relatively new employees. In presenting the program, Dr. Kathryne Newton, our traveling professor, generated the strongest responses and most enthusiastic table talk from two areas that are worthy of a closer look.

The strongest reaction came late in the course from the surprising increase in profit a company can achieve from a 1% improvement in pricing, cost of goods sold, unit sales and operating expenses. Assuming a 2% net profit before taxes, returns look like this:
1% Improvement
Profit Increase
Pricing 47.5%
Cost of Goods Sold 37.5%
Unit Sales 10.0%
Operating Expenses 11.5%

After looking at the results, participants developed several recommendations that could generate 1% improvements. Suggestions included learning how to avoid giving away greater discounts.

The other major reaction involved learning the negative impact of misunderstanding the difference between margin and markup. After completing some simple calculations and practicing using the markup/margin chart, participants calculated the loss that results from mistakenly thinking that a 25% markup yields a 25% margin on a product cost of $750,000.

Results looked like this:
33% MU Yields a 25% GM -- 25% MU Yields 20% GM
Sales 1,000,000 -- Sales $937,500
Cost of Goods -750,000 = -- Cost of Goods -750,000 =
Gross Profit 250,000 -- Gross Profit 187,500
Operating Exp. - 229,000 = -- Operating Exp. -229,000
Net Profit Before Taxes $21,000 -- Net Loss Before Taxes ($41,500)

The benefits of this type of learning go well beyond the simple "gee whiz" effect of the numbers. Participants expect that wholesale employees in sales and other customer contact positions, who previously saw no problem in giving extra discounts because "margins are so large anyway," will begin to appreciate the importance of knowing the numbers. In addition, no one completes the seminar believing the gross margin goes into the owner's pocket!

The critical need for this type of knowledge was reiterated the next morning when PWDA educational keynoter, Rich Schmidt, gave the room of 150 execs a quick five question gross margin test. He said that in his experience, the 16 people who got all five answers right is about average!

The Foundation will continue to improve and strengthen the Essentials program, which we believe is beginning to make a powerful and profitable impact on those who are using it.

Visit www.asaef.org for more information.