“Most companies lose sight, in the short run, of improving profits, and concentrate only on generating more sales,” says Al Bates, principal at Profit Planning Group in Boulder, Colo. “They lose sight of where the money comes from in that instance. Profit should come first, above sales. Profitability is a measure in improvement on the return on assets, and the goal is to get return on the investment.”

When looking at the prospect of improving one’s profitability, probably most distributors think they’re doing okay, and that they don’t need any help. But experts in the area of improving profitability disagree.

“I help them look at their numbers,” says Bates. “I look at the money they’ve invested, and the return they’ve seen on that investment, and put the numbers on the page. Most distributors are aware, in their hearts and minds, that they aren’t doing as well as they could. I help them, objectively, have that 'here I am’ moment, and make the tough decisions.”

Abe WalkingBear Sanchez also is a consultant/expert in the area of improving profitability. He is founder and president of A/R Management Group, located in Canon City, Colo., as well as a consultant who works with the Specialty Tools & Fasteners Distributors Assn.

“People want to be consistent [in their businesses],” he says. “...but things are constantly changing in the world of business. This area is a gold mine for them, but the people aren’t looking at it.”

Henry Camp didn’t have an “ah-ha!” moment, so much as he had an “ah-ha!” couple of months when it comes to realizing where the profitability of his company could be improved. Camp is president of Shippers Supply Co., a distributor of packaging products and supplies headquartered in Louisville, Ky.

“I tried to calculate my profits by invoice, and was able to figure that out, but then had a layer of costs, including my salary, that could not be attributed to any one customer or order,” he says. “The allocation of those costs was bothering me, and in looking deeper, I found a whole bunch of flaws in finding profit per product, per customer and per invoice.

“I built a picture of the current reality,” he adds, “and realized that the conflict was in the inventory, and by changing the rules in how we dealt with that, we were able to increase our profit.”

Looking for some tips and tactics on how to improve your distributorship’s profitability? Nothing can take the place of personalized service when it comes to looking at the numbers, but Bates and Sanchez have a few ideas for distributors that are considering a shift, for the better, to their company’s bottom line (in no particular order):

Raise prices: “There are really only three ways to improve your profitability, and the first is by increasing your prices [second and third are selling more and driving down costs of doing business],” says Sanchez. “Of course, [raising prices] may not be good when considering your competition, or your customers’ reactions, but it does help the bottom line.”

Bates also advises distributors to take another look at their pricing system.

“I spend a lot of time telling distributors that their gross margin is too low, and that they don’t understand their pricing and where they can get more money from it,” he says.

Distributors need to go through their products and find the pricing flexibility among them, he suggests. Of course, going through 20,000 items is a lot of work, but the little opportunities discovered will add up.

“There’s no substitute for looking at all the SKUs, one at a time,” he says. “With commodities, the importance is still focused on prices, but you can add to the prices of the complementary products without ripping off the customers or raising their irritations.”

Be objective when looking at those price systems, Bates advises.

“Customers will always tell you when your prices are too high, but will keep quiet when other prices are too low,” he reminds. “Raise those prices, and you’ve got more profit.”

Sell more: Sanchez considers the credit department a huge asset when looking at selling more products: extend more credit to customers, and you’ll sell more.

“Look at the product’s value at the time of the sale,” he says. “I had one [client] who was doing $30 million in sales, and wrote off only $5,000 last year in bad debt. But ask him, did he have the ability to take on more business without it costing his company more? Yes. Was he turning away customers because their credit didn’t qualify? Yes.

“I advised that he increase his bad debt percentage, and sell to everyone who wanted to buy from him,” Sanchez explains. “Following that, he went from a 5 percent to a 45 percent profit margin increase, just due to taking chances with the customers they previously considered 'bad.’”

When distributors think of credit now, Sanchez says, they think of credit in the 1950s and their percentage of bad debt. But when looking at a customer, they should consider more the customer’s profile, past performance, and the unused capital and turn time in the warehouse.

“Based on the customer’s business type, who they are and how they do what they do, distributors should extend a credit line, not limit, to allow them to buy,” adds Sanchez. “Ask them for 25 percent down, and extend a line of credit for the rest. Taking this chance is directly related to profitable sales. You’re getting rid of stuff in your own inventory, and clearing out your warehouse.”

Distributors should say yes, and bad debt and profit goes up, says Sanchez. Turning away a customer generates bad word of mouth; and the rejection denies profitable sales to your company.

“The true risks are only a small percentage of the people you’ll be selling to,” advises Sanchez. “Learn to identify them, and put them on credit hold, but don’t get in the mindset that they’re trying to get out of paying you. Think: it’s not collections; it’s completion of the sale.”

Repeat sales are the most profitable, Sanchez reminds distributors. Keeping customers current keeps sales coming in.

Cut back on payroll: “In every distributor’s business, it comes down to two things, and one is a payroll that is out of control [the other is raising prices],” says Bates. “It’s difficult to decide who to fire, but it needs to be done for profitability’s sake.”

Bates explains that this action is usually where business owners tend to lose their nerve, and will worry about other stuff that is easier to deal with—the stuff they can get their hands around, “but not the big gorilla in the room,” he says.

Better manage your inventory: “Two things impact your profitability: receivables and inventory,” says Camp. “Both are substantial investments, but your inventory is really the only thing under your control.”

Camp advocates a “don’t batch orders” philosophy that flies firmly in the face of how many distributors control their inventory. To him, orders made more frequently, with less bulk product, is the way to go.

“We believe that there is a way to hold less inventory and not run out,” he says. “We’ve changed our rules and broken assumptions to make this work.

“Distributors tend to work around three tenets that have them keeping extra inventory: they forecast; they assume that replenishment times are long; and they worry over the variability of suppliers getting them product,” he explains.

Camp keeps his inventory low by, first, ignoring the forecasts, “unless it’s a new product. Then you have to have a starting point,” he says. “I try to have my customers have as little inventory as possible. If they buy a little at a time, their orders are smaller, and I can see their demand and how it may change. That is actual usage data that breaks down better for our inventory.”

Camp then takes that more-accurate customer data back to his suppliers, and can send in his orders earlier, anticipating how much product he’ll need in his next order. This kills the lead and replenishment time, he says, and gives his orders a head start in the suppliers’ queue.

From there, the variables of the suppliers are less of an issue, and Camp is able to worry less about the days the order spends getting processed, produced, shipped, and just sitting around waiting to be taken care of.

“My 'safety stock’ is lessened because of these three things, and there is less stuff in the pipe at any given time,” he says. “I’ve reduced my inventory by a factor of three and increased my reliability to the customer, resulting in more sales.”

Reduce the cost of doing business: Opines Sanchez, “Managers not looking for ways to constantly improve the ways of doing business are not managers but, at best, administrators, and at worst, bureaucrats.”

Get better at what you do is the best advice that Sanchez can offer.

“Monitor what goes wrong in the processes, from supplier, to you, to the customer,” he says. “You will find areas of improvement. Talk to the credit department, too. They can tell you who’s dragging down the company. From the back of the parade, they can go in and find the areas of improvement.”

“Even after 24 years of sharing how profit margins can be increased, people still fall back on their day’s sales outstanding, and their percentage of bad debt,” says Sanchez. “The real money is how you say 'yes’ up front, and finding opportunities for improvement in the business cycle, driving down everyone’s costs.”

Says Bates, “I’m a hard-nosed profit guy, and can make the decisions easily. I line up all the subjective factors, and ask them if those factors are worth them not making as much as they could be.”

For Camp, who does business in an industry that, he says, “all you need is a garage and product to get into,” his philosophy on inventory control is the safest bet to improving profitability.

“It’s difficult to get a return on your assets,” he adds. “The more inventory you have, the more exposure you have to it becoming dead inventory. That inventory is the only aspect of the business that is entirely in your control, and has everything to do with your success.”

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