News from the Safety Equipment Distributors Association

December 2005              return to the newsletter contents page Driving Sales Volume: Thinking Inside the Box by Dr. Albert D. Bates
	One of the oldest adages in the business is that “sales solves all problems.”  The reality is closer to “sales sure helps with a lot of problems.”  Either way, there is no denying the importance of sales volume in impacting distributor profitability.  Financial benchmarking results compiled for SEDA and in other distribution industries indicates that the most profitable firms in almost every industry are those that are able to grow slightly faster than the industry as a whole.  The obvious problem is that every firm cannot grow faster than average.

The quest to grow “faster than the other guy” has lead most firms to look outside the firm’s existing operation for that growth.  Such an external view inevitably focuses on new customers.  Since every other firm is looking to add the same new customers, the process is time consuming, expensive and difficult.

Analysts have argued for years that a more profitable approach is to focus inside the firm in driving additional sales volume from existing accounts.  The only problem with that logic is identifying where such opportunities arise.

This article will examine the profit opportunity associated with existing customers from two perspectives:

• The Sales Drivers—A review of the two key pressure points in generating additional sales from customers.

• A Sales Growth Program—Guidelines for ensuring that the entire organization is focused on maximizing sales from existing operations.

The Sales Drivers

SEDA members operate using a low transaction value/high transaction count model.  Stated somewhat differently, the average invoice value is small and this challenge is overcome by processing a lot of transactions.  Data from the PROFIT Report, summarized in Exhibit 1, indicates just how transaction heavy the typical firm in the industry is.

As can be seen in the first column of numbers, the typical firm processes 23,810 orders per year.  Each order consists of 3 different line items with an average line value of $140.00.  The net result is a massive 71,429 lines processed to generate annual sales of $10,000,000. 

Within this workload-intensive model there are two key drivers of sales:

• Average Line Value—The dollar amount of each item that is purchased at one time.

• Lines per Order—The number of different items that are included on each order.

Managing these factors can create important increases in sales, even if the improvements are extremely modest.  The final column of numbers in Exhibit 1 demonstrates this by adding one additional line to each order and also increasing the average line value by one percent.

As can be seen, the result is that sales volume rises to $13,466,667, an increase of 34.7%.  This is an impressive sales increase considering that the firm did not have to increase the number of customers serviced or even the number of orders generated during the year.  This means that the sales increase had a very large positive impact on profit.

Clearly, the firm had to process 23,810 more order lines.  However, since this was done with the same number of orders, some significant order processing economies should result.  Of greater consequence, the increase in the order line value should not have resulted in any increases in expense as there was no greater workload required.

In short, sales generated through a process of incremental growth with existing accounts have the potential for major improvements in profitability.  The challenge is how to organize the firm to produce such increases.

A Sales Growth Program

Talking about an internal sales growth program is much easier than implementing one.  In reality, such programs need both a measurement system and an action plan for continuous improvement.

Measurement System—It continues to be true that if you can’t measure it, you can’t improve it.  With regard to factors such as the average line value and the number of lines per order, measurement systems are often woefully inadequate.

These metrics not only need to be measured at the total firm level, they have to be measured and monitored by both individual sales rep and by individual customer.  As only one example, proprietary research conducted by Profit Planning Group indicates that the number of lines per order may vary as much as fifty percent between different sales reps, even after controlling for differences in the customer base served.  Without specific information on such variances, improvement is impossible.

Action Plans—Improving the number of lines per order and the average order line value requires two very different mind sets as these are two very different issues.  They also exhibit two very different degrees of difficulty.

Increasing the number of lines per orders should be a relatively easy undertaking, or at least a less-difficult one.  The essence of increasing the number of lines is add-on selling, which is fundamental to the very job description of a sales rep.  In addition, the firm can ensure that customers are fully aware of the range of products being offered.  Further, the firm can make assortment changes to meet the requirements of customers.  The net result should be an opportunity for one-stop shopping on the part of customers.

Increasing the average line value is a much more problematic adventure since customers are notorious for purchasing the quantity they desire, not the quantity that makes distributors more profitable.  However, the frequency with which customers order, and the resulting amount ordered each time, is controllable with some degree of effort.

Customers are notorious for placing more orders than they should.  The result of this is not only lowered profits for the distributor, but excessive costs of operation for the customers themselves.  Through an educational process, it is possible to work with customers to change their buying behavior so that they purchase somewhat less frequently and in larger quantities each time.  Such a change is beneficial for both parties.

Moving Forward

There is an on-going need among SEDA members for adequate sales growth, a point which every firm understands.  What is not so well understood is that all sales volume is not created equally.  The economics of the firm, as demonstrated in the PROFIT Report, clearly favor generating growth via enhanced sales to existing customers.  Firms must begin to place greater emphasis on the concepts of putting more lines on every order and increasing the average order line value. 

About the Author: Dr. Albert D. Bates is founder and president of Profit Planning Group, a distribution research firm headquartered in Boulder, Colorado.

©2005 Profit Planning Group. SEDA has unlimited duplication rights for this manuscript.  Further, members may duplicate this report for their internal use in any way desired.  Duplication by any other organization in any manner is strictly prohibited.

A Managerial Sidebar On Order Economics

Firms sometimes lose sight of just how fragile the economics of the firm can be.  With the typical SEDA member generating $10,000,000 in sales, it is easy to overlook the fact that the revenue is generated one order and one line at a time.  Information from the PROFIT Report indicates just how easy it is to let profits slip away at the order level: 

With a net profit of only $4.20 per order, just one customer return wipes out the entire profit earned on five to ten orders.  Similarly, at only $1.40 in profit per order line, even the slightest problem in locating items and picking them eats up the entire profit on the line. 

© 2005 Safety Equipment Distributors Association

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Important links from this article

Profit Planning Group

Order the SEDA PROFIT Report

Notes

The SEDA PROFIT Report helps member distributors benchmark their financial performance against industry averages. Participating firms receive an individual critique of their operation which lays out a specific plan for improving company financial results.