When B’s = $193,400 in Profit

With an eye towards a slow growth economy, recently we launched a three part series in Electrical Wholesaling entitled “Back to Basics”. The premise is that in a slow growth economy it is important to “tighten” the back of the house, identify strategies to improve sales productivity and diversify your business by seeking niche growth opportunities.

The first article, “Fine-Tuning Your Operations”, offered 16 ideas for improving your bottom line. Each of these ideas can help you incrementally improve profits.

Additionally, this is the time to review your price matrices.

Recently a client called to share the results from an engagement.

During the engagement, the client was asked, “When was the last time that you checked your “B” items vs. your 32 different customer categories?” Client answer: “About 14 months ago.”

When he checked it had been some 2 years and the mini project had been initiated had not been completed. This particular company has approximately 4500 sku’s in the “B” velocity code across the majority of their different customer categories. This translated into 4,500 sku’s times 32 different categories = 144,000 chances for something to be miss priced over that time span…..

One of the reason why the question was asked about “B” velocity items and not “A” items is that most distributors are very conscious about “A” items and generally price them for a shorter period of time.

Upon checking his pricing, 94% of the B items had some type of error that averaged approximately 4.9% less (in other words the cost prices were low) than what they should have been. Hence his “true net into stock cost” was incorrect, and since many distributors mark up from their “true net into stock cost”, there is significant opportunity for profit leakage.

After running some calculations, the owner’s comment was, “Boy am I glad you mentioned my B items…..It only cost me $193,400.00 in lost profits over 23 months for not following through on what you recommended. So what was the frequency you recommended that we should check A, B, and C’s? Also you were right within the last 90 days we have seen some items for about 1/3 of customer type’s change. The quantities of some items have decreased.”

What this last part refers to is one customer may buy a high enough quantity of an item that will convert that product into a higher velocity coded item and thus might be available for a greater discount. As a distributor you should be wary that when the overall market velocity decreases it may mean that some “A” items may become “B” items for particular customers and that the price discount should decrease.

Reviewing your price matrix and fine-tuning your operations can add dollars to your bottom line. When was the last time you reviewed your price matrix?