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Growing or Shrinking

Imagine getting a call from one of your customers who says: “Sorry, but we have decided to go elsewhere and start purchasing our necessary products from another supplier.” Although not an uncommon situation in the world of our distribution clients, the only fact that may slightly change is that the call from your customer never came and yet that customer is now your past customer. So what can you do to prevent this case scenario from happening?

What is the recommended information needed to be evaluated? How often do you review your customers, examining trends in their business and their impact on you? How quickly are you able to produce this information and react to it?

A similar format is used to analyze the information for the next four analysis tools. This analysis is done from two main perspectives; gross sales against cost of sale. A minimum of 12 rolling months should be used although 24 or 36 are recommended. Numeric data output is good as supporting data although a chart represented as a line graph would speak a thousand words – or numbers in this case. The numeric section should contain the columns for each month (12 to 36 months) with four horizontal lines showing the sales for the month, the cost of that sale, the profit amount (sale less cost) and the profit percentage. The chart section should display a line graph with one line charting the sales by period and the other line charting the cost of sale. At a glance, while reviewing this chart, you should be able to determine how the top line (sales) is moving against the cost. A healthy trend should show the top line increasing while cost trailing behind or even going the opposite direction – pointing to higher profits. An alarming trend is that of the top line (sales) decreasing and / or cost increasing.

Below are some of the necessary informational tools you need to educate yourself prior to deciding on the next course of action:

1. Customer profitability analysis
This tool is used to analyze your customers either one customer at a time or globally looking at all of them. When reviewing all your customers, you may want to consider analyzing the data by different parameters such as industry segments, regions, descending by dollars or profits and more.

2. Main product class profitability analysis
This tool is used to analyze your data by inventory main product classes. Consider reviewing it by either looking at all product classes for all customers as well as analyzing it per customer. This will display trends in what classes are growing while the ones that are shrinking.

3. Sub product class profitability analysis
This tool is identical to the one above, except the analysis is by sub class within the product main class.

4. Item profitability analysis
This tool looks at the data by item at a time. Although it can be quite a lengthy report, it is necessary to “drill down” to further analyze the trends displayed in the reports above.

5. Payment trends analysis
This tool is quite different from the ones above. It looks at the average number of payment days per month for each customer. As an example if one of your customers is on net 30 days terms, yet the trends are showing that for the past several months they are taking longer to pay their invoices – red flag should come up.

These tools are quite powerful in enabling your organization to track the behavior and trends of your customers. Computers and proper software are great in generating and dissecting such information. However, maintaining great relationships and providing your customers with great service is the key to keeping your customers happy and your business growing.

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