The goal of any company is to make money. Companies that fulfill orders make profits on the orders that they fulfill. However, not all orders are created equal; some are more profitable than others. Most wholesalers have a large number of suppliers, products, and customers, but only a small portion of these customers produce a net profit. In fact, almost twenty percent of these companies' customers are very profitable and--taken alone--account for over 200 percent of a company's profits. Just over half of the customers are break-even, and the bottom few customers cause the company to lose more than 100% of their current profits. This same information can apply to product SKU's, orders and line items, and vendors.
The benefits of shifting to a profit focus are that the company can make more money. This happens by growing the most profitable sections of the business and curtailing the least profitable (or loss making). In order to make the strategic decisions that are necessary to shift to a profit focus, a company must have net operating profit information available. Measuring profitability of customers, products, or supplier using gross margins or simple allocations of indirect costs can lead to poor decision-making and cost the company profitability.
For example, some customers who appear very profitable on gross margins may have very high credit check or rush order charges. Other customers may appear unprofitable because they purchase products that have exceptionally high order fulfillment costs, such as high picking or packing costs. An accurate assessment of indirect costs can allow a distributor to design and implement a profit improvement plan. Some businesses have already seen significant increases in profits as a result. One company wanted to know the impact of vendor rebates on overall net contribution of a product and the true profitability of the vendor. The company discovered that its customers did not value costly daily delivery services, so it eliminated these services and saved hundreds of thousands annually. The company also found that certain products were more costly to handle due to the receiving process. One option to correct this is to renegotiate with vendors for additional rebate dollars to compensate for the receiving process.
Profit analysis software is available to help analyze net profitability of products, suppliers and customers. It provides data to spur action to improve financial performance in the areas of customer service, warehouse operations, sales, executive management, purchasing and marketing.
A profit focus is not without pitfalls, however. For instance, not all customers fall into neat categories. Some purchase a mix of high-profit and low-profit goods and services. Implementing a profit focus runs the risk of alienating these customers, who may take both their low- and high-profit business elsewhere. Customer fee stratification, for instance, often proves unpopular in the banking industry and there are those who believe it discriminates against middle-class customers. Additionally, renegotiating existing contracts with vendors can be risky because of the repercussions both in terms of legal issues and in term of goodwill. Another point to consider is that the use of profit focus may end up creating an entire category of undesirable customers, and at some point, some other company will find a way to capture their business in a profitable way.