Prologue: A Tale of Profit Erosion
Sam missed his sales quota last quarter. He knows he’ll have to really hustle to make his numbers this quarter. Fortunately, the pipeline looks healthy. Unfortunately, the company is clamping down on Sam’s most effective deal-closing tool: generous discounts. With net margins falling to a new low last quarter, management has set strict limits and special approval requirements on discounting. Sam now relies even more on other sweeteners he has used successfully, such as offering expedited delivery, special handling, and flexible fulfillment (e.g., customized lot and pack sizes). Leveraging these, he closes a couple of dozen deals and exceeds his quota, as do many of his sales colleagues. Success! Everyone is happy — until the CFO crunches the numbers at the end of the quarter and discovers that while revenue exceeded goals, EBIDTA1 declined to a new low, despite meaningful reductions in discounting. What happened?
While Sam was busy figuring out ways to close deals under the new policy constraints, major supply chain issues were occurring. Severe storms in Texas and resulting power outages forced the company to shut down its Texas regional distribution center (DC) for several days. Orders for customers in that region were fulfilled out of other DCs at substantial extra cost due to added mileage and expedited out-of-area shipping.
The same storms caused a prolonged plastic shortage (due to plant shutdowns), a vital ingredient of key products for the firm. To meet the demand for upcoming orders, the sourcing team had to scour the globe and compete with others for scarce supplies of plastic, driving up input materials costs. Simultaneously, the plastic shortage caused a surge in demand, as buyers shifted away from competitors who were facing more severe stock shortfalls. The remaining DCs all had to work overtime to keep up with increased demand. Furthermore, an increase in custom lot and small pack size orders drove additional warehouse labor overtime, causing underutilized truck space, and increased less-than-pallet excess inventory. Taken altogether, these additional costs more than offset the savings from reduced discounting.
Sam and his fellow salespeople were not fully unaware of the impact of these events. They had heard about the outage at the Texas DC but had no visibility into what products or how customer locations were being impacted. They also had heard rumors of plant production problems and were aware that additional effort was required to customize the lot and pack sizes. But in all these cases, Sam and his fellow salespeople lacked the specific data needed to make more informed decisions about what services and delivery promises to offer and to which customers. The Sales team’s primary metric of success was meeting revenue targets and, recently, a secondary focus on gross margin. But the gross margin fails to capture the variable cost fluctuations caused by supply chain disruptions or customer order-level requirements.
A Better Way is in Reach
Sam and the rest of sales were being asked to reduce profit erosion, but were not empowered with the tools to do so. They were flying blind regarding the consequences of offers and deal-level decisions on inventory and operational costs. Those consequences were made more severe during the temporary DC and plant downtime. The reality of the demand-supply imbalance was understood but not actively managed by those with the greatest influence over the profit margin and customer outcomes (i.e., the sales team crafting deals).
What if instead, the CRM system provided the sales team with visibility, right there within the context of specific customer sales opportunities, regarding the impact of disruptions or costs of specific services and requests, with steps to take at various points in the sales cycle?
Salespeople would have the information needed to more effectively partner with customers to improve profit margins in ways that were mutually beneficial. Sales would have the flexibility to support customers’ ad-hoc needs (e.g., a rushed order required) so long as, in the aggregate, costs were being reduced or recouped. Getting started can be simple. Accurate measures of cost-to-serve could be incorporated into the salespeople’s success metrics, motivating them to offer the right kinds of deals to better align customer value to service offered.
Businesses can initially get operational cost insights from supply chain teams who are well-versed in the areas of cost, risk, and efficiency. Then, insights can be further automated through data-triggered rules, planning models, external cost indexes, and cost-to-serve point solutions using company operational data (WMS, TMS, production, supply chain, etc.). Ultimately, these same insights can be translated into cost-based algorithms integrated into sales execution software, such as CPQ (configure, price, and quote), DOM (distributed order management), and ecommerce systems. This is the vision and capabilities provided by Synapsum.
Why Now? Tackling Today’s Challenges and Building Agility for What’s Next
If the tale shared above resonates with your experience, you may be considering whether now is the right time to tackle this issue. With the rise in logistics costs and mounting supply chain challenges, it is a critical time to look at better ways to manage disruptions and costs. Businesses that build better cross-functional response mechanisms will gain cost and customer advantage over competition. The trends below put the urgency of this issue into perspective.
|Transportation||Warehouse Fulfillment||Inventory Carrying|
|Logistics Manager Index = 74.5 for April 2021, the second highest reading ever, “driven by tight capacity, high prices for transportation and warehousing, as well as record-high levels of growth in Inventory Costs”|
|Costs as % of Sales||7-10%||2-4%||3-4%|
Today’s rising costs go hand in hand with supply chain disruptions. While some of the ‘headline-worthy’ recent supply chain challenges will normalize with time, businesses should be prepared for greater supply chain volatility going forward. There have been more disruptive events in the past six months than in recent history.7 The trends underpinning these prolonged disruptive events are expected to persist in the future.
|Globalization||Increasingly globalized and interconnected supply chains cause ripple effect from any disrupting event (e.g., Suez blockage, Texas freeze)|
|Commodity Shortages||From lithium ore to semiconductors, demand for many commodities can grow quickly, outpacing capital-intensive supply capacity.|
|Transportation Capacity Crunches||Demand/supply imbalances are cyclical, but several factors have aggravated these cycles, making them more intense.|
|Extreme Weather Incidents||Increasing frequency of hurricanes, droughts, floods, severe winter storms, dust storms, tornados, and wildfires.|
|Cyber Disruptions||As supply chains digitize, their ‘attack surface’ grows, increasing the exposure and value of supply chain targets for criminals and unscrupulous state actors.|
|Pandemics||Expect more pandemics of varying levels of severity due to increased proximity of humans with wildlife and increasing global consumption of animals, with inadequate hygiene and infection control.|
The rest of this series dives into how you can practically achieve these goals using actionable, profit-based insights to guide internal decision-making and create more profitable customer relationships.
In Part Two of this series, we explore potential steps for the journey to Transparent Cost-to-Serve Customer Relationships.
1 EBIDTA = earnings before interest, taxes, depreciation, and amortization. EBIDTA measures profit without variations caused by changes in interest, taxes, depreciation, and amortization. — Return to article text above.
2 Drewry’s composite World Container Index, reflecting the average price to ship a container worldwide, was almost 4X higher on May 20, 2021, than a year earlier. Rates from China to the EU went up almost 4X in a two-month period (from $2K to $8K, early Nov 2020 to the start of 2021). — Return to article text above
3 DAT Trendlines, on 5/26/2021, was reporting Van Spot Rates up 58.1% Y/Y, Flatbed Spot Rates up 52.1% Y/Y, Reefer Spot Rates up 51.8% Y/Y, Spot Load Posts up 577.3%. — Return to article text above
4 According to the Baltic Exchange Air Freight Index prices for Feb 2020 to Feb 2021 rose on average 101.9% (Source Statista). — Return to article text above
5 Agricultural Commodities, Raw Materials (Non-Timber), and Metal/Mineral prices from the World Bank’s Pink Sheet of global commodity prices, as of May 2021.– Return to article text above
6 Many of these shortages will persist for years. For example, ocean carriers are holding off on buying new ships until environmental regulations become clear, which will take many years. Truck driver shortages have continued for over a decade, driven by demographic and lifestyle changes, and have gotten considerably worse recently. — Return to article text above
7 Everstream Analytics: Annual Risk Report 2021. Everstream. Published March 2021. — Return to article text above
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