I celebrated my 10th anniversary with HARDI last May, just over five years as CEO and it’s amazing how fast time has passed. What surprises me even more is how often I now find myself unable to recall why we do some things certain ways, despite having seen just about every process and procedure change in some way over these 10 years. Institutional knowledge is one of the most powerful assets any successful company has, while also being any company’s heaviest anchor at the same time. While receiving yet another of my frequent lessons from our Market Research & Benchmarking Analyst, Brian Loftus, about trends in distributor profitability during our latest planning meeting for the launch of the new Distributor Performance Dashboards now powered by CoMetrics, I was struck by one particular metric that seemed to best exemplify how much HARDI distributors’ businesses have changed over the last decade. However, it wasn’t the metric itself that caught my attention, but rather how hard it must be for seasoned, experienced distribution leaders to adjust to this drastic shift in one of distribution’s most hallowed metrics. From a management perspective, it reminded me of a story I think about frequently:
The story is told of a woman who brought home a leg of ham and was preparing it for Christmas Dinner. She proceded to cut it in half, before placing it in the oven to cook it. Her husband, watching on, asked “Why do you cut it in half? Is that so it cooks better in the middle?” His wife paused a moment and then answered “I don’t really know, that’s just what I’ve always done. I saw my mother doing that when I was a girl”. Later the in-laws arrived for Christmas dinner and the question was brought up: “Mum – why did you cut the leg of ham in half before placing it in the oven to cook?” “I don’t really know”, her mother replied. “Your grandma used to do that – so it’s just something I’ve always done – there must be a reason for it!” Later the family all travelled to Grandma’s house to share Christmas tea. During a lull in the conversation, the wife asked her grandmother, “Grandma, why did you teach Mum to cut the leg of ham in half before cooking it?” “Well“, replied the grandmother, “when your mother was a girl, my oven was very small and I couldn’t fit the whole leg in without cutting it in half.”
10 years of Profit Report and DPD data suggests it is impossible for today’s high-profit distributors to achieve Turn-and-Earn performance of the average distributor a decade ago. I’m fascinated with how discussions in distributor board rooms over the last 10 years have changed, and at what point did leadership actively adjust their perceptions and expectations of Turn-and-Earn. High-profit distributors have seen their Turn-and-Earn performance drop 47% from 124.65 in 2003 to 67.65 in 2015, while typical distributor performance moved from 103.74 to 71.94 over that same period for a 31% decline. In case you think I’m exaggerating, a snapshot of exactly 10 years from 2005-2015 tells a similar story (43% and 26%, respectively). Now I have no illusions I’m telling anyone who led a distribution business over the last 10-15 years anything they didn’t already know, but I do want to challenge those leaders to consider if they are still “cutting the ham in half.”
In any annual planning or strategy meeting, distributors should be asking their management teams two questions while pouring over as much data as possible: Why is this metric important and what is an important target for generating profitable growth? Simply knowing that a company’s Turn-and-Earn target was 100 in 2007 doesn’t tell you anything; perhaps it was 100 then because “your oven was too small.” Use all of the data available to you- especially that from outside your company- to then establish a target goal for the most important metrics with a clear idea of the profit and growth objectives that will be achieved by meeting those goals.
Despite increased sales and sales per order, gross profit percentages not only rarely grow anymore, but keeping them flat should be considered a win. I believe many distributors focus most of their energies on growing revenues while leaving the operations to tradition, as evidenced by twice as many members attending our Marketing & Sales Conference than our Supply Chain Excellence Conference. These two topics should not be a strategic either/or proposition. The key to your bottom line improvement is on the expense-side of the ledger so we should all hope that within the next few years, at least as many members if not more are filling the seats to learn the latest opportunities for Supply Chain Excellence.
March 26-28, Phoenix, AZ, will be the site of the 2017 Supply Chain Excellence Focus Conference open to all HARDI members in good standing. For more information including the complete slate of sessions and speakers, go to http://hardinet.org/supply-chain/