Friday, August 31, 2018

Big Data and how you can reap the benefits.

Big data is having an impact on organizations’ reaction time to supply chain issues. 
  •  (36%), increased supply chain efficiency of 10% or greater 
  •  (46%), Improved customer service operations.
big da·ta
  1. extremely large data sets that may be analyzed computationally to reveal patterns, trends, and associations, especially relating to human behavior and interactions.

    "much IT investment is going towards managing and maintaining big data"

 The Big Data Analytics in Supply Chain: Hype or Here to Stay? Accenture Global Operations Megatrends Study found that companies are achieving significant results using big data analytics to improve supply chain performance and gain greater contextual intelligence.
figure 6 big data

For more information on TSH or MDS call The Systems House, Inc. at 1-800- MDS-5556. Or send a message to
Click here and tell us how we can help you with your business solutions.

Friday, August 24, 2018

That one weird sales rep...

Image result for salesman cost memeFor those who have run sales organizations and are familiar with trying to tackle the sales commission model, there are no easy answers. It typically starts with something simple like paying off sales dollars and then typically as you grow, it balloons into a mess with multiple calculations, special deals and constant exceptions to the rule. 

I have always been a big proponent of paying commissions based upon profit , but that has it's pitfalls as well. So today we look at another way... 

Commissions and Activity Based Costing (ABC) 

The value a good Activity Based Costing (ABC) model can bring to a distributor cannot be underrated. A well-designed model can provide powerful insight on profitability drivers and provide useful inputs when making strategic decisions on sales resource allocations and pricing. However, tying sales incentives to the “profit” these models derive can be troublesome. In fact, tying sales incentives to net profit based on an ABC model can have unintended consequences for distributors.

All of us are familiar with net profit when it comes to a standard income statement. It’s the bottom line. It’s what’s left of the money the company takes in (revenue) after it pays its suppliers and its other expenses. Net profit as it relates to sales compensation is somewhat different. It relies on ABC-driven allocations to calculate a net profit at a transaction, customer, or, in this case, a sales territory level. Using the MDS-Nx System offers you and option to allocate that cost at an product , product class or company level. So as a percentage of the items cost you can add a "Load" to allow you to capture and review these costs. The salesman's view of Net profit would then be different from your view of true profit. 

So the question now becomes how do we arrive at that loaded amount? And what is the most fair way to allocate. 

The problem on the surface is that net profit treats every expense as if it were variable. Each order has multiple costs applied to it. Some of these costs are direct – such as the cost of an inside salesperson receiving and entering the order, or the cost of fuel, and driver labor for making a delivery. However, most of the costs that are allocated to each transaction are not direct, but indirect costs. Some of these allocations are relatively straightforward such as using deliveries to allocate delivery expense or warehouse orders to allocate warehouse expense. However, for staff functions such as IT, HR, finance and so on, allocations are often simply made as a percentage of sales.

If HR expense equates to 1 percent of a company’s sales, then everything sold receives a charge equal to 1 percent of its sale price for HR expense. And here is where the problem begins.

Many costs incurred by distribution businesses are not variable. Selling one additional widget no more increases HR cost than selling one less widget decreases it. Of course, “all costs are variable in the long run.” But many costs are not incurred in increments of $1 or $10 but instead in increments of $40,000 or $80,000 because they correspond to salaried employees. It is not unusual for between two-thirds and three-fourths of a distributor’s operating expenses to be people, many of whom are salaried.

This is the core of the issue. If salespeople are paid based on net profit, the easiest way for them to increase net profit (and thus, grow their income) is to eliminate unprofitable sales. 

Yes, reduce sales to increase profit.

Reducing sales to increase profit is a dicey strategy. Not a bad strategy, but a strategy that requires real expenses (not allocated expenses) to decline at a rate equal to or greater than the rate at which gross profit dollars are declining. After all, the unprofitable sale probably isn’t truly having any impact on the company’s IT cost or how much the CFO is paid; it’s simply absorbing an allocated charge.
Here’s how the strategy works: 

1) Sales rep abandons unprofitable business causing sales to decline
2) ABC territory net profit increases because allocated costs exceed gross profit for these sales so the sales rep makes more money
3) actual company costs remain roughly the same, and company has fewer gross profit dollars to pay its bills
4) net profit at the company level declines. 

This, in a nutshell, is the reason commissions based on profit can result in sales problems and is often abandoned.

A Better Approach Cost Per Order/Line and Load Percentages

That said, the reasons distributors are looking at net profit as a potential basis for paying salespeople are legitimate. Voodoo accounting or not, we all know that a $5 order at 30 percent gross profit delivered to a customer in the next county is a money loser. This deficit is further amplified when a salesperson is also paid a commission or gets credit toward his gross profit bonus goal.

The goal of better aligning sales rep pay with the economics of the business is an admirable one.The good news is that there are ways to incorporate key profit drivers into a sales compensation program without taking the profit plunge. One approach is to eliminate the allocation of costs that are truly unrelated to transactional volume and focus in on costs that could be justifiably incurred as a result of the transaction.

Delivery, warehousing labor and order processing costs would fit this description. It’s true that warehouse labor and order processing costs are people costs that come in increments of tens of thousands and not tens of dollars, but staffing levels for inside sales and warehouse are much more elastic than IT system administrator or CEO.

A simple analysis can quickly lead to a "cost to fulfill an order". Applying this cost to every order to arrive at a commission able gross profit or incorporating a minimum order for commission can better align sales rep rewards with company profitability. If done properly, this approach can nearly eliminate the “shrink to profitability” dynamic because actual costs would be avoided if the orders were not taken. 

Direct Warehouse Employee Costs (50K/month)
Warehouse/Office Rent                (10K/month)
Shipping and supplies                 (3K/month)
Utilities and Misc.                       (2K/month)
Total Orders per month            1000
Total Order Lines per month       6000

Estimated Cost per order $6.50
Estimated Cost per line  $1.08 

Furthermore, if a portion of a rep’s business were not commissionable or the amount of gross profit on which commission were paid were reduced, growth would be required to make more money (and profitable growth at that). As a result, the “sell less, make more” scenario wouldn’t exist.

One potential issue with the minimum-order or order charge approach is that inevitably the impact will vary by sales representative. For some reps, the impact will likely be miniscule, while for others the impact could be significant. In these cases, using a multiplier approach to facilitate a level playing field may make sense.

The multiplier approach can be used many different ways. Goals or budgets would be established for each sales rep showing improvement on identified key cost drivers, and performance to this goal would regulate incentives that are otherwise paid on gross profit dollar production. 
Image result for sell more make more
For example, if order size is identified as a key cost driver, those with the lowest average orders would be expected to show the most improvement and have a goal set to that end. Missing the goal would result in a lower commission rate than is currently being paid or a 10 or 20 percent reduction in bonus earned depending on the structure of the existing incentive program. 

Calculating and displaying this data using the MDS-Nx Dashboard is automatic and using these metrics will help drive your profitability. Technology has made it much easier for distributors to analyze and model data in ways that previously not available. With tools like the MDS-Nx Software Suite , distributors have an opportunity to analytically understand profit drivers like never before. Distributors should be proactive in using this new-found knowledge. And when it comes to sales compensation, the more you know the better you will do.. .

Ready to sell more and make more? 

For more information on TSH or MDS call The Systems House, Inc. at 1-800- MDS-5556.
 Or send a message to

Click here and tell us how we can help you with your business solutions.

Friday, August 17, 2018

What is the Nature of the Beast?

Image result for elephant walkingThere is a expression that relates walking with elephants. Do you lead the elephant? or does the elephant lead you?  The interesting truth is that while we would all like to think we are leading the elephant around , it's not really true. And we all know that if the elephant wants to go somewhere it's going to to go there, we really don't have the tools to change it. 
So today's lesson is about understanding the forces of change and how elephants can be lead around and applying that lesson to an elephant in your business, namely... 

Dead Inventory

Quite often, even among well-run businesses, the actual costs of inventory are inaccurate, underestimated and incomplete. While most distributors know they have dead inventory, many are unaware of just how much. Even in well-run companies, anywhere from 20-30 percent of inventory is dead or obsolete.

While that is huge and alone could have devastating ramifications for a business, how do you calculate the real costs to determine the hit that your business is facing? The easy answer is to take the unit cost for those dead items, add them up and you have your answer. But not so fast. There are many other hidden costs to consider before determining the true cost of your dead inventory. Ignorance about these costs of dead inventory place your business in peril. And addressing the dead inventory problem can breathe life back into a troubled situation. So what are some of the other very real costs that complete a more accurate calculation of dead inventory costs?

Image result for dead inventory
  • Cost of capital/money
  • Finance and insurance
  • Discounts
  • Inventory housing
  • Handling costs
  • Administrative expenses
  • Lost Opportunity Cost

Paying employees to “fix” the inventory problems, as well as management time spent on solving inventory issues, is very costly. Employees paid for tactical, rather than strategic, management issues is essentially wasting your precious resources. Hopefully, your staff is making up for this by optimizing systems and procedures, such as leveraging multi location activity to reduce cost of inventory, as well as other system driven resources.

Utilizing a software system like the MDS-Nx System, can quickly identify and/or prevent dead inventory from sitting on your shelves. This will prove to be a worthwhile investment since it reduces these employee costs.

Using our Remotenet Ecommerce System's automated business intelligence module you have the option to automagically  (yes it is a word - see link)   create a category for overstock, closeouts and Daily Specials.  These categories use a combinations of length of time on the shelf, Carrying cost and Sales history if available to calculate and update automated search categories on your website.

Image result for dead inventory
So, what is the real cost of dead inventory?

When all additional costs are taken into account, the total cost of holding inventory can represent a shocking 25-30 percent more than the inventory’s unit cost value. In addition, having your cash tied-up in inventory-related expenses has an opportunity cost, which can translate to as much as 15 percent or more. Getting an accurate, realistic measurement of what inventory truly costs is a smart first step to saving money, increasing cash-flow, improving performance (inventory turns and customer service) and increasing your competitiveness.

The more inventory a company carries, the higher the ongoing costs will be, which is reason enough not to carry dead, outdated, or obsolete, inventory. A company that can reduce their inventory costs through operational efficiency will see tremendous benefit. 

Image result for dead inventoryLet us solve the problem with these three easy steps, 

  1. Identify your potential items using your software systems (use our MDS-Nx System if your's is not working for you...) 
  2. Push those items using your E commerce and Sales Force Automation tools (or use ours) 
  3. Repeat month/weekly/Daily to keep your dead inventory to a bare minimum.

So ask yourself , Are you leading the elephant of is the elephant leading you? 
Its not easy to change your practices and keep on top of inventory but as a distributor, 
don't let it be the elephant in the room  that no body will talk about, make sure it's the elephant you are leading with a sure and steady hand.

Are you ready to partner with a solution and team that knows healthcare and pharma?

For more information on TSH or MDS call The Systems House, Inc. at 1-800- MDS-5556.
 Or send a message to

Click here and tell us how we can help you with your business solutions.

Friday, August 10, 2018

Keeping on top of your prices..

Today’s technologies allow digital businesses (as well as a growing roster of traditional companies) to change prices frequently, even minute-by-minute in real time if they want to. It is not unusual for prices to change on sites like Amazon, Expedia, and Priceline several times a day.

But managers are struggling to understand these tactics.

How often should companies really change their prices? 

For any enterprise, the biggest constraint in changing prices is the “menu cost.” Historically, price changes were expensive and time-consuming. Price lists had to be recalculated, typed up, and mailed to customers; new catalogs, labels, and signs had to be printed. This forced companies to maintain prices. Throughout the 2000s, even as the Internet continued to grow, prices remained the same for months at a time.
Over the past few years, however, technology has drastically shifted the economics of price changes. Pricing optimization software helps companies link cost, customer, and sales-performance data and dynamic pricing methods allow firms to take account of market factors, competitor actions, and customer responses.

Menu costs have fallen dramatically. In industry after industry, this puts pressure on managers to change prices frequently. The popularity of short-lived price promotions, flash sales, and daily deals has further destabilized prices. But the trend is most pronounced among digital businesses, where price-change costs are virtually zero.

Many marketers see frequent price changes as a way of keeping customers on the hook and luring them back to their store or sites. Constant price shifts seem to be a good way to offer discounts selectively and protect margins.

Image result for frustratedBut for a lot of consumers, fluctuating prices are merely confusing, frustrating, and annoying. and Often these changes stop customers in their tracks.
Price changes make the buying decision infinitely more complex. Customers no longer have clear reference prices, so they don’t know when to pull the trigger. Research shows that when decisions become complex, many people delay making decisions or back out of them altogether. For example, when a price moves around on an hourly basis, the best option for many consumers is to simply tune out and postpone the purchase.

Another insidious consequence is that constant price changes shift the customer’s attention away from the product’s features to its price. Humans are hardwired to pay attention to stimuli that change and ignore those that remain stable. So when prices fluctuate constantly (and other features don’t), customers naturally turn their attention away from benefits and features of the product — the very factors that make a strong brand and allow the company to enjoy a price premium — and focus on price. Even products that used to be differentiated are seen as commodities. Nowhere is this phenomenon more evident than in furniture, where incessant sales have commoditized an entire category.

Frequent price changes are also perhaps the single biggest instigator of price wars. Most price changes, especially those that are publicized by companies, tend to be decreases. And when competitors see that a price is cut, they feel compelled to respond. Many airlines and supermarkets have fallen into this trap, ending up in bruising price wars as they match each others’ cuts and get caught in fast-moving downward price spirals.

There are legitimate reasons to change prices, of course. A company may want to get rid of its remaining inventory and introduce new versions of its products. Companies like Apple, Sony, Dell, and LG have to do this. And in non digital businesses, many products are seasonal: It makes sense to mark down sweaters in April and linen suits in October, for example. Other valid reasons for changing prices include rising raw material or labor costs, encouraging customers to try something new, and rewarding loyal customers.

But customer reactions to frequent pricing actions may make quick fluctuations unproductive at best, and inflict lasting damage to a company’s bottom-line at worst.

Having said all that, the question remains how to handle it best and what to do.

For me it's about three concepts:
Related image

Education - Collaboration - Sharing

Educate your customers , for example Diesel fuel fell this year, did your freight pricing fall? it most likely did not as UPS actually raised rates in 2015 , even though fuel prices are way down.
Customer's often assume that since fuel rates are down freight is down. Not always the case.
UPS® Ground, Air and International rates will increase an average net 4.9% for 2015 
Aug 20142.85---

Aug 20151.52-9.60 %

Collaborate with your customers,  Often they will be your best source for finding new models to save money and in many instance may lead to a lower sales price but better margins. 
In the health care industry this usually means some kind of rebate program or GPO membership but if you can collaborate with a customer or group of customer to consolidate your purchasing with a single vendor or product line , you can often negotiate that better pricing tier.

Sharing: And this is a key point if you want the collaboration and education to work. 
Share the profits and information with your customers, if you are doing better then give them a piece of the pie. Or at least encourage then by offering volume discounts and making them aware of how to get the best pricing from you company. very often if you educate them properly they will understand the pricing models and how to take advantage. 

So the message for today is , with a bit of collaboration , sharing and education you can change your prices to take advantage of market conditions, optimize your profits and at the same time provide your clients the best deal possible. 

How can you possibly manage all of this? - With the MDS-Nx Distribution management suite all the tools to make your pricing engine dynamic responsive and collaborative are at your fingertips... 

For more information on TSH or MDS call The Systems House, Inc. at 1-800- MDS-5556. Or send a message to
Click here and tell us how we can help you with your business solutions.