Bill Canady shows how to segment customers and products by pulling margin and revenue data from ERP systems, dividing each into four equal groups, then overlaying SG&A costs to find which high-margin products go to high-value customers. A company with 8 million SKUs used this to cut outside sales reps and shift low-value accounts to inside sales, raising margins and customer satisfaction.
Typically we'll work with the finance team of the organization, and it just depends on their capabilities. Sometimes they have very sophisticated systems, you know, where they're using Tableau or Board or Microsoft Dynamics, whatever it is, they're able to take and pull that out and drop it right in. That is really much more of a rare situation than anything else. The average company we'll go in will have a dozen different ERP systems. They can't close their books in a month and, and things like that. So Really what we look for them is they're gonna give us their product data, which will be their material margin and their revenue. And they'll do the same thing with their customers, right? So customer A buys $1 million and this is their material margin. We can work with gross margin as well, but we like to get it to material, uh, from it. It's just a more pure number that we use. But regardless, either way we, we can do it. Then once we have those 2 sets of numbers, We start seeing who's buying what and where, where they are. So if you think about it, since it's quads, it's just 25% is going in each bucket. So your top 25% of your customers are going to go in Quad 1, right? And same thing with Quad 2 and Quad 3 and Quad 4. Then we look for the overlaps, right? So that product, which is our best product, is being bought by both customers we love and customers that maybe buy once from Right. They're still great people and all that. They just don't buy very much from us. And it's typically very, very hard to, to serve them. To place a $25 order costs us the same amount as a $25 million order. It still— someone's got to take it. Still takes the system, still takes, takes everything else with it. So by going through and simply segmenting them and putting them into it, we are then able to take and get a really quick snapshot to say— so I'll just use my example. So with OTC, we looked at it And it's funny, most companies I've ran will have 200,000, 300,000 SKUs or different products that we sell. OTC had 8 million. I'd never seen such a thing. It didn't even seem possible that it had, but that's what they had. A lot of them were double counted and they were looked at it. And so it was kind of like UPS. We had 86 UPS accounts. It's still just one UPS. You'll find that true across a lot of organizations. And it was just because of all the different systems and how they had been been put together. You have to wade through that. We can do that really easily with Excel, right? It's not particularly elegant or whatever, but it works. You can dump the data in, you can put millions of lines in, and you can work your way through it. So we get the data from finance, we take it however they'll give us. Most of the time they give it to us in some type of rubric or some type of cube, and we just download it in Excel. We'll segment it out by those quads, as we said before. And then from that, we just simply start taking products and customers and putting those together and say, where are they buying them at? And where do they fall into that? Once we have that directionally, we can start seeing exactly, you know, what's going on in the business. We can see where they're making money, where they're not making money. The next thing that we do early on is we will, and we've learned this through, you know, 20 years of doing it, it turns out it takes about a quarter of your resources in each one of these. You know, maybe it's 21, 22, or maybe it's 26%. It's about 25%. So directionally, early on, you can lay over your costs over each one of these. So think about it. Your Quad 1, your best customers, your best price, where all the money's being made. You're a $100 million business. $70 or $80 million is in that quad. That's taking 25% of your resources. And let's say out of your $100 million business, uh, it is not unusual to see 30% of that being your, your cost to run it. Right. Right? So you've got $30 million of SG&A that is, that is put into that. Well, 25% of that in Quad 1, that's where, uh, $80 million of your sales. Well, guess what? 25% is also in Quad 4, which is going to be about 5%. So you've got $10 million worth of cost floating in Quad 4 that is supporting around $5 million of sales. That's why you lose so much. That's why it's so skewed. It's very little. Even if they're super profitable, even if you're, if you're paying a dollar for it and selling it for 2, it's still $5 million worth of sales against $20 million of cost or $15 million or $10 million. It's that big of a skew. And once they see that, once they understand that, it becomes very obvious of, I can take those resources. An example was we, uh, we had one group that had about 65 sales— outside salespeople covering the territories out there, and the leader wanted to take it up to 100. When we went through and looked at where they were actually making the money and where was that, they actually took it from 65 outside sales to 20 outside sales and focused it only on that top. They had about 100 accounts out there that were making all the money. They took those 20 people, gave each of them 5. They're Their customer satisfaction went up. Their sales actually went up. Everyone else, they pushed them to an inside salesperson, which was a much lower cost section to see, or they made them place their orders online, which didn't take a person at all. So just think about that for a second, right? They wanted to go from 60 outside people to 100 outside people. The right answer was actually to go to 20. Their customers were happy. Sales went up before because we started giving the customers what they needed versus just simply throwing more and more resources at it. And by the way, we didn't have the money to come up with another 40 outside salespeople to do it either. At the end of the day, our profitability increased, our sales increased because we listened to what the customers were telling us. And you could hear it through the numbers because they, they show you because they buy the product and they pay the bills. So it was a very interesting journey to go through.
