The REAL Profit Drivers: Managing the CPVs

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This research study is published by the NAW Institute for Distribution Excellence, a leading publisher of research exclusively for and about the wholesale distribution industry. More>>

Albert D. Bates, DBA

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Which should you use in making business decisions—profit anecdotes or profit facts?

For the first time, it's possible to use empirical information to determine what actually drives profitability in wholesale distribution. Al Bates used information from 885 distributors in 17 lines of trade in the largest study of profitability ever undertaken in distribution, and the conclusions he found shatter much of the conventional wisdom.

Much of what is known about profitability in distribution is just plain wrong. Urban legend and clever anecdotes dominate too much of management’s thinking about profitability.

This study identifies what actually drives profit. It does so by examining the financial performance on the Critical Profit Variables (CPVs) of the 885 distributors across 17 lines of trade included in the research. This study answers these questions that challenge all wholesaler-distributors:

• How do some firms produce a return-on-investment that is 2.5 times larger than the typical firm in the same line of trade?
• Does sales volume size matter?
• Why do most firms focus on factors that don’t improve profit?
• How fast does a firm have to grow to be successful?
• Can gross margin be too high or too low?
• Is cost control an out-of-date concept as some consultants suggest?

Key findings in this study include:

• Firms that control gross margin and operating expenses in tandem are far more profitable. Firms that focus on other combinations of the CPVs are demonstrably less profitable.
• Larger firms in a single line of trade are more profitable than smaller firms.
• Sales growth leads to higher profits, but only if the firm can significantly outpace its peers in terms of sales growth.
• Gross margin has a dramatic impact on profitability as long as the firm doesn't have to over-invest in inventory (through advanced buying) to generate the high margin.
• Operating expense control, especially payroll, represents the single most important drive of profitability. Nothing else even comes close.
• Both the DSO (days sales outstanding) and inventory turnover have only a modest impact on profit.
• Most firms emphasize actions that don't improve profitability. Only a small percentage combine the CPVs in a way that benefits financial results.
• To make improvements, firms need to have access to a strong set of financial and operating metrics that provide comparisons to their peers.

What Readers Have to Say

“I devoured this book! As usual, Al Bates has my head spinning and is challenging my preconceived notions after working in distribution most of my life.”

—Bob Mumford, Director of Marketing, Eoff Electric Supply


Albert D. Bates, DBA

Al is Founder and Chairman of the Profit Planning Group, a research and executive education firm in Boulder, Colorado. The firm works exclusively in the area of corporate financial planning.