Specifying Instead of Being Specified

As a consultant, you should be proposing improved profits as a result of solving customers' business problems by the application of your technology to their operations.

You are not selling your technology. Nor are you selling solutions to customers' business problems such as "improving materials flow" or "decreasing production backlogs." You are selling improved profits; they are your product, and your proposals must set them forth in their major specifications of how sure your customers can be that they will receive the "muchness" and "soonness" in your proposal. Customers will not have the comfort level to partner with you if only you are sure. Your sureness is unimportant. You must make your customers feel sure. Unless you do, they will tell you that they are not comfortable. If they stay that way, you will not partner them to sell for you.

There are many short-term comfortable partners. There are fewer long-term comfortable partners. But there are no long-term uncomfortable partners.

You make customer managers comfortable when you give them the evidence to prove where the return on their investment will come from and how it will flow. You may think, quite naturally, that the investment causes the return. Actually, it is the other way around. It is the promise of the return that causes the investment to be forthcoming, making the investment the result. If you do not make customers comfortable with the cause of their new profits first, they will be unable to envision a result.

When customers sign off on a transfer of funds to you, they are committing to incur an asset. They own something new. Its cost becomes a part of their balance sheets, increasing their indebtedness. The only valid trade-off for their debt is the added values they can receive from the improved operation, process, or function in their business that you will help them achieve.

To make this trade-off measurable, a consultative proposal is modeled after proposals commonly prepared by Box Two for presentation to Box One. When you present it to your Box Two partners, you will be playing their role. They will be playing the role of Box One. The more closely you replicate your Box Two partner, the more closely they will relate to you as partnerable and the more readily you will be accepted into their internal hierarchy.

You, like Box Two, will become a specifier of profit-improvement solutions. Box One, who allocates assets to maximize their profitable return, will sit in judgment of both of you. Together, you will follow the official business proposal approach: First, diagnose a problem or opportunity in business terms; second, prescribe a solution in business terms; third, prove how the solution works in business terms; and fourth, commit to controlling the solution to make sure it works in business terms—that is, make sure it improves the proposed amount of profits on time.

A consultant can find many relatively simple ways to specify profit improvement. If you sell to supermarkets, you can show each chain's central headquarters or even individual store managers how an improved planogram, substituting your brands for others or increasing the number and location of their shelf facings, may improve profit per case or per $100 of sales.

Profit improvement for a manufacturing customer may depend on improving the profits of dealers and third-party value-added resellers (VARs). By helping a customer's distributor organization increase its contribution—something the customer cannot directly control yet must nonetheless influence—you can help your customer raise the profit on sales made through channels.

A distributor's largest single investment is likely to be in inventory. The key to distributor inventory control is finding the minimum investment required to maintain adequate sales and service. One way of measuring the utilization of inventory investment is to compare distributors' inventory turnovers with their industry's average. Inventory turnover can be computed by using this formula:

If customers' distributors are in a business where the inventory turns an average of 4.5 times a year, or once every eighty to ninety days, you can help a distributor whose turnover is lower than average see their problem this way:

To help these distributors increase turnover to approach the 4.5 industry average, you will have to help them reduce inventory investment. To do this, you must first find out what level of inventory investment can yield a 4.5 turnover. Divide the distributors' projected cost of sales by the desired 4.5 turnover, which results in an $82,000 inventory. It now becomes clear that you can help the distributors achieve profit improvement by reducing inventory investment by $18,000. Then you can turn your attention to optimizing the inventory mix.

The consultant's best approach to inventory reduction is usually through product line smoothing. Distributors almost always carry too many items in their lines. An inventory burdened by too many items can cause a dissipation of the distributor's sales concentration, extra handling costs, waste through obsolescence or spoilage, and, of course, higher inventory carrying costs, higher insurance costs, and overextended investment.

To analyze a distributor's inventory, you can simply rank the products in the line according to their cost of sales and then compute their inventory turnover. Such an analysis could look like this:

• Products A, B, C, and D account for 57 percent of the cost of sales but only 34 percent of inventory. These products turn over inventory by an average of 6.2 times a year.

• Products E, F, G, H, J, and K account for 43 percent of the cost of sales but 66 percent of inventory. These products turn over inventory by an average of only 2.4 times a year.

The inventory turnover analysis in Figure 8-5 shows what it costs the distributor to carry inventory. By comparing the carrying costs of inventory to forecast sales volume, you can begin to learn more precisely what inventory the distributor should maintain. The first four products are apparently well controlled. They have an average turnover rate of 6.2 percent and 1 percent average carrying cost as a percentage of sales. You now know that you must concentrate on reducing inventory whose average turnover rate is only 2.4 percent and average carrying cost is 2.6 as a percentage of sales. This helps bring the distributor's inventory down to the $82,000 level that should contribute to the projected 4.5 inventory turnover.

Product	Percentage of Sales	Average $	Percentage of Average	Turnover	Carrying Cost as Percentage of Sales
A	15%	$ 7,000	7%	8.2%	0.8%
B	17	9,000	9	7.0	0.9
C	14	11,000	11	4.7	1.3
D	11	7,000	7	5.8	1.1
Subtotal	57%	$ 34,000	34%	6.2	1.0
All other products	43	66,000	66	2.4	2.6
TOTAL	100%	$100,000	100%	3.7%	1.7%

Figure 8-5: Inventory turnover analysis.