David Goetz invited an industry sales guru to Lewis-Goetz
& Co. Inc. to address his sales force and got sold on a way to
manage his business.
“We walked him through our warehouse, and he went to
the sales conference, and he got up there, and, of course,
everyone expected to hear, ‘You’ve done great things, your
numbers are good,’ all of that,” says Goetz, the company’s
president and CEO.
But it was anything but a backslapping, cheerleading session. Instead of telling the sales force how great it was doing,
he kicked off the session by asking the salespeople why a
prospective customer would want to buy from them instead
of from a competitor.
The consultant exhorted the salespeople not to trust only
their sales numbers and the compliments from their customers as the yardsticks for how they were performing, and
he challenged them to measure things like on-time deliveries
and fill rates. What doesn’t get measured doesn’t improve, he
advised them.
The consultant’s message was like a splash of cold water
because Lewis-Goetz was growing quickly and was profitable, and everyone was happy.
For Goetz, the session was an eye-opener.
“I think that was probably an epiphany for me,” he says.
Goetz knew that any inefficiencies the company was experiencing would grow as the company did. With a growth
strategy based on acquisitions of other industrial distributors
of hose, gaskets and belting products — its revenue grew
from $90 million in 2004 to $177 million in 2006, with much
of the growth attributable to acquisitions — Lewis-Goetz
needed better ways to gauge performance and control costs.
On the sales side
While Goetz has been a strong believer in using data to drive
decisions for a number of years, his former partner, who handled the sales side of the business, wasn’t nearly as enamored
with a similar approach when it came to the sales function. But
once his partner retired a half dozen years ago, Goetz decided
to use sales data, with the help of software designed specifically to analyze it, to realign the sales organization to emphasize its
focus and attention on servicing its large customers. First, he
went about separating the small accounts from the large ones.
“Once he left, we reduced the total number of accounts that
our outside folks were calling on,” Goetz says. “We wanted them
to be more focused. Some of them had as many as 200 accounts
that they were responsible for. Now, when you’re doing that, it’s
a culture change, so what we did was said, ‘OK, we know you’re
not calling on all these guys and the bottom 150 are small
accounts. You’re going to make up for whatever volume is lost.’
So we actually got everybody down to 35 accounts. There was
a little bit of grumbling, but we eased the pain with monthly
bonuses that made up the difference.”
Additionally, Goetz used the data to balance its pricing so that
small customers were charged to reflect the disproportionate
cost of servicing smaller purchases. To find out what the true
cost of selling to each customer was, Goetz used activity-based
costing, a method that takes into consideration a variety of factors associated with an activity, such as manufacturing or selling a product. For example, the cost associated with performing functions like taking an order or generating an invoice are
virtually the same for a $10 order as for a $10,000 order, making
the smaller order proportionately more expensive to process.
“Through the activity-based costing model that we have, we
were able to identify a couple of years ago, in our organization,
customers that give us less than $5,000 a year in business and
whether or not they’re profitable,” Goetz says. “By this time, we
had 35,000 of those accounts at 20 locations. We said, ‘Look, the
computer can tell us that these are the 35,000 accounts of less
than $5,000 that cost us money. With the information we have,
we can see we’re losing $1 million-plus on these accounts.
Here’s what we intend to do on these accounts: We intend to
raise the gross margin level to the point where they’re profitable.
They’ll either leave because they think we’re charging too much,
or they’ll be profitable because this is what it costs to service
them.’”
But Goetz didn’t simply use the data to make indiscriminate
cuts and establish blind policies regarding the size of accounts.
Those affected inside the company had an opportunity to look
over the list and suggest some exceptions.
“Before we did that, we had the customer service organization, the managers and the outside salespeople vet that list,”
Goetz says. “There could be customers on that list that were
$2,500 customers but had the potential to grow to $25,000. But
if these guys are giving us all their business and it’s costing us to
service them, let’s change the price. So we had total buy-in by
everybody in the organization, as long as they had a chance to
look at the list before this broad brushstroke went through the
organization.”
While sales to the small accounts dropped, the company
showed better profitability as a result.
“What we found was from one year to the next — at this
time we were at about $102 million in sales — the total sales
to these accounts was about $1.8 million,” Goetz says. “It
dropped to about $1.2 million. The margin increase was significant, and the gross profit dollars were actually higher on lower
sales. The number of transactions dropped from 8,500 to 2,500.
“What it did was it allowed us to service what was growing at
that particular time as the economy was taking off. It allowed us
to focus on the targeted accounts that we wanted to grow with,
with the same work staff and not have to add people. So, it’s
really cool when you have hard data to back you up. You bring
in a bunch of people and you say, ‘This is what we’re talking
about,’ and then you show them the results.”
Goetz also finds using data to be a powerfully persuasive tool in other parts of the business, as well.
“We create an income statement for every single location, and we
allow every single location to see it,” Goetz says. “We show the company average of occupancy expense, travel and entertainment, all the
different categories. Then we’ll highlight where expenses are in
excess of the average. Then we’ll have a sit-down and do one-on-ones
and ask why would that be; have them explain why it is, or we’ll help
them understand why it is and help them get it more in line with what
the rest of the company is doing.”
Making acquisitions
In making some of the company’s acquisitions, Goetz has used a
model based on Lewis-Goetz’s performance metrics to predict the kind
of performance that might be expected after the acquisitions are completed, thereby convincing lenders to bankroll the deals.
“We would take the metrics of our inventory turns, our day’s sales
outstanding, our activity-based costing performance on improving
overall profitability of the business, all of those metrics and say, ‘OK, if
we can do half as good with this company in the first year as we do
with this company now, here’s what the results would be,’” Goetz says.
“So our pro forma includes taking our metrics and applying them to
the target company and seeing what that does to the bottom line. If we
combine it with our business, how does that translate into how fast we
can pay off that loan? It’s pretty empirical; it’s data driven.”
And once Lewis-Goetz makes an acquisition, it compares its own
data to the acquired company’s to make structural changes to bring it
in line with its own practices and persuade management of the
changes that need to be made. For example, after it made the acquisition of Goodall Rubber Co. in 2006, Goetz compared the acquired
company’s performance to that of Lewis-Goetz.
“In 2005, they lost $700,000, and yet, they paid out $420,000 in bonuses,” Goetz says. “Again, hard data does it. When we brought their managers in, I showed them what our bottom line was, and I showed them
what our bonus pool was. Our bottom line was low seven figures, and
our bonus pool was lower than their $420,000. I said, ‘You’ve got this
loss, and yet, you’ve paid out bonuses.’”
The data supported the notion that there needed to be an adjustment in the bonus arrangements that were in place.
“Our guys know these numbers and realized that it doesn’t make
good sense to be paying bonuses when you’re losing money,” Goetz
says. “So the variable compensation plans had to be changed.”
Goetz says using the data aggregated across its 48 locations will
highlight clearly where extraordinary costs or expenses exist.
“It’s simple things,” Goetz says. “As we’ve done acquisitions over the
years, we’ve seen people spend money on frivolous things or things
they thought they needed, in some cases, entertainment. We’re not
against entertainment, but we think it should be within a certain limit,
and it’s getting them to understand it, as well. It’s part of doing business but not extravagant entertainment.”
Again, some discrimination is in order when it comes to applying the
data. Goetz doesn’t use it as an excuse to slash such expenses indiscriminately. Salespeople used to entertaining clients at a certain level
have to taper their expenses rather than cut them off abruptly.
“They have to be kind of weaned off it, as opposed to, ‘You can’t do
it at all,’ and it’s on a case-by-case basis,” Goetz says.
But the data doesn’t always indicate that cuts are in order. Sometimes
there’s evidence that not enough is being spent in particular areas. In
the case of entertainment, for instance, it can indicate that there isn’t
enough being spent to keep relationships lubricated.
Says Goetz: “There have been cases where we’ve had to encourage
some to spend a little more.”
HOW TO REACH: Lewis-Goetz & Co. Inc., www.lewis-goetz.com
