How to define and set up the commercial approach – in terms of systems, resources, sales methods and delivery models – is a fundamental question for all companies, whether they deal in physical goods or services. The following example, drawn from our direct experience, illustrates the depth and competitive advantage of our methodology, as well as the significant impact of our work.
In this specific case, before our intervention, our client was firmly convinced that they needed to transform their “No-Order” sales approach into an “Order-Based” one. They also believed that the way to achieve this was by adding physical sales representatives to visit customers and negotiate orders in person. These assumptions were based on the observation that many other companies in their industry had adopted an “Order-Based” sales model.
Following our methodology, we conducted a detailed assessment of all cost and revenue drivers within the Sales & Distribution area of our client’s business model. What we discovered was that our client’s belief was completely misguided and that, had they implemented such a change, instead of improving performance they would have permanently undermined their profitability.
The first step in our work was to calculate the cost of delivery and of pure order-taking under both sales models (“No-Order” vs. “Order-Based”). As shown in the graphs below, in no scenario – regardless of drop size, sales volume or number of stores visited per day – did the “Order-Based” model outperform the “No-Order” one: the total sales cost was always higher.
The next key question was: why, then, had so many companies in our client’s industry adopted an “Order-Based” sales approach?
One possible explanation lies in inventory and stock-out costs. These are highly complex to assess, as they depend on the statistical behavior of products, customers and stores – including seasonality, daily and weekly variability and other company-specific characteristics (for example, the specific margin contribution of each product, which in turn determines the cost of its stock-out).
Therefore, the second step of our work was to calculate both inventory and stock-out costs for each product in our client’s portfolio, and to integrate all these results and complexities into a comprehensive model. As shown in the graphs below, a break-even point emerged – beyond which the “Order-Based” model becomes economically preferable to the “No-Order” one.
Interestingly, for our client’s specific situation inventory costs were negligible compared with other costs. Stock-out costs, on the other hand, could instead be significant, but only at very high levels of operational intensity (drop sizes, daily volumes, stores visited, etc.), thus defining the existence of a break-even threshold.
The analysis did not stop there, however. Two additional factors needed to be incorporated into the economic model:
- the sales effectiveness factor
- the territorial dis-optimization factor.
These effects are particularly complex to quantify. For example, the territorial dis-optimization factor – shown in the charts below for our client – shifted the break-even threshold further, making an “Order-Based” model even less advantageous.
By combining all the analytical components and applying our methodology, we determined that our client’s current situation was far below the break-even threshold (see example graph below).
This meant that transforming their sales approach into an “Order-Based” model would have severely damaged their P&L.
To what extent? Our calculations showed that such a move – by nearly doubling Sales & Distribution costs while keeping sales constant – would have turned a highly profitable company into a deeply unprofitable one.
In short: we saved their business.