In many cases, sales strategies designed to drive ambitious rates of growth in top line revenue have an underlying supporting tactic: maintaining maximum customer demand satisfaction regardless of the customer profile. This tactic is executed by a robust investment in inventory to meet the widest spectrum of customer preferences. If you think that investing in so much inventory to fulfill every customer’s need is a good thing, think again.
The unintended consequence of such strategies is product proliferation, which may manifest itself through the ripple effect of extended lead times, reduced inventory return on assets, and declining margin contribution and sales. Here’s what you need to consider so that your organization can avoid this pitfall.
Unbalanced Sales Strategies Can Be A Root Cause Of Overall Company Distress
In this still uncertain environment, it can be tempting to favor sales strategies whose primary objective is the unilateral increase of revenue at the expense of other business objectives. However, such strategies often result in the exact opposite of the desired sales result beyond the short-term horizon. These are the typical results:
- Flat line or declining sales growth as inventory investment capital dries up
- Sourcing lead times increase as supply chains become more complex
- In-stock inventories become highly specialized and obsolete as they skew more towards fringe customer requirements that cannot turn consistently
These negative consequences of product proliferation are not readily seen because sales success metrics usually key on various levels of revenue tracking. Those metrics fail to consider inventory and capital relationships which, on the surface, appear not to be directly related to sales. However, despite the robust revenue generation these metrics may show, a deeper dive into the sales data, as revealed by the analysis of Jonathan Bynes’s, tell a different story:
- Only a minority of sales activity, 20%, drive a profit; in fact, this activity constitutes over 150% of a company’s overall profit
- 30% of sales activity erodes over 50% of the profit generated by the minority of sales activity.
- The remaining 50% of sales activity generates minimal profit, but consumes more than 50% of the company’s resources.
It is not a mental stretch to understand how sales strategies that emphasize product proliferation drive the sub-optimal profit generation results above and ultimately declining sales growth:
- Poor pricing strategies are implemented to keep sales turning, which over time result in declining profit contribution and cash generation.
- Inventory investment:
- Tends to skew towards specialty niches that won’t drive sales consistently over the long term.
- Is made without regard to handling, acquisition and cost of sales, which erode EBITDA.
- The required inventory investment cannot be maintained as profit and cash generation erode.
- Sales opportunities are missed as stock-outs become more prevalent because capital to reinvest in inventory, and sustain vendor sourcing, depletes at an increasing rate. At the same time, in-stock inventory skews more towards obsolescence.
A Better Approach
In a recent article we cover the fundamentals of item stratification as well as key concepts to consider when implementing this methodology. Item stratification is a best-practice sales strategy that:
- Grows sales and the profit contribution of customers
- Ensures sustainable return on sales and inventory investment
- Ensures maximum customer fulfillment and satisfaction
For a detailed roadmap on actionable steps toward applying item stratification to your operations, download our latest guide: “How Manufacturers Can Grow Profitably Using Item Stratification”. In it, you will learn a better approach to grow sales and build your business.
