Merrifield Consulting Group

















February 5, 2003 - Distribution Channel Commentary # 10

 

Greetings:

 

            If you know what these commentaries are all about, go to “TOPICS” below; otherwise, read on.

 

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This is our tenth commentary. If you would like copies of some or all of the others, please feel free to request them from karen@merrifield.com. If you want more reading, we also recommend that you  request our 45 page E-Booklet (EB) entitled “New Solutions for a Different Kind of Downturn.” This has 11 articles and a case study exhibit that haven’t been posted on our existing web site, because our first web master had a mid-life crisis at 25 which we mistakenly, patiently tried to accommodate. We do make frequent references to the EB, so it could be handy to have. All of the references to our past documents will stop when we can put them all on the new site with hotlinks.

Until then, here is what our Reference abbreviations mean: 

1.       “WS-ART#” = at our web site, under “articles”, the specific article # (warning: the transition site doesn’t retrieve the articles, so request them via email as desired);

2. “DCC# x/y” = Distribution Channel Commentary-edition#/topic#.

3.       “EB#”  = e-booklet article #.

4.       “VM#” = our video, “High Performance Distribution for All”, module #. Lots of info on the video is in the e-booklet: another reason to request it and skim through it.        

 

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THIS WEEK’S TOPICS:

 

1.       DISTRIBUTOR HOPE DATA AMIDST A SEA OF GLOOM

2.       GETTING PAID FOR SERVICE VALUE (REALLY!) – CASE STUDY

3.       LET CUSTOMERS STRATEGICALLY MANAGE YOUR CORE INVENTORY

 

 

 

 

 

 

1.       DISTRIBUTOR HOPE DATA AMIDST A SEA OF GLOOM

3 to 1 bad to good news reporting in the face of big headwinds

Latest distributor performance coverage

 

Doom and gloom sells well and this past week there was no shortage of it in the business press. Would you guess the bad news outweighs the good by at least 3 to 1? Yesterday, it was AIG Insurance, one of the last of the triple A rated, announcing a 2.8 Billion reserve for writing off stuff that they accumulated from ’97 to ’01. Their stock price took an immediate 6.6% hair cut and we are all left with how many other bad-debt write-off bombs are out there.

 

Goodyear also announced that they will be eliminating their dividend for the first time since Pluto was a pup. Their stock price went down 17%. They have too much debt that goes back to a deal that they did in ’90. The good news is that corporate interest rates and expense have been dropping, the bad news is that earnings from this lousy economy have been dropping even faster. Those of you with bank covenant violation blues know the problem, but it appears you have lots of big name company. Look for many others to follow this year.

 

These two tidbits of news illustrate that our current economic problems pre-date the notion of removing Sadaam and going into endless, debt-financed, nation-building in the Mid-East. In fact, the stock markets can’t sustainably rally until the following pre-conditions occur:

a.       Wall Street forecasts for earnings have to stop being greater than what is finally reported. In fact, real bull markets start when earnings surprise and exceed forecasts on the high side.

b.       The psychological cycle for how retail investors value earnings over-shoots to the downside what would seem to be a fair, long-term valuation average. Right now the trend for P/E ratios is still in a steep downward trend. Investors took money out of mutual funds in January which hasn’t ever happened in modern- 401K- year-end-contribution times. To understand how the big cycle works look at the graph at the following URL; don’t try to invest against the trend. http://home.houston.rr.com/intelligentbear/com-dj-infl.htm

c.        Bear market productivity tactics have to stop. Analyze this: Analysts are looking for 18% growth in operating earnings and 27% in net income for 2003 for the S and P 500 on a forecasted increase in top line growth of 0.45%. That sounds like cost-cutting and laying off people to prosperity. How good can the rising unemployment figures be for debt-exhausted consumers in a consumer demand driven economy? If you do have to layoff people, here is a case of how not to do it. Goldman Sachs CEO, Henry Paulson, said this last week to a group of analysts about cost-cutting his way to better profits: “I don’t want to sound heartless, but the fact is that in almost every one of our businesses, there are 15 to 20% of the people who really add 80% of the value.” After laying off 2, 983 people in ’02 (13% of the total), he told analysts that the firm was “sized about right”, but that he was prepared to fire more if market conditions didn’t improve. Then, here is what he said yesterday (2-4) to all of his employees… “that response was “glib and insensitive.” Apparently about 80% of the firm’s employees had gotten stressed out about the first comment. How do you layoff people in a motivating way? Check out the following modules in our “High Performance..” video (Modules #ed: 2.4, 3.14, 5.3-5.6).

d.       The excesses of our ‘96 to 03/01 bubble economy have been worked off and we have reinvented ourselves to replace the wealth creation jobs that we will continue to loose to China and India at accelerating rates. For lots more on the bubble excesses which, for most people, seem to be the invisible headwinds that have and will continue to hold our economy back for some time to come check out these references: EB#1; DCC 1.2, 2.1 and 2.2, 3.3, 6.1

 

So, where’s the hope Bruce? Well it wasn’t in Davos, Switzerland where global poohbahs didn’t listen to high-tech visionaries talking about endless high-productivity and prosperity creation. They listened instead to two generals talk about what may be imperial economic over-reach for the US and all G 7 officials talk about how hostage they were to slowing, deflationary, global growth.

 

Don’t look to Washington, D.C. for hope. There isn’t any kind of government stimulus plan that can take away the pain of having borrowed and spent $32 Trillion in interest-bearing debt mostly on consumption and bad investments instead of productive ones. Our hope has to come from within ourselves and our companies. Below are a few broad points on this theme followed by a detailed interpretation of recent reported distribution performance data.

 

America still has unique economic asset potential that we have to try to personally leverage. We have:  more PC’s per capita with 65% of the global bandwidth connecting us together; 80% of the global software market with first-user experience; the biggest, richest, contiguous economy with on balance the best business climate; the most scientists, universities and basic research that has already generated all of the identifiable, next-generation, important technology, etc. There’s lots of upside potential for Americans in the long-run if we just regain the nerve to seize and exploit these opportunities.

 

As for the nerve part, here is a “Red Badge Of Courage” pep talk. I don’t know how many of you had to read this book by Stephen Crane in high school like I did. It was a pretty boring experience for me until my teacher challenged the male athletes in the class to work together on sharing sports experiences that paralleled Henry Fleming’s (the book’s protagonist) feelings/stages of: panic; guilt; random luck for false credit; obsessive, unfocused courage in the second battle; and, veteran-courage in the final battle.

 

Well my teacher’s exercise worked well enough for me to remember Henry’s name to this day and to think to apply it to the new type of downturn battle that we are facing. A post-bubble slump that non of us have faced in our adult business careers. How will we deal with it? Will we find the courage to try new methods that we have never done before in order to triumph over new economic conditions that we have never faced before? Can it be done? Sure, read on to find about the top 10% of all distributors and how they are doing.

 

Distribution performance update story

 

Here are four recent distribution performance reports followed by some commentary on other experts’ commentary:

 

1.       “Goldman Analyst Learns that Candor Doesn’t Pay” (WSJ, 2-5-03). The story is an analyst downgraded the big surviving three wholesale drug distributors –McKesson, Cardinal Health and AmerisourceBergen- on November 19th. All three firms saw their stock prices tank that day by 5 to 7%. Since then, the analyst has gotten the big chill from the firms. Lessons learned? For analysts: don’t forget who your master is, be a cheerleader and spinmeister for the companies you follow or get cut off from data and any underwriting fee business. For investors: maybe the buy on the dips and holding for the long term advice we still are getting doesn’t work so well in secular bear markets. For distributor managers: even the big, oligopolistic distributors with the latest technology in growing channels – drugs and health care supplies – are being hammered by this new kind of war. Maybe “best practices” isn’t enough. 

 

2.       In a recent article in “Progressive Distributor” entitled “Big changes for industrial distributors.

Why you won’t be able to sell yourself out of troubleby Scott Benfield and Jane E. Baynard (http://www.progressivedistributor.com/progressive/Online%20exclusives/BigChanges.htm). The article starts out by citing data from the Industrial Distributor Association’s 2002 performance report. Here are the first couple of paragraphs:

 

“The latest profit figures from the Industrial Distribution Association (I.D.A.) show that its member distributors report profit of 0.4 percent of sales or a return on net worth of 2 percent.

Part of the slide is due to the dismal economy and the recession, now in its second year. However, the decline is not only symptomatic of the lousy economy, it is indicative of structural changes that have been brewing in industrial markets for some time.

Distributors serving the MRO and OEM manufacturing base are advised to carefully consider our diagnosis of the problem and prepare accordingly. One more year of the dismal economy at a 0.4 percent pre-tax level and the audience for our work will substantially decrease.”

 

Read the rest of the article. It is well written; I agree with the prescriptions; and there are hotlinks to more articles by the two authors.

 

3.       In the January 10th issue of Modern Distribution Management (www.mdm.com) Editor and Publisher Tom Gale has introduced yet another value-added, (quarterly) feature to his excellent publication. “Databank” is a fascinating 12 month trend report on 25 publicly traded companies in three sectors: industrial, plumbing+ (PHCP) and electrical. 11 of the 25 firms had pre-tax return on total assets (ROTA) of 10% or better for the past 12 months trailing, while the bottom 8 in the group had ROTA’s that were 8% or less.

 

In the same issue of MDM, Al Bates weighed in with a summary report for average 2001 numbers for about 10,000 distributors in over 40 different distribution channels. (For more on Al, his firm and his thinking go to www.profitplanninggroup.com and click on “financial issues.”) Here’s the shocker out of his MDM report: if you look at the median distributor’s ROTA (50% did better, 50% did worse) it was about 7% for ’98 -’00, but in ’01 it dropped to 5.3%. This suggests to me that the owners of the bottom 50% should liquidate their businesses, put the net proceeds in muni bonds and let themselves and their employees find new jobs with better futures.

 

BUT, HERE, FINALLY, IS THE HOPE PART (at the end of Al’s article)! In, 2001, the top 10% of all reporting distributors to Al’s surveys had a ROTA of 15.4% which I would guess would give them an after tax return on shareholders equity (ROE) that is 4 to 6 times greater than the average firm. So, in the midst of a new kind of recession, there are distributors who are making great bucks to further finance the hopes of all of their stakeholders.

 

So, it can be done! How? Not by trying to raise margin percent or take structural cost out of a business with “best practices” that are done in a service-value-for-specific-customer-niche vacuum and without the bottom-up, self-organizing spontaneous commitment of the bottom 80%+ of the payroll. Distributors must, instead, subscribe to “high performance service management practices” that are guided by most profitable customer-centric plays. (WARNING: HERE COME TWO ADS)

 

If you want to rethink your company’s unspoken assumptions and practices that aren’t giving you a 15%+ ROTA and then be able to extend education to all employees for the commitment piece, order a copy of our video, “High Performance Distribution Ideas for All” today. We can handle all of your objections, and the product is guaranteed for 30 days. Don’t think it can be useful, ship it back and throw the invoice away. What have you got to lose!

 

If you want the one-day seminar tuned to branch managers surrounded by a full-week of other great educational fare, then check out the University of Industrial Distribution, the best distribution educational offering of all time. This “university” has been run about 10+ times over the past 5+ years by a consortium of 20 distribution trade associations that are all in the durable goods, distributor-to-industry category. The product is combat tested, great. And, as a long-time faculty member I can guarantee that all of the faculty members have worked in lots of distribution channels besides those represented by the 20 sponsoring associations. The teaching is 95%+ applicable to any type of distribution channel, and “how should I apply this in my channel” questions are always welcome. You don’t have to be a member of the 20 sponsoring associations; anyone can go. So, for those of you who are looking for a great educational experience for some important employee(s), why not try an experiment. Send them to this best cost-benefit program with the understanding that they are going to come back and make a full report on what they have learned of value that can be applied at your company. Go to www.univid.org .

 

2.       GETTING PAID FOR SERVICE VALUE (REALLY!) – CASE STUDY

 

Every distributor that has big, price-demanding customers needs to check out www.valueaddedpartners.org every month for new inspirational case studies about getting paid for what you do. A recent case study addition that I enjoyed stars Engman-Taylor Co. of Menomonee Falls, MI. The URL for the case is:

http://www.valueaddedpartners.org/articles/articles_KeepingUpTheGoodWork.asp

 

As you read through this and other such case studies, you might think about these questions:

1.       What is an underlying process that we could develop that would allow us to identify and partner on a sustainable basis the few, big customers that really can, for their part, walk the “win-win” talk? Could such a process help us to turn the art of doing the win-win with a whale into a replicate-able science at multiple locations if we have them?

2.       What percent of distributors can really develop the in-house skills to make successful system supply deals even with border-line capable customers? What percent of the big customers who say they want to co-create a win-win, lowest total procurement cost supply system solution can really do it and stick with it instead of regressing to price shopping?

3.       How many “system” deals do we already have in place that for whatever reasons turned out to be big losers? What should we do about those losers before we try to get more like them?

 

Want my thoughts on these questions? Well, here they are anyway.

 

For question 1: I have evolved a 7-step process for going all the way to sustainable success a big percent of the time (VM# 4.13) The steps are:

1)      Qualifying the account for their ability to partner. Have they done it in the past with all stakeholder groups? Can they give you other suppliers to call about their ability to co-create win-win deals? This gets rid of 90% of the candidates.

2)      Give them total target, laser-beam/team treatment (VM# 3.7)

3)      Do up-front contracting about how you will together do the next 4 steps.

4)      Do the professional analysis and recommendation for a fee that can be paid for out of future savings

5)      Install

6)      Continuously improve, evolve and measure

7)      Testimonial selling within and to other target accounts. The story must be documented for future generation buying influences who might regress to thinking “price”= total value.  

 

 

For question 2: What percent of distributors and big, end-user customers can pull off these case study stories? I think about 3%. It takes two perpetually innovative firms to not only create partnership economics within their four walls with their employees, but then to do it across company lines and processes. If you can identify a top 3% target customer with a track record of partnering, why should they partner you? Trust is a track record of turning myopic, short-term stakeholders – employees, customers, suppliers and shareholders – into longer-term, bigger-picture, commonwealth capitalists. Most people understand and desire concepts like: “united we stand, divided we fall” and in the long-run, no one can do better than the whole (the company that feeds us). But, how many CEOs want to start the journey to making this happen and then try to maintain it against natural tendencies of human nature?

 

For question 3: Most every distribution location has failed, system/deal relationships within their customer portfolio. You will find them at the bottom of your customer profitability ranking report. Before trying to create new ones, fix and learn from the old, failed ones. Besides, no other turn-around tactic can improve profits and employee capacity bigger and faster than turning these lead accounts into golden ones. How should you proceed? Check out EB #s 11-14.s But, to generate branch level belief, will and action to actually transform these accounts from big losers to big winners , you may all have to watch, discuss, hem-and-haw about video modules numbered 3.5 to 3.11. Then, don’t expect the sales reps to do it, a champion will have to be assigned to these target lead-into-gold accounts.

 

3.       LET CUSTOMERS STRATEGICALLY MANAGE YOUR CORE INVENTORY

 

I recommend a fascinating read on how big retailers have turned over the management of product categories to one supplier that must decide which of their items and their competitors should go on the shelf. The practice is called “category management.” You might first read the article and then think about the following discussion points. The article is entitled “Who’s Minding the Store”; it is in the magazine Business 2.0 and at this URL: http://www.business2.com/articles/mag/0,1640,46334,00.html.

 

Discussion issues:

a.       Distributors that win integrated supply contracts are like “category captains” who get to choose between selling/stocking their brands or those of other tier 2 suppliers. If you are one of them, look for tips on how to do the best for all parties, but get the “favorable bounces.”

b.       For tier two suppliers that don’t trust the long-term, self-serving intentions of the primary distributor/supplier look for tips on how to get the captain to play fair.

c.        Applying category management ideas to a distributor’s inventory by a supplier doesn’t work like it does at retail where the items are bigger-volume, stable, forecastable-out-of-each-store products that are substantially pulled through channels by advertising. Most items within a local branch’s warehouse are, instead, mostly pulled through by core customers. Back in the start up days for a distribution location, the majority of sales came from sales reps pushing both old and new products to mostly new customers. But now, most locations have 80 to 90%+ of their sales falling into the old products to old customers segment.

 

HOW ABOUT THIS THEORY?

a.       Let’s assume that our core strategy is where we make our money which is at the intersection of our biggest, best customers that buy our most popular, fastest turning-earning items on a regular, healthy order-size basis.

b.       So, we look at the top 10 customers on our profitability ranking report. Then, we identify 4 to 6 of them that not coincidentally are all good friends of ours who happen to mostly buy from the same one-stop-shop assortment of well-tuned, high fill rate items out of our warehouse. (Can you figure out why all of those conditions are related and true?)

c.        We visit with these folks for a lot of reasons, but this time we ask them to review what they buy from both miscellaneous suppliers and from what we would consider head-to-head suppliers. Because they: are our friends; intuitively understand that total procurement cost goes down with supplier and purchasing activity/paper consolidation; and buy from other suppliers because we don’t have it, they work with us.

d.       On a 20/80 basis we are looking for holes in our one-stop-shop assortment of items for the niche of customers that these 4 to 6 best accounts represent and personify. We find and agree to put in some more items that 2 to all of these customers have been buying. We change our customers’ re-ordering systems so they will automatically now buy these extra items from us therefor increasing our volume and average order size for the fixed cost elements of one more transaction. The customers lower their total procurement cost. Everyone wins bigger and better!

 

Couldn’t these 4 to 6 customers act like our category managers for some important sub-set of our inventory that has been unconsciously shaped by them in the past anyway? If we improve our one-stop-shop assortment for them wouldn’t it also support the next 20 best customers in that niche that are already in our customer portfolio? If we went after the 5 best target accounts in the niche that we don’t already dominate, wouldn’t we have a more complete total procurement cost reduction story to sell?

 

So, what group of individuals at your company is going to do this project and why? What’s in it for them? Do they really comprehend and believe the huge flow-through profit potential of selling more old and new items to the very best customers? For one more dollar of sales HALF OR MORE of the incremental margin dollars will go to the profit line! To help this all happen, everyone might enjoy watching and discussing VM #s 2.1-12, 3.3 and 4.3.

 

THAT’S IT FOR THIS WEEK!

 

ALL THE BEST, 

 

 

Bruce Merrifield

Bruce@merrifield.com