February 19, 2003 - Distribution Channel Commentary # 12 Merrifield Consulting Group

February 19, 2003 - Distribution Channel Commentary # 12



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As many of you know, I started my career in wholesale distribution channels on a full time basis in June, 1974. Upon graduating from Harvard Business School, I didn’t seek fame and fortune in big time consulting or investment banking like 80% of my classmates. I took, instead, the road much less traveled to Peoria, Illinois where I started as the assistant branch manager of the Peoria Paper House, a distributor of both printing and industrial paper products. The Peoria plant was one of six distribution locations owned by a fledgling regional chain with big ambition called Distribix.


It took me 18 months to help turn this chronically money-losing, lousy-service-reputation business into a stable profit-maker that then became a platform for an incredible growth story from ’76 on. In the meantime, the founder of Distribix, to whom I reported, had bought a few more tired, old family distribution companies that needed to be transformed. To this day I have never stopped learning how to turn mediocre-at-best distribution companies into sustainable, high performers for the benefit of all stakeholders.


Much of what I have learned about distribution turnarounds over the past 29 years has once again been re-distilled and re-packaged into an all-day seminar that I will conduct on March 5th in Birmingham, Alabama as part of a one week “University of Industrial Distribution.” The whole story is at www.univid.org, AND anyone can sign up for it; you don’t have to be a member of one of the 20 trade associations that sponsor and promote it. The entire curriculum will work for just about any type of wholesale distributor, not just the “distributor-to-industry” subset that sponsors it. Is it worth it? Yes! It is simply the best-value, finely-tuned, educational offering that has ever been invented within the world of independent distribution channels.


But, if you would like to first check out my handout, whether you attend or not, please request it from karen@merrifield.com. We can send it to you in a PDF file for free if you have broadband capability. If you would like a hard copy snail mailed to you, that to is free IF you can credibly convince us that you might further employ my services. Otherwise, if you send us a check or contact us with a credit card for $15, you have a deal.




The magazine “Supply House Times” serves the plumbing supply distribution channel. It is one of the oldest, best trade publications within the world of distribution. Like many trade publications, it kicked off 2003 with an excellent outlook report on a product segment that is vital to their channel. The article is entitled: “The US Industrial Valve Marketplace” by Terry Helms. For those interested, here is the URL:



For readers in the other 150+ distribution channels in which I have worked, when you read your channel’s big product data reports, make sure you first surface and write down your (unspoken?) assumptions for how you will grow your profits in 2003. Because the assumptions that will work will not be (and can’t be) in a report like our valve example above. To illustrate the importance of having the right profit growth assumptions that will guide you to additional information peculiar to your business that will make 2003 marketing programs successful, here are some quotes from the valve report followed by my comments.


a.       “Growth in the US valve market is elusive…even the experts can’t agree where the opportunities are…there are some end-user industries showing promise…the overall outlook is unfavorable….most analysts feel that 2004 will be the turn-around year for the valve and actuator industry.”


Comments:  This channel’s general growth outlook isn’t much different than most other channels. Things seem to be bumping along a bottom at the outset of 2003 waiting for capital expenditure spending to return someday, maybe in 2004. For new readers who keep hoping that this year will finally get better, you might want to read my post-bubble economy management ideas in both our E-booklet and most of my past commentaries. Specific DCC topic coverage on getting growth with customer-centric strategies can be found in DCC #10 topic3,DCC #9 topic 2, DCC #9 topic 3, DCC
# 7 topic 3, DCC #5 topic 3 and our video modules #ed: 3.1 - 3.7.

The valve article has nice tables on multi-year growth trends in shipments by type of valve and by total valve shipments into different, end-user industry segments. Don’t fall into the trap of allocating more promotional effort towards the product sub-categories and end-user segments with the most promising growth potential and trends. The majority of your competitors are thinking and pursuing the same strategy. Ask yourself instead these customer-specific questions:  1) “This is fascinating product-centric data, but in these tough times, who are the 3 to 5% of my current customers that are generating a monstrous percent of my profit before taxes? To defend them from all of our product-centric competitors, what total-team, super-laser-beam focused effort should we lay on them to sell them whatever old and new products and services they may need? If they are bent upon putting all of our hard-won business out to bid, how do we help them frame the analysis to include economic concepts like: “total procurement cost” savings (not just bargain price for bargain service); “switching costs to new suppliers”; and insurance premiums to cover unspecified extra vendor resources to solve all forthcoming unforeseen problems and adaptations? How can we re-invent, sell and get credit for our total economic solutions before wrong-headed bidding even comes up? Prevention is usually better than reactive fire fighting. 


And, 2) “Who are the 3% of the potential customers in each end-user segment that will generate 80% of the future profitable growth over the next 5 years? Because these “gazelles” are perpetual innovators that can actually execute ideas successfully, they will continue to organically eat up share from the bottom 50%+ of the players within their respective industry. What are we going to do on a total-team, focused basis to partner these gazelles so they will then grow us faster than both the industry and product category growth rates?


b.       “Most projects call for standardized items produced by many manufacturers….the low cost distributor usually wins.”


Comments:  This is a generally a true statement from the perspective of the bottom 90% of distributors in all channels. According to Al Bates report on 8000+ distribution firms from 40 different distribution channels, the bottom 90% of all distributors are averaging 5% + for pre-tax return on total assets while the top 10% average 15.4% (DCC 10.1). The bottom 90% talk about “good service” and “getting paid for it”, but only the top 10% can actually achieve, sell and get paid for it. They are the price makers, the bottom 90%+ are the price-takers for whom the quote above is true. Modules 4.1 – 4.13 of our “High Performance” video can help any distributor to : define, measure, achieve, sell, get paid more for and partner with basic service brilliance.


c.        “We see the best prospects for future sales growth in the market for more sophisticated engineered products” (A valve manufacturing executive).


Comments:  Spoken like a die-hard, niche-product manufacturer. Perhaps they will be able to someday come up with a breakthrough, high-end product. In the meantime, however, I wonder if they couldn’t sell 2 to 3 times more volume on their best-moving, cash-cow products through their best distributors by co-creating a total-team effort to sell more to the distributors’ core and gazelle accounts. When you are totally immersed in a 100-year old product/volume culture with product managers and product data reports, it is hard to ask these kinds of customer-centric strategy questions:

1.       What are the five top distributor locations that sell our products?

2.       Who are the top five sales reps working out of those locations that sell the most of our products and why did they historically become exceptionally adept with our products? (Warning! Don’t be shocked to find a lot of accidents of history in which a sales rep coincidentally dropped off a brochure about some new product for which they new very little to the ideal customer at the ideal time. The rabid customer needs then forced the rep to become sufficiently masterful about the product to then successfully and persistently sell it to a few other appropriate niche-need customers in their territory. It’s a win the lottery story; a freak set of conditions that created a product evangelist. How do we turn the art and luck of such random successes into a more scientific, higher probability marketing strategy?

3.       Who are the top-5, most-profitable, important accounts for each of those five locations that also buy a lot of our product, so that they are important to both companies? What can we do to help defend and grow our share at those accounts that love our product, love the sales rep and love the distributor? Maybe those accounts will help us create new products and differentiating services.

4.       Ditto for mutual gazelle accounts at those five distribution locations.


If any manufacturers are concerned that the distributors won’t share the account data and do joint efforts on such accounts, you might generally be right. If, however, you go to the very best accounts and tell them about your new, key-account, extra resource commitment that you would like to allocate to the first 5 or so distributor locations as you work down your list of prospects, you won’t have to go to far down your top 10 list of candidates to find cooperative volunteers.


If your sales force doesn’t get it and balks at having to do different types of selling, that is to be expected. People always want to be in control and keep doing what they do. They confuse reactive, fine-tuning, adaptive “learning” with breakthrough innovation moves and learning. Tough times require new solutions and methods. Push the “wheel of learning”(VM #5.7); make “good mistakes” by falling on your faces forward to new, next level results (VM #5.8).


d.       (a manufacturer) “sees the power sector as the ….single largest market opportunity in the US today.”


Comments:  That is what all of the power companies thought a few years ago and bet the ranch with big debt to: consolidate, de-regulate and open up new plants. Remember the California shortages of two summers ago? Well, since the Supply House Times article was posted in early January, a torrent of bad news has come out of the power industry which seems to have developed a huge glut that may take several years to absorb. It turns out that Enron’s 2000 off-the-books subsidiaries went a long way towards inventing the big shortages of just a few years ago. I wonder how many valve manufacturers and distributors have targeted the same, now wrong industry? Nothing like lots of new foxes going after a shrinking group of rabbits. Again, the viable core and gazelle accounts in the power industry – all 2 to 4% of them – will always be good customers to team focus on. Don’t delegate the upside potential in these accounts to a “good sales rep” on the account. They won’t stand a chance against a total-team, full-court press effort from a smart competitor.




One of my distribution chain clients has evolved an in-house “RONA trend ranking report” for their 30+ branch managers and three regional managers that has sparked real, positive changes. Here’s the history of what has happened so far:

1.       Their RONA FORMULA? All managers in this company get paid on the financial components that go into measuring “RONA” (return on net assets). This chain’s particular flavor of the formula starts with the numerator being the “operating profit before interest and taxes (“PBIT”). But, corporate allocation expense is deducted before getting to the PBIT and half of the corporate expense is interest expense for total corporate debt that finances every branches inventory and receivables. So, the PBIT at the branch level is technically closer to a “profit after interest, but before taxes”(PBT) figure for those financial purists in reader-land. But, this chain figures that as long as their chosen measurements are internally consistent and comparable it is OK. The denominator is the sum of the average investment in branch inventory and branch customer receivables using twelve annual data points for each asset item. Because most of the trucks and warehouses are leased or rented, they aren’t considered “controllable assets” by branch managers on an annual basis. So, both their numerator and denominator are a bit understated compared to what the chain’s overall ratio for PBIT/Total Assets might be.


2.       The first RONA ranking reports from high to low by both branch and the three regions were done and presented to all branch managers and regional managers for the year 2000. This was a big step, because the bottom branches and region were initially quite defensive. (For more on “internal benchmarking” ideas and methods see our video modules # ed 5.3 to 5.6)

     By year-end 2000, it became apparent, that the report was “interesting”, but not a catalyst for new, more effective behavior. All managers professed to have the reasons and excuses for their past performance and to have plans for improvement, this really amounted to doing what they had always been doing with more vigor.


3.       For the year 2001 a few extra columns were added to the ranking report including: GM%, “gross margin $s/full-time equivalent employee” and length of tenure for the current branch manager. A fourth column was added by top management in which they ranked the overall effectiveness of the branch and regional managers on a 1 (worst) to 10 (best) scale. There was a close correlation between high RONA and both the GM$/employee ratio and the length/quality of branch managers at the locations. There was a slight inverse correlation between RONA and GM%. The high RONA branches had more often than not the lower GM%. It did seem apparent that the quality and longevity of the branch manager at a given branch was a driver of both the RONA and value-added productivity or GM$/employee ratio. Reducing turnover rates of branch managers and some longer-term business skill development curriculum for branch managers began to be discussed. The discussion of the report with managers yielded the same “we know what’s going on, we are improving” comments as the year before. New Year Resolutions were once again to do the same best practice kind of things harder and better. Even though there was an inverse relationship between GM% and RONA, many of the branches were working on “margin enhancement (sell higher)” programs short on specifics.


4.       For the year 2002 columns were added for the RONA scores from the previous two years and guess what? The RONA scores for all three years had generally not budged for most branches and regions whether they were at the high or low end! There were a few exceptions where a branch had a bigger RONA change for which top management could readily explain with a big outside change event, not continuous operational improvement programs.


5.       This raised some interesting questions like:

a.       If everyone gets paid to improve their RONA’s and if everyone is working away on improvement programs, why is no one improving? Are we working on the wrong RONA improvement initiatives? Are all of our initiatives just incremental fine-tuning efforts to a misunderstood, underlying business model? Are we fussing with deck-top efficiencies without understanding why some hull and sail strategies are causing consistently good or poor boat performance? If we keep doing what we are doing inside the same framework of unspoken success assumptions, won’t we keep getting what we are getting?


b.       Could there be more random good luck and bad luck to how our branches grew up into structurally and strategically more or less effective performers? Do we, for example, enjoy at one location some really profitable account dynamics (historical lucky breaks) along with weak local competition while another location suffers from some very, unprofitable account dynamics along with smart, tough local competition?


c.        Why didn’t the managers with the best and worst RONA’s have any answers for these questions.


6.       Next came the discussion about the need to look at branch profitability in new ways. Specifically, they took a look at some ideas from our video, “High Performance Distribution Ideas for All” including: Ranking reports by customer profitability (VM #3.5) to find out that there was a perfect correlation between RONA and the average PBIT/customer. The lowest RONA branches also had more, big loser accounts at the bottom of their reports. The highest RONA branches had more, big winners out of the same common niche of customers at the top of their report. A theoretical model was offered.
1) If more big customers from the same niche bought most of the same one-stop-shop basket of items, then wouldn’t those items be more reliably forecastable and flow through the warehouse on a faster, more regular basis?
2) Wouldn’t this allow the branch to have the highest fill-rates for that niche in the competitive area?
3) Wouldn’t highest fill-rates create higher customer satisfaction and retention with existing accounts? And would more potential customers within the same niche defect from competitors who had lower fill-rates?

4) Wouldn’t higher fill-rates cause higher average order size productivity for the branch? This would include lower: split-shipments from other branches, back-orders and costly substitution and expediting tactics?
5) Wouldn’t this allow the branch to attract more service value conscious customers that would pay a bit more for good service?
6) Wouldn’t higher GM% allow for a better “turn-earn” productivity score for warehouse business?
7) Wouldn’t all of these factors make it an easier, happier morale place to work than a location that had all of these factors working against it?


Enough speculation! Want some more factual evidence for these theories? The number one RONA ranking branch did have the highest turn-earn product. It didn’t have the highest turn rate that dubious honor went to a cost-plus, just-in-time OEM supply branch that had a very low GM%, a small order problem and a very low RONA. The #1 branch didn’t have the highest GM% either, that dubious honor went to a location that had a ton of will-call, small contractor, small order business along with a low RONA. (Hmmm?)


None of the regional managers had thought of pushing old or new ideas through to the bottom 80% of the payroll, the front-line service providers who could theoretically sense-and-respond with heroic extra efforts for best target accounts on a spontaneous basis. Except for a few detail problems: know one, including the regional and branch managers, knew what customers were the 5 most profitable or 5 most important strategically screened target accounts by heart. Even if they all knew, the front-liners didn’t really know the why’s and how’s of doing heroic extras for these groups of accounts. All of these productivity plays and background educational needs were fortunately packaged in bite-sized video training modules in the “High Performance” video so that the total, unadulterated story could eventually get to everyone on an affordable basis.


7.       So, where’s the beef in 2003? Checking in with the CEO this past week, this is what has happened in the first 6 weeks of the new year:

a.       There is a higher, broader level of open-mindedness, urgency and optimism for trying new things amongst most of the operational managers; the flat RONA trend numbers served as a wake up tool. No one was touting same old programs that had been guided by conventional, financial assumptions like: sell high, buy low, sell more ____ (fill in a product promotion here). Nor was anyone using the same old excuses for why RONA’s hadn’t improved.

b.       One regional manager got to work immediately on personally renegotiating contracts with about 20 of the biggest losing accounts in his 10-branch region. Based on the first few calls, audits and proposals, he thinks he can double his lowest, regional RONA in 6 months. Nothing will improve RONA’s faster than turning “lead accounts into gold ones.”

c.        All branches have discretely posted their top 5 or so core accounts and agreed on who their gazelle target accounts are for the total team-sell, full-court press treatment.

d.       Are all managers buying into new thinking and trying new things evenly? Far from it, breakthrough changes for breakthrough gains take great change management skills and different time lengths for different types of people (VM #5.1 – 5.13). This chain figures that they are way ahead of the competition.

e.       Things are looking up! New ideas are getting traction.




If you are looking for the most focused, insightful, timely stream of what’s going on in distribution channels, the best search engine on the planet is finding the right value-added guy who isn’t beholden to one distribution channel’s advertisers. That guy is Tom Gale who is the owner, publisher and editor of “Modern Distribution Management”(MDM). His biweekly newsletter has been one of my main informational and educational resources since 1979 when the founder and Tom’s predecessor, Van Ness Phillips was cranking it out. Whenever I write a formal article, I always try to get Tom to publish it first because he has the biggest, smartest subscriber base.


MDM’s historical focus has been on the distributor-to-industry, sub-set of the independent distribution world, but Tom has interesting plans afoot which bear watching and evaluating. Because a majority of my readers are outside MDM’s traditional scope of distribution, I persuaded Tom to offer you a special introductory exposure to what he has been doing.


Here’s the deal! You can get free, complete access to news, management articles, data and a few years of archives about wholesale distribution by emailing chris@mdm.com. In that email, please choose and include a password (min. 6 characters), your email address will be your username. Or, you can just call Chris at 651-771-2540, and she will get you set up. All you have to do is mention that you want the “Merrifield introductory offer.”


After you have reviewed what’s there, you will have to decide whether you will be able to get the “one good idea; the one great how-to article; etc.” that will return many times your annual investment in this service. The service costs $245 a year for 24 issues. This allows you to have either the online version or the paper-based mailed service or both with no need to save the paper, because the searchable archives are always there!


I believe this offer may expire at the end of February, so jump on it today.




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