March 19, 2003 - Distribution Channel Commentary (DCC) # 16

March 19, 2003 - Distribution Channel Commentary (DCC) # 16


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  2. As you will see in topic #2 below, rigorous, financial budgeting for fiscal 2003 isnít a strategy and it will, at best, get you more of the same (weak?) results that you have achieved in the past. To get a more complete, "balanced" and motivating view of corporate performance that also spurs the creation of an improving strategic service advantage in a distribution business, consider "strategy maps" along with related applications and measurements.

    A "strategy map" is a 1997 term coined by the authors of "The Balanced Scorecard" (BSC), Kaplan and Norton. It is a one-page description of cause and effect drivers of a strategy. The BSC approach for developing strategy maps has gone through "three generations" in the last 11 years. For a quick overview on the history of BSC methodology when Kaplan and Norton in 1992 wrote their first of three books on the topic and methodology, check out the 3 page article at the URL immediately below. For the "data into profit dollars" topic, software vendors, users and buyers might be interested to know that, according to this article, there are now 16 software vendors that have been certified as BSC-friendly.

    If you want to see a strategy map that is a good generic template for distribution, check out the five annotated slides at, especially the second one in the series that is a modified version of the "service retention model." To currently find this slide show at our site, click on DCC #15, go all the way to the last paragraph and click on the underlined sentence that references the slide show. We hope to soon have a "slide show" button on the home page to lead to more of these short, annotated slide shows.

    If you want more information on the BSC process and movement, just google it; thereís tons of info on BSC out there.

  4. A client, who runs a good-sized distribution chain in a durable goods channel, recently emailed me a package of his 2003 year-end numbers and 2004 budget numbers for my quick review and comments. The thoroughness of the numbers was overwhelming. The budgeting process and detail seemed to assure that his companyís weak, pre-tax return on total assets for both 2001 and 2002 would finally rise to a "good", although not "great" level for 2003.

    I donít think that this huge year-end number crunch will suffice. If all of this companyís management has had incentives tied into pre-tax return on controllable assets (inventory and receivables) for the past few years and this drill has not yet improved things, why should it work in 2003? The good news for most financially driven distribution cultures is that they will not go broke fast, just more slowly, because financial numbers arenít, nor will they explain or reveal, a strategy. The bad news is that without a service edge or having a valuable, exclusive product franchise, they will always be price-takers in a channel with too much dumb competition.

    Because financial numbers are lagging, consolidated symptom results of both underlying profitable and unprofitable activities within a business, doing more or less of both will give us the same return numbers. We need, alternatively, to determine what the leading performance metrics are that cause sustainable profit power that then lead to great eventual financial performance and manage them. We also need to identify the losing Ė customers, orders, products and employees Ė and make them profitable or let some competitor absorb them to create the slack to be more proactive with our best opportunities.

    If you check out the 5 annotated slides at the end of DCC #15, I have never had anyone in a distributor audience disagree with the assumptions behind slide 2, "the service profit chain." This generic strategy map that will work for any distributor that gets 80%+ of their sales on old commodity products sold to old customers. But, it is only a beginning, there are a lot of other productivity applications that need to tie into it. Needless to say, I told the client to order my video on a 30-day guaranteed basis, so that if he decided he didnít want to use the "map, apps and metrics" in the kit to pursue a strategic edge, he could return it and keep his enlightenment. He would at least know why a few distributors were niching away on his domain on a highly profitable basis while he continued to try to be too many things for too many different types of customers on a barely profitable basis.

    A second discussion point for this case example has to do with (branch) management behavior as a result of their incentive plan. I like using pre-tax return on controllable asset plans down a distribution organizational chart with refinements to make it more of a gainsharing bonus. But, all managers must first know, believe in, measure and pursue a very defined strategy map with appropriate apps and metrics. Their bonuses will then grow as a happy by-product of pursuing the right strategy over the long-haul on a sustained basis instead of managing the numbers (symptoms) harder with a 0 to 12 month payback window.

    A 0 to 12 month payback window? Think about it. Without the right strategy map, apps and metrics, how many proactive initiatives can a manager find that will have guaranteed positive paybacks in the months remaining before the fiscal year end when bonuses are totaled? All anyone will try to do during the last six months is to look for extra-5-off deals from suppliers and superficial, cost cutting efforts for payroll and other expenses. No wonder supplier channel loading programs work so well in the last quarter of every calendar year. And, trying to "buy better" to then pump and dump commodity goods to end-users just aggravates the price-selling contest to see which of the price-taking, financial management distribution crowd will be the last one standing. The 3 to 10% of distributors that have a true service value proposition tuned to one niche of customers at a time will, in the mean time, continue to grow with high returns. (For more on "rebate rot" that causes channel loading and pumping and dumping see DCC# 15.3)

    Doesnít it stand to reason that this particular distribution chain will keep getting the results that they have been getting if they keep doing what they are doing? No big changes for 2003 means no big gains for better or worse.

    The CEO in this story got understandably defensive about my comments and mentioned two initial points. The first was: "Donít you think that tight financial controls are important? We have spent a ton of money on both our information technology and our forecasting/budgeting process."

    Sure, financial numbers for managing expenses, cash and assets are important. Iím not making a one or the other pitch, but rather a suggestion for more complementary and balanced metrics that are guided by strategic insight for eventually all employees to understand and support. If front-liners canít measure how they are doing on service metrics tuned to target niches of customers and know whatís in it for them, how can a distribution location compete with another one that has such a bottom-up, focused, service commitment? They are going to lose the retention/defection war. The enlightened competitor will have the total service product that delivers the most consistent, lowest total procurement cost for commodity replenishment segment which is well over 80%+ of the sales volume for most distributors.

    A paraphrasing of the second big issue was: "We donít have the time or staff at headquarters or the branches to learn and do all of this new stuff; itís too overwhelming. I doubt that we can do it; canít we just keep doing what we are doing ever better."

    There are two parts to this objection: the extra resource problem; and the can we do it competency one. To create extra resources Ė time, operational slack, quick profit improvements Ė most distribution locations can dramatically shape up or out their biggest-losing, small-order customers and activity. An average distribution location that has not addressed this opportunity will find that 40% of their smallest transactions will generate less than 5% of their GM dollars, but take at least 40% of their operational activity cost. With a number of moves (all in the video), these numbers can become 10% or less of the transactions generating about 3% of the GM dollars.

    Yes, 2% of the GM dollars involving 10% or more of the transaction might leave to paralyze a competitor, but there are two great trade-off options for the proactive distributor:

    1) Lay-off a few of the least productive employees to maintain a constant transactions per day per employee ratio. This can increase branch profits 2 to 4 fold along with dramatic reductions in headache customers, orders and employees.

    2) And/or, use the operational slack to have the total branch team super-focus on heroic, extra service efforts for the top 5+ most profitable customers and the top 5+ most ideal target customers within a branchís number one historical niche. Give up 2% of GM dollars coming from customers with no past track record and no profitable growth future to partner customers that will generate 80% of all profitable growth in a branch area over the next 5 years! Thatís a good resource investment bet!

    As for the "we canít learn all of this stuff" concern, the short, curt answer is: "if you think you can or you canít, you are right." Iíve been involved with branch managers who are far less talented and resource-rich than our featured CEO who have made this stuff work.

    A "kinder, gentler", more-involved, analogy answer can be found at the local country club on any Saturday morning during the season at either the driving range or the tennis courts. Look for the fit, competitive, 40+ year-old player with self-taught strokes. On the job, he is probably an ambitious, "smart", obsessive professional. At the club, heís a good, consistent, contact hitter, but the ball in both arenas just doesnít go very far (or fast with accuracy in tennis). By scrambling hard, he can be an average hacker who edges others in the middling crowd on gamesmanship tricks and extra effort. He probably knows all sorts of details about the tools and the game. When, however, this type of fellow plays in a tennis or golf foursome that also includes one or more, perfect-stroking, elite players the contrast is arresting. The chap with perfect strokes can afford to be relaxed and gracious and still win easily even if he is much older, less fit and less athletically gifted. If the perfect strokers have learned the game correctly, canít a hard-working, competitive, "smart", better athletic aptitude chap do it too?

    Perfect strokes for both golf and tennis were converted from an art form to a science with books, tapes and video-training lessons in the Ď70ís. Why not dedicate a few months of extra effort and lessons to re-tool your game? Once you have the roughly right stroke mechanics, then practice just keeps making you better, whereas practice with wrong strokes does not. We need to get on a path where continuous improvement is possible. Also think of the joy you can bring to all of the foursomes you will play with. Doesnít everyone like to play tennis doubles or a round of golf with a happy, gracious, relaxed expert that can help everyone else have a good time and hit the ball better? Who wants, conversely, to play with an intense, poor-stroking chap who has excuses for why his game stinks (e.g. "bad tools, luck"), but doesnít want to question his dysfunctional strokes that everyone else can readily see?

    Now, letís relate golf and tennis foursomes to the foursome of stakeholders that are in a distributorís "commonwealth system" of customers, employees, suppliers and investors. How often do you hear complaints from distributors about one or more of these stakeholders being "disloyal." They arenít disloyal; they are, in fact, "loyal to the best long-term, economic return on what they can contribute to a commonwealth system." Every jockey wants to ride the best horse, but only the best jockeys are invited to ride the best ones. Is your company the best horse to ride? If so, you will have no shortage of loyal stakeholders and others from best to worst who will also want to ride with you ; pick the best!

    Enough! The big question in this case study is: does this CEO want to spend the next X years of his distribution career working hard for consistent, but poor financial results with grumbling and defecting stakeholders (usually the very best ones)? Or, take 6 months of lessons to learn how to be strategically effective in order to have fun all the way with loyal and improving stakeholders and to finally sell at a great price supported by high sustainable profit power?

    But, who has turned the art of "high performance service/distribution management" into a science to get a company to strategic competence as quickly and affordable as possible? Where are the affordable training books and videotapes like you can find for golf, tennis and just about any other athletic skill set? If you can find a better, more affordable solution for this challenge than our video and DCCís, let us know. While it isnít and canít be perfectly customized to every type of distributor, itís a good start and platform on which to build. We havenít, in the meantime, seen anything that comes close to the ambition and value of our offerings.


In the April 1st issue of Inc. magazine, there is an article entitled "Cutting Edge Customer Service..", here is the URL if you would like to take a quick look at it:

Below is the introduction to the article:

"During these soft economic times, small businesses are uniquely positioned to offer something that many lumbering giants canít: peerless customer service. Here are four ways that small companies are delivering cutting-edge customer serviceóon a budget."

It goes on to illustrate an eclectic group of service stories and concepts including: "the 24-7 clock, the human touch, real-time feedback, and proactive pursuit."

If and when distributors try to adapt such inspirational service concepts to their business, listed below are some guidelines to consider. (Warning: each of the following guidelines is the tip of a dedicated, lengthy article and/or video module, some of which are footnoted)

  1. Donít forget that the basic, elemental reason that physical distribution channels exist. The primary value-added on which all other services might be piled are the hub economics that come with breaking bulky shipments from an array of suppliers down and re-assorting them into local, consumption quantity orders/deliveries. This lowers total sales service costs for manufacturers to a greater degree than they discount the price to the distributor for buying in bulk, because the distributor organization can spread service costs over many supplier lines. It lowers the end-usersí total procurement cost at a higher price than if they bought it direct. (Vid. Mod. #4.11)
  2. Within the total sum of hub economic activity, the distributorís most profitable customers will be a homogenous sub-group of customers that buy the largest, common sub-group of faster-moving items on a repeat, routinized basis (DCC topics #s on "old to old" selling Ė 1.1, 7.3, 8.3, 9.2, 13.2, 14.3).
  3. Within that most profitable niche of customers defined by the selling of the most profitable old products to old customers, the niche can be further segmented by cost effective mode of selling Ė outside sales coverage ($400 to 500 in GM per month minimum and up!); telesales; catalog; and cash-n-carry, quasi-retail. The total sales potential and order size economics of these strata segments demand different pricing, terms and services that may be standard or un-bundled.
  4. A typical distribution location can serve only one, maybe two of the four strata well, because of inherent structural tradeoffs. This concept is similar to why shot putters and marathon runners canít do both of those events well.
  5. Within your number one niche you should always be looking for ways to get a service edge as this featured INC magazine article is suggesting, but donít bother with the extra services if you donít already have the best basic fill rate averages on a defined one-stop-shopping array of items. The fill rate metric is the cornerstone for lowest total procurement cost value service for a distribution customer (DCC #s 8.3, 10.3). What good are: zero errors, 100% on time delivery and whatever extra service icing you might want to add, if you donít have the item available on a timely, freight-realistic basis?
  6. If you can meet all of these guidelines AND one of the INC magazine article ideas has universal appeal to your top 5 most profitable customers within your number one niche, donít forget to ask them how much more they would pay for the service in price. Donít forget the two cardinal rules of business innovation/wealth creation:
    1. Find a new need (or pain) that a customer is anxious to have served.
    2. Fill it at a cost that is less than what the customer is willing to value and pay for it, so that there is a profit. There are lots of unmet needs out there, because the customer wants it, but not badly enough to pay for what it truly costs including a cost of capital/resource also known as "Profit after tax."


A theme throughout this commentary and previous others has been to discuss the root causes of "profit power" because financial numbers are by-products of underlying factors. Once the strategy maps, apps and metrics are surfaced, another set of root cause problems arise, emotional resistance to change. The 5 whyís can also be used for surfacing both root causes of profit power and emotional resistance.

Hereís a humorous example for applying the 5 whyís process followed by itís URL reference page that also provides a quick overview on this simple, but powerful analysis tool:

Problem Statement: You are on your way home from work and your car stops in the middle of the road.
1. Why did your car stop?
- Because it ran out of gas.
2. Why did it run out of gas?
- Because I didnít buy any gas on my way to work.
3. Why didnít you buy any gas this morning?
- Because I didnít have any money.
4. Why didnít you have any money?
- Because I lost it all last night in a poker game.
5. Why did you lose your money in last nightís poker game?
- Because Iím not very good at "bluffing" when I donít have a good hand.


If any readers have individual or collective leadership team concerns with some of the tough questions that I have asked in these commentaries, you might try doing this exercise to get to the root cause reasons or emotions of resistance that keep you from taking the high performance service plunge. I used this process when I wrote an article entitled "Business Stinks: Time to Share the Numbers and..?" last summer. The root reasons for not going open-book, which is a pre-requisite for a high performance culture, are actually quite personal. This article is one of 11 in our e-booklet; you can request either the e-booklet or just the article by emailing

With engineering problems, the 5 whyís will reveal definite pathways, but with human emotions the defense mechanisms and rationales for root fears can be quite thick and diverse. The root fears or causes for emotional resistance are usually quite simple, universal and often powerfully threatening to their keepers. Even if the 5 whyís helps to surface these fears, they canít usually be resolved quickly, they require "dialogue", patient comfort-zoning, emotional reassurance and support to help them gradually melt away. This brings up the topic areas of "transition management, dialogue skills and appreciative inquiry" which are all important skill sets for the journey to high performance.

Thatís all for this week!

Best regards,

Bruce Merrifield