November 8, 2002 Commentary # 1

Greetings:

We are in the transition process of beginning a regular commentary service that will be posted on a new-look, new-function web site at www.merrifield.com. Until the website is upgraded we will send you these short notes with follow-up: URLs, article and (video) module references, etc.

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THIS WEEK'S TOPICS:

1. DIFFERENT PATHS TO INCREASING PRODUCTIVITY

2. CHINA-DEFLATION STRATEGIES

3. VIDEO CASE STUDY QUESTIONS & ANSWERS; SCOREBOARDS & INCENTIVES

  1. How's your productivity improvement?
  2. An 11-7-02 news release reported that "US Productivity Rose at a 4% rate in the 3rd quarter and 5.3% over the past 12 months." Did yours? The usual, hard way that doesn't often work is to reduce payroll faster than your margin dollars drop, then your value-added or gross margin dollars per employee ratio could go up. You might then want to give raises (or pay for health benefits) for the remaining, harder working survivors and let some of the extra juice go to profits. This is easier said than done for at least two reasons. First, what if the competition does the same, straightforward drill and then they choose to compete the savings away to more aggressive, price-shopping customers? Secondly, because distribution activity is variable, reducing people faster than sales/margin erosion makes the survivors work harder which isn't good for morale.

    Or, there is the unusual, work smarter way that starts by drastically reducing empty transactional activity that comes from small orders, especially ones from unprofitable customers. This frees up personnel as transactions per day per person drop, but margin dollars per employee barely budge. This personnel slack can be laid off and/or reinvested into focusing more attention and value-added effort toward profitable customers that have a future. Read more about how in three out of the thirteen articles in our E-booklet or educate all employees on the why's and how's in our High Performance Video- modules 3.5 to 3.11; more on the e-booklet and video at the bottom.

    The productivity challenge above was given voice on Nov. 6th by a Midwestern plumbing supply executive just before I conducted a seminar for a group of wholesalers. He said, "Business isn't any fun for me or my employees. Good jobs keep disappearing from our local economy, none of us have had a raise in 18 months and we have raising health costs for our employees. Can you help us today?" Well, he liked the presentation a lot. It was entitled, "Solving the Good to Great Mystery." If any of you would like a copy of the 17-page, 60-slides handout, email karen@merrifield.com. We will send it free to anyone who can claim that they are planning a meeting and looking for a speaker. For the others, mail a check for $10 to cover our costs; or, wait an indeterminate amount of time (4 weeks?) for us to be able to post it on our new web site.

  3. Got your China/Deflation strategy in place?

The "good news" keeps pouring out of China and there are media reports everywhere about how they are exporting deflation to the world. The good news is that their economy is growing at an accelerating 8%+ rate. They have achieved a critical mass of sorts for breadth, depth and scale for manufacturing to go with a bottomless supply of super-motivated, educated workers that cost 3 to 15% of what similarly educated, less-motivated and less cooperative workers cost in Japan, Germany and the US. China is aiming to add 20 MM new factory jobs in knock-off production capacity annually for the next decade. (There are only 17MM factory jobs in the US, down from almost 20MM 27 months ago.) In China's free trade zones there are minimal taxes, no EPA, OSHA, unions, lay off costs or hassles of any sort. The infrastructure, supplier base, logistics and educated workers exist for whatever anyone wants to knock off. If global manufacturers want in, they must contribute their: direct investment capital, leading edge technology, tools and know-how. In return, they get access to a growing domestic market that has 25% of the world's population and they can export lowest cost goods to all foreign markets hopefully before their global competitors do the same to them.

What does this mean to our economy? First, unemployment will continue to climb. We will continue to lose higher-paying manufacturing jobs faster than: our economy can create new ones; laid off workers can re-skill themselves; and the government can create new "Transportation Security Agency" people to harass potential grandmother terrorists at the airports. This will force consumers to stop borrowing to buy cars and houses and start saving. This will dampen our domestic economy significantly in 2003. The rising unemployment numbers are also behind the newly rising rates for: delinquent mortgage payments, house foreclosures and personal bankruptcies. The housing bubble has peaked and the housing industry could be seeing the downside of its wonderful 5+ year boom over the next 2+ years.

What should distributors do? If you stock goods that can be exported from China in part or total, then quiz all of your suppliers about their China strategies. Shift more volume to the suppliers that seem to have the most effective "China Strategy." Small, domestic, heads-down manufacturers and their best distributors could be the most vulnerable. Producers of big, bulky, low-value per pound goods with significant automation (e.g. lumber and paper) will be least vulnerable to the China threat. Projected demand for their goods is, however, another story.

If 2003 is looking like economic activity of the past 2+ years minus debt-strapped consumption of autos and housing, then distributors need to stop belt tightening and embrace big, new, work smarter strategies including:

    1. Reduce inventory and shape-up or out profitless customers, especially brokerage accounts with huge receivables, thin margins and suspect balance sheets to boost profits and reduce debt.
    2. Make all employees responsible for tracking and improving annual value-added per employee which is gross margin dollars divided by full-time equivalent employees for the last 12 months trailing. If they don't get it and start to be part of this solution, then they will be part of the problem as to why compensation and layoffs at the firm continue to trend down.
    3. Going after the best pay-off productivity plays such as:
    4. 1. Reduction of errors (see Article 3.9 at www.merrifield.com or Modules 4.4 and 4.5 on
      our "High Performance Distribution Ideas for All" video.)

      2. The seven applications that spin out of customer profitability reports that are covered in a number of our articles that are in our free E-Booklet upon request from karen@merrifield.com, as well as Modules 3.1 to 3.12 in our video.

    5. Don't' just survive, thrive. Don't be in denial and have false hope, look at the facts. The big economic picture isn't pretty. Where is the opportunity amidst the bad news? In tough times, the ones that try new, right moves will be hurt the least and can even prosper, either way they will be in a position to clean up against the traditional cost-cutters. Stop thinking of buying volume to get economies of scale that don't exist on balance in distribution while working employees harder and paying them less. Focus on customer profitability and target account retention and growth with all employees being part of the solution.

3. Video case study question:

An industrial paper/Jan-San distributor who is well through the 53 modules of our "High Performance." video sent the following email. I have inserted a few article and module references in the[ ] brackets.

"Bruce,

Your videos continue to raise quite a stir here. We need to improve our pay "system". Currently, we pay a good wage ~1.10% of going wage PLUS a bonus paid monthly if we earn it. [Modules 2.2 - 2.4] The bonus plan is structured so that all non-sales people get paid x% of their wage for that month if we achieve Y% Operating Profit. The bonus (x) ranges from 5% to 24%! The Operating Profit threshold and cap range is 3.0% to 6.6%. (i.e. if we made 3.62% op. profit then we would pay out a 8% bonus.) [This is a "gainsharing" incentive method.]

We are working on Department Scorecards (Modules 5.3 -5.5) to tie into our Company Scoreboard. My thought is that we need to change the bonus plan to include some of the departmental performance #s and Company performance #s (North Stars). This would help to tie their "Hearts, minds, and WALLETS" to our commonwealth goals. (The rule of 4-7 is working.)

1. What thoughts do you have about bonus plans in general?

2. What comments do you have about the concept above?

3. Any and all implementation ideas are welcomed.

Thanks, Joe Paper Distributor"

My response was:

Dear Joe,

You do know it is the "rule of 5 to 7", not 4 to 7, don't you? I thought it was either a joke or you need one last repetition to really get it. [Module 2.12]

As for incentive plans at the department level, you should ask the targeted people what they recommend and tell them that you will then play the Devil's Advocate by questioning what could go wrong and how it could really make a difference or not. No sense trying to read their minds as to what they think is fair and motivating. Through their own discussion, they will discover that there is no one plan that will make everyone totally happy.

In a longer-term sense, no bonus should really be necessary at the departmental level. Part of the higher-pay, higher-productivity contract is that continuous improvement at all levels - individual, department and company - is a built in expectation. Then, if overall numbers do improve from their efforts, they will all share in: the gainsharing parts of compensation. The company will make more profit after tax to reinvest [the cost of their future - Module 2.9] and growth within the company to higher responsibility positions or tangential growth opportunities will be possible for those who want them.

In the short term, however, it might be fun to create a game to pique interest and enthusiasm with set goals and a group celebration event/pay-off of some sort. They might, for example, decide it would be fun to be able to invite a friend to a private-room, catered feast at a nicer than normal place; they can work on the details once a budget per team member is set. These types of rewards can be more memorable, appreciated, enjoyable and more team building than the same amount paid in cash. In other words, important progress milestones are worth celebrating in a way that renews commitment to look for the next round of continuous improvement ideas. But, they will tell you what is best!

When you first delegate the job of designing a first draft of an incentive/reward game to a department, you might remind them to draw on the integrated design ideas found in Module 5.10 (the "Kinetic Chain"). Point out that both the game and the results could benefit from the learning-how-to-learn ideas in Modules 5.7 ["The Wheel of Learning"] and 5.8 ["Make Good Mistakes"].

IN CLOSING:

Please send us your feedback on what you like, don't like, would like to see more of in some regularly generated e-newsletter, as well as any case study questions that might arise from video implementation.

All the best,

Bruce