April 23, 2003 - Distribution Channel Commentary (DCC) # 21

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THIS WEEKíS TOPICS:

  1. "CURE THEIR PAIN" ISNíT SO EASY Ė WHY?
  2. MAKE STRATEGY HAPPEN; BRAND YOUR SERVICE PRODUCT
  3. LESSONS FROM HEART BREAK HILL
  4. MINNOWS MATTER (?); LIFETIME VALUE OF CUSTOMERS AND EMPLOYEES
  1. "CURE THEIR PAIN" ISNíT SO EASY Ė WHY?

Peddlers of the easy, quick solutions (Think: "One Minute Manger"; "Who Moved My Cheese"; edutainer speakers with great quotes, jokes and feel good delivery) always have catchy phrases like: "find out where their pain is, because they will pay you to take it away." This assumes that the customer knows the true root cause of their pain instead of just the symptoms and that they really want to change. Offering just symptom relief solutions will not, however, have lasting, repeat value for any customer.

To digress for a minute to the personal services world, a counseling friend of mind told me that the vast majority of people seeking relief from their emotional pain will never dig deep enough to name, own and tame the true demon sources for their pain. They may try symptom relief medicines and methods, but they will not give up the notion that they are victims of outside influences. The result is that the average number of visits for a new patient seeking counseling is only one visit!

Is it possible that lots of distribution executives donít know the real cause of their pain? There is currently a lot of poor-profit and shrinking-sales "pain" in a number of industry distribution channels, but what is the root cause? Are we all complete victims of the post-bubble economy? Not the top 10% of distributors across forty different channels; they made over 15%+ pre-tax return on total assets in 2001 according to The Profit Planning Group (http://www.profitplanninggroup.com). And, I would guess that the top 3% of all distributors that are perpetual value innovators and true "gazelles" are making 20% or more and still growing both sales and profits in down markets through "service retention" and further penetration of their target accounts. Two big differences between the bottom 90%+ and the top 3 to10% are:

    1. The high performers can give you a much more detailed description of their competitive strategy to be the #1 value provider for specific niches of customers that they pursue. They know that they canít be great for all segments, sizes and buying-styles of customers.
    2. They have a bottom-up, personnel capability, commitment and energy to turn every perceived business environment negative into a positive. This is in comparison to what most other competitors arenít doing as well. This can-do, extra effort energy is a byproduct of a number of causes starting with every employee being strategically minded and knowing "whatís in it for me". Call it strategic alignment.

Following is an example of an association doing a good job of trying to define the pain of its members. The North American Wholesale Lumber Association (NAWLA) recently did a well thought out survey of both their manufacturers and distributors to see which of 8 different issues were most important to their members along with #9 "Other" as a fill in option. The results: the #1 concern was "oversupply" at 41%; "insurance" was the #2 concern with 17% of the votes; all other issues scored 0 to 7%; and "other" write-in topics cumulatively totaled 23%. "Defining our competitive strategy effectively" and "achieving energized, strategic alignment with all of our employees" did not appear amongst the many write-in topics.

What would you advise any business to do about rising insurance rates, too much global supply for demand or gravity weighing us down? Arenít these big general conditions and trends - facts of life - that all businesses must address with varying degrees of initiative and ingenuity? Donít winners turn everyone elseís perceived negative into their positive advantage?

Letís take a second look at the #1 concern, "too much supply", in an industry that just experienced an all time record for lumber consumption in 2002, thanks to the now topping out housing bubble that started in í97, but kicked into counter-economy overdrive in 2001. Because lumber is a very freight sensitive product, this factor immediately eliminates a lot of "capacity" from being the landed, low-cost solution in any given metro market. Besides lowest landed-cost, both distributors and their customers could find value differentiation from the following service elements that wrap around the commodity: a broader array (if not one-stop-shopping) of items; highest competitive fill rates; shortest lead times; on time delivery; and zero errors. How do each of these factors lower the "total procurement cost" and maximize internal productivity for both distributors and their customers?

Most companies talk "good service", but less than 1% will put their money where their mouth is and guarantee it or pay the customer an upset fee every time perfect service doesnít happen. Look how far Dominoís went in its boom years guaranteeing a hot, (OK tasting) pizza delivered in thirty minutes or less. The competition could easily define the strategy, they just couldnít figure out how to copy the service execution formula. Most were too busy working themselves to death by trying to offer too many products to too many different types of customers niches. Meanwhile for Dominoís: customer niche focus + targeted service excellence value = own your own major league baseball team + cool car collection + charitable foundation, etc.

Customers arenít just looking for a commodity at the lowest price. They are looking for a total value solution and their definition of "total" and "value" will vary, perhaps subtly, but importantly for each customer segment. Besides the commodities, arenít all commercial customers in a channel also buying the quality and flexibility of both a supplierís service processes and personnel performances?

Want some proof for "strategic productivity" amidst the NAWLA membership? Here is some data from the NAWLA financial performance study for fiscal year 2001 done by Al Batesí firm, Profit Planning Group. Letís compare the median points of both the top 25% and bottom 75% pre-tax return on total assets (ROTA) performers.

The top 25% had 15.4% ROTA with: $50MM in sales; 13.2% total average gross margin, but 17.1% out of the warehouse; $2800 per order; 24,600 per stocked item (SKU); and $134,000 in gross margin dollars per employee.

The bottom 75% had a 8.7% ROTA at the median point with: same sales of $50MM; margin rates of 13.4% total, but 15.8% out of the warehouse (8.2% less by comparison); $1800 per order (-55%); $17,000/SKU (-45%); and $115,000 gm/employee (-17%).

The top 25% were almost twice as profitable with their assets as the bottom 75%. The best apparently didnít do it by being huge and pounding suppliers for lower prices, because their general margin percent was slightly less on the same volume. The best did sell better, though, by getting larger average order sizes on a smaller selection of SKUs that turned faster all at a significantly higher margin out of the warehouse. How? We will have to infer an answer. I would guess that the best cut more system deals with more customers in a similar niche that bought the same one-stop-shop assortment of items to get bigger orders on a regular, repeat basis and make the same items spin faster in their warehouses/yards. They didnít fall into the trap of selling more products to any and all customers that might buy them without having the rest of the one-stop-shop package; they chose, instead, to sell everything to all of the customers within a given customer niche.

Considering how intensive delivery and lumber yard activity is in this channel, you would think that 50%+ larger average order size would make personnel productivity or value-added/employee (GM$/employee) go up more than just 17%. But, we donít know that the best donít have a few more people on board doing proactive initiatives to better cope with business conditions ("insurance") or marketing efforts to land the 3% of all accounts that are true growth gazelles themselves, etc. The average distributor often complains that they donít have extra resources for taking proactive steps, while the best do. That is how they got to be the best and stay the best. Note, incidentally, that the best donít have high people productivity by hiring them cheap and working them hard. Most of the productivity comes from strategic effectiveness that can then be built on with lots of other high performance measures. Strategic alignment first, high performance personnel practices thereafter to keep the strategic advantage opportunistically energized.

What to conclude generally about "curing their pain"? If any company can accurately describe an effective strategy for creating a consistently superior total value proposition for one target niche of customers at a time, then they can also define the true causes of their pain and believe that they can do something about them. They will buy and use appropriate, customer-centric solution proposals.

If, on the other hand, a company has these practices:

  1. top-down, financial management numbers, budgets and incentive plans that have nothing to do with focused service value creation;
  2. product-oriented, price-deal promotions aimed at any and all customers that might buy at least the featured product;
  3. the pursuit of profits through mythical economies of scale, cost cutting efficiency effectiveness and volume rebates; . . .

then they will have acute, chronic puny profit pain along with shrinking sales pain in a contracting post-bubble economy channel where there is "too much capacity".

How can you better define, refocus on and revive your #1 historic niche of customers? Here are more sources for help:

  1. Even without being able to describe a detailed, customer-centric, value-proposition strategy, both distributors and their customers should be open-minded to one universal buying objective, especially in these tough times: co-creating the lowest total procurement cost for the goods that they are buying. For more on this common objective, check out articles at our web site # ed 4.2, for the TPC creator and seller, and 4.3, for the TPC buyer. 4_2.asp and 4_3.asp
  1. Skim through our DCC Abstracts available via email by request and then skim the many topics that address the "define your historic strategy" DCC #16.2 and 3 might be a first place to look. 16commentary.asp
  2. Our video, "High Performance Distribution Ideas for All" has the total high performance story in 53 bite size discussion/learning modules. See more information than you need on this guaranteed satisfaction product at our web site.
  3. Check out a slide show that Neil Gillespie, a distribution consultant, has posted on his web site entitled "Steak not the Sizzle". A number of the slides do a nice job of detailing out strategic marketing verities and processes. I particularly liked the full build out slides #ed: 12-15, 22, 27-29,31, 42-43. I like Neilís themes of: be customer-centric (and not product-volume oriented); and, define a customer niche in which you can be the #1 volume player in for the local market. Here is the URL: http://www.channelmkt.com/nl_SteakNotSizzle.htm).

2. MAKE STRATEGY HAPPEN; BRAND YOUR SERVICE PRODUCT

If you slogged through topic #1 above, these concepts might still be familiar: "strategic alignment and productivity; bottom-up energy for turning all competitorsí negatives into positive advantages; customer niche focus + tuned service (lowest TPC) excellence = success. If it all sounds too complex and abstract, here are some steps with how-to implementation support references to make it simpler and concrete for all employees.

  1. Determine who the 5+ most profitable customers are within a distribution locationís number one historical best niche and put pictures of them all on the wall. Personalize, personify the niche for all employees so they can know who is paying a disproportionately large share of their current and future wages. (DCC #5.3-5commentary.asp)
  2. From interviews with the "core 5+" regarding both negative service performance and policy frustrations and service highlight memories re-tune your firmís definition of service metrics and guidelines and post them on the wall. Then, all employees can have a "line of sight" to the customer; the "voice of the customer" will be systematically rewoven into the firmís service culture and processes. Common responses from executives to employees will become: "Gee, Iím not sure, why donít you call 3 or more of our core customers and see what they want, what they will or will not value and pay for." And, " do what ever you have to keep faith with our service metrics and guidelines for at least priority customers".
  3. For an exhibit that lists one companyís "8 Elements of Service Excellence" along with: ideas for "automated reminders"; advantages for the company and the employee; and how the service features convert into TPC lowering benefits for the customer go to our website under Exhibits.

    For an exhibit that is a memo to all employees on the 4 Guidelines for Great Service Encounters plus a description of the whyís and howís of heroic recoveries go to our website under Exhibits.

    For more on "heroic actions" for both core and target accounts within target customer niches go to DCC # 9.3 (9commentary.asp).

  4. Once you have measured and achieved basic service brilliance, then you need to make it visible and valued by the customer. All employees have to know how to sell the economic benefits of their service product. Every time a customer even hints at being able to get a lower price, as though that were a better deal, every employee should be able to spontaneously say something like: "You can always find a lower price on an item by item basis, but for customers like you (in our target niche) we deliver the lowest total procurement cost that builds your bottom line at a higher price. Do you want to review how our best service metrics lower all 11 elements of your total procurement cost and allow your company to spend more time adding value for your customers?" Most customers will pass, because they are just trying to chisel to get both the best total service value and a lower price. And, if TPC education discussions begin, the customers that do buy the pitch will do it at first because our employees emotional conviction and easy articulation are the persuaders. Later, most customers will actually intellectually understand how to be better value buyers and even co-creators when it comes to achieving higher levels of win-win economics through more refined selling-purchasing systems.
  5. Will all customers buy your "lowest TPC at a higher price" pitch initially or eventually? No! So, they arenít part of your niche. Let pure-price buyers go get bargain price savings that are usually exceeded by the costs of lousy service from companies that are the consumerís equivalent of the wholesale clubs. To better understand how to sub-divide a customer niche by buying styles or values, look at this exhibit entitled: Value-Buying Categories of Customers posted in the Exhibits section of www.merrifield.com.
  6. Perhaps the ultimate "automated reminder" that makes service excellence visible and valued that helps to brand your company as the "best total value" is the "unconditional service guarantee" for more on this check out our web site article # 3.2 entitled "A Service Goal Ė the Unconditional Guarantee" (3_2.asp). Whatís amazing in the long run with such guarantees and obsession with Service Brilliance measurements is the power of pride that it has with the employees behind the service.

All of these steps are not the final and total solution for achieving a sustainable, high performance distribution company, but they will get you well on the way. The posted metrics will beg you to continue to do the right stuff if you will just listen to the most progressive, core niche customers and employees and do what they say!

3. LESSONS FROM HEART BREAK HILL

I know the stuff recommended in topics one and two above sound overwhelming. It would be nice if we could just wish our frustrations away or there existed silver bullets, like a new incentive plan, that would make everyone just work harder and smarter without much effort on our part. But, that failing, our seemingly marathon journey to high performance lies ahead and lessons from the number one most prestigious marathon in the world lies just behind. On April 21st, the "Patriot Day Observed" date, there was the 107th running of the most prestigious marathon in Boston.

(Some parenthetical reminders/laments: Patriots Day is actually April 19th and it use to celebrate the famous ride of Paul Revere that began on the night of April 18, 1775 and the initial skirmishes of the Revolutionary War between the British Red Coats and the Massachusetts Minutemen at both Lexington and Concord on the 19th. Now the date is celebrated on a Monday nearest the 19th for the three-day, legal holiday experience for many Massachusetts and Maine employees. I wonder how many people think that they get the day off because of the race and that the runners are the "patriots".)

Back to the story, think of all of the labor and pain that goes into this race by 30,000 suffering souls and pairs of soles, and there is only one winner that gets the laurel wreath. The Boston race isnít about fast times that come from flat courses like Chicago or London; it's about mastering the topography. Many of us have probably heard of "Heartbreak Hill", which is actually about three hills in Newton at about the 20 mile mark out of the 26 miles and 385 yards (the Olympic definition of a marathon). The Greek foot-soldier, Pheidippides, actually only ran about 24 miles from the plains of Marathon to Athens to gasp "Rejoice! We Conquer!" and then collapse, but how it got to 26.2 miles in 1908 at the London Olympics is another story.

Here are the facts about this yearís race that spoke to me the most. Robert Kipkoech Cheruiyot, the 24- year old Kenyan that won the race in 2:10:11, made his move against a pack of his countrymen at Heartbreak Hill. He not only moved out on them as he ran up the hill, but he then ran a 4:37 mile going down the backside to open up a 30 meter lead on the next runner who admitted that he gave up winning the race 2 miles from the finish.

As I dug a bit deeper into: why Robert was the 12th Kenyan to win in the past 13 years; and why Kenyans finished in the top 5 spots this year and in 9 of the top 11 spots, it turns out that Kenya has over 15 elite marathon training camps. Excellence truly requires personal desire, persistence and sacrifice, but it also helps if you can practice with the smartest methods, at altitude with others who collectively help to motivate and discipline one another.

How many distributors have identified other elite performers or wannabes and met in the right environment to learn about how to execute with the right methods? Couldnít even an intra-company group of key employees who desired high performance service economics for all stakeholders meet regularly to discuss best ideas for going from good to great totally tuned to distribution? One distributorís story of how he and his key employees did this is in DCC 20.2 (20commentary.asp). Fortunately in business we donít have to work nearly as hard as this yearís Boston Marathon winner, we just have to work strategically smarter and then do the common sense things that strategic alignment suggests that we do.

4. MINNOWS MATTER (?) LIFETIME VALUE OF CUSTOMERS AND EMPLOYEES

Brain McShane, the star of one of our articles entitled "Tackle the Small Order Problem Now" (2_15.asp) is back a year later with another set of three related concerns. After a spectacular economic revival of his core business in 2002 over 2001, he has noticed that one of his divisions that sells a lot of fancy consumer impulse/gift items through specialty retailers is fading with the economy. His three points are:

  1. Iím selling into a niche where my historically most important customers are seeing 10 to 30% drops in their traffic and sales; this is unnerving, where is the bottom?
  2. I have, for the moment, a lot of fixed costs in Ė salaries, departmental staffing, on-going business maintenance and development activities Ė which are now causing imminent losses.
  3. Considering the first two points, doesnít serving "minnows" Ė small house accounts Ė become important? With slack personnel capacity and temporarily fixed overhead costs, the incremental margin dollars should help Ė right? (His firmís #1 strata of customers are called "whales"; they generate $400 or more in gross margin per month to support at least one monthly outside sales call.)

There isnít one answer for these questions that will fit all distributors. One type of distributorís poison can be anotherís meat. There are both catalog selling and cash-n-carry location distributors that feast on high volumes of small orders from small customers and anyone else. Their prices are higher, they make money on freight and they have locations and automation that all make it possible for them to make good profits on small customers and small orders.

When it comes to niche domination, a distributor with a 70 to 85% share of a customer niche starring discretionary, recession-sensitive products will have to do more downsizing, than if they had 50% share and a few other unfocused competitors from which to steal more share from. I have seen situations where distributors in one channel are down 15% while one focused operatorís sales and profits are flat, but niche share is up 15%.

Without falling into analysis paralysis, Brian could and should do some deeper niche erosion investigating by ranking which customers and products are off the most to the least. By looking at the extremes of such ranking reports, we can better determine how much the niche might be eroding and what are the best old to old penetration possibilities to pursue.

To determine if and when downsizing is a necessity, Brian could and should track transactions/day/employee in the order fulfillment process to determine how much personnel slack he really has. To turn seemingly fixed personnel costs into variable ones, he might look at ranking reports of his employees by some different perspectives. Every profit center manager might consider having an excel spreadsheet during both good and bad times that can rank employees by these different columns:

  1. salary (their relative ranked value to the team);
  2. years and months on the job (seniority, wisdom equity);
  3. date of their last raise (anticipate when people will start getting anxious about a raise);
  4. overall rating on a scale from 1 to 10 to you AND potentially to most important customers (we will come back to this last concept).

Then, each month you might look at the entire team in different ways.

  1. Look at a ranking from high to low by salary; do you see any discrepancies between what someone is paid and how valuable they are to the team. If player 8 is making more than player 12, who is obviously worth more than 8, then too many other people probably already know about the value and pay difference. There are a number of tactical possibilities for correcting such injustices.
  2. Look at the ranking of whom has gone the longest without a salary increase to the most recent. Anticipate and deal with expectations before annual milestone dates arrive.
  3. Look at the report rankings from most valuable to you and to the customer, here is where you can identify who might be let go off the bottom and ask all of the other people to re-organize, self-organize themselves and their roles accordingly. High performance service firms always have lots of cross-trained people to take care of vacation needs and surge demand problems (video modules #4.6 and 4.7). If you tell the survivors: here are the downturn realities; we have to let the least productive overhead go, so that the most valuable ones (you) can re-organize to take care of business, they are likely to be very creative and cooperative.

Now, to the question about "minnows" being important. If our hero, Brian, can better understand:

  1. why his niche business is eroding;
  2. what he might best do about it with old to old possibilities; (DCC #s 13.2, 14.3, 13commentary.asp, 14commentary.asp)
  3. which minnows are profitable on an on-going basis as opposed to money-losing activity traps today and based on their track record and leadership for the foreseeable future;.
  4. And, make some crude guesstimates about lifetime value of customers, especially those that are currently most profitable and the targets within his target niches that have track records of growing faster than the industry;

Then, he can make some more informed decisions on which minnows, if any, are important to his firm in the short term and the long-term.

CONCLUSIONS

When business starts to erode in tough times, it can cause big panic. This is especially true when a company has enormous volume with one or two customers that have big downturns if not bankruptcy (Fleming just went bankrupt and a big factor was that K-Mart, their biggest customer, went bankrupt).

I think it best to keep cool; do thoughtful analysis; do strategic downsizing of payroll and longer-term development activities; and keep focusing on customers in your niche and the employees on your payroll that are most important today and for the longer term. If you start wasting your time, pursuing lots of little, miscellaneous activity it will take your eye and resources off the few customers that can make a big difference to your future.

Lifetime value of customers and employees are two concepts with which distributors could do a lot better, so we will re-visit them in a future commentary.

Thatís all for this week! If you really liked or didnít like any of this content, let us know, so we can continue to improve the product.

All the best,

Bruce Merrifield

bruce@merrifield.com

Phone: 919-933-7474